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Tuesday, June 18, 2013

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IT : Where assessee had to recover certain amount from its sister concern on account of goods sold, since said amount involved business transaction and it could not be categorised as loan or advance, question of application of section 2(22)(e) did not arise in respect of same


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[2013] 33 taxmann.com 614 (Gujarat)

HIGH COURT OF GUJARAT

Commissioner of Income-tax-II

v.

Shripad Concrete (P.) Ltd.*

AKIL KURESHI AND MS. SONIA GOKANI, JJ.

TAX APPEAL NO. 208 OF 2013†

APRIL 3, 2013

Section 2(22) of the Income-tax Act, 1961 - Deemed dividend [Loans or advances] - Assessment year 2006-07 - During assessment proceedings, Assessing Officer found that assessee had given certain amount as advance to its sister concern - Assessee's explanation was that said amount was not a loan or advance rather it represented value of goods sold to sister concern - Assessing Officer rejected assessee's explanation and made addition under section 2(22)(e) -Commissioner (Appeals) as well as Tribunal finding that assessee had infact sold goods to its sister concern, set aside addition made by Assessing Officer - Whether since amount in question involved business transaction and it could not be categorised as loan or advance, question of application of section 2(22)(e) did not arise - Held, yes - Whether, therefore, impugned addition was rightly deleted - Held, yes [Para 2] [In favour of assessee]

Manav A. Mehta for the Appellant.

ORDER



Akil Kureshi, J. - Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal ('the Tribunal' for short) dated 24.8.12, raising following question for our consideration:

"Whether on the facts and in the circumstances of the case, and in law, the ITAT was justified in holding that the amount of Rs.35,50,000/- received from Shripad Conchem Pvt. Ltd. and Shripad Construction, and Rs.1,02,830/- accumulated profit from Eco System Management Service (P.) Ltd., are not taxable in the hands of assessee company as deemed dividend u/s.2(22)(e)?

2. For the assessment year 2006-07, the Assessing Officer taxed a sum of Rs.35.50 lacs as deemed dividend within the meaning of section 2(22)(e) of the Income Tax Act, 1961 ('the Act' for short). The Assessing Officer noted that the assessee had shown two separate amounts of Rs.12.15 lacs (rounded off) by way of advance to Shripad Conchem Pvt. Ltd. and Rs.35.75 lacs (rounded off) by way of advance to Shripad Construction. Both being sister concerns of the assessee company the assessee was put to notice why such amount should not be treated as deemed dividend. The assessee contended that it had maintained two separate accounts. The above noted amounts were not in the nature of loan and advance, but were merely in the nature of production advance. The Assessing Officer, however, rejected such a theory and taxed the said amount as noted above. The assessee thereupon approached the appellate Commissioner. The CIT(Appeals), noted that the assessee was maintaining two separate accounts. One was for the purpose of financial transactions and other account was for business transactions. During the year under consideration the assessee had sold goods of Rs.12.15 lacs to Shripad Conchem Pvt. Ltd and Rs.35.75 lacs to Shripad Construction. Separate accounts for the sale were maintained. As and when the assessee company needed the funds, it obtained amount on various dates. The assessee company was manufacturing concrete mix and major part of the goods were sold to the, said companies. CIT (Appeals), therefore, allowed the assessee's appeal and reversed the decision of the Assessing Officer. The Revenue, thereupon, approached the Tribunal. The Tribunal confirmed the view of the CIT(Appeals), making following observations:

"6. We have perused the orders of the authorities below and gone through the cases relied upon by the appellant. The Ld. A.O. attracted the provisions of section 2(22)(e) of the IT Act on loan of Rs.35,50,000/- but the appellant has established that these are business transactions. The appellant sold has established that these are business transactions. The appellant sold goods of Rs.12,15,513/- to M/s. Shripat Conchem (P.) Ltd.and Rs.35,75,975 to M/s. Shripat Construction division of M/s. Shripat Conchem (P.) Ltd.. There were two accounts maintained by the appellant, one for financial transaction and another for business transaction. The loan amount was partly re-paid during the year. If both the accounts are taken together, there is liability on the assessee but it was business necessity of the appellant. It is not a loan as envisaged in section 2(22)(3) of the IT Act. We respectfully follow the findings given by the Co-ordinate Bench as discussed above as are squarely applicable on the assessee's case. There is no merit in the department's appeal. Accordingly, the same is dismissed."

Having heard the learned counsel Shri Manav Mehta for the Revenue and having perused the documents on record, we find that the Tribunal has committed no error. As a matter of fact, it was found by CIT(Appeals) which was upheld by the Tribunal that the appellant had sold goods and had established that the amounts involved business transactions. Such amounts, therefore, cannot be categorized as loan as envisaged under section 2(22)(3) of the Act. Section 2(22)(e) of the Act, as is well known, treats certain loan or advance made by the company to a person who is the beneficial owner of the shares holding not less than ten per cent of the voting power under certain circumstances to be the deemed dividend. In the present case, when the authorities found that the amount in question cannot be categorized as loan or advance, question of application o of section 2(22)(e) would not arise.

Before closing, we may clarify that the Tribunal in the impugned judgment has made a reference to a decision of the Ahmedabad Bench in the case of Sai Jyoti & Printing Ltd. The Tribunal has also reproduced a portion of that judgment. We are of the opinion that the said decision has no bearing in the present appeal. This order, therefore, would have no effect on the Revenue's appeal against such order, which we are informed has been admitted.

In the result, Tax Appeal is dismissed.

SUNIL









35D. (1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2),—

(i) before the commencement of his business, or

(ii) after the commencement of his business, in connection with the extension of his 27a[industrial] undertaking or in connection with his setting up a new27a[industrial] unit,

the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the 27a[industrial] undertaking is completed or the new 27a[industrial] unit commences production or operation :

28[Provided that where an assessee incurs after the 31st day of March, 1998, any expenditure specified in sub-section (2), the provisions of this sub-section shall have effect as if for the words “an amount equal to one-tenth of such expenditure for each of the ten successive previous years”, the words “an amount equal to one-fifth of such expenditure for each of the five successive previous years” had been substituted.]





Section 35D as it was in the A.Y 2007-08.From the reading of this section , it is clear that after commencement of business as per 35D(ii),deduction is allowable only if it is industrial undertaking.Industrial undertaking has been defined something which is involved in the process of manufacturing. Hospital is not an industrail undertaking.(reliance may placed on Appollo hospitals judgement of madras high court in refernce to sec. 72A).

The Hon,ble ITAT while allowing the appeal of the assessee in this case considered the provisions of sec. 35D has amended fom A.Y.2008-09. The word "industrail " has been omitted from A.Y. 2008-09.

Department must file MA before ITAT as the revnue involved is subsantaial.





IT : Where assessee, running hospitals, paid professional fees for acquisition of land to set up hospitals, it was allowable as preliminary expense in connection with expansion of business under section 35D

IT : Expenditure on registration of lease agreement is allowable as revenue expenditure

IT : Expenditure on recruitment through agencies is allowable as revenue expenditure, as it is an ongoing exercise

IT : Merely because assessee was in second year of operations and period between revenue recognition and write off of debt was short, amount claimed as bad debts could not be disallowed

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[2013] 32 taxmann.com 347 (Bangalore - Trib.)

IN THE ITAT BANGALORE BENCH 'C'

Deputy Commissioner of Income-tax, Circle 5(1), Bangalore

v.

Columbia Asia Hospitals (P.) Ltd.*

N.V. VASUDEVAN, JUDICIAL MEMBER

AND JASON P. BOAZ, ACCOUNTANT MEMBER

IT APPEAL NOS. 1146 (BANG.) OF 2011 & 449 (BANG.) OF 2012

[ASSESSMENT YEARS 2007-08 & 2008-09]

FEBRUARY 15, 2013

I. Section 35D of the Income-tax Act, 1961 - Preliminary expenses [Illustrations] - Assessment year 2007-08 - Assessee, running hospitals, incurred expenditure towards professional fees paid to law firms for acquisition of land to set up hospitals and claimed one-fifth of it as preliminary expenses under section 35D - Assessing Officer held it to be capital in nature and disallowed same - Whether, professional fees paid for acquisition of land to set up hospitals was incurred in connection with expansion of business, and therefore, one-fifth of it was allowable as preliminary expense - Held, yes [Para 5.3.4] [In favour of assessee]

II. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Lease expenses] - Assessment year 2007-08 - Whether, expenditure incurred by assessee towards registration of building taken on long lease, was allowable as revenue expenditure and was not capital in nature - Held, yes [Para 6.5] [In favour of assessee]

III. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Expenditure on recruitment] - Assessment year 2008-09 - Assessee incurred expenditure for identification and recruitment of manpower through an agency - Assessing Officer, taking a view that recruitment made through agencies was not easily terminated and that it was a non-recurring expense, held it to be capital in nature - Commissioner (Appeals), holding that recruitment was an ongoing exercise, allowed same as revenue expenditure - Whether, expenditure on recruitment through agencies was allowable as revenue expenditure - Held, yes [Para 12.3] [In favour of assessee]

IV. Section 36(1)(vii) of the Income-tax Act, 1961 - Bad debts - Allowability Of [Dues from patients] - Assessment year 2008-09 - Assessee-hospital claimed amount as bad debts, consisting of small amounts due from patients - Assessing Officer held, that it being second year of operation for assessee, it was premature to declare debts as bad when no efforts for recovery were made, and disallowed same - Whether, merely because it was second year of assessee's operations and period between revenue recognition and write off of debt was short, amount claimed as bad debts could be disallowed - Held, no [Para 14.3.3] [In favour of assessee]

FACTS - I



■ The assessee had incurred expenditure towards professional fees paid to various advocates and law firms for acquisition of land to set up hospitals. It claimed one-fifth of the expenditure as preliminary expenses under section 35D.

■ The Assessing Officer, held that since the expenditure was not in the nature of preparation of feasibility reports or market surveys, it was not allowable as preliminary expense under section 35D. He held it to be capital in nature and disallowed the same.

■ The Commissioner (Appeals) concluded that the expenses were incurred in connection with expansion of business and allowed one-fifth of the expenditure as preliminary expenditure.

■ On appeal by revenue:



HELD - I



On issue of preliminary expenses

■ On perusal of the provisions of section 35D, it is seen that section 35D(1) relating to amortization of certain preliminary expenses, allows deduction for expenditure incurred:

(i) before the commencement of business, or

(ii) after the commencement of business, in connection with the extension of undertaking or in connection with setting up of a new unit.

