Income Tax Appellate Tribunal - Chennai
A.Srinivasan, Erode vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH -- D CHENNAI
(Before Shri Abraham P.George, Accountant Member
and Shri George Mathan, Judicial Member)
ITA No.1573 /Mds/07
ITA No.1574/Mds/07
ITA No.1575/Mds/07
ITA No.1576/Mds/07
(Assessment Year :2000-01)
1. Sri A.Vadivel, Dy.Commissioner of
Prop: Minu Textiles, v. Income-tax
156 Eswaran Koil St. Special Range II,Coimbatore
Erode 638001
ABEPV8744R
2. Sri A.Srinivasan,
Prop: Srinivas Textiles,
84 Eswaran Klil St.,
Erode 638001
PAN AIXPS3019E
3. Sri A.Sengottuvel,
Prop: Anand Textiles
156 Eswaran Koil St.,
Erode 638001
PAN AIXPS3018F
4. Sri A.Mariappan,
Prop: Mariappa Fabrics,
156 Eswaran Koil St.,
Erode 638001
PAN ADWPM2351B
(Appellants) (Respondent)
Assessees by : Sri S.Sridhar & Sri S.Raghuraman
Respondent by :Sri Shaji P.Jacob
2 ITA Nos.1573 - 1576/Mds/07
O R D ER
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :
These appeals, though it relate to different assessees encompass similar set of facts; and similar set of grounds. Therefore, these are disposed of by this consolidated order.
2. Amongst the grounds taken by the assessees grounds Nos. 1 and 10 are general in nature and need no adjudication.
3. Vide grounds 8 and 9 all the assessees have challenged assumption of jurisdiction by reopening of the assessments.
4. Though in all these cases an additional ground has been raised through an affidavit, stating that notices u/s 148 were issued without the sanction of the Joint Commissioner of Income-tax, ld. counsel for the assessees, at the outset itself submitted that he was not pressing this ground. Hence the additional ground is dismissed as not pressed. 5, Coming back to the issue of jurisdiction, it is necessary to dwell on the facts apropos in short. All these assessees had filed their original returns of income for the impugned assessment years, alongwith its computation statement, trading account, profit and loss account, one capital account each showing therein transactions 3 ITA Nos.1573 - 1576/Mds/07 relating to shares, units, dividends and audit reports in Form No.3CB & 3CD. These assessees were engaged in the business of cloth trade. Original assessments were completed in these cases u/s 143(3) on 31-1-2002. It is stated in the original assessment order that the assessees' representative had appeared on various dates, produced the books of accounts and filed relevant details. The A.O has also stated that the assessments were being completed after scrutinizing the books of account and details filed. On the income admitted by the assessees as per the returns, certain additions were made by the A.O towards trade discount, etc. and assessments were completed on 31-1-2002. Thereafter reassessment proceedings were initiated and the reason recorded by A.O for initiating reassessment proceedings read as under:
"Details of shares sold obtained. It is seen that capital gain on sale of Kothari Pharma, Kothari Info tech and GIG Mutual Fund are short term capital gains as they were purchased and sold during this year. The 'a' has wrongly claimed it as exempt u/s 54 treating them as long term capital gains. Income has escaped assessment. Notice u/s 148 issue."
Thereafter notice u/s 148 was issued to the assessee on 7-6-2004 which was well within four years period from the end of the relevant asst. year. Assessees thereupon required the Assessing Officer to consider its earlier returns as one filed in response to such notice. 4 ITA Nos.1573 - 1576/Mds/07 Assesees were required to explain why the profit claimed as exempt by it on account of transfer of various shares should not be considered for assessment as short term capital gains. Explanation of the assessee was that only the value of shares had increased and same were invested in the units of mutual funds. Assessees also submitted the details of surplus arising on account of sale of unit in the various schemes of units of mutual fund. Though it was claimed by assessees that the proceeds were again invested in other mutual fund scheme and was therefore, exempt from tax, A.O. was of the opinion that no material was furnished by assessees in support of such claim. He, therefore, considered the surplus earned on switch over of mutual fund units as short term capital gains and accordingly completed the assessments.
