Rentex Weavers Ltd.,, Ahmedabad vs Assessee

Rentex W eavers Ltd, Commissioner of Income-tax, Previously known as Ahmedabad-III Kalpesh Investment Ltd, Vs (Respondent) B-116, Shree Gantakarna Mahavir Commercial Market, Sarangpur, Ahmedabad PAN: AACKB8764A (Appellant)

Assessee by: Shri Divyakant Parikh, A.R. Revenue by: Shri Roopchand, Sr. D.R.

Date of heari ng : 24-04-2015 Date of pronouncement : 22-05-2015

आदेश /ORDER

PER : RAJPAL YADAV, JUDICIAL MEMBER:-

The present appeal is directed at the instance of assessee against the order of Ld. Commissioner dated 22nd March, 2011, passed u/s. 263 of the Income Tax Act, 1961 in A.Y. 2006-07. The grounds of appeal taken by I.T.A No. 1164/Ahd/2011 A.Y. 2006-07 Page No 2 Rentex Weavers Ltd vs. CIT

the assessee are not in consonance with rule 8 of ITAT Rules, 1961. They are descriptive and argumentative in nature.

2. In brief, the grievance of assessee is that ld. CIT has erred in taking cognizance u/s. 263 of the Income tax Act and revising the assessment order passed by the Assessing Officer u/s. 143(3), directing him to treat income from sale of shares as business income instead of income from short term capital gains.

3. The brief facts of the case are that assessee has filed its return of income on 27-10-2006 declaring total income at Rs. 47,13,718/-. The case of the assessee was selected for scrutiny assessment and a notice u/s. 143(2) of the Income Tax Act was issued on 21st October, 2007. The Assessing Officer thereafter issued a questionnaire u/s. 142(1) on 23rd June, 2008. After hearing the assessee, he passed the assessment order on 4th December, 2008 u/s. 143(3) of the Income Tax Act. The Ld. Assessing Officer has made the addition of Rs. 18,750/- to the declared income of the assessee and in this way, the total income has been determined at Rs. 47,32,470/- as against declared income at Rs. 47,13,718/-.

4. On verification of the assessment record, Ld. Commissioner formed an opinion that assessee had income from capital gain at Rs. 19,99,677/-. The assesse, besides, doing normal business, had traded in shares. The Assessing Officer had treated the income arising out of the sale of shares as short term capital gain, whereas in view of explanation appended to section 73 of the Income Tax Act, 1961, trading in share was required to be treated as speculation business and profit from such speculation I.T.A No. 1164/Ahd/2011 A.Y. 2006-07 Page No 3 Rentex Weavers Ltd vs. CIT

business was required to be assessed as speculation income. According to the Ld. Commissioner, the order of Assessing Officer is erroneous and it caused a prejudice to the revenue. Therefore, he issued a show cause notice dated 4th March, 11 to the assessee. He confronted the assessee, as to why assessment order be not modified and Assessing Officer should not be directed to treat alleged short term capital gain as a business income.

5. On receipt of notice, assessee has filed detailed submission before Ld. CIT. The copy of the show cause notice has been place at page no. 1 to 2 of the paper book. The reply of the assesse is available on pages no. 03 to 8 of the paper book. It was contended before the Ld. Commissioner that Ld. Assessing Officer in his questionnaire dated 10-10-2008 had specifically asked as to why, profit on sale of shares amounting to Rs. 19,99,697/- may not be treated as business income of the assessee company. The assessee had given a reply contending therein that the company is not doing business of sale and purchase of shares. The shares were purchased by the company for investment purposes only. From the balance-sheet of the company for the last two to three years, it is discernable that company has purchased shares of only two companies namely, Aarvee Demin and Exports Ltd and Praneta Industries Ltd. The shares of Aarvee Denim were purchased by the assessee 10 years ago and still existing as investments in its balance sheet. Shares of Praneta Industries were purchased on 8th September, 2014, 14th September,2014 etc. Out of this 2,20,000/- shares were sold in the month of April, June, and August, 2005. It was also contended that explanation to section 73 is not applicable on the facts of the assessee's case. Thus, assessee had raised two fold submissions before the Ld. CIT. (a) Ld. Assessing Officer I.T.A No. 1164/Ahd/2011 A.Y. 2006-07 Page No 4 Rentex Weavers Ltd vs. CIT

has investigated the issue during the assessment proceedings and accepted the explanation of the assessee which is a plausible view; (b) even on merit the transaction of sale of shares cannot brought within the ambit of explanation appended to section 73. Ld. Commissioner did not make elaborate discussion on the issue. He appeared to be influenced by a Press Release from SEBI. According to this Press Release, Galaxi Broking Ltd and some other brokers had manipulated the prices of various scripts including Praneta Industries Ltd which had given a profit margin to the assessee of 2300% on its investment. Apart from this, Ld. Commissioner was not able to point out other circumstances for doubting the transaction.

