Inflation of capital gain by showing higher purchase price and paying tax under section 115JB is not questionable

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH “C”, MUMBAI

BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND

SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER

ITA No.1073/Mum/2007

Assessment Year:

Income tax Officer

Ward 8(2)(4), Room No.213,

Aayakar Bhavan, 2nd floor

M.K. Road

Mumbai-400 020.

 (Appellant)

Vs.

M/s. Pacific Energy Pvt. Ltd.

301, Capri Green Field Estate

A.B. Nair Road, Juhu

Mumbai-400 049.

PAN No. AACCP 0544 P

(Respondent)

Appellant by: Shri A.C. Tejpal

Respondent by: Shri Farrokh Irani and

Shri Vinod Modi

Date of hearing: 17.7.2012

Date of Pronouncement: 03.08.2012

O R D E R

PER RAJENDRA SINGH, AM:

This appeal by the revenue is directed against the order dated 30.11.2006 of CIT(A) for the assessment year 1999-2000. The only dispute raised by the revenue in this appeal is regarding legal validity of re-opening of the assessment for assessment year 1999-00 under section 147 of the Act.

2. The facts in brief are that the assessee for the assessment year 1999-00 had declared long term capital loss of Rs.4,01,75,013/- on sale of shares which had been set off against short term capital gain from sale of shares of Rs.3,98,40,597/- and thus there was net long term capital loss of Rs.10,73,749/-. The book profit of the assessee under section 115JB of the Income tax Act (the Act) was Rs.1,13,25,826/- and, therefore, under the provisions of the said section assessee had deemed total income of Rs.33,97,748/-. The assessee had, therefore paid tax under section 115JB on deemed income. The income declared by the assessee had been accepted by the AO under summary scheme under section 143(1). Thereafter, the AO noted from the assessment order passed under section 143(3) for 2002-03 that the assessee had sold 2,00,000 shares of Gammon India Ltd. in assessment year 1999-2000. The said shares had been purchased in financial year 1995-96. The AO also noted that purchase price of the share was Rs.242.01 per share whereas in the computation of long term capital loss from the said shares in assessment year 1999-2000, assessee had taken the purchase price @248.88 per share. Thus the assessee had inflated the loss to the tune of Rs.17,15,576/- and the income had thus been reduced to that extent. The AO, therefore, issued notice under section 148 which was served on the assessee on 18.4.2005. In response to the said notice, the assessee stated that the return of income filed on 29.12.1999 may

be taken as return filed in response to section 148.

2.1 The assessee also submitted that the notice issued under section 148 was misconceived and asked for the reasons recorded under section 147. The AO in the assessment order mentioned that the reasons recorded had been given to the assessee vide letter dated 18.11.2005. He also rejected the objection raised by the assessee to issue of notice under section 148. The AO on scrutiny of records also noted that the assessee had transactions in shares in bock and time gap between purchase and sale of shares was very short varying from 2 to 5 days. The AO, therefore, asked the assessee to explain as to why short term capital gain declared by the assessee from purchase and sale of shares should not be treated as business income and claim of set off of long term capital loss should not be disallowed. The assessee replied that action proposed by AO was baseless, misconceived and unjustified. The AO, however, concluded that the assessee had failed to prove as to why the share transactions resulting into short term capital gain should be treated as investment. Accordingly he assessed income declared as short term capital gain by the assessee as business income. The loss declared on sale of shares of Gammon India Ltd. was accepted as long term capital loss which was computed at Rs.3,84,59,438/- which was allowed to be carried forward. The total business income of the assessee was computed at Rs.3,91,01,264/- which included the gain from sale of shares of Rs.3,98,40,597/- declared by the assessee as short term capital gain and assessed by the AO as business income.

3. The assessee disputed the decision of AO to assess short term capital gain as business income and also challenged the legal validity of re-opening of the assessment before CIT(A). It was argued that assessee vide letter dated 18.10.2005 issued by AO was asked to give reasons recorded for issue of notice under section 147 which was received on 9.12.2005 vide letter dated 18.11.2005 of the AO enclosed with the assessment order dated 30.11.2005. The assessee submitted that AO had not given reasons recorded to the assessee before passing of the assessment order and therefore, reassessment was bad in law. The assessee placed reliance on the judgment of Hon'ble Supreme Court in the case of GKN Driveshafts (India) Ltd. vs. ITO (259 ITR 19).