6 Though in its appeal before the CIT(A) no grounds were taken by the assessees questioning the reopening, such ground has been now taken before us on a pleading that that it was a pure question of law. Ld. A.R. assailing the reopening stated that the assessee had never claimed exemption u/s 54 of the Act in its computation. According to him, in the original assessments there was not even a whisper of any such claim made by the assessees. Further submission was that in the capital account that the assessees 5 ITA Nos.1573 - 1576/Mds/07 had filed alongwith returns, the profits and dividends received on account of the investment in mutual fund made by the assessee and also losses arising from such transactions were correctly reflected. It was only after considering such capital account that the AO had originally completed assessments. Specific reference was made to the original assessment orders wherein it was mentioned by the A.O. that assessments were completed after scrutinizing the books of account produced. As per the ld. A.R. the A.O had completed the assessments after perusing the books accounts wherein all the transactions relating to mutual funds, units and income therefrom were properly reflected. Therefore, according to him, reopening was resorted without any new record whatsoever with the A.O. Further, according to him, the A. O had no power to go into the same set of facts again, when there was no fresh material or information available with him. Further attacking the reason mentioned by the A.O for reopening, ld. counsel contended that such reasons were not adequate for resorting to a reassessment proceedings when the books were already staring on the A.O and no new facts were available with him. In the opinion of the ld. A.R, even though the reopening was made within four years from the end of the relevant assessment year, in view of the decision of the Hon'ble Apex Court in CIT vs. Kelvinator of India Ltd. (320 ITR 561), reason to believe was 6 ITA Nos.1573 - 1576/Mds/07 still required and not a mere 'change of opinion'. According to him, the A.O had simply changed his opinion on the same set of facts and there was nothing before him to take a view that any income has escaped assessments. For the proposition that different opinion on the same set of facts without any new material would not be a good enough reason for reopening, ld. A.R. relied on the decision of Hon'ble Mumbai High Court in the case of Asteroids Trading & Investments P. Ltd. v. DCIT (308 ITR 190), and decisions of the Hon'ble Deli High Court in the cases of Satnam Overseas Ltd. & Anr. V. ADIT (33 DTR 81) and Legato Systems (India) (P) Ltd. v. DCIT (34 DTR 154).
7. Opposing the arguments of the ld. A.R., the counsel for the Revenue in the first place pointed out that assessees had made a wrong and patently illegal claim in its computation statement filed alongwith their returns. Referring to the paper book filed by the ld. A.R, a specific written submission was made by the ld. D.R. that the assessee should be directed to clarify whether the statement of income included therein fully tallied with the one filed along with their respective returns. According to ld. D.R, assessee had consciously kept out page No.2 of its computation statement from the paper book filed, for misleading this Tribunal. Reading from the note given 7 ITA Nos.1573 - 1576/Mds/07 in page 2 of the computation statement, the ld. D.R. submitted that the assessee itself had admitted earning profit from transfer of various shares but had in the same breath claimed entire sale proceeds alongwith the profit as exempt having been reinvested in other shares. According to him, this prompted the A.O. to make further enquires into this aspect and only thereafter the A.O came to a reasonable belief that income had escaped assessment. Ld. D.R., further proceeding with his submissions, mentioned that there was no provision under the head "capital gains" whereby exemption could be claimed on consideration received on sale of shares based on purchase of shares. He pointed out that sec.54 EC of the Act was not at all applicable for the impugned assessment year and therefore, the assessee had made a patently wrong and unlawful claim. In the opinion of the ld. D.R., assessees had wrongly claimed the short term capital gains as exempt and excluded such amount from its income, misleading the Revenue. According to him, the A.O had not made any enquiry on this aspect at the time of original assessments and there was no application of mind on the claim of the assessee. Ld. D.R further pointed out that the assessees were unable to produce any correspondence with regard to this issue between them and the A.O. Considerable reliance was placed on the decision of the Hon'ble jurisdictional High Court in ACIT vs. Apollo Hospital Enterprises Ltd. 8 ITA Nos.1573 - 1576/Mds/07 (300 ITR 167) for the proposition that when an illegal claim was made and there was no discussion on such claim in the assessment order, the reassessment proceeding initiated could not be considered as done on a change of opinion. Referring to Department's paper book (page no.3) the ld. D.R. submitted that a letter was issued by the A.O to the assessee on 22-8-2003 after completing the assessment, wherein the A.O had enquired regarding the claim of the assessee regarding profit earned from transfer of various shares as being exempt and also required the assessee to furnish full details thereof. Further referring to Department's Paper book P.4, ld. D.R. submitted that assessee had, thereupon, given a statement in which it had claimed that income arising on sale of various shares were all long term capital gains which were reinvested, and hence exempt from tax. As per the ld. D.R. it was based on such further material coming in to the hands of the A.O, that he had initiated reopening proceedings. According to him, whether information had come from external sources or even from material already on record, reopening could be validly initiated as held by the Hon'ble Apex Court in the case of Kalyanji Navji & Co. vs. CIT (102 ITR 287). Reliance was also placed on the decision of the Hon'ble Apex Court in Ess Kay .Engineering Co. P. Ltd vs. CIT (247 ITR 818).