6. Ld. counsel of the assesse, while impugning the order of CIT contended that Assessing Officer issued show cause notice on the particular issue and conducted an inquiry. After explanation of assessee, he accepted the stand of the assessee. Therefore, Ld. Assessing Officer has taken one of possible view and Ld. Commissioner while exercising his power u/s. 263 cannot replace the possible view taken by the Assessing Officer. In the second fold of submission, he pointed that explanation appended to section 73 is not applicable in the present case.

7. We have duly considered the rival contentions and gone through the record carefully. Section 263 has a direct bearing on the controversy, therefore, it is pertinent to take note of this section. It reads as under:-

"263(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing I.T.A No. 1164/Ahd/2011 A.Y. 2006-07 Page No 5 Rentex Weavers Ltd vs. CIT

to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. [Explanation.- For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,-

(a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include-

(i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A;

(ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorized by the Board in this behalf under section 120;

(b) "record shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner;

(c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-

section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.

(2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.

(3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction I.T.A No. 1164/Ahd/2011 A.Y. 2006-07 Page No 6 Rentex Weavers Ltd vs. CIT

contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court. Explanation.- In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded."

8. On a bare perusal of the sub section-1 would reveal that powers of revision granted by section 263 to the learned Commissioner have four compartments. In the first place, the learned Commissioner may call for and examine the records of any proceedings under this Act. For calling of the record and examination, the learned Commissioner was not required to show any reason. It is a part of his administrative control to call for the records and examine them. The second feature would come when he will judge an order passed by an Assessing Officer on culmination of any proceedings or during the pendency of those proceedings. On an analysis of the record and of the order passed by the Assessing Officer, he formed an opinion that such an order is erroneous in so far as it is prejudicial to the interests of the Revenue. By this stage the learned Commissioner was not required the assistance of the assessee. Thereafter the third stage would come. The learned Commissioner would issue a show cause notice pointing out the reasons for the formation of his belief that action u/s 263 is required on a particular order of the Assessing Officer. At this stage the opportunity to the assessee would be given. The learned Commissioner has to conduct an inquiry as he may deem fit. After hearing the assessee, he will pass the order. This is the 4th I.T.A No. 1164/Ahd/2011 A.Y. 2006-07 Page No 7 Rentex Weavers Ltd vs. CIT

compartment of this section. The learned Commissioner may annul the order of the Assessing Officer. He may enhance the assessed income by modifying the order. He may set aside the order and direct the Assessing Officer to pass a fresh order. Explanation-1 has been substituted by the Finance Act 1998 (26 of 1988). It threw a light to some extent the scheme of the Act. Under clause (a) of the Explanation, it has been provided that an order of the assessment made by the Income Tax Officer on the basis of a direction issued by the Jt. Commissioner u/s 144A would be an order of the Income Tax Officer. In other words, if directions of binding nature were issued by a higher authority translated into the order of the Income Tax Officer, then that order would be considered of the Assessing Officer and not of the higher authorities. Therefore, before considering the various contentions raised by the learned representatives, we deem it pertinent to take note of the fundamental tests propounded in various judgments relevant for judging the action of the CIT take u/s 263. The ITAT in the case of Mrs. Khatiza S. Oomerbhoy Vs. ITO, Mumbai, 101 TTJ 1095, analyzed in detail various authoritative pronouncements including the decision of Hon'ble Supreme Court in the case of Malabar Industries 243 ITR 83 and has propounded the following broader principle to judge the action of CIT taken under section 263.

(i) The CIT must record satisfaction that the order of the AO is erroneous and prejudicial to the interest of the Revenue. Both the conditions must be fulfilled.

(ii) Sec. 263 cannot be invoked to correct each and every type of mistake or error committed by the AO and it was only when an order is erroneous that the section will be attracted.

I.T.A No. 1164/Ahd/2011 A.Y. 2006-07 Page No 8 Rentex Weavers Ltd vs. CIT

(iii) An incorrect assumption of facts or an incorrect application of law will suffice the requirement of order being erroneous.

(iv) If the order is passed without application of mind, such order will fall under the category of erroneous order.

(v) Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the AO has adopted one of the courses permissible under law or where two views are possible and the AO has taken one view with which the CIT does not agree. If cannot be treated as an erroneous order, unless the view taken by the AO is unsustainable under law

(vi) If while making the assessment, the AO examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determine the income, the CIT, while exercising his power under s 263 is not permitted to substitute his estimate of income in place of the income estimated by the AO.

(vii) The AO exercises quasi-judicial power vested in his and if he exercises such power in accordance with law and arrive at a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not fee stratified with the conclusion.

(viii) The CIT, before exercising his jurisdiction under s.

263 must have material on record to arrive at a satisfaction.

(ix) If the AO has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the AO allows the claim on being satisfied with the explanation of the assessee, the decision of the AO cannot be held to I.T.A No. 1164/Ahd/2011 A.Y. 2006-07 Page No 9 Rentex Weavers Ltd vs. CIT

be erroneous simply because in his order he does not make an elaborate discussion in that regard.

