TaxTMI 
TaxTMI 
2011 (8) TMI 1115
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.... 13.11.2006, declaring a total loss of Rs. 45,38,701. Schedule-I of the return of income, containing computation of income from business, showed the assessee's net profit from the profit and loss account at Rs. 21,95,18,260, against which, in item No.10 of Schedule-I, assessee claimed exempt income at Rs. 22,17,11,512. The details of income claimed as exempt are as under- Dividend income from Companies Rs. 47,19,169 Income from Mutual Funds Rs.2,71,85,732 Rs. 3,19,04,901 Long term capital gains Rs.18,98,06,611 Rs.22,17,11,512 3. The break-up of the amount of long term capital gains of Rs. 18,98,06,611, noted above, is furnished in adjusted statement of computation of total income enclosed to the return of income, which indicates Long term capital gains from sale of quoted shares at Rs. 13,56,48,478 and Long term capital gains from the sale of Mutual Fund units at Rs. 5,41,58,133. Assessment thereafter was completed under S.143(3) determining the total income of the assessee at Rs. 21,32,002, vide order of assessment dated 16.12.2008. 4. The Commissioner of Income-tax on perusal of the records of the ass....
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....ax therefore was of the opinion that though the assessee has been carrying on trading in shares and units extensively and regularly in huge volumes an high frequency, but offered the profit generated there from as capital gains and claimed exemption from tax of an amount of Rs. 22,17,11,512. Accordingly, he issued a show cause notice under S.263 dated 20.1.2010, calling upon the assessee to show cause as to why the activity of the assessee should not be treated as trading in units and shares and tax its profits as business income, since the assessment order dated 16.12.208 passed under S.143(3) of the Act accepting the claim of the assessee treating it as capital gains and short term capital gains, according to the Commissioner of Income-tax, was erroneous and prejudicial to the interests of the Revenue. After detailed consideration of the submissions of the assessee in response thereto, the Commissioner of Income-tax ultimately arrived at the following conclusions- (i) The scale of activity of buying and selling shares, mutual fund units, debt funds, etc. is substantial. The assessee sold 10123003 shares of 53 listed companies during the year for a net sale consideration ....
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.... 8. Learned counsel for the assessee, after narrating the facts of the case in brief submitted that initially a show cause notice under S.263 was issued to the assessee on 20.1.2010 to which the assessee has filed its reply on 29.1.2010. After a long pause, the successor Commissioner of Income-tax issued again a show cause notice under S.263 of the Act on 21.2.2011 proposing revision on entirely different grounds. This act of successor Commissioner of Income-tax amounts to starting fresh litigation on new views which is against the ratio of the decision of the jurisdictional High Court in the case of Syrup Paper Mills Ltd. v. ITO & Anr. (114 ITR 404). He further submitted that the order of the Commissioner of Income-tax passed under S.263 is only an alternative method of assessment based on his own study and reappraisal of the same record, which amounts to mere substitution for the assessment order, taking a different and an alternative view. Such a revision made by the Commissioner is not sustainable in law. He further submitted that the assessment in this case was made after the assessee substantiated its claim for exemption in respect of long term capital gains and short term ca....
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....vs. Max India Ltd. (295 ITR page 282) (SC) iii. CIT vs. Gabriel India Pvt. Ltd. (203 ITR 108) (Bom) iv. CIT vs. Arvind Jewellers (290 ITR 689) (Guj.) v. CIT vs. Development Credit Bank Ltd. (323 ITR 206) (Bom) vi. CIT vs. Vikas Polymers (194 Taxman 57) (Del.) vii. CIT vs. Anil Kumar Sharma (194 Taxman 504) (Del.) 9. On merits, the learned counsel for the assessee submitted that the Commissioner of Income-tax has erred in not considering all the facts cumulatively, viz. (a) the assessee has not borrowed any funds and made all the investments with its own funds; (b) the closing stock is valued in the books of accounts consistently at cost and not at cost or market price whichever is lower; (c) the share holders of the company are all family members and first degree relatives; (d) the intention of the assessee to indulge only in the activity of investment. The Commissioner according to the learned counsel considered each of the above facts as only grounds of the assessee. He further submitted relying on catena of decisions, including those of Apex Court, that neither the number of transactions nor the frequency in an year carried on by t....