■ Section 35D(2) specifies the expenditure that are eligible for deduction under this section.

■ As per the scheme of deduction laid out under section 35D, the concerned expenditure to be eligible for deduction, should qualify the alternate condition stipulated in section 35D(1) and should be one of the items of expenditure specified in section 35D(2). In the present case, evidently, the expenses have been incurred after the commencement of business and, therefore, in order to qualify for deduction under section 35D, the expenses have to be incurred in connection with the extension of the undertaking or in connection with the setting up of a new unit. As can be seen from the detailed breakup of the expenditure, the expenses were essentially towards payment of professional fees related to acquisition of land for setting up of hospitals. As the assessee was already in the business of running hospitals, the expenditure related to setting up of new hospitals was ostensibly only for expansion of the existing business of the assessee. Therefore the condition stipulated in section 35D(1) was satisfied. Further, it is found that since the expenditure in question were mainly professional fees paid to advocates and legal firms, which were related to the expansion of the assessee's existing business of running hospitals, the condition stipulated in section 35D(2) was also satisfied. The expenditure in question qualifies for deduction under section 35D and, therefore, the Assessing Officer is directed that the expenditure be allowed as a deduction equally over a period of five years as provided under section 35D. [Para 5.3.4]



HELD - II



On issue of expenditure related to lease agreement

■ In order to appreciate the respective contentions, it is necessary to examine the nature of the transaction. It is not disputed by revenue that the said lease agreement entered into by the assessee gave rise to a lease in favour of the assessee and no other legal rights in the hospital building were granted to the assessee. As such, the view of the Assessing Officer that the said lease agreement brought into existence an asset of enduring nature was misplaced. The Apex Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69 laid down certain guidelines to determine whether, in a given case, the expenditure incurred is in the nature of revenue or capital expenditure. The Karnataka High Court in the case of CIT v. H.M.T. Ltd. [1993] 203 ITR 820/67 Taxman 506 referred to this decision to hold that expenditure related to lease arrangement is in the nature of advance rent and the premium was allowable as business/revenue expenditure. Therefore, the reliance placed by the Commissioner (Appeals) on the decision in the case of H.M.T Ltd. (supra) on this issue is in order. Consequently, the ground raised by revenue is dismissed. [Para 6.5]



HELD - III



On issue of expenditure on recruitment

■ It is found from the record that the Assessing Officer did not question the genuineness of the expenses or the fact of the expenditure having been incurred and disallowed the said expenses only on conjectures and suspicion, for which there is no basis, nor is his finding established by any evidence. Therefore, the Commissioner (Appeals) rightly held that the expenses incurred towards recruitment of manpower were attributable to the assessee's business and that recruitment is an ongoing exercise in the assessee's nature of business and, therefore, is allowable as a revenue expenditure. [Para 12.3]



HELD-IV



On issue of allowability of bad debts

■ After the amendment to section 36(1)(vii) with effect from 1-4-1989, in order to obtain deduction in relation to bad debts all that the assessee has to show was that the bad debt was written off as irrecoverable in its books of account. There was no need for the assessee to establish that the debt, in fact, had become bad. This proposition has been upheld by the Apex Court in the case of T.R.F. Ltd. v. CIT [2010] 323 ITR 397/190 Taxman 391 (SC). [Para 14.3.2]

■ In the instant case, it is not disputed that the amounts claimed as bad debts were shown as 'receipts' and offered to tax earlier. Merely because this is the second year of the assessee's operations and the period between the revenue recognition and the decision to write off the debts is short, it does not automatically lead to the conclusion that the debt cannot be claimed as irrevocable, as has been wrongly presumed by the Assessing Officer. It is also found that the Assessing Officer did not dispute the transactions, constituting the debts written off, as not being genuine. The Commissioner (Appeals), on the other hand, examined the details of these transactions and found them to be comprising of small amounts receivable from various patients who had been discharged and agreed with the claim of the assessee that the amounts claimed as bad debts were to be allowed under section 36(1)(vii), after recording the finding that the Assessing Officer had not brought on record any specific reason for making the disallowance. In the facts and circumstances of the case, following the decision of the Apex Court in the case of T.R.F. (supra), the amount claimed as bad debts by the assessee are allowable under section 36(1)(vii). Consequently, this ground raised by revenue is dismissed. [Para 14.3.3]



CASE REVIEW



TRF Ltd. v. CIT [2010] 323 ITR 397/190 Taxman 391 (SC) (para 14.3.2) followed.

CASES REFERRED TO



CIT v. H.M.T. Ltd. [1993] 203 ITR 820/67 Taxman 506 (Kar.) (para 6.1), Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69 (SC) (para 6.5) andT.R.F. Ltd. v. CIT [2010] 323 ITR 397/190 Taxman 391 (SC) (para 14.3.1).

A. Sundar Rajan for the Appellant. S. Anantha for the Respondent.

ORDER



Jason P. Boaz, Accountant Member - These two appeals by revenue are directed against the orders of Commissioner of Income Tax (Appeals)-II, Bangalore for Assessment Year 2007-08 and 2008-09 dt.18.1.2012 and 5.9.2011 respectively. As these appeals were heard together, they are being disposed off together by this consolidated order.

ITA No.449/Bang/2012 (A.Y. 2007-08)

2. The facts of the case, in brief, in respect of this appeal are as under :

2.1 The assessee, a leading hospital in the city, filed its return of income for Assessment Year 2007-08 on 31.10.2007 declaring loss of Rs. 8,71,58,141. The return was processed under section 143(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') and was subsequently taken up for scrutiny by issue of notice under section 143(2) of the Act. The Assessing Officer completed the assessment by an order under section 143(3) of the Act on 21.12.2009 determining the loss of the assessee at Rs. 7,27,79,693 by making the following disallowances.





Rs.

(i) Disallowance of Depreciation 73,514

(ii) Revenue expenditure disallowed 29,60,093

(iii) Business expenditure disallowed 93,36,039

(iv) Revenue expenditure disallowed 19,71,000

(v) Disallowance under section 14A & rule 8D 37,802



Total : 1,43,78,448



2.2 Aggrieved by the order of assessment for Assessment Year 2007-08 dt.21.12.2009, the assessee went in appeal before the learned CIT (Appeals). The learned CIT (Appeals) disposed off the assessee's appeal by order dt.18.1.2012 wherein the assessee's grounds raised in respect of the disallowances made at S.No.(i) and (v) were upheld; the disallowance at S.No.(iv) was deleted. In respect of the disallowance made at (iii) above deduction under section 35D of the Act was allowed to the extent of Rs.18,67,207. The disallowance made by the Assessing Officer at S.No.(ii) above was accepted and not agitated by the assessee before the learned CIT (Appeals). In sum and substance, the assessee was allowed partial relief by the learned CIT (Appeals) in its appeal for Assessment Year 2007-08.

3. Aggrieved by the order of the learned CIT(Appeals), revenue is now in appeal before us in which it has raised the following grounds :

" 1. The order of the CIT (Appeals) is opposed to the facts of the case.

2. The learned CIT (Appeals) has erred in concluding that the items of expenditure of Rs.93,36,039 are in connection with expansion of business.

3. The learned CIT (Appeals) has erred in not upholding the Assessing Officer's action of treating the amount of Rs.93,36,039 as capital expenditure.

4. The learned CIT (Appeals) erred in allowing the expenditure of Rs.93,36,039 over 5 years as provided under section 35D of the Income-tax Act, 1961.

5. The learned CIT (Appeals) has erred in treating the expenditure of Rs.19,21,000 on taking leased property as business expenditure relying on the decision of Karnataka High Court in the case of CIT v. H.M.T. Ltd. reported in 203 ITR 820.

6. For these and such other grounds that may be urged at the time of hearing the appeal, the order of the learned CIT (Appeals) may be set aside and that the order of the Assessing Officer may be restored."



4. On perusal, we find that the grounds raised at S.Nos.1 and 6 above, are general in nature and therefore no adjudication is called for thereon.

5.1 In the grounds raised at S.Nos.2 to 4 above, revenue contends that the findings of the learned CIT(Appeals) holding that items of expenditure amounting to Rs.93,36,039 were expended in connection with the expansion of the assessee's business and in allowing deduction of this expenditure under section 35D over a period of 5 years was erroneous. The learned Departmental Representative reiterated the arguments put forth in the grounds raised and pleaded that the order of the learned CIT(Appeals) be reversed and that the finding of the Assessing Officer that the said expenditure was capital in nature be restored.

5.2 Per contra, the learned counsel for the assessee supported the finding in the order of the learned CIT(Appeals) on this issue.

5.3.1 We have heard both sides and have perused and carefully considered the material on record and the orders of the authorities below. In the course of assessment proceedings the Assessing Officer noticed that the assessee had incurred expenditure towards professional fees paid to various advocates and law firms and such other expenses amounting to Rs.95,66,039 which are listed out at pages 4 to 7 of the order of assessment. On examination thereof the Assessing Officer was of the view that out of the total amount of Rs.95,66,039 except for expenditure amounting to Rs.2,80,000 which he held to be revenue in nature, the remaining portion related directly to the acquisition of capital assets; were not in the nature of preparation of feasibility reports or market surveys and hence were classified as capital expenditure and disallowed by the Assessing Officer.

5.3.2 After having held that these expenditures to the extent of Rs.93,36,039 were capital in nature and disallowing the same, the Assessing Officer rejected the assessee's claim for deduction of 1/5th of the said expenditure under section 35D of the Act, imposed a condition that if any of the appellate authorities were to hold the said expenditure as revenue in nature, these expenditures are protectively held as attracted under section 35D of the Act and accordingly a deduction thereon of 1/5th viz. Rs.18,67,207 out of Rs.93,36,939 is to be allowed and the amount of Rs.74,68,831 be allowed in the future years.

5.3.3 The learned CIT(Appeals), after examining the items of expenditure, came to the conclusion that these expenses are incurred in connection with expansion of business and hence are covered under section 35D of the Act thereby allowing the assessee 1/5th of the said expenditure of Rs.18,68,208 in the current year with the direction that the remaining expenditure of Rs.74,68,831 is to be allowed equally in the next four assessment years.

5.3.4 On careful consideration of the submissions made and the factual matrix of the issue as laid out above and perusal of the provisions of section 35D of the Act, it is seen that section 35D(1) of the Act relating to amortization of certain preliminary expenses, allows deduction for expenditure incurred.

