Brief of the case
In the case of Equity Intelligence India Pvt Ltd vs. Assistant Commissioner Of Income Tax High Court of Kerala at Ernakulam has held that (1) for reopening u/s 147 of the IT Act The requirement that the Assessing Officer must have ‘reason to believe’ cannot be taken to mean that the Assessing Officer must be satisfied that there exists grounds for reopening the assessment or the Assessing Officer should have formed an opinion about the nature of the final order that is likely to be passed after reopening the assessment. (2) profit on sale of shares is to be treated as business income when the assessee carried on business by systematic and organised manner.
Facts of the case
Company engaged in portfolio management services having obtained necessary registration from the SEBI. The return of income for the assessment year 2008-09 was filed and assessment under section 143(3) of the Income Tax Act was completed, treating the transactions in purchase and sale of shares as ‘business income’ instead of capital gains as shown by the assessee company.
In so far as the assessment year 2006-07 is concerned, return of income was processed under section 143(1) of the Act and assessment was completed. After completing the assessment for the assessment year 2008-09, the assessment for 2006-07 was reopened by the Assessing Officer invoking his power under section 147 of the Act. Accordingly, assessment was completed under section 143(3), where also, the income of the assessee from the purchase and sale of shares, which was originally treated as short term capital gains and taxed at the lower rate, was assessed as business income. The assessment for the year 2010-11 was also completed under section 143(3) as in the case of the assessment year 2008-09.
Both the authority i:e CIT(A) and Tribunal confirm the action of AO and Aggrieved against the said decision, the Assessee preferred an appeal before High Court
Whether on the facts and circumstances of the case, the Appellate Tribunal is right in confirming the reopening of assessment under Section 147?
Whether on the facts and circumstances of the case, the Appellate Tribunal is right in confirming that the profit on sale of shares is to be assessed under the head “income business”
Contention of Assessee
The reopening of the assessment for the year 2006-07, invoking the power under section 147 of the Act, is illegal. That the grounds contemplated for re-opening an assessment under section 147 are not existing in this case. The assessee has been in the business since the assessment year 2002-03 and that till 2006-07, the income derived by the assessee from the sale and purchase of shares was accepted by the Department as capital gains and that by treating such income for the aforesaid three assessment years as business income, the Department has shown that it did not have consistency in the matter of assessment and treatment of income. That even after reopening the assessments for the year 2006-07 and completing the assessments for the years 2008-09 and 2010-11, the Department has left out assessments for the years 2007-08 and 2009-2010. Such picking and choosing some of the years and leaving out the remaining years when the assessee had returned loss is impermissible.
High Court decision / observations
1. The first issue that is required to be considered is the scope of the power of the Assessing Officer under section 147 of the Act. The expression ‘reason to believe’ incorporated in Section 147 by Act 3 of 1989 with effect from 1.4.1989 came up for the consideration of courts on various occasions. In Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers P. Ltd [(2007)291 ITR 500], the Apex Court examined this expression and held thus:
“Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word reason in the phrase reason to believe would mean cause orjustification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. ITO [1991 (191) ITR 662], for initiation of action under Section 147(a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is reason to believe, but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm o subjective satisfaction (see ITO v. Selected Dalurband Coal Co. Pvt. Ltd. [1996 (217) ITR 597 (SC)]; Raymond Woollen Mills Ltd. v. ITO [1999 (236) ITR 34 (SC)].
2. Commissioner of Income Tax v. Kelvinator of India Ltd. [(2010) 228 CTR 488] is another case where the Apex Court had again considered the scope of this provision and it was held that one needs to give a schematic interpretation to the words ‘reason to believe’, failing which, section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of ‘mere change of opinion’ which may not be, per se, reason to re-open.
3. Decision in case of Commissioner of Income Tax v. Usha International Ltd. [(2012) 348 ITR 485] is also being considered.
4. From the principles laid down in the above judgments, it can be seen that the power under section 147 of the Act can be invoked by the Assessing Officer, if, on the materials available before him, he has reason to believe that any income chargeable to tax has escaped assessment in any assessment year, provided such proceedings are not barred by the time limit prescribed in the first proviso to the said section. The requirement that the Assessing Officer must have ‘reason to believe’ cannot be taken to mean that the Assessing Officer must be satisfied that there exists grounds for reopening the assessment or the Assessing Officer should have formed an opinion about the nature of the final order that is likely to be passed after reopening the assessment. The question is whether the Assessing Officer was justified in re-opening the assessment for the year 2006-07. For the assessment year 2006-07, assessment was initially completed under section 143(1) of the Act. The scope of enquiry that is permissible in an assessment proceedings under section 143(1) is very limited as is evident from the section itself.