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....to notice this information on record. As regards acquisition of 6,95,000 shares of 1$ each of the assessee's subsidiary company formed in USA, it is submitted that it is a pure investment as observed by the Commissioner himself. The learned counsel for the assessee also disputed the observation of the Commissioner that the assessee has sold more than 1 crore shares in the year under consideration, and submitted that the total number of shares sold was only 10,23,003. The learned counsel for the assessee also disputed the findings of the Commissioner with regard to assessee's transactions of buying and selling on the same day of shares of Andhra Sugars Limited, by submitting that the transaction dates recorded in the Demat Account were different form the actual dates of transaction and consequently, the dates recorded in the Demat Account would not reflect the correct date of execution of transaction. He clarified in this behalf that all the shares purchased were taken delivery and all the shares sold were given delivery and same is the case with regard to all other scrip where there were no transactions on the same date. 10. As for the assessee's transactions in units of Mutual ....
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....itted in this behalf that the Commissioner has failed to consider the relevant fact that the assessee consistently valued the investments at the end of each year at cost price and not at cost/market price whichever was lower, which is a very important feature of a trader. This aspect has been highlighted in a number of decisions like Fidelity North Star & Others in re (2007) 288 ITR 641(AAR) and ARA Trading and Investments Pvt. Ltd. Vs, DCIT (ITAT Pune in ITA No.499/PN/2008 dated 31.2009), besides the Circular of the Board, being Circular No.4 of 2007. He disputed the observations of the Commissioner of Income-tax that the very name of the assessee-company as also its Memorandum of and Articles of Association are indicative of the nature of activity of the assessee being business and trading in shares, and submitted that these observations are irrelevant and one has to look into what was done by the assessee and not what could have been done. The learned counsel for the assessee submitted that dividend income of the assessee is the outcome of investment and depends upon the business results of the companies concerned and it has nothing to do with the activity of an investor in acqu....
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....e and cautious and is interested in the safety of its capital and wealth creation, and it has never taken the risky plunge into the waters of share trading. Referring to the decision of the Tribunal in assessee's own case for the assessment year 2004-05 in ITA No.477/Hyd/2008, and relying on the conclusion of the Tribunal for that year that assessee was only an investor and not a trader, it is submitted that there is no substantial variation between the facts of that year and the facts of the year under appeal, but for the booking of substantial capital gains in the year under appeal, more particularly in the month of March, which too accrued over a number of years, and this is also due to the impact of the proviso of S.10(38). In this view of the matter, it is pleaded that for the year under appeal also, assessee should be treated only as an investor and activity should not be treated as 'business'. The learned counsel for the assessee relied on the following case-law: i. CIT vs. Max India Ltd. (268 ITR 128) (P&H). ii. CIT v. Mehsana District Co-operative Milk Producers Union Limited (263 ITR 645) (Guj.) iii. CIT v. Simon Carves Ltd. (105 ITR 212) (SC). ....
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....21 mutual funds were 9764511. At least equal number of shares and units have been purchased during the year. These details are enumerated in tabular form on page 7 of the CIT order u/s. 263 of the Act. The assessee-company has purchased and sold 500 shares of Reliance Industries Limited on 8.8.2005 i.e., on the same day without taking delivery, by squaring the account. This is a day trading transaction. The assessee had availed the services of three leading stock brokers for its trading activity viz., Sl. No. Name of the company Purchase & Sales (Rs.) 1. M/s. Excel Fincap Pvt. Ltd. 36,62,25,492 2. Standard Chartered Securities 1,60,86,428 3. UTI securities 1,40,00,000 15. The learned DR further submitted that the above turnover covers only part of the year. The assessee has sold 2,00,000 unquoted shares of M/s. Hindustan Coca Cola Beverages Pvt. Ltd. and received Rs. 2,66,08,493. The assessee has invested in 6,95,000 shares of 1 dollar each of its subsidiary company formed in USA viz., Vijaya Finvest Inc. Amounting to Rs. 3,36,72,409. The assessee has also purchased and sold shares of Andhra Sugars Ltd., the details of which are give....