(i) before the commencement of business; or

(ii) after the commencement of business, in connection with the extension of his undertaking or in connection with his setting up of a new unit.



Section 35D(2) specifies the expenditures that are eligible for deduction under this section, namely (a) expenditure incurred for,

(i) Preparation of feasibility report;

(ii) preparation of project report;

(iii) conducting market survey or any other survey necessary for the business of the assessee;

(iv) engineering services relating to the business of the assessee;



(b) legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee;



(c) where the assessee is a company, also expenditure -

(i) by way of legal charges for drafting the Memorandum and Articles of Association of the company;

(ii) on printing of the Memorandum and Articles of Association;

(iii) by way of fees for registering the company under the provisions of the Companies Act, 1956.

(iv) in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage, and charges for drafting, typing, printing and advertisement of the prospectus;



(d) Such other items (not being expenditure eligible for any allowance or deduction under any other provision of this Act) as may be prescribed.



As per the scheme of deduction laid out under section 35D of the Act, the concerned expenditure to be eligible for deduction should qualify the alternate condition stipulated in section 35D(1) and should be one of the items of expenditure specified in section 35D(2). In the present case, evidently the expenses have been incurred after the commencement of business and therefore in order to qualify for deduction under section 35D of the Act, the expenses have to be incurred in connection with the extension of the undertaking or in connection with the setting up of a new unit. As can be seen from the detailed breakup of the expenditure in question at pages 4 to 7 of the order of assessment, these expenses are, essentially towards payment of professional fees related to acquisition of land for setting up of hospitals. As the assessee is already in the business of running hospitals, the expenditure related to setting up of new hospitals are ostensibly only for expansion of the existing business of the assessee. We are therefore of the view that the condition stipulated in section 35D(1) of the Act is satisfied. Further, we also find that since the expenditure in question are mainly professional fees paid to advocates and legal firms, which are related to the expansion of the assessee's existing business of running hospitals, the condition stipulated in section 35D(2) of the Act is also satisfied. In this view of the matter, we concur with the finding of the learned CIT(Appeals) that the expenditure in question qualifies for deduction under section 35D of the Act and therefore direct the Assessing Officer that this expenditure amounting to Rs.93,36,039 be allowed as a deduction equally over a period of five years as provided under section 35D of the Act. We, therefore, dismiss grounds raised at S.Nos.2 to 4 above by revenue.

6.1 In the grounds raised at S.No.5, revenue contends that the learned CIT (Appeals) erred in treating the expenditure of Rs.19,21,000 on taking leased property as business expenditure by relying on the decision of the Hon'ble Karnataka High Court in the case of CIT v. H.M.T Ltd. [1993] 203 ITR 820/67 Taxman 506.

6.2 The assessee, in the relevant period, has incurred an expenditure of Rs.19,60,000 and Rs.2,32,000 towards registration of the building that it had taken on long lease (viz. for an initial period of 5 plus 5 years which was renewable for further periods of 5 years six times) for its hospital at Bellary Road, Near Hebbal Flyover, Bangalore vide lease deed dt.29.6.2006 and claimed as these lease rent charges as revenue expenses. The Assessing Officer did not accept the claim of the assessee that these expenses were revenue in nature. On the contrary, the Assessing Officer held that, in view of the long period of 40 years for which the lease would run, the said expenditure was capital in nature and allowed depreciation of Rs.2,19,000 thereon.

6.3 The learned CIT(Appeals) relying on the decision of the Hon'ble Karnataka High Court in the case of H.M.T. Ltd. (supra), held that this expenditure of Rs.21,90,000 are allowable as a business expenditure without elaborating on the reasons for her finding.

6.4 The learned counsel for the assessee supported the findings in the orders of the learned CIT(Appeals) on this issue inter alia placing reliance on the decision in the case of H.M.T. Ltd. (supra) and sought the dismissal of the grounds raised by revenue.

6.5 We have heard both parties, carefully perused, considered the material on record and the judicial decisions relied on by the learned CIT (Appeals) and the assessee. In order to appreciate the respective contentions, it is necessary to examine the nature of the transaction. It is not disputed by revenue that the said lease agreement dt.29.6.2006 entered into by the assessee give rise to a lease in favour of the assessee and no other legal rights in the hospital building are granted to the assessee. As such, the view of the Assessing Officer that the said lease agreement brings into existence an asset of enduring nature is, in our opinion, misplaced. The Hon'ble Apex Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69 has laid down certain guidelines to determine whether, in a given case, the expenditure incurred is in the nature of revenue or capital expenditure. The Hon'ble Karnataka High Court in the case of H.M.T. Ltd.(supra) has referred to this decision of the Hon'ble Apex Court to hold that expenditure related to lease arrangement is in the nature of advance rent and the premium was allowable as business/revenue expenditure. We are, therefore, of the considered opinion that the reliance placed by the learned CIT(Appeals) on the decision of the jurisdictional High Court in the case of H.M.T. Ltd. (supra) on this issue is in order and finding no reason to interfere therein, uphold the finding of the learned CIT(Appeals). Consequently, the ground raised by revenue is dismissed.

7. In the result, Revenue's appeal for Assessment Year 2007-08 is dismissed.

ITA No.1146/Bang/2011 for Assessment Year 2008-09 .

8. The facts of the case, in brief, are as under :

8.1 The assessee, a leading hospital in Bangalore, filed its return of income for Assessment Year 2008-09 on 29.9.2008 declaring a loss of Rs.7,20,80,875. The return was processed under section 143(1) of the Act, and the case was subsequently taken up for scrutiny by issue of notice under section 143(2) of the Act. A survey under section 133A of the Act was conducted at the business premises of the assessee on 13.9.2010. The assessment was completed by an order under section 143(3) of the Act on 30.12.2010 determining the loss of the assessee at Rs. 5,90,88,701 by making the following disallowances :





Rs.

(i) Disallowance under section 14A & Rule 8D 19,31,371

(ii) Brand building expenses 58,63,651

(iii) Bad Debts 71,228

(iv) Loss on disposal of Fixed Assets 39,41,007

(v) Payment for recruitment of Manpower 23,57,487



Total : 1,29,92,174



8.2 Aggrieved by the order of assessment for Assessment Year 2008-09 dt.30.12.2010, the assessee went in appeal before the CIT(Appeals). The learned CIT(Appeals) disposed off the assessee's appeal by order dt.5.9.2011 wherein the grounds raised by the assessee in respect of disallowances made at S.No.(iii), (iv) and (v) above were fully allowed in favour of the assessee, the disallowance made at S.No.(ii) by the Assessing Officer was upheld and the disallowance made at S.No.(i) above was partly allowed to the extent of Rs. 1,36,000. In the manner as laid out above, the assessee's appeal for Assessment Year 2008-09 was partly allowed.

9. Aggrieved by the order of the learned CIT(Appeals), for Assessment Year 2008-09 dt.5.9.2011, revenue is now in appeal before us raising the following grounds :

"1. The order of the CIT (Appeals) is opposed to the facts of the case.

2. The learned CIT (Appeals) has erred in deleting the addition to the extent of Rs.65,05,722.

3. The learned CIT (Appeals) has failed to appreciate the fact that the assessee had submitted the sum of Rs.1,36,000 as direct cost.

4. The CIT (Appeals) has failed to appreciate the fact that the previous year relevant to the assessment year 2008-09 is first year where the expenditure is made for the first time to an agency that is into the business of identifying manpower and arranging manpower for the company.

5. The learned CIT (Appeals) has failed to take cognizance of the fact that recruitment made through agencies is not easily terminated because at the time of recruitment itself a lot of screening is done to verify suitability and no company would be interested in spending money on recruitment repeatedly.

6. The learned CIT (Appeals) has failed to appreciate the fact that loss on disposal of fixed assets is not admissible.

7. The learned CIT (Appeals) has failed to appreciate the fact that the previous year relevant to the assessment year 2008-09 is the second year of operation and it is premature to declare the debts as bad debts though no efforts for recovery have been found feasible and hence not done.

8. For these and such other grounds that may be urged at the time of hearing the appeal, the order of the learned CIT (Appeals) may be set aside and that the order of the Assessing Officer may be restored."



10. On perusal, we find that grounds raised at S.Nos. 1, 2 and 8 above are general in nature and therefore no adjudication is called for thereon.

11.1 In the ground raised at S.No.2, revenue contends that the learned CIT(Appeals) failed to appreciate the facts that the assessee had admitted a sum of Rs.1,36,000 as direct cost. Though it is not mentioned as to which expenditure this ground pertains to, it appears to be in respect of the issue related to the disallowance under section 14A r.w. Rule 8D.

11.2 Per contra, the learned counsel for the assessee supported the finding in the order of the learned CIT(Appeals) on this issue. It is submitted that the learned CIT(Appeals) had rightly held that when the assessee itself had disallowed Rs.1,36,000 under section 14A of the Act, as being attributable to the investment made in the earning of exempt income, the Assessing Officer on working out the disallowance under section 14A r.w. Rule 8D at Rs.19,31,371 ought to have restricted the disallowance at Rs.17,95,371 (viz. Rs.19,31,371 less Rs.1,36,000). In view of this, it is the plea of the learned counsel for the assessee that the ground of revenue be dismissed.

11.3 We have heard both parties and carefully perused the material on record. It appears that revenue has not comprehended the order of the learned CIT(Appeals) in this regard. We find that the learned CIT(Appeals) has fully upheld the both the actions of the Assessing Officer in invoking Rule 8D and also the disallowance made by the Assessing Officer of Rs.19,31,371. We find from the details, on record that out of the total expenditure of Rs.2,71,39,502, the assessee itself had attributed sum of Rs.1,36,000 as expended towards the earning of exempt income and made the disallowance to this extent. In this view of the matter, it is evident that quantum of disallowance worked out by the Assessing Officer at Rs.19,31,371 includes the sum of Rs.1,36,000 already disallowed by the assessee and therefore the additional disallowance that ought to have been made by the Assessing Officer was Rs.17,95,371 (viz. Rs.19,31,371 less Rs.1,36,000). In fact at para 2 of the order of assessment, the Assessing Officer has narrated this very position as " …… this office is constrained to disallow Rs.19,31,371 which includes the direct cost of Rs.1,36,000 submitted by the assessee and the disallowance amounting to Rs.17,95,371 is determined by this office under section 8D." However, in the computation of income / loss at the end of the order of assessment, the amount of disallowance has been erroneously taken by the Assessing Officer at Rs,19,31,371. The learned CIT(Appeals) has only sought to point out this mistake and direct that the correct amount of Rs.17,95,371 taken for disallowance. This ground raised by revenue being frivolous, is dismissed.

