TaxTMI 
TaxTMI 
2012 (11) TMI 713
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....ed the notice of reopening of the assessment of that year. The assessment of that year, if reopened and revised, may not be sustainable in law. The learned Commissioner of Income-tax(Appeals) has failed to appreciate that the issue of application of Section 45(2) has to be decided on the facts obtaining for the A.Y. under appeal and not on hypothetical facts relating to the preceding assessment . 4. The learned CIT(A) has also erred in holding that the sale of units constituted trading turnover by not appreciating the fact that the units are not a marketable commodity and that the turnover of units constitute turnover of investments." 3. Briefly stated, relevant facts of the case are that the assessee filed the return of income for AY 2006-07 on 25.10.2006 declaring a loss of Rs 48,35,701, which was assessed under S.143(3) vide order dated 15.12.2008 determining its total income at Rs.21,32,002. Subsequently, the CIT issued a show cause notice proposing to review the said order of the AO holding the same as 'erroneous and prejudicial to the interests of the Revenue', and ultimately passed his review order u/s 263 dated 31.3.2011. On appeal to the Tribunal for adjudication ....
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....ed with the said fresh assessment order of the AO, the assessee filed appeal before the CIT(A) raising the issue relating to correctness of the AO's finding on the change of head of income and taxing the same as 'business income'. Without prejudice, assessee also raised the issue of applicability of the provisions of S.45(2) of the Act, when the AO thrust the conversion of shares into stock in trade. 7. Insofar as the issue relating to the head of income is concerned, the CIT(A) essentially followed the order of the ITAT and upheld the views of the AO held in the assessment order passed under S.143(3) read with S.253 of the Act. In the process, the CIT(A) extracted the relevant conclusions of Commissioner of Income-tax III, Hyderabad, from the revision order and also the conclusions arrived at by the Tribunal in its order in the appeal. Further, the CIT(A) discussed various decisions and facts of the present case before concluding that the claims made by the assessee with reference to the long term capital gains and short term capital gains cannot be accepted. 8. As for the other issue raised for the first time before the CIT(A) vide grounds in Form 35, without prejudice on the a....
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.... of income, Ld DR for the Revenue heavily relied on the order of the Tribunal dated 5.8.2011 in ITA No.748/Hyd/2011 and dated 16th March, 2012 in MA No 193/Hyd/11 arising there from. In summary, Dr Rao argued submitted that the said orders of the tribunal have to be followed and said earnings on sale of impugned shares have to be assessed under the head of income "profits and gains from business or profession". 12. We heard the parties on both the contentious issues detailed in the preceding paragraphs i.e. (i) correctness of the claim of the earnings on sale of shares/units under head of income of 'capital gains' and (ii) issue raised without prejudice ie on the applicability of the provisions of section 45(2) of the Act, when the AO thrust the conversion of shares from investment into the stock in trade despite the protest by the assessee. In so far as the first issue is concerned, as mentioned by the parties before us, the ITAT had already upheld the views of the Revenue and confirmed the views of the CIT given in the review order u/s 263 of the Act. The coordinate Bench of this Tribunal vide order dated 5.8.2011 in ITA No.748/Hyd/2011 on the issue has to be followed and theref....
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....l 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 not show any application of mind on his part. He simply accepted the income declared by the assessee under the head 'long term capital gains' as it is, though the assessee company has been carrying on the business in shares. The Assessing Officer not bothered to examine the nature of business carried on by the assessee though it was mentioned in the tax audit report that the assessee is engaged in the business of 'investment/trading of shares and securities'. It was also on record that the Tribunal for the assessment year 2004-05 vide order dated 3.10.2008 in ITA No.477/H/2008 has held that the assessee was engaged in the business of investments and trading on shares and securit....
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.... 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, examination into the claim of the assessee. If the Assessing Officer passes an order mechanically without making the requisite inquiries or examining the claim of the assessee in accordance with law, such an order will clearly be erroneous in law as it would not be based on objective consideration of the relevant materials. It is therefore, the mere failure on the part of the Assessing Officer in not making the inquiries or not examining the claim of the assessee in accordance with law that per se renders the resultant order erroneous and prejudicial to the interest of the revenue. Nothing else is required to be established in such a case to show that the order sought to be revised is erroneous and preju....
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....o only for the purpose of investment and there was no motive of the assessee to earn 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 or....
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....the shares which were sold in this year under consideration were the brought forwarded ones from the preceding years, where the revenue did not disturb the 'investment status' of those shares given in the books. In effect, this is the case of 'conversion of shares held as investment into the stock in trade' within the meaning of section 45(2) of the Act. 16. It is in this backdrop of the facts, assessee for the first time raised an alternative issue raised in ground 2 and 3 of the ground extracted above before the first appellate authority ie CIT(A). It is the argument of the assessee that, when such conversion is trust on the assessee despite the protest, the AO ought to have applied the provisions of section 45(2) of the Act and computed the taxable profits. In principle, the CIT(A) upheld the applicability of the provisions of section 45(2) of the Act and however, he rejected the alternative claim of the assessee mentioning that the assessment for the preceding year, viz. assessment year 2005-06 is reopened and therefore, conversion of investment into stock in trade did not take place in the accounting year for the year under appeal, viz. 2006-07. In the impugned order, the CIT....
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....ween such market value and their cost of acquisition has to be assessed under the head 'capital gains'. Thereafter, in the second leg, income from sale of shares or redemption of units has to be found out by arriving at the difference between the sale price and the market price as on the date of aforesaid conversion. Accordingly, in principle, the appellant is right in contending that once the activities are considered as in the nature of business or trading shares/units, it would be entitled to the benefit of sec.45(2) on the date of conversion of shares/units held as 'investments' earlier intos tock in trade. However, the question is, as to , what is the point of such conversion. It is seen that in terms of the provisions of sec.45(2), such benefit is available when "the owner of a capital asset" converts or treats such capital asset into "stock in trade of a business carried on by him". In the instant case however, the appellant never conceded that it had converted its capital asset into stock in trade of its business, nor the appellant has treated such investments as the stock in trade of its business by filing any trading account before the Assessing officer or even in the cou....
