2015 (2) TMI 945 - AT - Income Tax

Tribunal upholds assessment reopening for 2006-07, treats share income as business, allows deductions

M/s. Equity Intelligence (India) P. Ltd. Versus The Assistant Commissioner of Income-tax, Circle-1(1), Kochi

The Tribunal upheld the reopening of assessment under section 147 for the assessment year 2006-07 based on valid reasons to believe that income had ... Reopening of assessment - Under assessment of income under section 143(3) with reference to the intimation under section 143(1) - Treating business income as short-term capital gains - Held that:- Merely because material lies embedded in the material or evidence produced by the assessee, which the Assessing Officer could have uncovered but did not uncover that is not a good ground to cancel the reassessment proceedings. The Assessing Officer could have found the truth, but he did not, does not preclude the Assessing Officer from exercising the power of re-assessment to bring to tax the escaped income. In the present case, as seen from the reasons recorded, there is a prima facie escapement of income. Hence, the Assessing Officer after recording the reasons, issued notice to the assessee under section 148 of the Act. We do not find any infirmity in the order of the lower authorities to reopen the assessment. - Decided in favour of revenue Source of income - Sale of shares - business income or capital gains - Held that:- In the light of the various parameters and the decision of the Andhra Pradesh High Court in the case of P. V. S. Raju v. Addl. CIT [2011 (7) TMI 818 - Andhra Pradesh High Court ] and on perusal of the statements incorporated by the Assessing Officer in the assessment order, we find that the assessees have made several transactions of purchase of shares during the relevant year under consideration, and if there high volume, frequency and regularity of the activity carried on by the assessees in a systematic manner, it would partake of the character of business activities carried on by the assessee in shares, and it cannot be said that the assessees have merely made investments in shares. - Decided in favour of assessee Diminution in the value of shares - assessee made an alternative claim that in the event of the Tribunal confirming the action of the Assessing Officer, reduction in market value of shares has to be allowed as deduction - Held that:- Claim of the assessee is appropriate. However, we make it clear that the shares are to be valued at market price or cost, whichever is less. Accordingly, while passing a consequential order, the Assessing Officer shall consider the same and decide the issue accordingly. - Decided partly in favour of assessee for statistical purposes. Expenses to be allowed under business - Held that:- AO is required to consider what are the expenses relating to the sale transactions to be allowed while computing the income of the assessee, if it is not allowed already. - Decided in favour of assessee for statistical purposes. Disallowance under section 40(a)(ia) - Held that:- This ssue is squarely covered by the order of the Special Bench of the Tribunal, Mumbai in the case of Bharati Shipyard Ltd. v. Deputy CIT [2011 (9) TMI 258 - ITAT MUMBAI] wherein held that the disallowance under section 40(a)(ia) of the Act cannot be made invoking retrospective amendment. - Decided in favour of assessee Issues Involved:1. Reopening of assessment under section 147.2. Treatment of income from sale of shares as business income versus capital gains.3. Diminution in the value of shares.4. Allowance of expenses under business.5. Disallowance under section 40(a)(ia) for shortfall in deduction of tax at source.Detailed Analysis:1. Reopening of Assessment under Section 147:The assessee challenged the reopening of the assessment for the assessment year 2006-07, arguing that no new material facts warranted such action. The Departmental representative contended that new material facts, such as underassessment of income, wrong depreciation claims, and short deduction of TDS, justified the reopening. The Tribunal upheld the reopening, emphasizing that the Assessing Officer had valid reasons to believe that income had escaped assessment, supported by several judicial precedents.2. Treatment of Income from Sale of Shares as Business Income versus Capital Gains:The primary issue was whether the income from the sale of shares should be treated as business income or capital gains. The Commissioner of Income-tax (Appeals) observed that the frequent and high-volume transactions indicated a business motive rather than investment. The assessee argued that the shares were held as investments, not for trading, and cited several judicial precedents and guidelines from the Central Board of Direct Taxes (CBDT). However, the Tribunal, considering factors like high transaction frequency, short holding periods, and the systematic nature of transactions, concluded that the income should be treated as business income. The Tribunal also noted that the assessee's treatment of these transactions in the books was not conclusive.3. Diminution in the Value of Shares:The assessee claimed that if the income from share transactions was treated as business income, the diminution in the value of shares should be allowed as a deduction. The Tribunal agreed, stating that the shares should be valued at market price or cost, whichever is lower, and directed the Assessing Officer to consider this while passing a consequential order.4. Allowance of Expenses under Business:The assessee sought allowance for expenses related to the sale transactions. The Tribunal directed the Assessing Officer to consider and allow the relevant expenses while computing the income, if not already done.5. Disallowance under Section 40(a)(ia) for Shortfall in Deduction of Tax at Source:The assessee argued that the disallowance under section 40(a)(ia) was unwarranted as the shortfall in TDS was due to retrospective amendments in the Finance Act. The Tribunal agreed, citing the Special Bench decision in Bharati Shipyard Ltd. v. Deputy CIT, which held that disallowance cannot be made by invoking retrospective amendments. Consequently, the Tribunal allowed this ground in favor of the assessee.Conclusion:The Tribunal partly allowed the appeals for statistical purposes, directing the Assessing Officer to reconsider certain aspects like diminution in the value of shares and allowance of expenses. The disallowance under section 40(a)(ia) was overturned, and the stay petitions were dismissed as infructuous.