2017 (8) TMI 1711 - AT - Income Tax

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 ... Reopening of assessment - withdrawal of the exemptions granted u/s.10(38) - disallowance u/s.14A r/w Rule 8D - HELD THAT:- Admittedly, the re-opening has been done beyond the period of four years from the end of the relevant assessment year and consequently, the reasons recorded must disclose the failure on the part of the assessee to disclose fully and truly all material facts required for assessment. In the present case, the reasons recorded do not specify the failure on the part of the assessee to disclose truly and fully all the material facts in respect of the assessment. A perusal of the reasons recorded clearly shows that the same is a verbatim extract of the audit objection. On both these grounds, the reopening is bad in law. However, as the assessee has withdrawn the ground in respect of the challenge to the disallowance u/s.14A, we are unable to quash the re-opening, as if the re-opening assessment is validly initiated in respect of one of the issues, then the AO would be entitled to examine other issues also in the course of the re-opened assessment. In these circumstances, as the assessee has withdrawn the ground in respect of the challenge to the disallowance made u/s.14A, we are of the view that the re-opening is valid. In these circumstances, Ground Nos.1 & 2 of the assessee’s concise grounds stands dismissed. Claim u/s.10(38) in respect of the long term capital gains - A perusal of the Assessment Orders for the earlier years clearly shows that the Revenue has recognized that the assessee is in the business of Derivative, Future & Options in shares and the assessee is having investments in shares which has given rise to long term capital gains and short term capital gains which are being assessed as offered. It is only during this year that the Revenue has shifted its stand and has attempted to tax the long term capital gains disclosed by the assessee and claimed as exempt u/s.10(38) as a business income of the assessee. Circular issued by the CBDT in Circular No.6/2016 in F.No.225/12/2016-ITA-II clearly shows that “In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years' This applies to the Revenue also. In the present case, the assessee has been consistently holding his claim of long term capital gains in respect of his investments in shares. This being so, we are of the view that the AO is not justified in denying the assessee’s claim of deduction u/s.10(38). In these circumstances, the AO is directed to grant the assessee, the claim u/s.10(38) in respect of the long term capital gains disclosed by the assessee. 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 147The 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 SharesThe 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 14AThe 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.