9 ITA Nos.1573 - 1576/Mds/07
8. On the reliance placed by the ld. counsel for the assessee on the decision of Kelvinator of India Ltd. (supra), ld. D.R. submitted that here there was tangible material for formation of a belief regarding escapement of income from assessment and not merely a change of opinion. According to him, the decision in Kelvinator of India Ltd. (supra) only supported the case of the Revenue. Specifically referring to the capital accounts furnished by assessees alongwith the original returns, ld. D.R pointed out that the details therein did not in any way tally with the details submitted by the assessee in the statements filed pursuant to post assessment enquiries made by the A.O. Adverting to the statement filed by the assessees in response to the post assessment enquiries, ld. D.R. stated that the long term capital gain arising to the assessees on sale of mutual fund units, were all shown as dividend income in the capital accounts earlier filed, and therefore, according to him the intention of the assessees was to conceal the income that had arisen to it on account of such transactions, camouflaging it as dividend. In short, he submitted that the original claim of the assessee was knowingly made in utter disregard of law and misrepresenting fact with the intention of keeping away the short term capital gains from the eyes of the Revenue. Therefore it was strongly submitted that reopening proceedings were correctly initiated.
10 ITA Nos.1573 - 1576/Mds/07
9. We have perused the orders and heard the rival contentions. First we take up the submission of the ld. D.R. wherein he pleads that assessees be directed to clarify in writing, whether the statement of income filed by it through the paper book completely and fully tallied with those filed by them alongwith the returns. We find that in the case of assessees Sri A. Srinivasan and Sri A.Mariappan the second page of the computation statements were available in the paper books. However, vis-à-vis the other two assessees such second page were not available. It is in the second page of the computation that the assessee had mentioned earning of profit from transfer of various shares which it claimed as exempt from tax on account of reinvestment in other shares. Admittedly, all the assessees are of the same group. Since two of the assessees had filed the second page of their respective computation statement in respective paper books, whereas the other two had not filed it, we cannot say that the latter two assessees had made any intentional omission. Hence we are of the opinion that it is not necessary to give any direction as required by the Ld. D. R. in this regard. We deem such omission only to be inadvertent.
10. Now to resolve the issue regarding validity of reopening, it can be seen that all proceedings started from a note at the foot of page 2 of 11 ITA Nos.1573 - 1576/Mds/07 the computation statement filed by the respective assessees, which run as under:
"The assessee has earned profit from transfer of various shares. The entire sale proceeds of shares along with profit, the assessee reinvested in another shares. The profits are exempted from Income-tax."
Assessees had also filed their respective capital accounts along with their regular returns in which receipts on account of interest, dividend, agricultural income, rent, loss on sale of certain other investments are all shown. Therefore, according to the assessees, there was a proper disclosure of all the facts relevant to their assessments and the reopening was done only on a reappreciation of the records. However, we find from the original assessment orders for all the assessees, that there was not even a whisper regarding the claim of the exemption on account of sale of its shares being reinvested in other shares. Original assessment orders placed at assessees' paper book page 1 to 3, in our opinion clearly brings out non-application of mind by the A.O on this particular aspect. Assessees have not been able to bring on record any question asked by the A.O in this regard or any enquiry made by the A.O and any reply given by it. No doubt, A.O has mentioned in the assessment order that he was completing the assessments after scrutinizing the books of account and details filed by the assessee. 12 ITA Nos.1573 - 1576/Mds/07 However, the main business of the assessees were cloth trade, and obviously the books of account which were examined would have been pertaining to such trade. Even the additions made in the original assessments came out of claims relating to such business. Now if we look at the letter dated 22-8-03 written by the ACIT to the assessee, which undisputedly was after completion of the original assessments on 31-1-2002 the A.O had required the assessee to furnish details of the shares sold and the Section under which it had claimed exemption on the reinvestment. Pursuant to that, assessees did furnish details and also claimed it as long term capital gains. If we look at such details placed at paper book No.4 filed by Revenue, profits arrived on account of sale of Kothari Infotech A and Kothari Infotech B and similar other mutual fund investments have been shown in the capital account earlier filed by the assessees alongwith their original returns as 'dividend'. It was because of such material which came into the possession of A.O, subsequent to the original assessments, that he came to a belief that