Commissioner of Income Tax vs Gulmohar Finance Ltd.

Madan B. Lokur, J.—The revenue is aggrieved by an order dated 28-2-2006 passed by the Income Tax Appellate Tribunal, Delhi Bench ''D'' New Delhi (The Tribunal'') in ITA No. 251 l/Del/2005 relevant for the assessment year 2001-02.

The assessee had filed its returns, which were accepted by the assessing officer.

The Commissioner of Income Tax (CIT) was of the opinion that the order passed by the assessing officer was erroneous and prejudicial to the interests of the revenue and he, therefore, issued a notice u/s 263 of the Income Tax Act, 1961 ("the Act") to the assessee. This notice reads as follows:

Return of income for assessment year 2001-02 was filed on 31-10-2001 declaring an income of Rs. 5,69,210. The assessment was completed u/s 143(3) on the income of Rs. 6,37,110.

Scrutiny of records revealed that the company is an investment company trading in shares. The shares are the stock of the company and hence cost index cannot be applied. On examination of assessment records by the undersigned it is found that the assessee has sold 45,000 shares of BT Tech Net Ltd. for an amount of Rs. 49,22,912 against the cost price of Rs. 4,50,000 Thus the income earned was Rs. 44,72,912 which should have been credited to the trading/P&L a/c and should have been incurred in taxable income. The assessing officer had completed the assessment and assessed the said income under the head ''Income from business and profession'' resulted in under assessment of income.

It is further seen that the assessee company had claimed a loss of Rs. 64,80,000 on sale of Prudential ICICI Technology Fund units. The units were purchased on 3-3-2001 for Rs. one crore @ Rs. 10 per unit. On 22-3-2001, the unit got redeemed at NAV of Rs. 3.52 per unit. The loss booked appears to be manipulated for the following reasons:

(i) The account statement filed in this regard during course of assessment proceedings is not signed by anybody and it has been mentioned therein ''that the data in this accounts statement may differ from investors'' actual position.

(ii) The loss has been booked in the month of March, 2001 apparently with an intent to avoid payment of taxes on capital gain sustained much earlier in November, 2000.

In view of the above facts the order passed by the assessing officer is considered to be erroneous as well as prejudicial to the interest of revenue.

Consequently, I propose to pass an order to modify the assessment framed by the assessing officer in accordance with the provisions of Section 263 of the Income Tax Act. However, before any decision in the matter is taken, you are hereby allowed an opportunity of being heard so that you can submit evidence in support of your claims made in the return of income. You may send your written submissions and attend personally or/and through Authorized Representative my office on the above address on 27-12-2004 at 11.00 A.M.

On considering the reply given by the assessee, the Commissioner passed an order on 22-3-2005 setting aside the assessment order and directing the assessing officer to make a fresh assessment.

Being aggrieved, the assessee preferred an appeal before the Tribunal, which came to be disposed of by the order under challenge.

Three issues have arisen in this appeal.

The first relates to the sale of shares held by the assessee in a company called M/s BT Tech Net Ltd.

According to the assessing officer as well as the Tribunal, the shares were held as an investment of the assessee and therefore, the profit earned by the assessee on the sale of the shares was to be treated as capital gains. However, the Commissioner was of the view that the shares were the stock-in-trade of the assessee and therefore, profit earned on the sale thereof could not be treated as capital gains but as business income.

It was noted by the Tribunal that in earlier assessment years, the assessee had shown the shares held in BT Tech Net Ltd. as investment right from the date of purchase and this was shown as such in the balance sheet of the assessee, which was filed along with the return of income. No objection was taken to this position in the earlier years. However, the Commissioner has now decided that it was not an investment without there being any change in facts and therefore, the Tribunal held that there was no occasion for the Commissioner to take a contrary view than what was disclosed and accepted on earlier occasions.

Even on merits, the Tribunal came to the conclusion that the shares held by the assessee in BT Tech Net Ltd were an investment and therefore, any profit earned on the sale thereof is required to be treated as capital gains. Whether the shares were held by the assessee as an investment or stock-in-trade is a matter of fact and we do not find any perversity in the view taken by the Tribunal that the shares were held as an investment.

The second issue pertains to the sale of units of Prudential ICICI Technology Fund.

As mentioned in the notice issued by the Commissioner u/s 263 of the Act, the units, according to him, were purchased on 3-3-2001 for Rs. 10 per unit and were sold on 22-3-2001 at Rs. 3.52 per unit. According to the Commissioner, this loss was manipulated, inter alia, because the data in the accounts statement may differ from investor to investor and that the loss has been booked in the month of March, 2001 apparently with an intent to avoid payment of taxes on capital gains earned earlier in November, 2000.

The Tribunal has noted that there is a factual error committed by the Commissioner inasmuch as the units were purchased by the assessee on 3-3-2000 and not on 3-3-2001. Therefore, there was no question of manipulating the loss in the month of March, 2001 itself for the purpose of avoiding tax on capital gains. It was also noted by the Tribunal that necessary documents were produced by the assessee such as the certificate issued by the Prudential ICICI Technology Fund confirming the purchase and redemption of the units as well as the dates and price thereof. The correctness of the certificate produced by the assessee from Prudential ICICI Technology Fund was not doubted by the Commissioner.

It was held by relying upon the decision of the Gujarat High Court in Raylon Silk Mills Vs. Commissioner of Income Tax, that the Commissioner could not have acted on mere suspicion so as to disturb a completed assessment which was made after due consideration of facts. There has to be an objective consideration of the material by the Commissioner and not a mere subjective satisfaction. Following the decision in Rayon Silk Mills (supra), we are of the view that the Tribunal has not erred in the conclusion that it has arrived at. There was enough material available to show that the assessment was not prejudicial to the interest of the revenue.

The third issues relates to the interpretation of Section 14A of the Act.

It has rightly been held by the Tribunal that this issue did not find a mention in the notice sent by the Commissioner u/s 263 of the Act to the assessee. It has been held in The Commissioner of Income Tax Vs. Smt. R.G. Umaranee, that in the absence of a notice given by the Commissioner on a particular issue, it is not open for him to reopen the proceedings on that issue which is different altogether and initiate an inquiry thereon.

We are of the opinion that since the assessee was not put to the notice in regard to any issue u/s 14A of the Act, the Commissioner could not enlarge the scope of the proceedings on whatever issue arose during the proceedings.

We do not find any error or illegality in the order passed by the Tribunal.

No substantial question of law arises. Dismissed.