THE issues before the Bench are - Whether merely because the order of the AO does not contain reasons as to why he accepted the assessee’s claim, his order becomes susceptible for revision u/s 263; Whether it is open to the Commissioner to reopen the assessment on the ground that a different view is possible; Whether merely because of large frequency and volume of transactions, a conclusion that an assessee is a trader cannot be drawn without considering the period of holding of those shares by the assessee; Whether merely because of large frequency and volume of transactions, a conclusion that an assessee is a trader can be drawn without considering the period of holding of those shares by the assessee and Whether the fact that the assessee has an administrative set up and incurs considerable administrative expenditure can be a factor to hold that the assessee is a trader. And the verdict goes against the Revenue.
Facts of the case
The assessee is a private limited company and registered as NBFC with the RBI. Initially, it was a franchisee of M/s Coca-Cola Company and was engaged in the Bottling business. In December, 1997, the business of the assessee was taken over by the said Company as a going concern and the assessee received Rs.56.23 Crores as consideration/compensation. This amount received by the assessee was invested by it in stages in shares of Companies quoted on the Stock Exchange and in units of Mutual Funds. The assessee also owns a Kalyanamandapam at Vijayawada from which it gets rental income by letting it out for various functions.
For the AY 2006-07, the assessee filed its return of income declaring a loss under normal computation as well as u/s 115JB of the Act. During the relevant year, it also claimed exemption u/s 10 (38) on LTCG from the sale of quoted shares and equity oriented Mutual Funds. It also had LTCG and STCG which was offered for taxation.
The case of the assessee for AY 2006-07 was selected for scrutiny proceedings. The AO issued a show cause notice dated 04.08.2008 asking the assessee to file various details including (i) a detailed note on the business activity of the assessee, (ii) to substantiate the claim of exemption of LTCG, (iii) details of LTCG from the transfer of unquoted shares, (iv) details of STCG from sale of shares and Mutual Fund Units and (v) computation of capital gain under various categories. Assessee filed its reply giving all the details sought by the AO including a note on its business activity, statement/working of LTCG and STCG of income which was claimed as exempt and which was chargeable to tax.
After considering the submissions of the assessee, the AO completed the assessment u/s 143 (3) of the Act stating that he had gone through the information furnished and computed the total income accepting the assessee to be an Investor and holding that the income chargeable from sale of shares and units of Mutual Funds was chargeable under the head ‘Capital Gains’.
The CIT issued a show cause notice u/s 263 of the Act stating that the Capital Gain on the sale of 6100 shares of M/s ITC Limited had been wrongly categorized as LTCG and was claimed as exemption by the assessee but it was clear from the Balance Sheet that the said shares were acquired and sold during the year and therefore to show cause as to why exemption claimed on the sale of shares of M/s ITC Limited should not be revoked.
Assessee clarified that during the relevant AY, the assessee company had got allotment of 660 equity shares of M/s. ITC Limited against the existing holding of 5500 equity shares of M/s. ITC Hotels pursuant to a scheme of amalgamation of M/s. ITC Hotels with M/s. ITC Limited; that the newly allotted 660 equity shares of Rs.10/- each of M/s. ITC Limited, were received in demat form during May, 2005 and further they were sub divided into 6600 equity shares of Re.1/- each during September, 2005; that the assessee was holding the original shares of M/s. ITC Hotels for more than a year prior to the year relevant to the A.Y 2006-07; that the cost and date of acquisition of original shares of M/s. ITC Hotels would be the cost and date of the newly acquired merger shares of M/s. ITC Limited; and that since the holding of the original shares of M/s. ITC Hotels was more than a year, the capital gain arising on the sale of shares of M/s. ITC Limited would be long term in nature and therefore the claim of the assessee of LTCG of Rs.8,16,084/- is correct.
The CIT did not proceed further and it appeared that he was satisfied with the reply of the assessee. There was a change of incumbent and the succeeding Commissioner called upon the assessee to appear before him and orally required it to furnish further information relating to activity of acquisition and sale of shares and other related information. The assessee submitted the information sought by the CIT. Subsequently also further information was sought which went beyond the notice u/s 263 of the Act which had been issued only with regard to shares of M/s ITC Limited.
