Tribunal upholds assessment reopening, grants capital gains exemption, finds reassessment invalid due to lack of disclosure

The tribunal partly allowed the appeal, upholding the validity of the assessment reopening but directing the AO to grant the exemption for long-term capital gains under Section 10(38) regarding the treatment of income from the sale of shares. The tribunal found the reassessment invalid due to lack of disclosure by the assessee but could not quash it entirely as the challenge to disallowance under Section 14A was withdrawn.

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Issues Involved:
1. Jurisdiction: Re-opening of assessment under Section 147 of the Income Tax Act, 1961.
2. Merits: Treatment of income from the sale of shares as business income versus long-term capital gains under Section 10(38).
3. Disallowance under Section 14A.

Detailed Analysis:

Jurisdiction: Re-opening of Assessment under Section 147

The assessee challenged the re-opening of the assessment by the Assessing Officer (AO) under Section 147, arguing that all relevant materials were furnished with the original return, and there was no non-disclosure or omission. The reopening was claimed to be based on a mere change of opinion and dictated by the audit party and Commissioner of Income Tax (CIT), without independent application of mind by the AO.

The tribunal noted that the reopening was beyond four years from the end of the relevant assessment year. For such cases, the reasons recorded must disclose the failure on the part of the assessee to fully and truly disclose all material facts. The tribunal found that the reasons recorded did not specify such failure and were a verbatim extract of the audit objections, making the reopening bad in law. However, since the assessee withdrew the ground challenging the disallowance under Section 14A, the tribunal could not quash the reopening entirely. Therefore, Ground Nos. 1 & 2 of the assessee’s concise grounds were dismissed.

Merits: Treatment of Income from Sale of Shares

The assessee contended that the income from the sale of shares should be treated as long-term capital gains and not business income. The assessee had consistently shown the purchase of shares as investments in the balance sheet, and this treatment had been accepted by the Revenue in earlier and subsequent years.

The tribunal examined the assessee's balance sheet, which separately showed investments and business assets. The tribunal also considered the CBDT Circular No. 6/2016, which clarifies that if listed shares are held for more than 12 months and the assessee opts to treat the income as capital gains, this treatment should not be disputed by the AO. The tribunal found that the assessee had consistently treated the shares as investments, and the majority of the shares sold during the accounting year were held for more than two years.

Given the consistency in the assessee's treatment of shares as investments and the CBDT circular, the tribunal directed the AO to grant the assessee the exemption under Section 10(38) for long-term capital gains. Consequently, Ground Nos. 3 to 8 of the assessee’s concise grounds were partly allowed.

Disallowance under Section 14A

The assessee initially challenged the disallowance of interest under Section 14A but later chose not to press this ground. Consequently, Ground Nos. 9 to 11 were dismissed as not pressed.

Conclusion:

The appeal filed by the assessee was partly allowed. The tribunal upheld the validity of the reopening of the assessment but directed the AO to grant the exemption under Section 10(38) for long-term capital gains.

Order Pronounced:
The order was pronounced in the Open Court on August 08, 2017, at Chennai.

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