income had escaped assessment. If we look at the reason for reopening as reproduced by us at para 5 above, from this scenario, it is certainly relevant. Assessee cannot say that such reason was based on any irrelevant or vague information or was not bonafide. Assessees had claimed exemption for a transaction which gave rise 13 ITA Nos.1573 - 1576/Mds/07 to profit, which prima facie could be considered as "capital gains", that too of short term in nature, and such exemption was claimed without specifying the relevant section. When the original assessments were completed, there was a clear non application of mind by the A.O. There was also availability of subsequent material with the A.O. which went to show that there could have been escapement of income by the assessee. No doubt, it was held by the Hon'ble Mumbai High Court in Asteroids Trading & Inv. P.Ltd. (supra) that a different view on same set of facts with no new material would not be sufficient reason for reopening. This view was also taken by Hon'ble Delhi High Court in the cases of Satnam Overseas Ltd. and Legato Systems (India) P. Ltd. (supra). But in our opinion these decisions will not help the assessee. In the first place, here there was misrepresentation by the assessee in its returns filed and in the second place there was no application of mind by the A.O on the claim made by the assessee. On the other hand, as aforesaid, subsequent material was available with the A.O to show that income might have escaped assessment. As held by the Hon'ble Apex Court in the case of Kalyanji Navji & Co. v. CIT (supra), even if the belief came from an external source or even from material already on record it would be good enough reason for reopening. In our opinion, decision of the Hon'ble jurisdictional High 14 ITA Nos.1573 - 1576/Mds/07 Court in Apollo Hospital (supra), would squarely apply to the facts. Assessee had made a claim which prima facie appears as not allowable and a reopening done thereafter, when there was no disallowance of such claim in the original assessment, cannot be considered a change of opinion. Hon'ble Apex Court in the case of Phoolchand Bajrangdal vs. ITO (203 ITR 486) has clearly held that sufficiency of the reason was not justiciable but relevancy alone could be assailed. In our opinion relevancy of the reason is unquestionably substantiated .In any case reopening was admittedly done within four years from the end of the relevant asst. year and therefore, proviso to sec. 147 also would not apply. Thus we have no hesitation to hold that the reopening was validly initiated. Ground No.8 and 9 of the assessees therefore, stand dismissed.
11. We are left with grounds 2 to 8 which assails the merit of bringing to tax, capital gains arising to the assessee under sec.80CCB(2) read with sec.45(6) of the Act. According to the assessee, such capital gains arose from switch over from one scheme of mutual fund to another scheme of same mutual fund and the CIT(A) failed to appreciate that provisions of sec. 80CCB(2) read with sec. 45(6) did not apply. In the opinion of the assessee there was only a notional increase in the value and there was no 15 ITA Nos.1573 - 1576/Mds/07 repurchase or redemption by switch over from one scheme to another.
12. Fact apropos has already been captured by us in the immediately preceding paragraphs. Claim of the assessee was that profits on sale of various mutual fund units were all reinvested by it and therefore, exempt. It was not accepted by the A.O and he considered such profits to be short term capital gains. Though the A.O did not mention the specific section under which he was considering the profits as taxable capital gains, from the remand report dated 8-1-2007 reproduced by the Ld. CIT(A) at para 4.3 of his order, it is clear that such gains were considered as exigible to tax under sec. 80CCB(2) read with sec, 45(6) of the Act.
13. Contention of the assessees before the ld. CIT(A) was that they had only switched from one scheme of mutual fund to another scheme and resulting notional increase was not taxable as capital gains. According to the assessee, change from one scheme to another scheme did not result in any redemption and surplus cannot be treated as capital gains. This contention of the assessee, as mentioned in the preceding paragraph, was in all force put by the CIT(A) to the A.O, who, nevertheless, justified his assessment stating 16 ITA Nos.1573 - 1576/Mds/07 that switching over of an investment in between mutual fund units operated by the fund managers, would be covered u/s 45(6) of the Act. According to him in view of the Securities & Exchange Board of India (SEBI) (Mutual Funds) Regulations 1996, switch over from one scheme to another of a mutual fund could be equated to redemption or repurchase and therefore, the provisions of sec.45(6) and sec 80CCB(2) were applicable. Ld. CIT(A) gave his stamp of approval to this.
14. Now before us, the ld. A.R. submitted that there was only a switch over of the scheme and the assessee never realized any surplus. Per contra, the ld. D.R. submitted that redemption did amount to transfer since the definition of "transfer" u/s 2(47) included an 'exchange' as well. According to him, even if the switch over was considered as an exchange, there was definitely a transfer and the surplus was exigible to tax under the head "Income from capital gains", vide sec.45(6) and 80CCB (2) of the Act.