The CIT thereafter issued a ‘Revised Show Cause Notice’ dated u/s 263 of the Act raising a new issue i.e., that the appellant is an investor or trader in shares generally and also stating that on further examination of the records, it is noticed that the assessee is engaged in the business of trading in shares, Mutual Fund Units and other securities; that the Assessment Order dated 16-12-2008 u/s 143 (3) of the Act is erroneous in so far as it relates to the above issues and is prejudicial to the interest of the Revenue; and the assessee should show cause why the profits from the sale of shares and Mutual Funds should not be taxed under the head ‘income from business’ instead of ‘Capital Gains’ in the light of a CBDT Circular No.04/2007, dated 15-06-2007 and the judgment of the Supreme Court in Raja Bahadur Visheswara Singh & Others Vs. CIT (2002-TIOL-530-SC-IT-LB). The assessee submitted a reply challenging the validity of the revised show cause notice.
CIT held that the order of the AO is erroneous and prejudicial to the interest of the Revenue; that the assessee is holding the shares and Mutual Funds as ‘Stock-in-Trade’ and not as ‘Investment’ and Profit from the sale of the same is chargeable as _Income from Business’ and not as ‘Capital Gains’; that this inference has to be drawn on the basis of information available before the AO and in Assessment Records; that the AO has not examined the issue in detail and erroneously accepted the claim of the assessee on LTCG; issuing a modification to the notice u/s 263 of the Act based on the same record before conclusion of the proceedings u/s 263 would not amount to change of opinion and is well within the powers u/s 263 (1) and as per the time limit provided u/s 263 (2) of the Act; that the application of mind by the AO and coming to a wrong conclusion is not a bar for exercising jurisdiction u/s 263 by the Commissioner; that failure of the AO to make an enquiry before granting a deduction would render the Assessment erroneous; that u/s 263, the Commissioner can correct both errors of fact and of law; that the order of a Revisional Authority is not an infringement of the power of the Assessing Authority and is not a mere change of opinion; that the concept of change of opinion would not arise in the case of revision by a superior authority; that an analysis of the transactions carried out by the assessee during the year in question indicates that it is buying and selling shares in the same year frequently; that there is a correlation of buy and sell day after day of huge number of shares of the same scrip i.e. M/s Andhra Sugars Limited; similar pattern is found on analysis of purchase and sale of several other scrips; that the assessee has been regularly buying and selling shares and Mutual Fund Units through very high volume of transactions throughout the year; the fact that the assessee is doing buying and selling of shares on day-to-day basis shows that it is monitoring the stock markets and buying at dips and selling at highs with an intention to make profit from these transactions; the assessee's earning of dividend income is incidental to the trading activity as stocks held by it through rolling at any given point of time is so huge that on the record dates, the assessee has been able to receive dividend income also; that such dealing in shares and Mutual Funds as an organized activity with high volume and frequency is to be construed as business activity and not as investment activity; that the Taxing Authority are entitled to draw different conclusions in different AYs and principles of res judicata do not apply to Income Tax proceedings; that name or label given by a party to a particular amount in its books of account is not conclusive; that the borrowing of fund for the purpose of buying of shares or Mutual Funds is not conclusive as to the nature of activity of an assessee; that passing of a resolution in a meeting of the Board of Directors of the assessee authorizing its Directors to make investments does not conclusively show that the intention is only to make investments and not trading; that the assessee is a closely held company with the family members of the Chairman running its business and such board resolutions of closely held Companies are intended to cover up its true activity i.e. trading in shares; the fact that the assessee had an elaborate administrative set up with considerable administrative expenditure proves that it was indulging in trading activity and not investments; that the very name of the assessee i.e., M/s Spectra shares and Scrips Private Limited indicates its business activity of dealing in shares and Scrips; that the annual report for the year 2005-06 shows the income of the Company in the Profit and Loss account drawn only for an entity carrying on business as it shows net profit before depreciation; the remarks in the Director's Report for 2005-06 that during the year, the market was up-beat and the Directors were hopeful of good results supports this conclusion; that merely because the assessee is registered as an NBFC with RBI would not mean that it cannot do trading activity; that the assessee is using its registration as NBFC as a camouflage for its trading activity; one of the objects in the Memorandum and Articles of Association of the assessee states ‘the company will raise funds to acquire or hold, sell, buy or otherwise deal in shares, debentures, bond units, obligations and other securities’ and these along with its actions are all reflective of its business activity and not investment activity; that the only and sole objective of purchase and sale of shares is to derive profits and not to earn dividend therefrom; that the ratio between dividend income and profits is 2:40 which shows that the dividend income is meager compared to income from sale of Share; that it is fair to conclude that its main business is only purchase and sale of shares and Units while its ancillary activity is running of a marriage hall at Vijayawada; therefore, the income declared by the assessee under the head LTCG amounting to Rs.18,98,06,611/- and STCG amounting to Rs.20,70,510/-, together amounting to Rs.19,18,77,121/- is to be held as the income chargeable under the head ‘business’. The Tribunal dismissed the appeal of the assessee.