12.1 In the grounds raised at S.Nos.4 and 5, revenue contends that the learned CIT(Appeals) failed to appreciate the fact that the period relevant to Assessment Year 2008-09 is the first year in which expenditure has been incurred to an agency for identifying and recruitment of manpower for the company and also failed to take cognizance that recruitment made through agencies is not easily terminated because at the stage of recruitment itself a lot of screening is done to verify suitability of candidates and no company would be interested in spending money on recruitment repeatedly. The learned Departmental Representative supported the grounds raised.

12.2 Per contra, the learned counsel for the assessee supported the finding of the learned CIT(Appeals) on this issue and sought dismissal of the grounds raised by revenue.

12.3 We have heard both parties and carefully perused and considered the material on record including the orders of the authorities below. In the course of assessment proceedings the Assessing Officer found that the assessee had incurred expenditure of Rs.23,57,487 for the recruitment of manpower through an agency and had claimed it as revenue expenditure as recruitment is an ongoing exercise. The Assessing Officer, however, was of the view that no company would be interested in spending money on recruitment repeatedly and recruitment made through agencies is not easily terminated because a lot of screening is done at the stage of recruitment itself and as this expenditure is for a long time benefit, held it to be capital in nature. The learned CIT(Appeals) after examining the expenditure involved came to the conclusion that it was attributable to the recruitment of manpower for the assessee's business of running a hospital and therefore held the said expenditure to be revenue in nature and therefore allowable. We find from the record that the Assessing Officer has not questioned the genuineness of the expenses or the fact of the expenditure having been incurred and appears to have disallowed the said expenses only on conjectures and suspicion, for which there is no basis, nor is his finding established by any evidence. We are therefore of the considered view that the learned CIT(Appeals) has rightly held that the expenses of Rs.23,57,487 incurred towards recruitment of manpower are attributable to the appellant's business and that recruitment is an ongoing exercise in the assessee's nature of business and therefore is allowable as a revenue expenditure. We, therefore, uphold the decision of the learned CIT(Appeals) and consequently dismiss the grounds raised by revenue on this issue.

13.1 In the ground raised at S.No.6, revenue contends that the learned CIT(Appeals) failed to appreciate the fact that loss on disposal of fixed assets is not admissible. The learned Departmental Representative reiterated the ground raised.

13.2 Per contra, the learned counsel for the assessee supported the findings of the learned CIT(Appeals) on this issue. It is the contention of the learned counsel for the assessee that the Assessing Officer without giving any reason disallowed the loss on disposal of fixed assets amounting to Rs.39,41,007 in spite of the fact that the same was not debited to the profit and loss account for the period relevant to the current year i.e. for Assessment Year 2008-09. The learned counsel for the assessee therefore submits that the grounds raised by revenue be rejected.

13.3 We have heard both parties and perused and carefully considered the material on record. We find that without any discussion or assigning any reasons, the Assessing Officer observing that the assessee has charged an amount of Rs.39,41,007 to the profit and loss account on account of loss on disposal of fixed assets and proceeded to make the disallowance in a summary manner. The learned CIT(Appeals) has verified the issue and found that since the assessee has made no such claim for deduction in the period relevant to Assessment Year 2008-09 which is the subject-matter of this appeal, no disallowance was called for and therefore deleted the disallowance. Before us, revenue has not been able to bring on record any evidence to controvert the finding of the learned CIT(Appeals) that since no such claim for deduction of Rs.39,41,007 on account of loss on sale of fixed assets was made by the assessee in Assessment Year 2008-09, no disallowance was called for. In this view of the matter, we uphold the finding of the learned CIT(Appeals) on this issue and consequently dismiss this ground raised by revenue.

14.1 In the ground raised at S.No.7, revenue contends that the learned CIT(Appeals) has failed to appreciate the fact that being the second year of operation it was premature to declare the debts as bad, particularly when no efforts for recovery were made. The learned Departmental Representative was heard in support of the grounds raised by revenue.

14.2 Per contra, the learned counsel for the assessee supported the findings of the learned CIT(Appeals) on this issue and urged for dismissal of the grounds raised by revenue.

14.3.1 We have heard both parties and carefully perused and considered the material on record. In the current year, the Assessing Officer, noted that the assessee had written off bad debts to the extent of Rs.71,228. Observing that it was premature to be declared / treated as a bad debt since this was only the second year of operations by the assessee and noting that no efforts for its recovery have been made, the Assessing Officer disallowed the assessee's claim. We find that the learned CIT(Appeals) after examining the details thereof agreed with the assessee's contention that the sum of Rs.71,228 consisted of smaller amounts due from patients which were not recoverable. Holding that this expenditure was allowable under section 36(1)(vii) of the Act, the learned CIT(Appeals) deleted the disallowances made by Assessing Officer.

14.3.2 As per the provisions of section 36(1)(vii) of the Act and it now stands, the following conditions have to be cumulatively satisfied for claiming deductions for bad debts :-

(i) there must be a debt, an obligation to pay an ascertainable sum of money;

(ii) such debt must be revenue in nature.

(iii) such debt must be incidental to the business of the assessee;

(iv) such debt must have been taken into account while computing the income of the assessee;

(v) It must have been written off in the books of the assessee.



After the amendment to the law w.e.f. 1.4.1989 in order to obtain deduction in relation to bad debts all that the assessee has to show was that the bad debt was written off as irrecoverable in its books of account. There was no need for the assessee to establish that the debt, in fact, had become bad. This proposition has been upheld by Hon'ble Apex Court in the case of T.R.F. Ltd. v. CIT [2010] 323 ITR 397/190 Taxman 391.

14.3.3 In the instant case, it is not disputed that the amounts claimed as bad debts have been shown as 'receipts' and offered to tax earlier. Merely because this is the second year of the assessee's operations and the period between the revenue recognition and the decision to write off the debts is short, it does not automatically lead to the conclusion that the debt cannot be claimed as irrevocable, as has been wrongly presumed by the Assessing Officer. We also do not find that the Assessing Officer has disputed the transactions, constituting the debts written off, as not being genuine. The learned CIT(Appeals), on the other hand, has examined the details of these transactions and found them to be comprising of small amounts receivable from various patients who have been discharged and agreed with the claim of the assessee that the amounts totalling Rs.71,228 claimed as bad debts are to be allowed under section 36(1)(vii) of the Act, after recording the finding that the Assessing Officer has not brought on record any specific reason for making the disallowance. In these facts and circumstances of the case as discussed above and respectfully following the decision of the Hon'ble Apex Court in the case of T.R.F. Ltd. (supra), we concur with the finding of the learned CIT (Appeals) that the amount of Rs.71,228 claimed as bad debts by the assessee are allowable under section 36(1)(vii) of the Act. Consequently, this ground raised by revenue is dismissed.

15. In the result, revenue's appeal for Assessment Year 2008-09 is dismissed.

PSEN









IT: Where explanation for sufficient cause made in application to condone delay in filing of return as well as revised return, when accepted by CBDT, benefit of condoning delay was not only limited to original return but would also extend to filing of revised return

■■■

[2013] 33 taxmann.com 615 (Karnataka)

HIGH COURT OF KARNATAKA

Mahalakshmi Co-operative Bank Ltd.

v.

Central Board of Direct Taxes*

RAM MOHAN REDDY, J.

WRIT PETITION NO. 48004 OF 2012 (T-IT)

APRIL 19, 2013

Section 139, read with section 119, of the Income-tax Act, 1961 - Return of income - General [Condonation of delay] - Assessment year 2005-06 - Petitioner co-operative society filed belated return due to submission of belated first report by statutory auditor - Thereafter, revised return was also filed belatedly claiming enhanced loss again on basis of belated final audit report - On application for condonation of delay, CBDT passed order directing assessing authority to accept enhanced claim of loss - CBDT, however, had not made reference to revised return - Petitioner's request for rectification was rejected by CBDT - Whether explanation for sufficient cause made in application to condone delay was not only with regards to original return but also to revised return as it referred to enhanced loss as claimed in revised return and, thus, order of CBDT had to be modified to condone delay in filing revised return of income - Held, yes [Paras 10 & 11][In favour of assessee]

FACTS



■ The petitioner-society was registered under the Karnataka Co-operative Societies Act, 1959. It filed its return of income on 7-6-2006, i.e., beyond the due date of 30-11-2005 for the assessment year 2005-06 and claimed loss of Rs. 70.33 lakhs after submission of first report of statutory auditor. Thereafter, revised return based upon the final audit report claiming loss of Rs. 1.28 crores was filed on 30-5-2008.

■ The petitioner filed an application before CBDT under section 119(2)(b) to condone delay in filing of returns and to allow the claim of carry forward of business loss of Rs. 1.28 crores. It showed delay in submission of audit report by statutory auditor as cause for delay in filing of return and revised return of income.

■ The CBDT having considered the application, accepted the cause shown for the delay in filing of return of income and directed the Assessing Officer to consider all losses claimed.

■ The assessment was concluded. The appeal was pending before the Commissioner (Appeals).

■ The petitioner noticed that the order of CBDT made reference to the carrying forward of loss of Rs. 1.28 crores without making reference to the revised return filed on 30-5-2008. The CBDT rejected the request of petitioner for rectification of said order.