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....chased and sold Mutual Fund units of the same fund throughout the year. Few instances of repetitive purchase and sale of units are as under: Date Particulars No. of MF units sold/purchased 8.3.2006 Franklin India Prima Fund 26011 9030 10.3.2006 Franklin India Prima Fund 22116 52734 35659 10.3.2006 Tata Equities Opportunities Fund 33814 97252 65221 3.10.2003 Franklin India Prima Fund 19586 20000 20000 19. The learned DR submitted that on 27.03.2006, the assessee purchased through one broker 23400 shares and sold 28607 shares. Similarly on 28.3.2006, it brought 43340 shares of 17 companies and sold 4750 shares of four companies. Per day more than 50 trade orders are executed on the stock exchanges covering purchases and sales. A study of the above data reveals that the assessee has been regularly buying and selling shares and mutual fund units though very high volume of transactions throughout the year. The fact that the assessee-company is doing buying and selling of ....
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....n of the transactions. In fact, the Hon'ble A.P. High Court in the case of CIT v. JD Italia (141 ITR 953) and even the Hon'ble Supreme Court in the case of CIT v. Bazpur Co. Operative Sugar Factory Ltd. (172 ITR 330) has held that the name or label given by a party to a particular amount in its books of account is not conclusive. The Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (227 ITR 172) held that the entries in the books of account are not the determining factor regarding the real nature of transaction. Thus, the assessee's contention that the closing stock was shown as investment in its balance sheet are held to be closing stock of its business and not investments. 22. The learned DR further submitted that merely because borrowed funds were not used is not a conclusive fact in understanding the true nature of transactions. One can do business with more ease and high profits with own funds. That is no conclusive fact to say that it was not doing trading in shares. Similarly, the fact that a large part of the profit was because of some shares sold after six months or one year, is also not conclusive as to the intention of the tran....
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.... company rather than the category to which it belongs viz., NBFC or not. The income tax authority has the power to lift the veil and find the true nature of the business of the assessee. In this case, the assessee has been doing trading in shares and units as shown above and not investments or financing of other business enterprises. On the facts of the case, the ratio laid down by the Supreme Court in the case of McDowell & Co. Ltd. (154 ITR 148) is squarely applicable as the assessee is trying to take shelter of its being an NBFC to camouflage its trading activity in shares and units of mutual funds. In the Memorandum of Articles of Association of the company one of the objects clause states that: "the company will raise funds to acquire or hold, sell, buy or otherwise deal in shares, debentures, bond units, obligations and other securities." 25. The learned DR submitted that the assessee has been precisely doing buying and selling of shares, mutual fund units, debt funds, unlisted company shares, etc. These are all reflective of the assessee's clear business activity and not investment activity. On the basis of the above facts and analysis, he submitted that the following ....
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....accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to erroneous order of the assessing officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interest of the revenue. As held in the case of Malabar Industries Co. Ltd., Vs. CIT ( 243 ITR 83 (SC), the Commissioner can exercise revision jurisdictional u/s 263 if he is satisfied that the order of the assessing officer sought to be revised is (i)erroneous; and also (ii) prejudicial to the interests of the revenue. The word 'erroneous' has not been defined in the Income Tax Act. It has been however defined at page 562 in Black's Law Dictionary (seventh Edition) thus'; 'erroneous, adj. Involving error, deviating from the law'. The word 'error' has been defined at the same page in the same dictionary thus: 'error No. 1 : A psychological state that does not conform to Objective reality; a brief that what is false is true or that what is true is false'. At page 649/650 in P. Ramanatha Aiyer's Law Lexicon Reprint 2002, the word 'error' has been defined to mean- 'Error. A mistaken judgement or deviation from the truth in matters of fact, a....