On appeal, the High Court held that,
++ from the juridical decisions, the following principles as to exercise of jurisdiction by the Commissioner u/s.263 of the Act can be culled out:
The assessee is a private limited company and registered as NBFC with the RBI. Initially, it was a franchisee of M/s Coca-Cola Company and was engaged in the Bottling business. In December, 1997, the business of the assessee was taken over by the said Company as a going concern and the assessee received Rs.56.23 Crores as consideration/compensation. This amount received by the assessee was invested by it in stages in shares of Companies quoted on the Stock Exchange and in units of Mutual Funds. The assessee also owns a Kalyanamandapam at Vijayawada from which it gets rental income by letting it out for various functions.
For the AY 2006-07, the assessee filed its return of income declaring a loss under normal computation as well as u/s 115JB of the Act. During the relevant year, it also claimed exemption u/s 10 (38) on LTCG from the sale of quoted shares and equity oriented Mutual Funds. It also had LTCG and STCG which was offered for taxation.
The case of the assessee for AY 2006-07 was selected for scrutiny proceedings. The AO issued a show cause notice dated 04.08.2008 asking the assessee to file various details including (i) a detailed note on the business activity of the assessee, (ii) to substantiate the claim of exemption of LTCG, (iii) details of LTCG from the transfer of unquoted shares, (iv) details of STCG from sale of shares and Mutual Fund Units and (v) computation of capital gain under various categories. Assessee filed its reply giving all the details sought by the AO including a note on its business activity, statement/working of LTCG and STCG of income which was claimed as exempt and which was chargeable to tax.
After considering the submissions of the assessee, the AO completed the assessment u/s 143 (3) of the Act stating that he had gone through the information furnished and computed the total income accepting the assessee to be an Investor and holding that the income chargeable from sale of shares and units of Mutual Funds was chargeable under the head ‘Capital Gains’.
The CIT issued a show cause notice u/s 263 of the Act stating that the Capital Gain on the sale of 6100 shares of M/s ITC Limited had been wrongly categorized as LTCG and was claimed as exemption by the assessee but it was clear from the Balance Sheet that the said shares were acquired and sold during the year and therefore to show cause as to why exemption claimed on the sale of shares of M/s ITC Limited should not be revoked.
Assessee clarified that during the relevant AY, the assessee company had got allotment of 660 equity shares of M/s. ITC Limited against the existing holding of 5500 equity shares of M/s. ITC Hotels pursuant to a scheme of amalgamation of M/s. ITC Hotels with M/s. ITC Limited; that the newly allotted 660 equity shares of Rs.10/- each of M/s. ITC Limited, were received in demat form during May, 2005 and further they were sub divided into 6600 equity shares of Re.1/- each during September, 2005; that the assessee was holding the original shares of M/s. ITC Hotels for more than a year prior to the year relevant to the A.Y 2006-07; that the cost and date of acquisition of original shares of M/s. ITC Hotels would be the cost and date of the newly acquired merger shares of M/s. ITC Limited; and that since the holding of the original shares of M/s. ITC Hotels was more than a year, the capital gain arising on the sale of shares of M/s. ITC Limited would be long term in nature and therefore the claim of the assessee of LTCG of Rs.8,16,084/- is correct.
The CIT did not proceed further and it appeared that he was satisfied with the reply of the assessee. There was a change of incumbent and the succeeding Commissioner called upon the assessee to appear before him and orally required it to furnish further information relating to activity of acquisition and sale of shares and other related information. The assessee submitted the information sought by the CIT. Subsequently also further information was sought which went beyond the notice u/s 263 of the Act which had been issued only with regard to shares of M/s ITC Limited.
The CIT thereafter issued a ‘Revised Show Cause Notice’ dated u/s 263 of the Act raising a new issue i.e., that the appellant is an investor or trader in shares generally and also stating that on further examination of the records, it is noticed that the assessee is engaged in the business of trading in shares, Mutual Fund Units and other securities; that the Assessment Order dated 16-12-2008 u/s 143 (3) of the Act is erroneous in so far as it relates to the above issues and is prejudicial to the interest of the Revenue; and the assessee should show cause why the profits from the sale of shares and Mutual Funds should not be taxed under the head ‘income from business’ instead of ‘Capital Gains’ in the light of a CBDT Circular No.04/2007, dated 15-06-2007 and the judgment of the Supreme Court in Raja Bahadur Visheswara Singh & Others Vs. CIT (2002-TIOL-530-SC-IT-LB). The assessee submitted a reply challenging the validity of the revised show cause notice.