■ On writ petition before High Court:



HELD



■ The averments in the application for condonation of delay makes reference to the claim of Rs. 1.28 crores as carried forward loss during the assessment year 2005-06, which fact is indicated at the order of the CBDT. [Para 7]

■ The non-filing of the return and revised return within the time stipulated under section 139, as observed by the CBDT in its order cannot be attributed to the petitioner since being a co-operative society is bound by the provisions of the Karnataka Co-operative Societies Act, 1959 to have its books of account audited by a statutory auditor and until the submission of the final audit report. The delay in submission of the reports by the statutory auditors cannot but be said to be beyond the control of the petitioner. [Para 9]

■ It is no doubt true that in the application, the words, 'revised return filed on 30-5-2008' is not forthcoming, nevertheless specific reference is made to the loss carried forward i.e. Rs. 1.28 crores as indicated in the profit and loss account as on 31-3-2005, as per final audit report. Regard being had to the statements made in the application, it cannot be doubted that the explanation over sufficient cause for the delay was not only with regard to the return filed on 6-7-2006 but also the revised return on 30-5-2008. [Para 10]

■ The reason assigned by the CBDT in its order declining the request of the petitioner to correct/revise it's order insofar as it relates to condoning the delay upto 30-5-2008 when the revised return was filed, in the factual matrix, is perverse. The order of the CBDT declining request of the petitioner is quashed. The order of the CBDT stands modified to condone the delay in filing the revised return of income for the assessment year 2005-06 and in all other respects, remains unaltered by allowing the petitioner's application. [Paras 11 and 12]



A. Shankar and M. Lava for the Appellant. K. V. Aravind for the Respondent.

ORDER



1. Petitioner, a co-operative society registered under the Karnataka Co-operative Societies Act, 1959, for short 'KCS Act', carrying on business of banking and established in the year 1978 for the benefit and assistance of its members none other than farmers and fishermen did not within the due datei.e. 30.11.2005, under the Income-tax Act, 1961, for short Act file the return for the assessment year 2005-06 (financial year 2004-05), but did so on 6.7.2006 after the statutory auditor appointed under the KCS Act submitted his first report, and thereafter on 30.5.2008 filed a revised return based on the second report furnished during the year 2007 claiming business loss of Rs. 1,27,77,270/-. Petitioner filed an application on 9.1.2010 invoking Section 119(2)(b) of the 'Act' before the Central Board of Direct Taxes, for short 'CBDT' to condone the delay in filing returns and to allow the claim of carry forward of business losses. The CBDT having considered the application, accepted the cause shown for the delay in filing the return of income on 6.7.2006 insofar as the assessment year 2005-06, and directed the 3rd respondent to consider all losses claimed, after ascertaining their genuineness and correctness, by order dt. 11.7.2011 Annexure-C. The 3rd respondent in compliance with the said order concluded the assessment on 2.8.2011 Annexure-D, subject-matter of appeal pending before the Commissioner of Income-tax (Appeals).

2. Petitioner having noticed that the order dt.11.7.2011 Annexure-C of the CBDT made reference to the carrying forward of loss of Rs. 1,27,77,270/- for the assessment year 2005-06, without reference to the revised return filed on 30.5.2008 filed a petition Annexure-E for rectification/amendment of the said order, which, when rejected by letter dt. 30.7.2012 Annexure-A has resulted in this petition.

3. Learned Counsel for the petitioner submits that the delay in filing the revised return on 30.5.2008 was due to the statutory auditor making available to the petitioner during the end of 2007 the final audit report Annexure.F4 though predated as 27.5.2006 indicating carrying forward of loss of Rs. 1,27,77,270/- in the Profit and Loss Account as on 31.3.2005. According to the learned counsel, the original return filed on 6.7.2006 for the assessment year 2005-06 is based upon the report Annexure-F2 also dated 27.5.2006 of the statutory auditor, disclosing loss of Rs.70,33,270/- . Learned counsel hastens to add that in the application dt. 9.1.2010 Annexure-B invoking Section 119(2)(b) of the Act it was specifically indicated that the delay in filing the return for the assessment year 2005-06 petitioner carried forward loss of Rs. 1,27,77,270/- which the CBDT made reference at paragraph 3 in its order dt. 11.7.2011 Annexure-C, being fully aware of the filing of the revised return on 30.5.2008. The explanation offered by the petitioner over sufficient cause as set out in paragraph 7 of the application, Annexure-B when considered and accepted by the CBDT, with respect to the return filed on 6.7.2006 for the assessment year 2005-06, the mistake crept in the order Annexure-C required to be revised to include the revised return filed on 30.5.2008. Learned counsel further submits that the refusal on the part of the CBDT to rectify the defect the order, Annexure-A is perverse and calls for interference.

4. Per contra, Sri. K.V. Aravind, learned standing counsel for the Income tax department seeks to sustain the orders Annexures-C and A as being well merited, fully justified and not calling for interference. Learned counsel submits that in the absence of use of the specific words 'revised return filed on 30.5.2008' for the assessment year 2005-06 in the application dated 9.1.2010 Annexure-B to condone the delay, the authorities were fully justified in condoning the delay only in respect of the original return filed on 6.7.2006. In addition, it is contended that CBDT being the delegatee of power under section 119 of the Act, in the matter of condonation of delay is required to scrupulously examine the applications filed and in the instant case, having done so noticed that there was no request to condone to the delay, in filing the revised return on 30.5.2008, hence the claim of the petitioner for rectification of the defect in the order Annexure-C was unsustainable.

5. Having heard the learned counsel for the parties, perused the pleadings and examined the orders impugned, the only question for decision making is:

"Whether the CBDT, in the facts and circumstances, was justified in declining to extend the benefit of accepting the cause shown to condone the delay in filing the revised return by the petitioner on 30.5.2008 for the assessment year 2005-06 ?"

6. There is no more dispute that the original return filed on 6.7.2006 for the assessment year 2005-2006 petitioner claimed loss of Rs.70,33,270/- on the basis of a first report of the statutory auditor under the KCS Act, while the revised return Annexure-F3 filed on 30.5.2008 is based upon the final report Annexure-F4 of the statutory auditor indicating Rs. 1,27,77,270/- as loss in the Profit and Loss Account as on 31.3.2005.

7. The averments in paragraph 3 of the application Annexure-B for condonation of delay makes reference to the claim of Rs. 1,27,77,270/- as carried forward loss during the assessment year 2005-06, which fact is indicated at paragraph 3 of the order dated 11.7.2011 Annexure-'C' of the CBDT.

8. The averments in paragraph 7 of the application dt. 9.1.2010 Annexure-B is over sufficient cause for the delay in filing the return on 6.7.2006 and the revised return on 30.5.2008, though the words 'revised return filed on 30.5.2008' is not specifically stated.

9. The non-filing of the return and revised return within the time stipulated under section 139 of the Act, as observed by the CBDT in the order Annexure-C, cannot be attributed to the petitioner since being a co-operative society is bound by the provisions of KCS Act to have its books of account audited by a statutory auditor and until the submission of the final audit report. The delay in submission of the reports by the statutory auditors cannot but be said to be beyond the control of the petitioner.

10. It is no doubt true that in the application, Annexure-B the words, 'revised return filed on 30.5.2008' is not forthcoming, nevertheless in paragraph 3 specific reference is made to the loss carried forward i.e. Rs. 1,27,77,270/- as indicated in the Profit and Loss Account as on 31.3.2005 , Annexure-F4. Regard being had to the statements made in paragraph 3 of the application Annexure-B, it cannot be doubted that the explanation at paragraph 7 over sufficient cause for the delay was not only with regard to the return filed on 6.7.2006 but also the revised return on 30.5.2008.

11. The reason assigned by the CBDT in its order Annexure-A declining the request of the petitioner to correct/revise the order dt. 11.7.2011 Annexure-C insofar as it relates to condoning the delay upto 30.5.2008 when the revised return was filed, in the factual matrix, is perverse.

12. In the result, this petition is allowed. The order dt. 30.7.2012 Annexure-A of the 1st respondent is quashed. The order dt 11.7.2011 Annexure-C stands modified to condone the delay in filing the revised return of income for the assessment year 2005-06 and in all other respects remains unaltered, by allowing the petitioner's application Annexure - E.

SB









2013-TIOL-514-ITAT-MUM

IN THE INCOME TAX APPELLATE TRIBUNAL

BENCH 'J' MUMBAI

ITA No.650/Mum/2013

Assessment Year: 2006-07

PAYASH SECURITIES PVT LTD

17/19 KHATAU BLDG

44 BANK STREET

MUMBAI-400001

PAN NO:AABCP8975B

Vs

DEPUTY COMMISSIONER OF INCOME TAX

5(2), MUMBAI

Vijay Pal Rao, JM and N K Billaiya, AM

Dated: April 19, 2013

Appellant Rep by: Shri Tej Shah

Respondent Rep by: Shri S D Srivastava

Income Tax - Sections 143(3), 147 - Whether an assessment which is completed u/s 143(3) can be reopened on the basis of objection raised by audit party particularly when no new fact on material has come to the knowledge of AO.



Assessee company is engaged in the business of investment and trading in shares and securities - filed its Return of Income for the impugned assessment year declaring business income as well as income from LTCG & STCG. The same was selected for scrutiny and assessment u/s 143(3) of the act was framed. Thereafter the AO reopened the assessment of the assessee alleging that the income in the form of STCG is taxable as business income in views of the large number of transactions of sale and purchase of shares and securities – the CIT(A) affirmed the order of AO – On appeal before the Tribunal, the AR of the assessee pointed out that the observation of the AO, the transaction of sale and purchase of shares are very large is factually incorrect and the same has been arrived on the opinion of audit wing of the department. The AR of the assessee finally argued that no fresh material or fact has come to the notice of AO and hence the assumption of jurisdiction is bad in law.



After hearing the parties the ITAT held that,



++ it is discernible from the assessment order passed u/s 143(3) that the Assessing Officer has taken a definite view after duly applied his mind on the issue in question and taking into consideration all the relevant facts, material and evidence. Therefore, there is no doubt while passing the assessment order u/s 143(3), the Assessing Officer took a view and then accepted the claim of the assessee. The reason for reopening of the assessment on the issue of treating the STCG as business income is mainly the number of sale and purchase occasions as 1062 which appears to be misconceived and misunderstood by the authorities below



++ the audit party has not pointed out any factual mistake which has been committed by the Assessing Officer or any crucial aspect which has been overlooked by the Assessing Officer in the original assessment order passed u/s 143(3); but it is only the re-It is pertinent to note that there is no dispute on the point that after the original assessment passed u/s 143(3), no new material, information or facts came to the notice of the Assessing Officer on the basis of which the Assessing Officer can form an opinion that the income assessable to tax has escaped assessment and thereby exercised its power u/s 147 of the I T Act;



++ in the case of Asian Paints Ltd, the Jurisdictional High Court while considering the issue of validity of reopening of assessment has held in paras 9 & 10 as under appreciation of the same facts and evidence as well as relevant material available on record;



++ the High Court has taken note of the fact that between the date of order of assessment sought to be reopened and date of forming of opinion by the Assessing Officer, nothing new has happened; therefore, no new material has came on record, no new information has been received, it is merely a fresh application of mind by the AO to the same set of facts. Therefore, forming of the opinion by the AO for reopening of the assessment on the basis of the material which was available on record while passing the assessment order is merely change of opinion and thus, reopening on the basis of change of opinion on the issue, which has been examined by the Assessing Officer in the original assessment is not permitted in view of the settled proposition of law as held by the Hon’ble Supreme Court as well as jurisdictional High Court.

