TMI Blog2011 (8) TMI 1115X X X X Extracts X X X X X X X X Extracts X X X X ..... taken by the Assessing Officer should not be a mere view in vacuum but a judicial view. As already stated earlier, we are not able to appreciate on what material was placed before the Assessing Officer at the assessment stage to take such a view. The assessee has also not been able to lead enough evidence to show to us that any inquiry was made by the Ao in this regard. Therefore mere allegation that the Assessing Officer has taken a view in the matter will not put the matter beyond the purview of Section 263 unless the view so taken by the Assessing Officer is a judicial view consciously based upon proper inquiries and appreciation of all the relevant factual and legal aspects of the case. In the case of income tax matters each assessment year is an independent assessable distinct unit in which principles of res judicata are not applicable. The income of each assessment year and admissible expenses are determined in each year considering the facts and circumstances of the case prevailing during the year. As per the facts and circumstances of the case if there is a change in the facts and circumstances, a different view as per the changed facts and circumstances is required t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king the stay of operation of revision order passed by the CIT. 2. Facts of the case in brief are that the assessee-company is carrying on business of dealing in shares and mutual fund units. Its ancillary business is running a function hall at Vijayawada, from which it declared gross receipts of ₹ 4,37,315 and net profit at ₹ 1,72,292. For the assessment year 2006-07, the assessee has filed return of income on 13.11.2006, declaring a total loss of ₹ 45,38,701. Schedule-I of the return of income, containing computation of income from business, showed the assessee s net profit from the profit and loss account at ₹ 21,95,18,260, against which, in item No.10 of Schedule-I, assessee claimed exempt income at ₹ 22,17,11,512. The details of income claimed as exempt are as under- Dividend income from Companies ₹ 47,19,169 Income from Mutual Funds Rs.2,71,85,732 ₹ 3,19,04,901 Long term capital gains Rs.18,98,06,611 Rs.22,17,11,512 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing officer and in assessment records, the Commissioner of Income-tax found that the assessee company has been carrying on the business in shares. He also found from the Balance Sheet for the financial year 2005-06 that the assessee had sold 6100 shares of ITC Limited and claimed the income earned there from as exempt on the ground that the gain constituted long term capital gains, though the shares were acquired and sold in the same year. The assessing officer, according to the Commissioner had not examined the issue in detail and erroneously accepted the claim of the assessee as long term capital gains. The Commissioner of Income-tax therefore was of the opinion that though the assessee has been carrying on trading in shares and units extensively and regularly in huge volumes an high frequency, but offered the profit generated there from as capital gains and claimed exemption from tax of an amount of ₹ 22,17,11,512. Accordingly, he issued a show cause notice under S.263 dated 20.1.2010, calling upon the assessee to show cause as to why the activity of the assessee should not be treated as trading in units and shares and tax its profits as business income, since the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts business profit Accordingly, the Commissioner of Income-tax concluded that the income declared by the assessee under the head long term capital gains amounting to ₹ 18,98,06,611 and short term capital gains amounting to ₹ 20,70,510 together amounting to ₹ 19,18,77,121 is the assessee s income from business. With these findings, the Commissioner of Income-tax, vide order under S.263 dated 31.3.2011, directed the assessing officer to revise the assessment order passed under S.143(3). 7. Aggrieved by the order of the Commissioner of Income-tax passed under S.263 of the Act, the assessee preferred the present appeal before us. 8. Learned counsel for the assessee, after narrating the facts of the case in brief submitted that initially a show cause notice under S.263 was issued to the assessee on 20.1.2010 to which the assessee has filed its reply on 29.1.2010. After a long pause, the successor Commissioner of Income-tax issued again a show cause notice under S.263 of the Act on 21.2.2011 proposing revision on entirely different grounds. This act of successor Commissioner of Income-tax amounts to starting fresh litigation on new views which is against the ratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner in the impugned order under S.263, including the one of the Gujarat High Court in CT V/s. MM Khambhatwala (198 ITR 144); and of the Apex Court in the case of Sri Manjunathewara Packing Products Camphor Works (231 ITR 335), are clearly distinguishable from the facts of the present case, inasmuch as in the present case it is not a mere change of opinion on the part of the Commissioner, but it is a question of finding of fact as regards the nature assessee s activity given by the assessee based on the evidence on record. He further relied on following judgements: i. Malabar Industrial Co. Ltd. v. CIT (243 ITR 83) (SC) ii. CIT vs. Max India