CIT held that the order of the AO is erroneous and prejudicial to the interest of the Revenue; that the assessee is holding the shares and Mutual Funds as ‘Stock-in-Trade’ and not as ‘Investment’ and Profit from the sale of the same is chargeable as _Income from Business’ and not as ‘Capital Gains’; that this inference has to be drawn on the basis of information available before the AO and in Assessment Records; that the AO has not examined the issue in detail and erroneously accepted the claim of the assessee on LTCG; issuing a modification to the notice u/s 263 of the Act based on the same record before conclusion of the proceedings u/s 263 would not amount to change of opinion and is well within the powers u/s 263 (1) and as per the time limit provided u/s 263 (2) of the Act; that the application of mind by the AO and coming to a wrong conclusion is not a bar for exercising jurisdiction u/s 263 by the Commissioner; that failure of the AO to make an enquiry before granting a deduction would render the Assessment erroneous; that u/s 263, the Commissioner can correct both errors of fact and of law; that the order of a Revisional Authority is not an infringement of the power of the Assessing Authority and is not a mere change of opinion; that the concept of change of opinion would not arise in the case of revision by a superior authority; that an analysis of the transactions carried out by the assessee during the year in question indicates that it is buying and selling shares in the same year frequently; that there is a correlation of buy and sell day after day of huge number of shares of the same scrip i.e. M/s Andhra Sugars Limited; similar pattern is found on analysis of purchase and sale of several other scrips; that the assessee has been regularly buying and selling shares and Mutual Fund Units through very high volume of transactions throughout the year; the fact that the assessee is doing buying and selling of shares on day-to-day basis shows that it is monitoring the stock markets and buying at dips and selling at highs with an intention to make profit from these transactions; the assessee's earning of dividend income is incidental to the trading activity as stocks held by it through rolling at any given point of time is so huge that on the record dates, the assessee has been able to receive dividend income also; that such dealing in shares and Mutual Funds as an organized activity with high volume and frequency is to be construed as business activity and not as investment activity; that the Taxing Authority are entitled to draw different conclusions in different AYs and principles of res judicata do not apply to Income Tax proceedings; that name or label given by a party to a particular amount in its books of account is not conclusive; that the borrowing of fund for the purpose of buying of shares or Mutual Funds is not conclusive as to the nature of activity of an assessee; that passing of a resolution in a meeting of the Board of Directors of the assessee authorizing its Directors to make investments does not conclusively show that the intention is only to make investments and not trading; that the assessee is a closely held company with the family members of the Chairman running its business and such board resolutions of closely held Companies are intended to cover up its true activity i.e. trading in shares; the fact that the assessee had an elaborate administrative set up with considerable administrative expenditure proves that it was indulging in trading activity and not investments; that the very name of the assessee i.e., M/s Spectra shares and Scrips Private Limited indicates its business activity of dealing in shares and Scrips; that the annual report for the year 2005-06 shows the income of the Company in the Profit and Loss account drawn only for an entity carrying on business as it shows net profit before depreciation; the remarks in the Director's Report for 2005-06 that during the year, the market was up-beat and the Directors were hopeful of good results supports this conclusion; that merely because the assessee is registered as an NBFC with RBI would not mean that it cannot do trading activity; that the assessee is using its registration as NBFC as a camouflage for its trading activity; one of the objects in the Memorandum and Articles of Association of the assessee states ‘the company will raise funds to acquire or hold, sell, buy or otherwise deal in shares, debentures, bond units, obligations and other securities’ and these along with its actions are all reflective of its business activity and not investment activity; that the only and sole objective of purchase and sale of shares is to derive profits and not to earn dividend therefrom; that the ratio between dividend income and profits is 2:40 which shows that the dividend income is meager compared to income from sale of Share; that it is fair to conclude that its main business is only purchase and sale of shares and Units while its ancillary activity is running of a marriage hall at Vijayawada; therefore, the income declared by the assessee under the head LTCG amounting to Rs.18,98,06,611/- and STCG amounting to Rs.20,70,510/-, together amounting to Rs.19,18,77,121/- is to be held as the income chargeable under the head ‘business’. The Tribunal dismissed the appeal of the assessee.