9. Apart from the above principles, we deem it appropriate to make reference to the decision of the Hon'ble Delhi High Court in the case of CIT vs. Sun Beam Auto reported in 227 CTR 113 wherein the Hon'ble High Court has pointed out a distinction between lack of inquiry and inadequate inquiry. If there is a lack of enquiry, then the assessment order can be branded as erroneous. The following observations of the Hon'ble Delhi High Court are worth to note:

"12. We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income-tax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry"

and "inadequate inquiry". If there was any inquiry, I.T.A No. 1164/Ahd/2011 A.Y. 2006-07 Page No 10 Rentex Weavers Ltd vs. CIT

even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry", that such a course of action would be open".

10. In the light of above, let us consider the show cause notice issued by the Assessing Officer dated 10-10-2008 which is available on page 40 of the paper book. The relevant part is as under:-

"To The Principal Officer Rentex Weavers Ltd (Formerly known as Kalpesh Investment Ltd) B/116, Shree Ghantakaran Mahayk Cloth Mkt. O/s Rainpur Gate, Ahmedabad

Sir,

Sub: Assessment Proceedings for A.Y. 2006-07

Please refer to this office notices issued from time to time and also your submission dated 26.06.2008. In this regard, you are requested to submit the following further information:-

1. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

2. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

3. Why profit on sale of shares of Rs. 1999697 may not be treated as business income of the company?

4. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx.

5. Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

The above details may please be filled within 3 days of receipt of this letter.

Yours Faithfully Sd/-

(R.H. GOHEL) Dy. Commissioner of Income-tax I.T.A No. 1164/Ahd/2011 A.Y. 2006-07 Page No 11 Rentex Weavers Ltd vs. CIT

Circle. 5. Ahmedabad"

11. In response to this query, Assessee has submitted a reply on 28th October, 2008 contending therein as under:-

20th October, 2008 "To, Dy. Commissioner of Income Tax, Circle-5, 2nd Floor, C.U. Shah Chambers Ashram Road, Ahmedabad Dear Sir, Sub: Assessment Proceedings A.Y. 2006-07

In reply to your letter dated 10/10/2008, we submit herewith following information.

1. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

2. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

3. The company is not doing business of sale and purchase of shares. Shares purchased by the company are for investment purpose only. From the balance sheet of the company for last two to three years it will be observed that the company has made investment in shares of only two companies, viz. Aärvee Denim and Export Ltd and Praneta Industries Ltd. Out of this investment in shares of Aarvee Denim and Export Ltd is made before 10 years and which still exist as investment. Investment in shares of Praneta Industries Ltd is made on 08-09-2004, and 14-09-2004. Out of this, 2,20,000 shares are sold on 04/04/2005, 25/04/2005, 15-06-2005 and 02/08/2005. In audited Balance sheet also same is shown as investment and not stock in trade. The same policy is consistently followed since inception and same is accepted by the department.

In view of above facts profit on sale of share of Rs. 19,99,690/- cannot be considered as business income.

4. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

We hope and trust that the above information shall be sufficient for your requirement. In case you need any further details/clarification we shall be pleased to prove the same.

Thanking you, I.T.A No. 1164/Ahd/2011 A.Y. 2006-07 Page No 12 Rentex Weavers Ltd vs. CIT

Yours faithfully,

For RENTEX WEAVER LIMITED Sd/-

Director/Authorized Person"

12. Perusal of the questionnaire as well as reply given by the assessee exhibits that Assessing Officer has conducted inquiry before accepting the stand of the assessee. In the impugned order, Ld. Commissioner has nowhere pointed out, as to how the order of the Assessing Officer is erroneous. He simply observed that since assessee has earned huge margin on short term investment, therefore, the transaction ought to have been treated as speculative transaction. Even otherwise, the assessee has pointed out that delivery of the shares was taken by it in its Demat account. Speculative transaction means, a transaction in which a contract for the purchase or sale of any commodity including stocks and shares is periodically settled, otherwise than by actual delivery or transfer of the commodity or scripts. The Ld. CIT had nowhere establishes, as to how, it was speculative transaction. It is merely replacement of the opinion of the Assessing Officer with other possible view. Therefore, in our opinion Ld. Commissioner is not justified to take action u/s. 263. We allow the appeal of assessee and quash the impugned order passed u/s. 263 of IT Act by Ld. CIT.

Order pronounced in the open court on 22-05-2015

Sd/- Sd/-

(G.D. AGRAWAL) (RAJPAL YADAV) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad : Dated 22/05/2015 ak I.T.A No. 1164/Ahd/2011 A.Y. 2006-07 Page No 13 Rentex Weavers Ltd vs. CIT

आदेश क त ल प अ े षत / Copy of Order Forwarded to:-

1. Assessee

2. Revenue

3. Concerned CIT

4. CIT (A)

5. DR, ITAT, Ahmedabad

6. Guard file.

By order/आदेश से,

उप/सहायक पंजीकार आयकर अपील य अ धकरण, अहमदाबाद