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.... in his order, vide ground No.3, Ld counsel submitted that the assessment was neither reopened finally nor revised by the CIT nor the assessee received any notice of reopening for the assessment year 2005-06. In these circumstances, he pleaded that the assessee's alternative claim should have been allowed considering the principle of consistency. Mr Mehta argued stating that the revenue cannot deny the entitled benefits to the assessee merely relying on the future outcome of the likely reassessment proceedings for the AY 2005- 06. Ld counsel read out the provisions of S.45(2) of the Act and explained that normally, the provisions of sub-section (2) comes into play where there is a transfer of capital asset by way of a conversion or the treatment as stock in trade of the business of such capital asset. Explaining the facts of the case, learned counsel mentioned that in the instant case, the assessee has been regularly treating its capital assets as investment, the profits and gains earned on transfer of these assets should have been treated as capital gains. But, in this case, the assessing officer made out a case of conversion of investments into the stock in trade, by rejecting th....
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....ars. The assessee cannot change the book entries overnight, when the Revenue authorities do not approve the assessee's stand in the year under appeal. More so, when the assessee contests the action of the Revenue authorities by filing appeal before the Hon'ble High Court of Andhra Pradesh. When the Hon'ble High Court is thus seized of the matter, any change in the entries in the books of account, as expected by the Revenue authorities, would be contradictory to its stand from the beginning and before the Hon'ble High Court and it would be selfdefeating, and that being the position, the assessing officer should understand that the assessee is not in a position to take a stand with reference to the conversion or treatment of the impugned transactions. Elaborating the above, he mentioned that it is the duty of the assessing officer to make proper assessment by applying the provisions of the Act, granting all the benefits due to the assessee, who may or may not ask for the same. In this regard, learned counsel relied on the decision of the Bombay High Court in the case of Ciba of India Ltd. V/s. CIT (202 ITR 1), wherein, vide relevant portion of the head-note of the Reports(202 ITR), i....
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....n the date of conversion i.e. 1.4.2005, if adopted as submitted by the assessee without prejudice, Ld DR mentioned that there is requirement of passing of multiple rectification orders as date 1.4.2005 cannot be taken as the date of conversion in view of the intended reopening of the proceedings under S.148 of the Act for the preceding AY 2005-06. Therefore, the benefits of S.45(2) are rightly denied by the CIT(A), and therefore, the impugned order of the CIT(A) does not call for any interference. 23. During the rebuttal time, the learned counsel for the assessee mentioned that assessee has already furnished required computation of income applying the provisions of S.45(2) without prejudice to its original position that the transactions in question are to be decided as per the provisions relating to the capital gains and not under the head 'business or profession'. He also mentioned that when the matter can be set aside to the file of the assessing officer with a direction to apply the provisions of S.45(2) of the Act, which was in principle agreed to by the CIT(A) against when there was no appeal by the Revenue. 24. We heard both the parties and perused the papers available befo....
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....im as, stockin- trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stockin- trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset." The above sub-section deems that the conversion by the owner of or treatment of, capital asset into/as stock-in-trade generates profits or gains. Such conversion or treatment has to be done by the assessee and not by anybody else. These profits or gains are taxable in the AY, in which the said stock in trade of the business is sold. Date of conversion is deeded as the date of transfer for the purpose of section 48 of the Act. Full value of consideration is the FMV of the share on the said date of conversion. 26. The above provisions provide for the computation and it is done in two steps. Firstly, the market value as on the date of conversion has to be ascertained in respect of the shares/units sold during the year. The difference between the market....
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....or even "do some violence" to it, so as to achieve the obvious intention of the Legislature and produce a rational construction vide Luke vs. IRC (1963) AC 557. The Court may also in such a case read into the statutory provision a condition which, though note expressed, is implicit as constituting the basis assumption underlying the statutory provision. It is a well recognised rule of construction that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided." 28. Therefore, AO is duty bound to make the assessment in accordance with the provisions of the Act including the provisions of section 45(2) of the Act. Reliance is placed on the judgment of the Bombay High Court in the case of Ciba of India Ltd vs CIT 202 ITR 1, which was in fact decided in the context of ITAT's failure to issue directions. The CIT(A) appreciated the claim of the assessee and upheld the applicability of the provisions of section 45(2) of the Act, with which we agree. Now, we shall take up the procedural issues connected to the computation of the impugned capital gains and to examine if the CIT(A) is justified in rejecting the benefits of section 45(2) of the Act. ....
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.... that the assessee has been consistently following a method of accounting showing the impugned investments as capital assets and not business assets or stock in trade. The stand of the assessee right from the beginning, and even now in its contest before the Hon'ble High Court, is that the capital assets in question are its investments and any gain on sale of the same is assessable as capital gains and not as business income. The claim of the assessee, in the meanwhile, for relief under S.45(2) of the Act, springs as a consequence of rejection of its stand by the revenue authorities, who treated the gain on sale of shares as business income. When the assessee persists with its stand and contests the rejection of its claim with regard to assessment of capital gains in appeal before the Hon'ble High Court, it would be unfair for the Revenue authorities to expect the assessee to change the entries in its books of account, so as to consider the claim of the assessee for relief under S.45(2) of the Act. It is so because, such alteration of the entries in the books would be contradictory to its own stand from the beginning, and self defeating for the assessee in the appellate proceedings....