On appeal, the High Court held that,
++ from the juridical decisions, the following principles as to exercise of jurisdiction by the Commissioner u/s.263 of the Act can be culled out:
a) The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent _ if the order of the Income Tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but it is prejudicial to the Revenue _ recourse cannot be had to Sec.263 (1) of the Act.
b) Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of Revenue: or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income-tax Officer is unsustainable in law.
c) To invoke suo motu revisional powers to reopen a concluded assessment u/s 263, the Commissioner must give reasons; that a bare reiteration by him that the order of the Income Tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, will not suffice; that the reasons must be such as to show that the enhancement or modification of the assessment or cancellation of the assessment or directions issued for a fresh assessment were called for, and must irresistibly lead to the conclusion that the order of the Income Tax Officer was not only erroneous but was prejudicial to the interests of the Revenue. Thus, while the Income Tax Officer is not called upon to write an elaborate judgment giving detailed reasons in respect of each and every disallowance, deduction, etc., it is incumbent upon the Commissioner not to exercise his suo motu revisional powers unless supported by adequate reasons for doing so; that if a query is raised during the course of the scrutiny by the AO, which was answered to the satisfaction of the AO, but neither the query nor the answer were reflected in the assessment order, this would not by itself lead to the conclusion that the order of the AO called for interference and revision.
e) The Commissioner cannot initiate proceedings with a view to start fishing and roving inquiries in matters or orders which are already concluded; that the department cannot be permitted to begin fresh litigation because of new views they entertain on facts or new versions which they present as to what should be the inference or proper inference either of the facts disclosed or the weight of the circumstance; that if this is permitted, litigation would have no end except when legal ingenuity is exhausted;
f) Whether there was application of mind before allowing the expenditure in question has to be seen; that if there was an inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders u/s 263 merely because he has a different opinion in the matter; that it is only in cases of lack of inquiry that such a course of action would be open; that an assessment order made by the Income Tax Officer cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately; there must be some prima facie material on record to show that the tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation, a lesser tax than what was just, has been imposed;
g) The power of the Commissioner u/s 263 (1) is not limited only to the material which was available before the AO and, in order to protect the interests of the Revenue, the Commissioner is entitled to examine any other records which are available at the time of examination by him and to take into consideration even those events which arose subsequent to the order of assessment;
++ the AO had passed the assessment order on 16-12-2008 accepting the case of the assessee that its income has to be taxed under the head ‘Capital Gain’ as he was satisfied with the explanation and data submitted by the assessee to his queries, that it is an investment company carrying on business in shares and such investment is made for the sole purpose of deriving dividend income. The correspondence exchanged between the parties shows that the AO raised specific queries about the business activity of the assessee and also its claim of LTCG income from quoted shares, unquoted shares and Mutual Fund Units apart from STCG from sale of shares and Mutual Fund Units. The assessee had also given details of computation of Capital Gains under various categories. It is settled law that the AO is not called upon to write an elaborate judgment giving detailed reasons. CIT also held that substantial information had been furnished by the assessee, and held that there was application of mind by the AO but the conclusion of the AO is wrong;
++ It may be that in the Assessment Order, the AO has not made an elaborate discussion on the issue as to the nature of activity of the assessee i.e. whether it is an investment or whether it is business income and did not refer to his query on the issue to the assessee before passing the order or the reply given by the assessee to his query. When it is not incumbent on the AO to pass a detailed order, merely because the order does not contain reasons as to why he accepted that the assessee is a trading company, his order does not become susceptible for revision. The AO while making an assessment had examined the accounts, made inquiries, applied his mind to the facts and circumstances of the case and determined the income of the assessee. Therefore, it is not open to the Commissioner, on the ground that a different view is possible, to reopen the assessment on the ground that the AO did not make an elaborate discussion in that regard;
++ Admittedly, the assessee had given full details of these transactions in its letter/reply to the AOs letter, giving details of dates of acquisition of the shares in question and dates of sale of shares. As such this material was available before the AO. Both the CIT and the Tribunal did not take note of the dates of acquisition of the shares which are sold in March, 2006 and presume that the assessee was purchasing and selling shares in the same year. Both the CIT and the Tribunal refer only to the purchase and sale by the assessee of its shares in M/s. Andhra Sugars Limited and concluded that similar pattern is found in respect of several other scrips also without considering the details of the date of purchase and sale of the other scrips. This shocks our judicial conscience;
++ the orders of both the CIT and the Tribunal indicates a very disturbing and dishonest intention on the part of the respondent to twist the figures to justify a preconceived conclusion adverse to the assessee and we strongly deprecate it. The assessee had no occasion to point out to the respondent the reason for the high volume and frequency of transactions in March, 2006. For the first time in his order dated 31.03.2011 at Para 5.4, the respondent refers to the said fact;
++ the assessee had only made use of the exemption provision u/s. 10(38) and S.115JB by carrying out transactions in March, 2006 and such use of a provision to get benefit is permissible;
++ the C.B.D.T had issued a circular no.4/2007 in exercise of its powers u/s. 119 of the Act laying out certain guidelines for AOs to distinguish between shares held as stock in trade and shares held as an investment;