Assessee's appeal allowed

ORDER

Per: Vijay Pal Rao:

This appeal by the assessee is directed against the order dated 13.12.2012 of the Commissioner of Income Tax(Appeals) for the Assessment Year 2006-07.

2. The assessee has raised the following effective grounds in this appeal:

“1. That the Ld. CIT (A) erred in law and in the facts of the case in conforming the action of the Assessing Officer for reopening the assessment of the appellant u/s 147 of the act.

2. That the Ld. CIT (A) erred in law and in the facts of the case in conforming the order of the Assessing Officer by not appreciating that merely because of change in the head of income by the Assessing Officer, no income chargeable to tax has escaped assessment

3. That the Ld. CIT (A) erred in law and in the facts of the case in conforming the order of the AO in considering the validity of reopening on the basis of a subsequent decision of the jurisdictional bench of the Hon’ble ITAT.

4. That the Ld. CIT (A) erred in law and in the facts of the case in conforming the order of the AO in reopening the case on the basis of audit objection.

5. That the Ld. CIT (A) erred in law and in the facts of the case in conforming the order of the AO in treating the income from sale of investment as business income and not as short term capital gains as shown by the appellant.

6. Without prejudice to the above, the Ld. CIT (Appeal) should have directed to grant credit for Securities transaction tax (STT) paid in respect of such income.

7. That the Ld. CIT (A) erred in law and in the facts of the case in confirming the order of the Assessing Officer in charging interest u/s 234B of the act.”

3. Grounds nos 1 to 4 regarding validity of reopening of the assessment.

3.1 The assessee company is engaged in the business of investment and trading in shares and securities. It furnished its return of income for the Assessment Year under consideration by disclosing the total income of Rs. 20,60,73,429/- on 14.11.2006. The Assessing Officer while passing the assessment order u/s 143(3) on 29.12.2008 accepted the claim of Long Term Capital Gains (LTCG) and Short Term Capital Gains (STCG) arising out of sale and purchase of shares and securities. Subsequently, the revenue audit party has observed that the holding period in respect of 98% of the sale of shares is less than 12 months and therefore, raised an objection against the claim of STCG. Thereafter, the Assessing Officer reopened the assessment by issuing notice u/s 148 on 28.3.2011 on the reason that the shares were purchased and sold on more than 1062 occasions in which approximately 98% sale occasions were less than 12 months. Taking into consideration the number, volume and frequency of transactions carried out by the assessee, the activity of purchase and sale of shares amounts to trading activity and not an investment activity and hence, the profits earned from the activity amounting to Rs. 20.60 crores should be brought to tax as ‘business income’ as against assessee’s claim of STCG.

3.2 In respect of the notice u/s 148, the assessee submitted that the return of income filed on 16.11.2004 may be treated as return filed in response to the said notice.The assessee vide its letter dated 16.12.2011 filed objections for reopening of the assessment. The Assessing Officer rejected the objections raised by the assessee against the reopening of the assessment and assessed the amount of Rs. 20.60 crores claimed by the assessee as STCG as business income while passing the reassessment order dt 29.12.2011.

3.3 The assessee challenged the action of the Assessing Officer before the Commissioner of Income Tax (Appeals) including the validity of reopening of the assessment. The Commissioner of Income Tax (Appeals) did not accept the contention of the assessee against the validity of the reopening and hence, rejected the grounds raised by the assessee.

4. Before us, the ld AR of the assessee has submitted that originally, the assessment was passed u/s 143(3) after considering all the details and material on the issue of STCG and the nature of transactions and after the Assessing Officer made himself satisfied, allowed the claim of the assessee by observing that there is no change in the nature and activity of the assessee company in comparison to earlier year. He has referred the original assessment order passed u/s 143(3) and submitted that the Assessing Officer asked various details by issuing notice u/s 143(2) and 142(1) and the assessee, in response to the notices, filed all the relevant details including the books of account, vouchers, contract notes etc., before the Assessing Officer for verification. Thus, after examination and discussion of the issue, the Assessing Officer was satisfied with the claim of the assessee regarding LTCG and STCG on shares and mutual funds. The ld AR has referred the notices issued by the Assessing Officer u/s 143(2) and 142(1) placed at pages 36 to 40 of the paper book and submitted that the Assessing Officer issued a detailed questionnaire vide notice dated 11.6.2008 whereby the details of new investments during the year with source thereon, copies of bank statement along with reconciliation, details of profit on sale on mutual funds and the details of profit/capital gain on sale on shares and securities were called for. The Assessing Officer has also raised a question about the circular no.4/2007 regarding the income from share transactions as to whether the same should be treated as business or capital gain in nature. Accordingly, the Assessing Officer asked the assessee to furnish the submissions on this issue. The ld AR has then referred the reply in response to the notice issued by the Assessing Officer and submitted that the assessee vide letter dated 18.6.2008 ( pages 64 to 69 of the paper book) filed the detailed reply explaining all the transactions and giving answers to each and every query raised by the Assessing Officer. Thus, the ld AR has submitted that the Assessing Officer has duly examined the issue of nature of transactions of shares and mutual funds and after having satisfied on the queries made, the Assessing Officer allowed the claim of the assessee by taking a view that he transactions are similar in the nature as in the earlier years.

4.1 Thus, the ld AR has forcefully contended that the Assessing Officer has taken a view after due investigation and examination of the relevant material and issue of STCG as well as business income. The ld AR then referred the order passed u/s 143(3) for the AYs 2005-06 and 2007-08 as well as the order u/s 143(3) for the Assessment Year 2008-09 and submitted that the claim of the assessee had been accepted in the earlier year as well as subsequent year. Even for the Assessment Year 2009-10, the Assessing Officer has accepted the claim of the assessee.

4.2 The ld AR further contended that there is no change in the facts and circumstances of the case for the earlier year as well as subsequent year. Therefore, once the Assessing Officer has taken a view after examination of the relevant record and having conducted proper enquiry, then the reassessment on the basis of audit objection is nothing; but on change of opinion. In support of his contention, he has relied upon the decision of the Hon’ble Supreme Court in the case of Commissioner of Income-tax v. Kelvinator of India Ltd. reported in 320 ITR 561 = (2010-TIOL-06-SC-IT) and submitted that the Hon’ble Supreme Court has observed that reopening of the assessment on the basis of mere change of opinion cannot be permitted to give arbitrary powers to the Assessing Officer to reopen the assessment on the basis of mere change of opinion. Once the Assessing Officer has taken a particular view and allowed the claim of the assessee while passing the assessment order u/s 143(3), then the assessment cannot be reopened on the same issue by taking a different view/opinion.

4.3 The ld AR has then relied upon the decision of the Hon’ble Supreme Court in the case ofAssistant Commissioner of Income-tax v. ICICI Securities Primary Dealership Ltd. reported in 349 ITR 299 = (2012-TIOL-57-SC-IT) and submitted that after a mere re-look of accounts which were earlier furnished by the assessee, the Assessing Officer had come to conclusion that the income had escaped assessment, same was not permissible u/s 147 of the Act as it was clearly a change of opinion.

4.4 The ld AR then referred the decision of the Hon’ble jurisdictional High Court in the case ofAsian Paints Ltd vs DCIT reported in 308 ITR 195 = (2008-TIOL-698-HC-MUM-IT) and submitted that as held by the Hon’ble jurisdictional High Court the Assessing Officer cannot take recourse to the provisions of sec. 147 for his own failure to apply his mind to the material which, according to him, is relevant and which was available on record. The ld AR has submitted that nothing new had happened and no new material has come to the knowledge of the Assessing Officer and even no new information had been received; it was merely a fresh application of mind by the Assessing Officer to the same sets of facts and therefore, as held by the Hon’ble Supreme Court, the reopening of the assessment on the basis of change of opinion which is not permissible.

4.5 The ld AR has then referred the decision of the Hon’ble Delhi High Court in the case of Ritu Investments P. Ltd. v. Deputy Commissioner of Income-tax., reported in 345 ITR 214 (Del) =(2010-TIOL-821-HC-DEL-IT) and submitted that when in the initial proceedings, the Assessing Officer has passed the order and the issue was dealt with after due application of mind, then the reopening is nothing; but change of opinion, which cannot permit the Assessing Officer to initiate proceedings u/s 147. The ld AR has also relied upon a series of decisions on the point of reopening and contended that when the issue has examined by the Assessing Officer in the original assessment proceedings and thereafter, no new material facts or information came to the knowledge of the Assessing Officer, then the reopening on the basis of material already available on record is not permitted as the same is on the basis of change of opinion.

4.6 On the other hand, the ld DR has contended that the audit party has pointed out a very crucial and important fact about the number of transactions, which is very high as more than 1062. Therefore, the audit party has pointed out an important fact, which was over looked by the Assessing Officer while passing the original assessment order. In support of his contention, he has relied upon the decision of the Hon’ble Supreme Court in the case ofCommissioner of Income-tax v. P.V.S. Beedies Pvt. Ltd. reported in 237 ITR 13 and submitted that the Hon’ble Supreme Court has held that internal audit party had merely pointed out a fact which had been overlooked by the Income-tax Officer in the assessment and therefore, reopening of a case on the basis of a factual error pointed out by the audit party was permissible under law.

4.7 The ld DR has further contended that even otherwise, from the facts and circumstances of the case, the claim of the assessee cannot be accepted as the Assessing Officer, in the original assessment has accepted the claim of the assessee which could not have been accepted by any person having ordinary prudence. In support of his contention, he has relied upon the decision of the Hon’ble jurisdictional High Court in the case of Dr. Amin's Pathology Laboratory v. P.N. Prasad, Joint Commissioner of Income-tax reported in 252 ITR 673 = (2003-TIOL-358-HC-MUM-IT). The ld DR has then submitted that the Assessing Officer has over looked the material fact of number of transactions, holding period and borrowed funds utilized by the assessee. He has relied upon the order of the CIT(A). Since the reopening is within 4 years; therefore, the case of the assessee does not fall under the provisions of sec. 147 and there is no pre-condition that escapement of the income from assessment on account of failure on the part of the assessee to disclose fully and truly all material facts necessary.