The assessee also submitted that in the assessment order for assessment year 2002-03 made under section 143(3), the AO had accepted the sale and purchase of shares as investment activity and, therefore, re-opening of assessment was based on change of opinion which was not permitted in law. The assessee also pleaded that the assessment should be quashed on the ground that the reasons recorded had not been provided to the assessee. CIT(A) did not accept the plea of the assessee that the assessment should be quashed on the ground that the reasons were not provided before passing assessment order. However, he agreed with the assessee that the reopening was based on change of opinion and AO did not have reasons to believe for escapement of income for assessment year 1999-2000. He, therefore, quashed the re-assessment made by AO aggrieved by which, the revenue is in appeal.

4. Before us, the ld. Departmental Representative appearing for the revenue assailed the order of CIT(A). It was submitted that the return of income filed for assessment year 1999-2000 had only been processed under section 143(1)and there was no assessment made and, therefore, re-opening of the assessment under section 147 could not be said to be based on change of opinion. It was also submitted that AO had re-opened the assessment on valid ground of inflation of long term capital loss by showing inflated purchase price and once the assessment had been re-opened on valid ground, the AO had the jurisdiction to assess or re-assess any other income which had escaped assessment. The ld. DR further submitted that the AO had given reasons recorded to the assessee vide letter dated 18.11.2005 which was before the date of assessment order. Therefore, the order of CIT(A) quashing the re-assessment was not proper. It was also argued that the assessee was aware of the reasons recorded and, therefore, non-supply of reasons even if it was presumed that the reasons were not received by the assessee before passing of assessment order, could not be considered as fatal to validity of reassessment. Reliance was placed on the decision of Delhi Bench of the Tribunal in the case of ITO vs. Gurinder Kaur (102 ITD 189).

4.1 The ld. AR on the other hand argued that the AO was required to give copy of reasons recorded to the assessee within a reasonable time and on receipt of reasons, assessee was entitled to file objections which the AO was bound to dispose off by a speaking order as held by Hon'ble Supreme Court in the case of GKN Driveshafts (India) Ltd. (supra), The AO had thus not followed the procedure laid down by the Hon'ble Supreme Court in the matter of re-opening of the assessment. It was also pointed out that the assessee in the return of income had declared long term capital loss of Rs.10,73,749/-. The AO re-opened the assessment for escapement of income by inflating long term capital loss by Rs.17,15,576/- and, therefore, even if the long term capital loss was increased to that extent, this would have resulted into total long term capital gain of Rs.6,41,829/-. The assessee had paid the tax on deemed total income of Rs.33,97,748/- under section 115JB of the Act. Therefore, even after considering the reasons recorded by AO, there was no escapement of income chargeable to tax. It was also submitted that had the AO given copy of reasons recorded before assessment, the assessee would have explained the point and probably the AO would have dropped the reassessment as the very ground for re-opening of the assessment was not valid. Therefore, there being no valid reason for re-opening, AO would not have been able to reassess the short term capital gain as business income. Since the AO had not followed the procedure laid down by the Hon'ble Supreme Court in the case of GKN Driveshafts (India) Ltd. (supra), the ld. AR urged that the re-assessment order should be quashed or at the most the matter could be sent back to AO for providing opportunity to the assessee to file objections afresh.

5. We have perused the records and considered the rival contentions carefully. The dispute raised by the revenue in this appeal is regarding legal validity of re-opening of the assessment. The assessee in assessment year 1999-2000 had declared long term capital loss of Rs.10,73,749/- on sale of shares. The assessee had also earned gain on sale of shares of Rs.3,98,40,597/- which had been declared as short term capital gain. The return had been processed under section 143(1). Thereafter the AO from the details given in the assessment proceedings for assessment year 2002-03 noted that the assessee had purchased shares of Gammon India Ltd. at Rs.242.01 per share in financial year 1995-96 which had been sold in assessment year 1999-00 resulting into long term capital loss of Rs.10,73,749/-. It was found that the assessee had adopted purchase price of Rs.248.88 per share while computing long term capital loss whereas the actual purchase price was Rs.242.01 per share. The loss thus had been inflated by Rs.17,15,576/-. The AO had, therefore, re-opened the assessment proceedings and in the fresh assessment order determined long term capital loss on the basis of current purchase price of Rs.242.01. The AO also did not accept the claim of short term capital gain on sale of shares and treated the same as business after holding that the assessee had frequently bought and sold shares in big volume.