++ the respondent did not dispute that the assessee had not borrowed any funds and it had made all the investments with its funds; that the closing stock was valued in its books of account consistently at cost and not at cost or market price whichever is lower; it had earned substantial dividend income amounting to Rs.3,19,04,901/- for A.Y 2006-07, Rs.2,17,25,781/- for A.Y 2007-08 and Rs.2,13,38,005/- for A.Y 2008-09 i.e., more than Rs.8,00,00,000/-; that 99 % of the total gains are LTCG and less than 1 % is STCG; that 40% of investments are in mutual funds; the assessee had never dealt in futures, derivatives and options; that all the transactions of purchase and sale were delivery based except the one solitary instance of Reliance Industries Limited explained above; that the assessee was registered as NBFC with the R.B.I; and the assessee had never claimed set off of the losses arising from sale of investments against other incomes. Merely because of large frequency and volume of transactions, a conclusion that an assessee is a trader cannot be drawn without considering the period of holding of those shares by the assessee. A trader in shares normally holds them for a short time only; is unlikely to invest in unquoted shares or in mutual funds (which the assessee did ); and is likely to borrow funds for it's trading activity. The fact that the assessee is monitoring the stock markets and buying at dips and selling at highs with an intention to make profit from these transactions is not conclusive of the fact that the assessee is a trader because even an investor would not buy or sell blindly and take the risk of suffering losses. The fact that the assessee has an administrative set up and incurs considerable administrative expenditure also cannot be a factor to hold that the assessee is a trader because online trading is prevalent today and there is nothing special about the assessee having a few computer terminals or staff to operate them and help it in making the investments. The fact that the assessee is making repetitive purchases and sales of the same shares is a factor in favour of holding that the assessee is an investor as the assessee has explained that this was done due to amendments by Finance Bill, 2006 w.e.f, 01.04.2006 (A.Y 2007-08) to S.10(38) and S.115JB of the Act. The conclusion of the respondent that the only and sole objective of purchase and sale of shares is to derive profits and not to earn dividend is belied by the admitted fact that the assessee had earned dividends more than Rs.8,00,00,000/- for A.Y 2006-07, 2007-08 and 2008-09. We are unable to understand how the respondent at para 5.13 infers from the name of the assessee i.e Spectra Shares and Scrips Private Limited and a statement in the Director's report for the year 2005-06 that _during the year the market is upbeat and the directors were hopeful of good results_ indicates that it is only doing trading activity as there is nothing in these circumstances to show that the assessee cannot be an investor. In our opinion, it is the total effect of all relevant factors and circumstances that determines the character of the transaction. The fact that the Revenue from A.Y 1998-99 had accepted that the assessee is an investor and the shares and mutual funds are investments and not stock-in-trade (except for A.Y 2006-07) ; the fact that 99 % of the shares were held for considerable time after their purchase before their sale; that the action of the assessee in undertaking large volume of transactions in March,2006 was because of the change in law sought to be made effective from 01.04.2006 with regard to treatment of LTCG u/s.115JB of the Act for book profit tax and was not a colourable action and was permissible under the law, lead to an irrefutable conclusion that the assessee was only an investor and the AO had rightly taxed his income under the head ‘Capital Gains’;
++ in view of the above, the respondent cannot u/s 263 interfere on an issue which has been accepted by the Revenue for a number of years particularly when the AO in the assessment order for the AY 2006-07 takes the same view by terming it erroneous as the respondent is able to demonstrate a change in circumstances in the said AY;
++ the Tribunal could not have upheld the action of the respondent u/s 263 on a ground different from what has been mentioned in the notice u/s 263 or the order of the respondent u/s 263. In the present case, the respondent had held that the AO had applied his mind but has come to an erroneous conclusion at para-5.1 of his order dated 31-03-2011. The Tribunal at para-34 of its order dated 05-08-2011 held that the assessment order was passed without proper examination or inquiry or verification or objective consideration of the claim made by the assessee and hence, the Commissioner was justified in revising the order. This is clearly impermissible;
++ the contention of the Revenue that the AO had not applied his mind to the material on record cannot be accepted because the respondent in his order dated 31.03.2011 specifically records a finding at Para 5.1 that there is application of mind by the AO. The Revenue cannot raise a plea which is not contained in the order of the respondent and is contrary to it and to the record. The contention of the Revenue that there are no reasons given by the AO about the nature of activity of the assessee cannot be accepted because a query was raised by him in the course of the assessment proceedings and was replied by the assessee. Obviously, he was satisfied with the explanation of the assessee and therefore did not think that the issue needs to be specifically mentioned. It is settled law that the AO in the assessment order is not required to give detailed reasons and once it is clear that there was application of mind by an enquiry, the respondent, merely because he entertains a different opinion in the matter, cannot invoke his powers u/s. 263 of the Act. It is therefore not correct to say that there was no proper enquiry by the AO;
++ the AO had not only taken a possible view but in the circumstances the only view possible and therefore his order could not have been termed as erroneous or prejudicial to the revenue warranting exercise of revisional jurisdiction u/s.263 of the Act by the respondent. The respondent had no different or new material to take different view from the one taken by the AO and the reasons given by him to reopen the assessment and sustain the revision are totally unacceptable. The respondent is not vested any power u/s.263 to initiate proceedings for revision in every case and start re-examination and fresh enquiries in matters which have already been concluded under the law. The Tribunal had grossly erred in agreeing with the order of the respondent and in upholding it on grounds which have not been found in the show cause notice of the respondent , that too without considering the several issues of fact and law raised by the assessee in his written submissions and grounds of appeal. Both the respondent and the Tribunal have based their orders on preconceived notions, conjunctures and surmises, manifestly misread the facts and twisted them to justify their conclusions.