Ltd. (295 ITR page 282) (SC) iii. CIT vs. Gabriel India Pvt. Ltd. (203 ITR 108) (Bom) iv. CIT vs. Arvind Jewellers (290 ITR 689) (Guj.) v. CIT vs. Development Credit Bank Ltd. (323 ITR 206) (Bom) vi. CIT vs. Vikas Polymers (194 Taxman 57) (Del.) vii. CIT vs. Anil Kumar Sharma (194 Taxman 504) (Del.) 9. On merits, the learned counsel for the assessee submitted that the Commissioner of Income-tax has erred in not considering all the facts cumulatively, viz. (a) the assessee has not borrowed any funds and made all the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when HCCBPL would go public, there would be good appreciation in share value. However, as the HCCBPL did not go public, the assessee thought it wise to sell the shares to the company itself, which agreed to take. From these events, it was submitted that the intention of the assessee in acquiring the shares of HCCBPL was to invest in shares with the hope of future appreciation when the shares are listed, and as such it was a clear case of investment. Though evidence in this behalf, as furnished before the assessing officer on specific query from him, was also available in the paper-book, the Commissioner failed to notice this information on record. As regards acquisition of 6,95,000 shares of 1$ each of the assessee s subsidiary company formed in USA, it is submitted that it is a pure investment as observed by the Commissioner himself. The learned counsel for the assessee also disputed the observation of the Commissioner that the assessee has sold more than 1 crore shares in the year under consideration, and submitted that the total number of shares sold was only 10,23,003. The learned counsel for the assessee also disputed the findings of the Commissioner with regard to assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent activity was accepted is not relevant and principle of res judicata does not apply, learned counsel for the assessee submitted that the assessee s case is not based on the principle of res judicata but on principles of consistency, which was stressed in a number of decisions, including those of Bombay High Court in the case of CIT V/s. Gopal Purohit (in Income-tax Appeal No.1121 of 2009 dated 6th January, 2010); and of the Delhi High Court in CITV/s. Escorts Limited (in Income Tax Appeal No.14 of 1999 dated 1.2.2011), besides the Bombay High Court decision in CIT V/s. Darius Pandole (330 ITR 485). It is submitted in this behalf that the Commissioner has failed to consider the relevant fact that the assessee consistently valued the investments at the end of each year at cost price and not at cost/market price whichever was lower, which is a very important feature of a trader. This aspect has been highlighted in a number of decisions like Fidelity North Star Others in re (2007) 288 ITR 641(AAR) and ARA Trading and Investments Pvt. Ltd. Vs, DCIT (ITAT Pune in ITA No.499/PN/2008 dated 31.2009), besides the Circular of the Board, being Circular No.4 of 2007. He disputed the observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FIIs and Portfolio Management Schemes and therefore, simply because of the magnitude of the transactions, the assessee does not cease to be an investor. Recapitulating the background of the assessee company, which was floated in 1963, it was stated that it was a franchisee of Coca Cola company and was in bottling business up to December, 1997 when Coca Cola Company took over the business as a going concern, it paid substantial amount by way of slump price and with that fund, the assessee company entered the stock market as an investor. Being a family concern, it is submitted, the assessee company is conservative and cautious and is interested in the safety of its capital and wealth creation, and it has never taken the risky plunge into the waters of share trading. Referring to the decision of the Tribunal in assessee s own case for the assessment year 2004-05 in ITA No.477/Hyd/2008, and relying on the conclusion of the Tribunal for that year that assessee was only an investor and not a trader, it is submitted that there is no substantial variation between the facts of that year and the facts of the year under appeal, but for the booking of substantial capital gains in the year und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned DR submitted that in order to appreciate the nature of activity of the assessee it is necessary to analyse the transactions carried out by the assessee during the year. The assessee has been buying and selling shares and units of Mutual Funds throughout the year through an organised full time and day-to-day activity. A statement of sale of shares of 82 listed companies furnished by the assessee shows the number of shares and units sold at 10787514. Similarly, the units sold of 121 mutual funds were 9764511. At least equal number of shares and units have been purchased during the year. These details are enumerated in tabular form on page 7 of the CIT order u/s. 263 of the Act. The assessee-company has purchased and sold 500 shares of Reliance Industries Limited on 8.8.2005 i.e., on the same day without taking delivery, by squaring the account. This is a day trading transaction. The assessee had availed the services of three leading stock brokers for its trading activity viz., Sl. No. Name of the company Purchase Sales (Rs.) 1. M/s. Excel Fincap Pvt. Ltd. 36,62,25,492 