5.1 The re-assessment proceedings were challenged by the assessee. Though the AO in the assessment order has mentioned that he had given a copy of the reasons recorded to the assessee vide letter dated 18.11.2005, but the case of the assessee is that the reasons were received along with the assessment order dated 18.10.2005 on 9.12.2005. The assessee argued that re-assessment proceedings should be quashed as reasons recorded were not given to the assessee before passing of the assessment order. CIT(A) did not accept the plea of the assessee that assessment order should be quashed only on the ground that reasons were not given to the assessee. However, he held that treatment of short term capital gain declared by assessee as business income was based on change of opinion as AO in the assessment order under section 143(3) in assessment year 2002-03 had accepted the share transactions as investment activity. He, therefore, quashed the reassessment proceedings on the ground that the same was based on the change of opinion.

5.2 On careful consideration of the various aspects of the matter we are unable to sustain the order of CIT(A) quashing reassessment proceedings on the ground that re-opening of the assessment was based on change of opinion. The AO had not re-opened the assessment on the ground of treatment of income from share transactions which had been declared by the assessee as short term capital gain. The AO had re-opened the assessment on the ground that long term capital loss from sale of shares of Gammon India Ltd. had not been correctly computed resulting into inflation of capital loss. The return for assessment year 1999-2000 had only been processed under section 143(1) in which the AO had only to accept whatever had been declared by the assessee and he had no power to change or modify the income/loss returned. Therefore, the re-opening could not be said to be based on change of opinion. This legal position is settled by the judgment of Hon'ble Supreme Court in the case of ACIT vs. Rajesh Jhaveri Stock Brokers P. Ltd. (SC) (291 ITR 500). Moreover, in this case the fact that the assessee had inflated purchase price in computation of long term capital loss came to the notice of the department only later during course of assessment proceedings for assessment year 2002-03. It is also a settled legal position that, once assessment has been re-opened properly, in the re-assessment order, the AO could also bring to tax any other income which has escaped assessment. Therefore, once the assessment has been re-opened properly, the AO has power to consider the true nature of income from share transactions resulting into short term capital gain. However, we find that the AO in the matter of re-opening of the assessment, had not followed the procedure laid down by the Hon’ble Supreme Court in the case of GKN Driveshafts (India) Ltd. (supra). In that case it has been held that after assessment is reopened, the assessee can seek reasons for issue of notice and AO is bound to furnish reasons within reasonable time. Further on receipt of reasons, assessee is entitled to file objections to the issuance of the notice and AO is bound to dispose of the same by passing a speaking order. In this case there is no dispute that the assessee did ask for copy of reasons recorded. The claim of the department is that the AO had given copy of reasons recorded vide letter dated 18.11.2005 but the case of the assessee is that the said letter dated 18.11.2005 was received by the assessee only on 9.12.2005 along with copy of assessment order dated 30.11.2005. Before us, the ld. D.R has not produced any material to show that the letter dated 18.11.2005 was served on the assessee before passing of the assessment order. Therefore, the claim of the revenue that the reasons had been given before the assessment order was passed is not supported by any evidence. The ld. Counsel for the assessee has made a very valid point that the assessee had declared long term capital loss of Rs.10,73,749/- and therefore, even after addition of Rs.17,15,576/- was made by AO because of inflation of long term capital loss, it would have resulted into long term capital gain of Rs.6,41,829/-. The assessee had however paid tax under section 115JB of deemed income of Rs.33,97,478/-. Therefore, there was no escapement of income on account of wrong computation of long term capital gain. The ld. Counsel for the assessee rightly argued that in case the AO had given assessee reasons recorded, the assessee may have been able to convince the AO that there was no escapement of income and AO may have agreed to drop the reassessment proceedings. The assessee had been deprived of this vital opportunity having a bearing on the reopening of the assessment. Therefore, in our view, the matter is required to be sent back to the AO for providing opportunity to the assessee to raise objections against reasons recorded which will be disposed off by AO by way of reasoned and speaking order. The AO will pass a fresh order after disposing off the objections raised by the assessee and after allowing opportunity of hearing to the assessee.

6. In the result, appeal of the revenue is allowed for statistical purposes.

Order pronounced in the open court on 3.8.2012.

                                                    Sd/-                               Sd/-

                                   (D. MANMOHAN)    (RAJENDRA SINGH)

                                  VICE PRESIDENT   ACCOUNTANT MEMBER

Mumbai, Dated: 3.8.2012.

Jv.

Copy to:

The Appellant

The Respondent

The CIT, Concerned, Mumbai

The CIT (A) Concerned, Mumbai

The DR “” Bench

True Copy

By Order

Dy/Asstt. Registrar, ITAT, Mumbai.