2012 (5) TMI 367 - AT - Income Tax

Tribunal upholds CIT's jurisdiction under section 263, directs reassessment.

Wig Investments Versus ACIT

Wig Investments Versus ACIT - TMI Issues Involved:1. Whether the income shown by the assessee should be assessed under the head 'business or profession' or 'capital gains'.2. Applicability of section 2(22)(e) of the Income Tax Act regarding deemed dividends.Issue-wise Detailed Analysis:1. Assessment of Income as Business Income or Capital Gains:The primary issue was whether the income from mutual funds should be assessed as business income or capital gains. The assessee argued that the income should be considered as capital gains since the investments were made for long-term purposes, and there was no regular business activity of purchase and sale of mutual funds. The assessee relied on various case laws to support this claim. However, the CIT observed that the transactions were substantial and frequent, indicating a business activity. The CIT referred to CBDT Circular No.4/2007 and concluded that the assessment order was erroneous and prejudicial to the interests of revenue, directing the Assessing Officer to reassess the income under the correct provisions of law.2. Applicability of Section 2(22)(e) - Deemed Dividends:The second issue was whether the capital contributions received from partner companies should be treated as deemed dividends under section 2(22)(e). The assessee contended that the contributions were not loans or advances but capital contributions for a share in the profits. The CIT, however, noted that the partnership seemed to be a device to transfer accumulated profits of the controlled companies to the partners, who were also shareholders in those companies. The CIT cited the Supreme Court's judgment in CIT v. Mukundray K. Shah, which held that such arrangements could attract section 2(22)(e). The CIT directed the Assessing Officer to reassess the applicability of section 2(22)(e) and whether the partnership was a mere device for tax avoidance.Tribunal's Observations and Conclusion:The Tribunal observed that the Assessing Officer did not apply his mind to the complex issues involved and mechanically accepted the assessee's submissions. The Tribunal agreed with the CIT that the assessment order was erroneous and prejudicial to the interests of revenue. However, the Tribunal noted that the CIT should not have given specific findings on certain issues and modified the CIT's order to allow the Assessing Officer to reframe the assessment without being bound by those specific findings.Final Decision:The Tribunal upheld the CIT's assumption of jurisdiction under section 263, allowing the appeal to the extent that the Assessing Officer should reframe the assessment as per law, without being bound by specific findings of the CIT. The appeal was allowed to this extent, and the order was pronounced in the open court.