5. Law mandates that the Assessing Officer should have reason to believe that income chargeable to tax has escaped assessment for any assessment year to invoke the power to re-open assessments under section 147. Admittedly, assessments for the year 2006-07 were completed treating the income in question as capital gains. Once the assessment for the year 2008-09 was completed and the income for that year was assessed as business income, the Assessing Officer had sufficient materials to believe that income chargeable to tax as business income for the assessment year 2006-07 had escaped assessment. It was on that basis, proceedings under section 147 was initiated. The initiation of such proceedings under section 147, according to us, is fully within the four corners of section 147 of the Act.
6. It is true that returns treating the income as capital gains were accepted in the previous assessment years also. It is on that factual basis that contention was raised by the assessee that Department should maintain consistency in the matter of assessment. In support of this contention, counsel for the appellant relied on the judgment of the Bombay High Court in Commissioner of Income Tax v. Gopal Purohit [(2011) 336 ITR 287]. This again is an untenable argument for the reason that in the matter of assessment of income tax, the decision arrived at in the previous year cannot be regarded as binding in the assessment for the subsequent years. It has been so held by the Apex Court in Dwarakadas Kesardeo Morarka v. Commissioner of Income Tax [(1962) XLIV ITR 529].
7. Therefore, though consistency is desirable, the desirability of consistency cannot operate against the Revenue in completing assessments for subsequent years in accordance with law. This is all the more so since the assessments for the previous years were completed under section 143(1) of the Act. In so far as the judgment of the Bombay High Court in Gopal Purohit (supra) is concerned, though the court has highlighted the need for consistency, it has also taken note of the fact that in that case, the Revenue did not furnish any justification for adopting a divergent approach for the assessment year in question.
8. As per the assessee contention, Revenue has, adopted a pick and choose method, choosing the assessment years when the assessee had returned profit. Though this contention would appear to be attractive, a closer examination thereof would show that there is no substance in it. Admittedly, for the assessment years 2007-08 and 009-2010, the assessee had returned loss. The assessment for such years was also completed under section 143(1). Re-opening of those assessments is permissible only under section 147 and power under that section could be invoked only if any income chargeable to tax has escaped assessment. Here, in the instant case, the assessee has returned loss and therefore, no income chargeable to tax has escaped assessment, permitting invocation of the power under this provision.
9. Second and main issue is that arises for consideration is regarding the legality of assessment treating the income for the years in question as ‘business income’ instead of ‘capital gains’.
10. in our view, having regard to the principles laid down by the Apex Court in its judgment in Commissioner of Income Tax, Nagpur v. Sutlej Cotton Mills Supply Agency Ltd. [(1975) 100 ITR 706], the Apex Court summarised the principles thus:
“In the absence of any evidence of trading activity in cases of purchase and resale of shares, it has been held that profit arising from the resale is an accretion to the capital……..
It is not necessary to constitute trade that there should be a series of transactions, both of purchase and of sale. A single transaction of purchase and sale outside the assessee’s line of business may constitute an adventure in the nature trade………..
Tthe character of a transaction cannot be determined solely on the application of any abstract rule, principle or test but must depend upon all the facts and circumstances of the case………
Where the purchase of any article or of any capital investment, for instance, shares, is made without the intention to resell at a profit, a resale under changed circumstances would only be a realisation of capital and would not stamp the transaction with a business character (see Commissioner of Income-tax v. P.K.N.Co.Ltd (1966) 60 ITR 65 (SC).
Where a purchase is made with the intention of resale, it depends upon the conduct of the assessee and the circumstances of the case whether the venture is on capital account or in the nature of trade………
A capital investment and resale do not lose their capital nature merely because the resale was foreseen and contemplated when the investment was made and the possibility of enhanced values motivated the investment…….
This court laid down in G.Venkataswami Naidu & Co. v. Commissioner of Income-tax [(1959) 35 ITR 594, 610, 622(SC)] that the dominant or even sole intention to resell is a relevant factor and raises a strong presumption, but by itself is not conclusive proof, of an adventure in the nature of trade.