++ It may be that in the Assessment Order, the AO has not made an elaborate discussion on the issue as to the nature of activity of the assessee i.e. whether it is an investment or whether it is business income and did not refer to his query on the issue to the assessee before passing the order or the reply given by the assessee to his query. When it is not incumbent on the AO to pass a detailed order, merely because the order does not contain reasons as to why he accepted that the assessee is a trading company, his order does not become susceptible for revision. The AO while making an assessment had examined the accounts, made inquiries, applied his mind to the facts and circumstances of the case and determined the income of the assessee. Therefore, it is not open to the Commissioner, on the ground that a different view is possible, to reopen the assessment on the ground that the AO did not make an elaborate discussion in that regard;
++ Admittedly, the assessee had given full details of these transactions in its letter/reply to the AOs letter, giving details of dates of acquisition of the shares in question and dates of sale of shares. As such this material was available before the AO. Both the CIT and the Tribunal did not take note of the dates of acquisition of the shares which are sold in March, 2006 and presume that the assessee was purchasing and selling shares in the same year. Both the CIT and the Tribunal refer only to the purchase and sale by the assessee of its shares in M/s. Andhra Sugars Limited and concluded that similar pattern is found in respect of several other scrips also without considering the details of the date of purchase and sale of the other scrips. This shocks our judicial conscience;
++ the orders of both the CIT and the Tribunal indicates a very disturbing and dishonest intention on the part of the respondent to twist the figures to justify a preconceived conclusion adverse to the assessee and we strongly deprecate it. The assessee had no occasion to point out to the respondent the reason for the high volume and frequency of transactions in March, 2006. For the first time in his order dated 31.03.2011 at Para 5.4, the respondent refers to the said fact;
++ the assessee had only made use of the exemption provision u/s. 10(38) and S.115JB by carrying out transactions in March, 2006 and such use of a provision to get benefit is permissible;
++ the C.B.D.T had issued a circular no.4/2007 in exercise of its powers u/s. 119 of the Act laying out certain guidelines for AOs to distinguish between shares held as stock in trade and shares held as an investment;
++ the respondent did not dispute that the assessee had not borrowed any funds and it had made all the investments with its funds; that the closing stock was valued in its books of account consistently at cost and not at cost or market price whichever is lower; it had earned substantial dividend income amounting to Rs.3,19,04,901/- for A.Y 2006-07, Rs.2,17,25,781/- for A.Y 2007-08 and Rs.2,13,38,005/- for A.Y 2008-09 i.e., more than Rs.8,00,00,000/-; that 99 % of the total gains are LTCG and less than 1 % is STCG; that 40% of investments are in mutual funds; the assessee had never dealt in futures, derivatives and options; that all the transactions of purchase and sale were delivery based except the one solitary instance of Reliance Industries Limited explained above; that the assessee was registered as NBFC with the R.B.I; and the assessee had never claimed set off of the losses arising from sale of investments against other incomes. Merely because of large frequency and volume of transactions, a conclusion that an assessee is a trader cannot be drawn without considering the period of holding of those shares by the assessee. A trader in shares normally holds them for a short time only; is unlikely to invest in unquoted shares or in mutual funds (which the assessee did ); and is likely to borrow funds for it's trading activity. The fact that the assessee is monitoring the stock markets and buying at dips and selling at highs with an intention to make profit from these transactions is not conclusive of the fact that the assessee is a trader because even an investor would not buy or sell blindly and take the risk of suffering losses. The fact that the assessee has an administrative set up and incurs considerable administrative expenditure also cannot be a factor to hold that the assessee is a trader because online trading is prevalent today and there is nothing special about the assessee having a few computer terminals or staff to operate them and help it in making the investments. The fact that the assessee is making repetitive purchases and sales of the same shares is a factor in favour of holding that the assessee is an investor as the assessee has explained that this was done due to amendments by Finance Bill, 2006 w.e.f, 01.04.2006 (A.Y 2007-08) to S.10(38) and S.115JB of the Act. The