4.8 In rebuttal, the ld AR has submitted that there is no new fact came to the knowledge of the Assessing Officer after passing the initial assessment order u/s 143(3). All the facts and relevant records have been considered and examined by the Assessing Officer and therefore, reopening of the assessment is not sustainable as held by the Hon’ble Supreme Court in the case of Parashuram Pottery Works Co. Ltd. v. Income-tax Officer reported in 106 ITR 1 =(2002-TIOL-573-SC-IT)

5. We have considered the rival submissions and carefully perused the relevant material as well as the decisions relied upon by the parties. There is no dispute on the point that the Assessing Officer issued notice u/s 148 after the objections raised by the audit party. The reasons recorded for reopening of the assessment are as under:

“On perusal of assessment records it is noted that during the relevant previous year, the assessee had purchased and sold shares of around 63 companies within a period of 12 months with total sale consideration received of Rs. 377.45 crores and purchase value of Rs. 684.66 crores. It was further noted that shares were purchased and sold on more than 1062 occasions, in which approx. 98% of sales occasions were within less than 12 months.

Taking into consideration, the number, volume and frequency of transactions carried out by the assessee, in my opinion, assessee’s activity of purchase and sale of shares amounts to trading activity and not an investment activity and hence profit earned from such activity amounting to Rs. 20.60 Cr should be brought to tax “business income” as against assessee’s claim of “short term capital gains”.

I therefore have reason to believe that income to the extent of differential tax amount has escaped assessment within the meaning of section 147 of the I.T. Act.. The assessment is therefore reopened u/s. 147 of the I.T. Act.”

5.1 It is to be noted that in the original assessment proceedings, the Assessing Officer issued notice u/s 143(2) as well as 142(1) and issued questionnaire to the assessee vide letter dated 11.6.2008. The relevant part of the questionnaire in paras 7,13 to 19 are as under:

“vii) Nature of business carried on by you during the year.

(xiii) In the computation of total income you have shown tax free income of Rs.1,92,24,566/-, please give details thereof and basis as to how the same is exempt.

(xiv) Proof of payment of security transaction tax and service tax along with payments attributable to tax free income.

xv) Details of dividend received along with dividend warrants.

(xvi) Details of profit/capital gains on sale of shares with scrip-wise details in the following proforma:

Sr. No. Name of the Scrip Brought forward as on 01.04.05 wotj rate New purchases during the year with rate Sale during the year with rate Amt. of profit/loss Treatment given regarding nature of income Whether quoted or unquoted

1 2 3 4 5 6 7 8



xvii) Details of profit on sale of mutual fund in identical proforma as above.

xviii) Details of new investment during the year with sources thereon.

(xix) Your attention is drawn to the contents of CBDT Circular No.4/2007 regarding income from share transactions as to whether the same should be business or capital gain in nature, please furnish your submission vis-a-vis this circular.”

5.2 The assessee reply the queries of the Assessing Officer by filing vide letter dated 18.6.2008 and the relevant part of the reply is as under:

“7. Nature of business: The assessee company does not have any business or profession of trading manufacturing. The Company is engaged in the activity of Investment in Shares and Mutual funds. In the current year the company has undertaken Investment activities in the primary & secondary equity market. The company also invested in mutual funds.”

“13. Details of exempted income Rs. 1,92,24,566/-is asunder:

Long Term Capital Gains Rs. 86,72,771/- - Exempt u/s 10(38),

Dividend on shares and MF Rs. 102,38,780/-(Shares) Rs. 3,13,014/-(Mutual Funds) - Exempt u/s 10(34) and 10(35).

During the year assessee company made long term capital gains of Rs. 86,72,771/- by selling the investment held for a period of more than 12 months. Security transaction tax has been paid on these transactions. Detailed working of long term capital gains showing the date of purchase quantity of purchase, purchase value, date of sale, quantity sold, sale value capital gain. The statement clearly shows the period of holding. Copies of investment accounts of earlier years are enclosed to show that the investment sold during are held for more than 1 year. Copies of de-mat a/c are also enclosed showing the opening balances and the sale debits. Copies of bills are also enclosed showing the transaction and the payment of security transaction tax. STT certificate issued by the brokers are also enclosed.

During the year assessee company received dividend on equity shares and mutual funds units aggregating to Rs. 1,05,51,794/- The details of dividend are enclosed. Assessee company has not violated the provisions of section 94(7) of the I T Act, The assessee company has not incurred any loss on sale of equity subsequent to the receipt of dividend.”

14. Copies of bills are also enclosed showing the transaction and the payment of security transaction tax. STT certificate issued by the brokers are also enclosed. No service Tax is payable by the assessee company.

15. Details of dividend along with the warrants enclosed.

16. Details of capital gain Rs. 86,72,771/- being long term capital gain, Rs. 204,58,028/- being short term capital gains.

17. Rs. 15,19,230/- being short term capital gain on MF units in required format enclosed.

18. Details of new investment are mentioned in the enclosed in the investment details. The source of this investment are out of sale proceeds of investment and interest free unsecured loans from the shareholders.

19. During the assessment year in question assessee earned income under the head long term Capital on sale of investment in Shares at Rs.86,72,771/- which is claimed as exempt under Section 10(38) of the I .T. Act. Further short term capital on sale of investment in shares earned at Rs. 2,04,58,028/- and short term capital gain, on sale of M.F. investment aggregating to Rs 15,19,230/- which is shown in the return of income under head capital gains. We have submitted scrip wise details of long term and short term capital gains. During the course of assessment proceedings your hoour asked us to justify the income arising out of purchase and sale of shares under the head capital gains. In the context it is submitted that assessee has been doing investment in shares since last several years. He is maintaining the books of accounts. The ledger account of shares investment is separately maintained and income arising on sale of such shares is shown under the head capital gain. These shares were purchased with the intention of investment only. On perusal of the Balance sheet filed with the return of income your honor would appreciate that the shares were shown under the head investment. The books of accounts clearly show that, the entries were made in a manner that there is a definite demarcation for shares held as investment. The question as to whether the shares sold were investment or stock in trade is determined on the basis of entries made in the assessee’s book of accounts and when the shares purchased and held as investment, then the said entries clearly demonstrate the intention of the assessee with which the shares were purchased. The assessee is also getting regular dividend from the various shares which are held as an investment.

It may be noted that in the earlier assessment years also the assessee had held the shares under the head investment and capital gain arising on sale of such shares was accepted in the scrutiny assessments completed. Your attention is drawn to the assessment orders completed U/s 143(3) for the A.Y. 2003-2004, 2004-05, 2005-06 and earlier years wherein income arising on sale of shares held as investment has been assessed under the head capital gains both short term and long term and there is no change in the facts and circumstances of the case from earlier years and therefore there is no reason to deviate from the stand taken in the earlier years.

Your honor’s attention is also invited to the definition of short term capital asset as provided u/s 2 (42A) of the IT Act which states that if the shares are held by an assessee for not more then 12 months the same are to be treated as short term capital asset and accordingly as per section 2(42B) the capital gain arising on the transfer of such asset should be treated as Short Term Capital gain. Under such circumstances even if the shares are sold by the assessee within the period of 12 months the income arising from such sale has been rightly computed under the head short term capital gain.

Also your honor’s attention is also invited to the definition of Long term Capital asset as provided u/s 2 (29A) of the IT Act which states that capital asset which is not an short term capital asset in not shell if the shares are held for the more then one year will be treated as long term capital assets.

It is further submitted that mere volume of transaction done by the assessee would not alter the nature of transaction from investment to stock in trade. The transaction of the sale of share held with intention of investment by the assessee has to be considered separately with out regards to the volume and frequency of the transactions. The transaction in whole has to be taken into consideration and the magnitude of the transaction does not alter the nature of transaction.

It is further brought to your kind notice that there is no interest bearing loans raised by the assessee for the purpose of making the investment.

On perusal of the long term capital gain statement your honor will see that shares sold during the year, were held by the assessee for the fairly long period and the same were appearing under the head investment in the earlier balance sheets.

Your Honor’s attention is also invited to the guideline given by the CBDT is in Circular no. 4/2007 dated 15/06/2007 on the issue of treatment of income arising out of sale of shares as Capital Gain or Business Income. The relevant portion of the said circular is reproduced herein below:

………………………………………………………………………………………… ……………………………………………………………………………………….

The CBDT circular is reproduced below

…………………………………

…………………………….

The assessee company relied on the decision of Mumbai ITAT in the case of Janak Rangwala v/s ACIT 11- SOT 627 in which it is held that magnitude of transaction does not change the nature of transaction hence it is nature of transaction which shall decide category of transaction and not frequency of sale. It is also relied on the decision of Kerala High Court in the case of ACIT v/s Ketan Kumar Shah 242 ITR 83 in which it is held that a broker in shares can have two accounts, one for trading and another for investments. It is also relied on the decision of Madras High Court in the case of CIT v/s NSS Investments P. Ltd. 277 ITR 149 = (2005-TIOL-178-HC-MAD-IT) in which it is held that a company can hold shares for earning dividend and treat them as investment and can also trade in shares for making quick bucks in the market. It also relied on the decision of Gujarat High Court in Hy. Mohamed and Co. v/s CIT 107 ITR 637, in which Gujarat High Court held that stock in trade is something a trader a businessman deals, where as his capital assets is something with which he invests. Thus, the test of intention is also a very important factor. It also relied upon the circular referred by you No. 4/207 dated l5the June 2007 issued by CBDT in which it is held that shares can be held in two categories one as investment and another as Stock In Trade.

The assessee company also relies on Mumbai Tribunal Decision in the case of J.M.Shares & Stock Brokers Ltd. ITR No. 2801/Mum/2000, decided on 30-11-2007 a copy of the same is enclosed.

From the records submitted before you it can be seen that assessee has shown shares under the head investment. The balance sheet of the assessee reveals that assessee does not have any stock in trade of shares during the year. Further it can be seem that assessee is not indulging in frequent buying of shares from the market and selling the same in the market. It can also be seen that the intention to hold the share as investment and for this reason, the assessee had not claimed any loss on account of depreciation in shares.

In view of the above and considering the facts it is submitted that the assessee company complied all the principals laid in the circular No. 4/2007 for determining the shares held by the assessee as investment and to accept assessee claim of income as long term capital gain and short term capital gains.”

5.2 It is evident from the record that the Assessing Officer issued detailed questionnaire asking each and every relevant details on the issue of claim of STCG and the nature of transaction. The assessee has also filed detailed reply to the queries of the Assessing Officer . After considering the reply of the assessee, the Assessing Officer accepted the claim of the assessee regarding STCG while passing the assessment order dated 29.12.2008 and observed in paras 2 & 3 as under:

2. Consequent to the assignment of the case, notices u/s.143(2) and 142(1) alongwith questionnaire was issued on 19.12:2007 which was duly served upon the assessee. In response to the said notices no one appeared nor filed any details thereof. Thereafter another letter was issued on 23.01.2008. In response to this, ShrLC.B.R. Murthy, C.A filed part details. Another letter dated 11.06.2008 alongwith notice u/s 142(1) was issued, but no one appeared nor filed the balance details.