The intention to resell would, in conjunction with the conduct of the assessee and other circumstances, point to the business character of the transaction.”
11. The Apex Court in M/s.Rajputana Textiles (Agencies) Ltd. v. Commissioner of Income tax, Bombay City [42 ITR 743], where the contention that buying and selling in shares was not one of the objects of the company was rejected and the court held that this was only one of the circumstances in the totality of the circumstances which must be considered, though this by itself is not determinative of the question. in Sutlej Cotton Mills Ltd. v. Commissioner of Income Tax, West Bengal [(1979) 116 ITR 1], the Apex Court held that the way in which entries are made by the assessee in its books of accounts is not determinative of the question whether the assessee has earned any profit or suffered any loss. Therefore, even if it is accepted that the objects clause in the Memorandum of Association of the assessee did not provide for trading in shares and that in the accounts it was shown as investments, that by itself would not be determinative of the issue involved in these appeals.
12. While the precedents that we have referred to above lead to the irresistible conclusion that it is the totality of the circumstances which is determinative of the question as to whether the profit earned by the assessee is an accretion to the capital or is a trading profit, it is also relevant that the Central Board of Direct Taxes issued circular No.4/2007 dated 15.6.2007 indicating the tests to draw a distinction between the shares held as stock-in-trade and shares held as investment.
13. The authorities have also taken note of the fact that the assessee has all the infrastructure for buying and selling shares and that it has incurred establishment expenses and various establishment expenses have been charged to Profit and Loss Account which indicated an organised and systematic activity carried on by the assessee. It was also found that the income earned by the company in the form of dividend was only in respect of very few scrips which gave a very low rate of return as compared to the value of shares held by it. Yet another finding that has been entered into is that the involvement of the assessee in the trading of shares was not an occasional one but was carried on by it in a systematic and organised manner. The authorities have also found that the short period of holding of shares reveal that the assessee had no intention to hold the shares for longer term as an investment. These findings of the authorities below are absolutely unassailable and therefore, the fact that trading in shares is not the main object of the assessee or that the shares were shown as stock-intrade in the books of accounts of the assessee cannot be of any consequence.
14. It is true as contended by the learned counsel for the assessee that it is possible for an assessee to have more than one portfolio, viz., that a part of the shares could have been held by it as investment and the remaining part, as stock-in-trade. Such a distinction has been recognised by the Central Government in circular No.4/07 (supra). This submission was made mainly with reference to the 219,641 shares of M/s.JK Investo Trade held by the assessee, which has the maximum weighted holding period. This particular transaction has been discussed in the assessment order for the year 2008- 09, where the Assessing Officer has found thus:
“16. In order to see whether the shares of JK Investo Trade Ltd. was held by the assessee as an investment or as a prudent step to earn more income, the price value chart of the above said share for the period 1.12.2005 to 30.11.2007 was called for. The papers presented by the assessee is annexed as Annexure B, C & D. The assessee started purchasing the share on 8.12.2005 and went on buying it continuously till 1.12.2006. It started selling it off in 4.4.2007 and sold off the entire shares by 26.11.2007. Now a look at the price value chart show that except for a rise for the period May, 2006 to August, 2006, the price of the share was almost statue till June-July, 2007. It started shooting upon in August 2007 and assessee started selling it in Sept., 2007 and the entire shares were sold off in Nov. 2007. Thus, it can be seen that holding of this share is not with an investors mind, but with a real business man’s mind to sell it off at the right time. This instance itself shows that the assessee was not a mere investor but a prudent business man making the right calculation to see when to buy and when to sell, which share. This is definitely an adventure in the nature of trade. It may also be seen that though the assessee had held this share for a long period, it was engaged in buying and selling all the time throughout the year.”
15. The factual correctness of the findings of the Assessing Officer was not disputed at any stage of the proceedings. It was on the basis of the assessment for the year 2008-09 that the assessment for the year 2006-07 was re-opened and the same standard has been applied in respect of the assessment for 2010-11 also. These findings, the factual correctness of which has been concurrently confirmed by the first appellate authority and the Tribunal, when appreciated in the light of the principles laid down by the Apex Court in Commissioner of Income Tax, Nagpur v. Sutlej Cotton Mills Supply Agency Ltd. [(1975) 100 ITR 706], only leads to the conclusion that the assessee was engaged in trading in shares and was not holding the shares as stock-in-trade.
Hence, appeal filed by assessee is dismissed