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DR further submitted that the assessee-company has carried out substantial activity of purchase and sale of units of Mutual Funds. During the year, it has sold units of 121 Mutual Funds. The details of units sold during the year are as under: Sl. No. Details Amount (Rs.) (i) No. of Mutual Funds Traded in 121 (ii) No. of units sold 9704511 (iii) Net sale consideration received ₹ 21,21,98,996 (iv) Long term capital gains claimed ₹ 5,41,58,133 (v) Short term capital gains claimed ₹ 8,27,498 (vi) Short term gain in Debt Funds ₹ 3,81,297 18. The learned DR submitted that the assessee-company had repeatedly purchased and sold Mutual Fund units of the same fund throughout the year. Few instances of repetitive purchase and sale of units are as under: Date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in ITA No. 883/Mum/2010 dt. 31.12.2010, ITAT Mumbai Bench where the assessee was dealing in shares as an organised activity with high volume and frequency, it was held to be carrying on business and not investment. 20. The learned DR further submitted that the assessee s contention that its claim of investment activity and exemption of its income as capital gain was accepted in earlier years cannot be changed in a subsequent year on the basis of principle of consistency, is not tenable because on proper enquiry, the tax authority is entitled to draw a different conclusion in a different assessment year as has been done in this case now. The principle of res judicata is not applicable to the income-tax proceedings. Surplus in the sale of shares where repeated purchases and sales are done in the shares is held to be business income. For this purpose he relied on the order of the Tribunal in the case of Sri Upendra P. Dadia in I.T.A. No. 485/Mum/09 dated 18.2.2011. He submitted that the assessee had been consistently investing in shares and rotating the funds again and again in various scrips to make profit with an intention to make profit in the share market and it has to be held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that the shares have been treated as investments in the accounts from the very beginning and that the investments have been valued at the purchase price and not market price or cost price whichever is lower, does not in anyway help the case of the assessee. Had it been the sole intention of investments, there should not have been much administrative set up with considerable administrative expenditure. The innumerable purchase and sale transactions made by the assessee are clearly covered by the situations contemplated in Board s Circular No. 4/2007 dt. 25.06.2007 and the tests laid down in the Hon ble Apex Court s decision in the case of G. Venkataswami Naidu and Co. [35 ITR 549 (SC)]. The very name of the assessee company i.e., Spectra Shares Scrips Pvt. Ltd., is clearly indicative of its business activity of dealing in shares and scrips. The annual report for the year 2005-06 shows the income of the company in the P L account which is drawn only for an entity carrying on business. It also shows the net profit before depreciation. The directors report for the year 2005-06 states that during the year the market was upbeat and the directors were hopeful of good results. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing a marriage hall at Vijayawada with gross receipts of ₹ 4,37,315 is only its ancillary activity. (e) The only and sole objective of purchase and sale of shares is to derive profits and not to earn dividend there from. The profit earned from buying and selling of shares is ₹ 19,18,77,121 which constituted long term capital gain shown at ₹ 18,98,06,611 and short term capital gains shown at ₹ 20,70,510 while its dividend income from companies is only ₹ 47,19,169 i.e., the ratio between dividend and profits is 2:40. It shows that the dividend income was meagre compared to profit on sale of shares. 26. The learned DR submitted that in view of the aforesaid discussion, the shares in respect of which the assessee admitted income under the head short term and long term capital gains, are stock-in-trade of the assessee and not investments as claimed by the assessee. The activity of the assessee in buying and selling shares is nothing but a business activity and the surplus there from represented its business profits. The learned DR, accordingly, vehemently supported the orders of the lower authorities. 27. We have carefully considered the rival subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... knowledge, a mistake is from insufficient or false observation. Blunder is a practical error of a peculiarly gross or awkward kind, committed through glaring ignorance, heedlessness, or awkwardness. An error may be overlooked or atoned for, a mistake may be rectified, but the shame or ridicule which is occasioned by a blunder, who can counteract. Strictly speaking, Hallucination is an illusion of the perception, a phantasm of the imagination. The one comes of disordered vision, the other of discarded imagination. It is extended in medical science to matters of sensation, whether there is no corresponding cause to produce it. In its ordinary use it denotes an unaccountable error in judgement or fact, especially in one remarkable otherwise for accurate information and right decision. It is exceptional error or mistake in those otherwise not likely to be deceived. 