3. After taking over the charge of AddLCIT.Rg.5(2), Mumbai, the undersigned issued fresh notices u/s 143(2) & 142(1) dated 18.09.2008 which was duly served on the assessee company on 22.09.2008. Again no one appeared nor filed any details called for. Further notices were issued u/s 142(1) on 22.10.2008 & 14.11.2008. In response to the notices, Shri C.B.R Murthy, C.A and authorized representative of the assessee attended and filed all the details called for from time to time. Books of account, vouchers, contract notes were produced and the same were verified on test check basis. The case was examined and discussed with reference to details filed.

3. The assessee company is engaged in Investment in Shares and Mutual Funds and has shown Long Term Capital Gain on shares and Short Term Capital Gain on shares and Mutual funds There is no change in the nature of activity of the assessee company in comparison to earlier year.

5.3 It is manifest from the assessment order passed u/s 143(3) as well as record that the Assessing Officer has duly conducted the enquiry and considered the reply, details and other evidence produced by the assessee for exanimation and verification. After the examination and discussion with reference to the details filed by the assessee, the Assessing Officer finally concluded that the assessee is engaged in the investment in shares and mutual funds and has shown capital gain on sale of shares and STCG on sale of mutual funds. It has been specifically observed by the Assessing Officer in the assessment order that there is no change in the nature of activity of the assessee company in comparison to earlier years.

5.4 It is discernible from the assessment order passed u/s 143(3) that the Assessing Officer has taken a definite view after duly applied his mind on the issue in question and taking into consideration all the relevant facts, material and evidence. Therefore, there is no doubt while passing the assessment order u/s 143(3), the Assessing Officer took a view and then accepted the claim of the assessee. The reason for reopening of the assessment on the issue of treating the STCG as business income is mainly the number of sale and purchase occasions as 1062 which appears to be misconceived and misunderstood by the authorities below. Thus number of sale and purchase as basis of reopening is factually not correct as it is evident from the details of the script-wise transactions that the assessee has purchased the shares of 62 scripts during the year and the quantum of the shares of a script is large. It is manifest from the details that the order placed by the assessee has been executed by electronic system of Stock Exchange in various segments depending upon the availability of the number of shares for sale on the floor of stock exchange. Therefore, when the order of purchase of large quantity of a particular script has been executed in the segments as per the smaller quantity available to meet out the purchase quantity of the assessee, then a single transaction of purchase appears to be the many transactions, which has been considered by the authorities below as the number of transactions. When a single script though quantity of shares is large but purchased on a single day and executed also on a single day from the supply of quantity from various sellers, then the transaction is shown a bifurcated in various transaction. Therefore, the concept of entire purchase and sale of shares of transactions has been misunderstood by counting a single transaction as multiple transactions. Similarly, when a large quantity of shares is offered for sale, the execution is in small quantity shares in various segments. Therefore, a single transaction of sale appears to be number of transaction.

5.5 As it is clear from the facts that the real transaction of sale and purchase are much more less and even less half of the number of transactions, which are considered by the authorities below and therefore, the number of transactions as mentioned by the authorities below as 1062 are not factually correct. Hence, the very basis of forming an opinion that the nature of transaction is not investment but business activity, is based on incorrect facts and reasons.

5.6 Even otherwise, the audit party has not pointed out any factual mistake which has been committed by the Assessing Officer or any crucial aspect which has been overlooked by the Assessing Officer in the original assessment order passed u/s 143(3); but it is only the reappreciation of the same facts and evidence as well as relevant material available on record. The audit party has raised the objection by taking a view which is different from the view taken by the Assessing Officer while passing the assessment order.

5.7 It is pertinent to note that there is no dispute on the point that after the original assessment passed u/s 143(3), no new material, information or facts came to the notice of the Assessing Officer on the basis of which the Assessing Officer can form an opinion that the income assessable to tax has escaped assessment and thereby exercised its power u/s 147 of the I T Act.

6. In the case of Asian Paints Ltd (supra), the Hon’ble Jurisdictional High Court while considering the issue of validity of reopening of assessment has held in paras 9 & 10 as under:

9. It is clear from the observations made above that the Full Bench of the Delhi High Court has taken a view that in a situation where according to the Assessing Officer he failed to apply his mind to the relevant material in making the assessment order, he cannot take advantage of his own wrong and reopen the assessment by taking recourse to the provisions of section 147. We find, ourself, in respectful agreement with the view taken by the Full Bench of the Delhi High Court.

10 It is further to be seen that the Legislature has not conferred power on the Assessing Officer to review its own order. Therefore, the power under section 147 cannot be used to review the order. In the present case, though the Assessing Officer has used the phrase “reason to believe”, admittedly between the date of the order of assessment sought to be reopened and the date of formation of opinion by the Assessing Officer, nothing new has happened, therefore, no new material has come on record, no new information has been received, it is merely a fresh application of mind by the same Assessing Officer to the same set of facts and the reason that has been given is that the some material which was available on record while assessment order was made was inadvertently excluded from consideration. This will, in our opinion, amount to opening of the assessment merely because there is change of opinion. The Full Bench of the Delhi High Court in its judgment in the case of Kelvinator [2002] 256 ITR 1 = (2003-TII-19-HC-DEL-INTL-LB) referred to above, has taken a clear view that reopening of assessment under section 147 merely because there is a change of opinion cannot be allowed. In our opinion, therefore, in the present case also, it was not permissible for respondent No. 1 to issue notice under section 148.”

6.1 In the above noted case, that the Hon’ble High Court has taken note of the fact that between the date of order of assessment sought to be reopened and date of forming of opinion by the Assessing Officer, nothing new has happened; therefore, no new material has came on record, no new information has been received, it is merely a fresh application of mind by the AO to the same set of facts. Therefore, forming of the opinion by the AO for reopening of the assessment on the basis of the material which was available on record while passing the assessment order is merely change of opinion and thus, reopening on the basis of change of opinion on the issue, which has been examined by the Assessing Officer in the original assessment is not permitted in view of the settled proposition of law as held by the Hon’ble Supreme Court as well as jurisdictional High Court.

6.2 The Hon’ble Supreme Court has confirmed similar view taken by the full Bench of the Hon’ble Delhi High Court in the case of Kelvinator India (supra). This view has been consistently taken by the Hon’ble High Courts as well as Supreme Court in the series of decisions and therefore, for the sake of brevity, we do not record and reproduce the same here under.

6.3 In the case of PVS Beedies P Ltd (supra) the Hon’ble Supreme Court has pointed out that the recognition granted to that charitable trust had expired on 22.9.1972 which was not noticed by the ITO in the assessment. Thus, in the said case, the crucial fact regarding the expiry of recognition to the charitable trust and subsequently the donation made to the charitable trust did not qualify for deduction u/s 80G was overlooked by the ITO in the original assessment and the audit party mainly pointed out that the crucial fact which was overlooked by the ITO whereas in the case in hand, it is manifest from the record that the Assessing Officer has made a detailed enquiry through questionnaire and after considering the reply of the assessee on all the aspects of the issue of nature of transaction accepted the same.

6.4 Even otherwise, the issue of nature of transaction of purchase and sale of shares and securities is debatable issue and having accepted the claim of the assessee in the past, in the original assessment for this Assessment Year as well as in the subsequent year, further leaves no doubt that the Assessing Officer consciously accepted the claim of the assessee.

6.5 In the case of Dr Amin’s Pathology Laboratory (supra), the issue before the Hon’ble High Court was whether there was failure on the part of the assessee to disclose the material fact necessary for the assessment. In the said case, the Assessing Officer failed to notice an important item i.e. an amount of Rs. 6,70,758 which represented unpaid purchases and the assessee firm claimed the expense in respect of all purchases. Accordingly, in view of the Explanation 1 to the proviso to sec. 147, the Hon’ble High Court has observed that mere production of account books from which material evidence could have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the proviso. The issue in the said case is entirely different which has no applicability in the case of the assessee before us, as there is no allegation of failure on the part of the assessee to disclose all material facts necessary for assessment.

7. In view of the above discussion as well as the facts and circumstances of the case, when the issue of nature of transaction whether investment or trading is debatable issue and the department right from the beginning had accepted the claim of the assessee by treading the transaction as investment and the gain arising out of the purchase and sale of shares as capital gain; therefore, the reopening on the issue which was examined and accepted by the Assessing Officer in the original assessment is based on change of opinion. Hence, we are of the considered view that the notice issued u/s 148 and subsequent reassessment u/s 147 is bad in law and accordingly, set aside.

8. Even on the merit, we note that the transaction in the earlier year as well as in the subsequent year are similar and there is no material change as evident from the details as under:

STCG LTCG DIVIDEND Addition Made u/s 14A Other Addition

A.Y.2005-06 16,172,755 0 212,500 0 0 Order Passed u/s 143(3)

A.Y.2006-07 204,580,282 8,672,771 10,551,794 26,083 0 Order Passed u/s 143(3)

A.Y.2007-08 734,945,792 15,496,992 90,613,339 581,468 0 Order Passed u/s 143(3)



8.1 The number of transaction, as we have discussed in the foregoing paragraphs, has been misunderstood by the authorities below. We further note that if the average holding period is calculated from all the transaction, it will be more than 60 days in respect of the sale and purchase of the transaction giving rise to the STCG which indicates that there is no difference in the nature of transaction for the year under consideration from that of the earlier year as well as subsequent year. Further, the transaction of purchase and sale giving rise to the LTCG have been accepted by the authorities below, even in the reopening of the assessment, the assessee is treating the same as investment by showing in the books of account; these are delivery based transactions; therefore, having accepted similar transaction in the earlier years as well as in the subsequent year the Assessing Officer cannot take a different view in the absence of distinguishing material factors. The borrowed fund is not interest bearing as it has been arranged from the share holders of the assessee company; therefore, it alone would not effect the nature of transaction. Accordingly, in view of principles of consistency, we accept the claim of the assessee as the transaction of purchase and sale of shares and securities in question as investment and arising out of the transaction is capital gain and business income.

9. In the result, the appeal of the assessee is allowed.

(Order pronounced in the open Court on this day of 19.4.2013)


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