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....ection 263 of the Income-tax Act seeks to remove the prejudice caused to the revenue by the erroneous order passed by the Assessing Officer. It empowers the Commissioner to initiate suo moto proceedings either where the Assessing Officer takes a wrong decision without considering the materials available on record or he takes a decision without making an enquiry into the matters, where such inquiry was prima facie warranted. The Commissioner will be well within his powers to regard an order as erroneous on the ground that in the circumstances of the case, the Assessing Officer should have made further inquiries before accepting the claim made by the assessee in his return. The reason is obvious. Unlike the Civil Court which is neutral in giving a decision on the basis of evidence produced before it, the role of an Assessing Officer under the Income-tax Act is not only that of an adjudicator but also of an investigator. He cannot remain passive in the face of a return, which is apparently in order but calls for further enquiry. He must discharge both the roles effectively. In other words, he must carry out investigation where the facts of the case so require and also decide the matte....
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....the case. In taking the aforesaid view, we are supported by the decisions of the Hon'ble Supreme Court in Rampyari Devi Saraogi v. CIT (67 ITR 84) (SC), Smt. Tara Devi Aggarwal v. CIT (88 ITR 323) (SC), and Malabar Industrial Co. Ltd's case ( 243 ITR 83) (SC). 31. In Malabar Industrial Co. Ltd. case the Hon'ble Court has held as under: "There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall the orders passed without applying the principles of natural justice or without application of mind. In our humble view, arbitrariness in decision-making would always need correction regardless of whether it causes prejudice to an assessee or to the State Exchequer. The Legislature has taken ample care to provide for the mechanism to have such prejudice removed. While an assessee can have it corrected through revisional jurisdiction of the Commissioner under Section....
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....d that it is not required that the reasons should be as elaborate as in the decision of a court of law. The extent and nature of the reasons would depend on particular facts and circumstances. What is necessary is that the reasons are clear and explicit so as to indicate that the authority has given due consideration to the points in controversy. The need for recording of reasons is greater in a case where the order is passed at the original stage. The appellate or revisional authority, if it affirms such an order, need not give separate reasons if the appellate or revisional authority agrees with the reasons contained in the order under challenge." 32. Similar view was earlier taken by the Hon'ble Supreme Court in Siemens Engg. & Mfg. Co. Ltd. v. Union of India AIR 1976 SC 1785. It is settled law that while making assessment on assessee, the ITO acts in a quasi-judicial capacity. An assessment order is amenable to appeal by the assessee and to revision by the Commissioner under Sections 263 and 264. Therefore, a reasoned order on a substantial issue is legally necessary. The judgments on which reliance was placed by the learned Counsel for the assessee also points to the sa....
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....e 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 securities. This is a case where the Assessing Officer mechanically accepted what the assessee wanted him to accept without any application of mind or enquiry. The evidence available on record is not enough to hold that the claim made by the assessee was objectively examined or considered by the Assessing Officer. It is because of such non-consideration of the issues on the part of the Assessing Officer that the claim by the assessee stood automatically accepted without any scrutiny. The assessment order placed before us is clearly erroneous as it was passed without proper examination or enquiry or verification or objective consideration of the claim made by the assessee. The Assessing Officer has completely omitted the issue in question from consideration and made the assessment in an arbitrary manner. His order is a completel....
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....s 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 prejudicial to the interests of the revenue. 36. We are unable to accept the submission of the learned Counsel for two other reasons also. First reason is that the view so taken by the Assessing Officer without making the requisite inquiries or examining the claim of the assessee will per se be an erroneous view and hence will be amenable to revisional jurisdiction under Section 263. Second reason is that it is not taking of any view that will take the matter under the scope of Section 263. The view taken by the Assessing Officer should not be a mere view in vacuum but a judicial view. It is well established that the Assessing Officer being a quasijudicial authority cannot take a view, either against or in favour of the assessee / revenue, without making proper inquiries and without proper examination of the....