15 We have perused the orders and heard the rival submissions. There is no dispute on the fact that there was switching of mutual fund units. Such switching resulted in some surplus to the assessee which of course was not realised by him directly but was reflected in the Net Asset Value (NAV) of the new units, representing the result of such switch over. Mutual Fund managers float various 17 ITA Nos.1573 - 1576/Mds/07 schemes and each such schemes though floated by the same Mutual Fund Manager, will have different underlying investment pattern for earning income. Thus investment for different schemes would be different. Underlying investments in some of the units could be entirely shares or entirely debt instruments or any combination thereof. NAV also therefore would differ from unit under one scheme to a unit under another scheme. The same mutual fund administrator might be running units of different types in different schemes and they do allow their clients to switch subject to conditions which might vary from one administrator to another. When switch over is done on customers' request, what effectively happens is a redemption from one scheme and acquisition of units in another scheme representing the NAV. It is not like a switching on and off of an electrical circuit. There is relinquishment of rights in one set of units and acquisition of another set of units. The transactions go through simultaneously but nevertheless the transactions which involve a redemption and purchase resulting out of a switch over, cannot be taken out of the ambit of "transfer" as defined in sec.2(47) of the Act. Transfer definitely includes sale, exchange, relinquishment and extinguishment of reights as specified in cl.(i) and (ii) respectively of Sec. 2(47). Now if we look at Sec.45(6) of the Act, it reads as under: 18 ITA Nos.1573 - 1576/Mds/07
"Notwithstanding anything contained in sub-sec.(1) the difference between the repurchase price of the units referred to in sub-sec.(2) of sec. 80-CCB and the capital value of such units shall be deemed to be the capital gain arising to the assessee in the previous year in which such purchase takes place or the plan referred to in that section is terminated and shall be taxed accordingly."
Thus the difference between the repurchase price of a unit and capital value of a unit has to be deemed as capital gains. Just because such difference is invested in acquiring new units, camouflaged as a switch over, would, in our opinion, make no difference. But nevertheless we also find that the above sub-section exclusively deals with units referred in Sec.80CCB(2) and not every type of unit. It therefore brings us to sub-sec.(2) of sec.80CCB which is reproduced hereunder:
"(2) Where any amount invested by the assessee in the units issued under a plan formulated under the Equity Linked Savings Scheme in respect of which a deduction has been allowed under sub-sec.(1) is returned to him in whole or in part by way of repurchase of such units or on the termination of the plan, by the Fund or the Trust, as the case may be, in any previous year, it shall be deemed to be income of the assessee of that previous year and chargeable to tax accordingly."
As aforesaid, for application of sec. 45(6) of the Act it is necessary that the units should be one referred in sub-sec.(2) of sec.80-CCB. What has been referred in sub-sec.(2) to sec.80CCB are units issued 19 ITA Nos.1573 - 1576/Mds/07 under a plan formulated under an Equity Linked Savings Scheme in respect of which a deduction has been allowed under sub-sec.(1) thereof to the assessee. Thus for applying sec.45(6) the units should qualify twin conditions. First is that such units should be those on which a deduction u/s 80CCB (1) was allowed to the assessee, and the second is that such units should have been issued under a plan formulated under an Equity Linked Savings Scheme. If we look at proviso to sub-sec.(1) of sec.80CCB, it is clear therefrom that no deduction under that sub-sec was available to any assessee on or after 1-4-1992. Here the impugned asst. year is 2000-01 and therefore, there can be no doubt that assessee could not have claimed nor allowed deduction on these units under sub-sec.(1) of Sec.80CCB. In any case, there is no case for the Revenue that assessees had ever made any claim in respect of these units under sub-sec (1) of Sec.80CCB of the Act. Thus, we cannot say that the units of the mutual funds held by the assessees were those on which any deduction was allowed to them under sub-sec. (1) of the Act. Nor is there any finding by the A.O that the units redeemed by the assessees and invested were originally under a plan formulated under any Equity Linked Savings Scheme only. Thus, the units here would never have been the type of units mentioned in sub-sec.(2) of sec.80CCB of the Act. As a natural corollary sec. 45(6) would not be 20 ITA Nos.1573 - 1576/Mds/07 applicable to such units. We are, therefore of the opinion that the surplus that arise to the assessee on account of the switch over of the units could not have been considered as capital gains u/s 45(6) of the Act. Such treatment was not warranted under law. Therefore, we have no hesitation to delete the addition on account of capital gains made relying on sec. 45(6) read with sec. 80CCB(2) of the Act, on such surplus. Such addition stands quashed. Ground Nos. 2 to 7 of the assessee are allowed.
16. In the result, appeals of the assessees are partly allowed.
The order was pronounced in the Court on 16.07.2010.
Sd/- sd/- (GEORGE MATHAN) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER Chennai, Dated the 16th July, 2010 Nbr"
Cc: The assessee/Assessing Officer/CIT(A)/CIT/DR/Guard file