conclusion of the respondent that the only and sole objective of purchase and sale of shares is to derive profits and not to earn dividend is belied by the admitted fact that the assessee had earned dividends more than Rs.8,00,00,000/- for A.Y 2006-07, 2007-08 and 2008-09. We are unable to understand how the respondent at para 5.13 infers from the name of the assessee i.e Spectra Shares and Scrips Private Limited and a statement in the Director's report for the year 2005-06 that _during the year the market is upbeat and the directors were hopeful of good results_ indicates that it is only doing trading activity as there is nothing in these circumstances to show that the assessee cannot be an investor. In our opinion, it is the total effect of all relevant factors and circumstances that determines the character of the transaction. The fact that the Revenue from A.Y 1998-99 had accepted that the assessee is an investor and the shares and mutual funds are investments and not stock-in-trade (except for A.Y 2006-07) ; the fact that 99 % of the shares were held for considerable time after their purchase before their sale; that the action of the assessee in undertaking large volume of transactions in March,2006 was because of the change in law sought to be made effective from 01.04.2006 with regard to treatment of LTCG u/s.115JB of the Act for book profit tax and was not a colourable action and was permissible under the law, lead to an irrefutable conclusion that the assessee was only an investor and the AO had rightly taxed his income under the head ‘Capital Gains’;
++ in view of the above, the respondent cannot u/s 263 interfere on an issue which has been accepted by the Revenue for a number of years particularly when the AO in the assessment order for the AY 2006-07 takes the same view by terming it erroneous as the respondent is able to demonstrate a change in circumstances in the said AY;
++ the Tribunal could not have upheld the action of the respondent u/s 263 on a ground different from what has been mentioned in the notice u/s 263 or the order of the respondent u/s 263. In the present case, the respondent had held that the AO had applied his mind but has come to an erroneous conclusion at para-5.1 of his order dated 31-03-2011. The Tribunal at para-34 of its order dated 05-08-2011 held that the assessment order was passed without proper examination or inquiry or verification or objective consideration of the claim made by the assessee and hence, the Commissioner was justified in revising the order. This is clearly impermissible;
++ the contention of the Revenue that the AO had not applied his mind to the material on record cannot be accepted because the respondent in his order dated 31.03.2011 specifically records a finding at Para 5.1 that there is application of mind by the AO. The Revenue cannot raise a plea which is not contained in the order of the respondent and is contrary to it and to the record. The contention of the Revenue that there are no reasons given by the AO about the nature of activity of the assessee cannot be accepted because a query was raised by him in the course of the assessment proceedings and was replied by the assessee. Obviously, he was satisfied with the explanation of the assessee and therefore did not think that the issue needs to be specifically mentioned. It is settled law that the AO in the assessment order is not required to give detailed reasons and once it is clear that there was application of mind by an enquiry, the respondent, merely because he entertains a different opinion in the matter, cannot invoke his powers u/s. 263 of the Act. It is therefore not correct to say that there was no proper enquiry by the AO;
++ the AO had not only taken a possible view but in the circumstances the only view possible and therefore his order could not have been termed as erroneous or prejudicial to the revenue warranting exercise of revisional jurisdiction u/s.263 of the Act by the respondent. The respondent had no different or new material to take different view from the one taken by the AO and the reasons given by him to reopen the assessment and sustain the revision are totally unacceptable. The respondent is not vested any power u/s.263 to initiate proceedings for revision in every case and start re-examination and fresh enquiries in matters which have already been concluded under the law. The Tribunal had grossly erred in agreeing with the order of the respondent and in upholding it on grounds which have not been found in the show cause notice of the respondent , that too without considering the several issues of fact and law raised by the assessee in his written submissions and grounds of appeal. Both the respondent and the Tribunal have based their orders on preconceived notions, conjunctures and surmises, manifestly misread the facts and twisted them to justify their conclusions.
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