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....nalysing the facts in the light of applicable law. Therefore, proper examination of facts in the light of relevant law is a necessary concomitant in order to say that the Assessing Officer has adopted a permissible course of law or taken a view where two or more views are possible. It is only after such proper examination and evaluation has been done by the Assessing Officer that he can come to a conclusion as to what are the permissible courses available in law or what are the possible views on the issue before him. In case he comes to the conclusion that more than one view is possible then he has necessarily to choose a view, which is most appropriate on the facts of the case. In order to apply the aforesaid observations to a given case, it must therefore first be shown that the Assessing Officer has "adopted" a permissible course of law or, where two views are possible, the Assessing Officer has "taken" one such possible view in the order sought to be revised under Section 263. This requires the Assessing Officer to take a conscious decision; else he would neither be able to "adopt" a course permissible in law nor "take" a view where two or more views are possible. In other word....
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.... natural justice or without application of mind will satisfy the requirement of the order being erroneous and prejudicial to the interest of the revenue. If the order sought to be revised under Section 263 suffers from any of the aforesaid vices, it cannot be said that the Assessing Officer has "adopted", in such an order, a course permissible in law or "taken" a view where two or more views are possible." 40. It was next contended by the learned Authorised Representative that the Assessing Officer had considered all the relevant aspects of the case carefully while passing the order. According to him, the mere fact that the assessment order passed by the Assessing Officer was short would neither mean failure on his part in not examining the matter carefully nor would render his order erroneous so long as the view taken by him was a possible view. In our view, the aforesaid submission of the assessee must fail for the reasons already explained in the foregoing paras of this order as the order, which is sought to be revised under Section 263 reflects no proper application of mind by the Assessing Officer and thus be amenable to revision under Section 263. In this case before us, t....
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....ciples of natural justice or without application of mind or without making requisite inquiries will satisfy the requirement of the order being erroneous and prejudicial to the interest of the revenue within the meaning of Section 263. 42. Further the assessee's counsel taken a plea that consistency has to be followed. In our opinion, in the case of income tax matters each assessment year is an independent assessable distinct unit in which principles of res judicata are not applicable. The income of each assessment year and admissible expenses are determined in each year considering the facts and circumstances of the case prevailing during the year. As per the facts and circumstances of the case if there is a change in the facts and circumstances, a different view as per the changed facts and circumstances is required to be taken, In this case, on enquiry the CIT came to conclusion that the assessee is engaged in the business of buying and selling of shares and income arising out of these transactions has to be considered as income from business instead of considering the same as income from capital gain. Accordingly, we do not find any infirmity in the order of the CIT. The same....
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....h are not reproduced here for brevity. 46. A sample study of the shares purchased and sold in April, 2005 and February, 2006 was done as furnished by the assessee. The data shows that during April, 2005, the assessee purchased 64476 shares of 28 listed companies for Rs. 1,39,82,193 and in the same month sold 29910 shares for Rs. 33,80,617. Similarly during the month of February, 2006, the assessee purchased 56769 shares of 45 companies for Rs. 1,01,40,444 and sold during the same month 118806 shares for Rs. 3,14,16,760. This data shows that each month the assessee is buying and selling over 60,000 shares of over Rs. 3 crores. In order to see the trend of purchases and sales made on a single day the data of two dates was compiled as follows: 47. Further, the assessee-company has carried out substantial activity of purchase and sale of units of Mutual Funds. During the year, it has sold units of 121 Mutual Funds. The details of units sold during the year are as under: Sl. No. Details Amount (Rs.) (i) No. of Mutual Funds Traded in 121 (ii) No. of units sold 9704511 (iii) Net sale consideration received 21,21,98,996 (iv) Long term capital....
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....otive 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 ordinarily the characteristics of volume, frequency and ....