29. In order to ascertain whether an order sought to be revised under Section 263 is erroneous, it should be seen whether it suffers from any of the aforesaid forms of error. In our view, an order sought to be revised under Section 263 would be erroneous and fall in the aforesaid category of errors if it is, inter ali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xchequer. The Assessing Officer has got to protect, on one hand, the interest of the assessee in the sense that he is not subjected to any amount of tax in excess of what is legitimately due from him, and on the other hand, he has a duty to protect the interests of the revenue and to see that no one dodged the revenue and escaped without paying the legitimate tax. The Assessing Officer is not expected to put blinkers on his eyes and mechanically accept what the assessee claims before him. It is his duty to ascertain the truth of the facts stated and the genuineness of the claims made in the return when the circumstances of the case are such as to provoke inquiry. Arbitrariness in either accepting or rejecting the claim has no place. The order passed by the Assessing Officer becomes erroneous because an enquiry has not been made or genuineness of the claim has not been examined where the inquiries ought to have been made and the genuineness of the claim ought to have been examined and not because there is anything wrong with his order if all the facts stated or claim made therein are assumed to be correct. The Commissioner may consider an order of the Assessing Officer to be erroneo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to play. He is the investigator, prosecutor as well as adjudicator. As an adjudicator he is an arbitrator between the revenue and the taxpayer and he has to be fair to both. His duty to act fairly requires that when he enquires into a substantial matter like the present one, he must record a finding on the relevant issue giving, howsoever briefly, his reasons therefor. In S.N. Mukherjee v. Union of India AIR 1990 SC 1984, it has been observed by the Hon'ble Supreme Court as follows: Reasons, when recorded by an administrative authority in an order passed by it while exercising quasi-judicial functions, would no doubt facilitate the exercise of its jurisdiction by the appellate or supervisory authority. But the other considerations, referred to above, which have also weighed with this Court in holding that an administrative authority must record reasons for its decision are of no less significance. These considerations show that the recording of reasons by an administrative authority serves a salutary purpose, namely, it excludes chances or arbitrariness and ensures a degree of fairness in the process of decision-making. The said purpose would apply equally to all decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterests of both the parties, because even the assessee is deprived of the benefit of a positive finding in his favour, though he may have sufficiently established his case. 33. In view of the foregoing, it can safely be said that an order passed by the Assessing Officer becomes erroneous and prejudicial to the interests of the Revenue under Section 263 in the following cases: (i) The order sought to be revised contains error of reasoning or of law or of fact on the face of it. (ii) The order sought to be revised proceeds on incorrect assumption of facts or incorrect application of law. In the same category fall orders passed without applying the principles of natural justice or without application of mind. (iii) The order passed by the Assessing Officer is a stereotype order which simply accepts what the assessee has stated in his return or where he fails to make the requisite enquiries or examine the genuineness of the claim which is called for in the circumstances of the case. 34. We shall now turn to the facts of the case to see whether the case before us is covered by the aforesaid principles. Perusal of the assessment order passed by the Assessing Officer does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Section 263. We have given our thoughtful consideration to the aforesaid submissions. As already stated earlier, an order becomes erroneous because inquiries, which ought to have been made on the facts of the case, were not made and not because there is anything wrong with the order if all the facts stated or the claims made in the return are assumed to be correct. Thus, it is mere failure on the part of the Assessing Officer to make the necessary inquiries or to examine the claim made by the assessee in accordance with law, which renders the resultant order erroneous and prejudicial to the interest of the revenue. Nothing more is required to be established in such a case. One would not know as to what would have happened if the Assessing Officer had made the requisite inquiries or examined the claim of the assessee in accordance with law. He could have accepted the assessee's claim. Equally, he could have also rejected the assessee's claim depending upon the results of his enquiry or examination into the claim of the assessee. Thus, the formation of any view by the Assessing Officer would necessarily depend upon the results of his inquiry and conscious, and not passive, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r contains some apparent error of reasoning or of law or of fact on the face of it. 37. The learned Counsel has strongly relied upon the following observations made in the case of Malabar Industrial Co. Ltd. (supra) and submitted that the learned Commissioner was not justified in substituting his view for that of the Assessing Officer: ... Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue, unless the view taken by the Income-tax Officer is unsustainable in law. 38. We have carefully gone through the aforesaid observations. Adopting one of the courses permissible in law necessarily requires the Assessing Officer to consciously analyse and evaluate the facts in the light of relevant law and bring them on record. It is only then that he can be said to h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view after analysing the facts and deciding the matter in the light of the applicable law. However, in the case before us, the Assessing Officer has not at all examined as to whether only one view was possible or two or more views were possible and hence, the question of his adopting or choosing one view in preference to the other does not arise. The aforesaid observations of the Hon'ble Supreme Court do not, in our view, help the assessee; and rather they are against the assessee. 39. In the case of Padmasundara Rao v. State of Tamil Nadu (255 ITR 147), the Hon'ble Supreme Court has held that ... There is always peril in treating the words of a speech or judgment as though they are words in a legislative enactment, and it is to be remembered that judicial utterances are made in the setting of the facts of a particular case, said Lord Morrin in Harrington v. British Railways Board [1972] 2 WLR 537 (HL). Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases.... Therefore, the observations of the Hon'ble Supreme Court in Malabar Industrial Co. Ltd's case (supra) on which reliance has been p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Section 264. But the State Exchequer has no right of appeal against the orders of the Assessing Officer. Section 263 has therefore been enacted to empower the Commissioner to correct an erroneous orderpassed by the Assessing Officer which he considers to be prejudicial to the interest of the revenue. The Commissioner has also been empowered to invoke his revisional jurisdiction under Section 264 at the instance of the assessee also. The line of difference between Sections 263 and 264 is that while the former can be invoked to remove the prejudice caused to the State the later can be invoked to remove the prejudice caused to the assessee. The provisions of Section 263 would lose significance if they were to be interpreted in a manner that prevented the Commissioner from revising the erroneous order passed by the Assessing Officer, which was prejudicial to the interest of the revenue. In fact, such a course would be counter productive as it would have the effect of promoting arbitrariness in the decisions of the Assessing Officers and thus destroy the very fabric of sound tax discipline. If erroneous orders, which are prejudicial to the interest of the revenue, are allowed to stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ummins Ltd 3 13 6 Dabur India Ltd. 3 13 7 Gujarat NRE Coke 25 36 8 Hindal Co. 28 13 9 Indian Hotels 1 12 10 ITC Ltd. 15 10 11 IPCL 12 9 12 Jain Irrigation 0 30 13 L T Ltd. 3 16 14 LIC Housing 11 3 15 Matrix Labs 4 29 16 NALCO 26 13 17 Reliance Industries 33 12 18 SAIL 12 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antial activity of purchase and sale of units of Mutual Funds. During the year, it has sold units of 121 Mutual Funds. The details of units sold during the year are as under: Sl. No. Details Amount (Rs.) (i) No. of Mutual Funds Traded in 121 (ii) No. of units sold 9704511 (iii) Net sale consideration received 21,21,98,996 (iv) Long term capital gains claimed 5,41,58,133 (v) Short term capital gains claimed 8,27,498 (vi) Short term gain in Debt Funds 3,81,297 48. The assessee-company had repeatedly purchased and sold Mutual Fund units of the same fund throughout the year. Few instances of repetitive purchase and sale of units are as under: Date Particulars No. of MF units sold/purchased 8.3.2006 Franklin India Prima Fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit. Though the word business has not been defined in the taxing statute at it postulates the existence of certain elements in the activity of an assessee which would invest it with the character of business. According to well established interpretation of word business as found in taxing statutes it is the sense of an occupation or profession which occupies the time, attention and labour of a person normally with the object of making profit. To record an activity as business there must be of course of dealing either actually continued or contemplated to be continued with a profit motive and not for support or plier. 51. In our opinion, whether or not a person carried on business in a particular commodity must depend upon volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transaction must ordinarily be entered into with a profit motive. Such motive must pervade the whole series of transaction effected by the person in the course of his activity. To infer from a course of transactions that is intended thereby to carry on business ordinarily the characteristics of volume, frequency and regularity indicating an inte ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
