Shri Prakash H. Parakh, Pune V. ACIT, Cir.2, Pune, Pune

ITA 554/PUN/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9919 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 5 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-10-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 28-08-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 29-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MUKESH VERMA
• Keywords: Business income; Assessment record; Revenue expenditure; Capital expenditure
• Section: 143(3); 263; 63

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A , PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO. 554/PN/2011 (ASSTT. YEAR : 2 006-07) SHRI PRAKASH H. PARAKH, APPELLANT 584/1, SALISBURY PARK, PUNE PAN : AAXPP9219R V. CIT II, PUNE RESPONDENT APPELLANT BY : SHRI N IKHIL PATHAK RESPONDENT BY : SHRI MUK ESH VERMA CIT DATE OF HEARING : 28/8/12 DATE OF PRONOUNCEMENT : 19 -10-12 O R D E R PER R.S. PADVEKAR, JM IN THIS APPEAL, THE ASSESSEE HAS CHALLENGED THE I MPUGNED ORDER OF THE LD CIT(A)- II,PUNE, PASSED U/S. 263 OF THE INCO ME TAX ACTDATED DATED 31.3.2011 FOR THE A.Y. 2006-07. 2. THE ASSESSEE HAS TAKEN THE MULTIPLE GROUNDS, BUT THE CORE ISSUE ARISES FOR OUR CONSIDERATION IS WHETHER THE LD CIT( A) JUSTIFIED IN HOLDING THAT THE ASSESSMENT ORDER PASSED U/S. 143(3) OF THE INCOME TAX ACT IN THE CASE OF THE ASSESSEE FOR THE A.Y. 2006-07 IS E RRONEOUS AS WELL AS PREJUDICIAL TO THE INTEREST OF THE REVENUE. 3. THE FACTS WHICH REVEAL FROM THE RECORD ARE AS UN DER. THE ASSESSEE IS AN INDIVIDUAL AND ENGAGED INTO THE SHARE TRANS ACTIONS. THE ASSESSEE FILED THE RETURN FOR A.Y. 2006-07 DECLARING TOTAL I NCOME OF RS.19,56,57,110/-. THE ASSESSEES CASE WAS SELECTE D FOR SCRUTINY AND ASSESSMENT HAS BEEN COMPLETED U/S. 143(3) OF THE AC T. THE ASSESSEE DECLARED THE LONG TERM CAPITAL GAIN ON THE SALE OF THE EQUITY SHARES AT RS.17,35,20,205/-. AS OBSERVED BY THE A.O, THE LON G TERM CAPITAL GAIN DECLARED BY THE ASSESSEE INCLUDES THE SUM OF RS. 67 ,73,196/- PERTAINING TO HIS MINOR SON MASTER AKAH PARAKH. THE ASSESSEE SOLD OUT PART OF 35420 SHARES IN PARAKH FOODS LTD. (PFL) TO CARGILL MAURITIOUS LTD. FOR A 2 ITA NO.554/PN/2011 SHRI PRAKASH H. PARAKH A.Y.2006-07 CONSIDERATION OF RS. 18,06,60,955/- AND ON THE SAID TRANSACTION, THE ASSESSEE DECLARED THE LONG TERM CAPITAL GAIN. THE ASSESSEE ALSO CLAIMED THE EXPENDITURE TOWARDS BANK GUARANTEE AND EXPENSES TO THE EXTENT OF RS.86,40,745/-. THE A.O SOUGHT THE EXPL ANATION OF THE ASSESSEE ON THE ALLOWABILITY OF THE SAID DEDUCTION. THE ASSESSEE FILED THE REPLY JUSTIFYING THE CLAIM WHICH IS REPRODUCED IN T HE ASSESSMENT ORDER ON PAGE NOS. 3 TO 7. THE A.O. REJECTED THE CLAIM OF TH E ASSESSEE AFTER CONSIDERING THE EXPLANATION AND HELD THAT THE CLAIM OF DEDUCTION OF RS.86,40,745/- WAS NOT ALLOWABLE TO THE ASSESSEE. 4. NOW THE ISSUE WHICH IS THE SUBJECT MATTER FOR EX ERCISES OF JURISDICTIONAL REVISION U/S. 263 OF THE ACT BY THE LD CIT IS IN RESPECT OF THE SHORT TERM CAPITAL GAIN OF RS.65,33,174/- DECLARED BY THE ASSESSEE. THE DISCUSSIONS ARE FOUND IN PARA NO. 8 OF THE ASSESSME NT ORDER. THE AO HAS OBSERVED THAT THE ASSESSEE HAD MADE INVESTMENT IN S HARES THROUGH ENAM SECURITIES, A PORTFOLIO MANAGEMENT SCHEME (PMS ). THE ASSESSEE HAD CLAIMED THE DEDUCTION OF RS.23,04,631/- WHILE C OMPUTING STCG. THE SAID CLAIM OF DEDUCTION WAS IN RESPECT OF THE EXPEN SES TOWARDS COMMISSION AND OTHER EXPENDITURE. THE A.O HELD THA T EXCEPT THE EXPENDITURE OF RS. 14,982/- WHICH WAS TOWARDS DEMAT AND CUSTODY CHARGES, OTHER EXPENSES WERE INCURRED IN CONNECTI ON WITH TRANSFER OF SHARES AND HENCE, THE SAME WAS NOT ALLOWABLE EXPEND ITURE. HE, THEREFORE, DISALLOWED RS.22,89,649/- OUT OF RS.23,0 4,631/- CLAIMED BY THE ASSESSEE. THE A.O. COMPLETED THE ASSESSMENT DE TERMINING THE TOTAL INCOME OF RS.20,64,07,564/-. SUBSEQUENTLY, THE LD CIT, PUNE ISSUED THE NOTICE TO THE ASSESSEE PROPOSING TO REVISE ASSESSME NT ORDER BY EXERCISING POWERS U/S. 263 OF THE INCOME TAX ACT. THE REASONS GIVEN BY LD CIT, PUNE, FOR PROPOSING TO REVISE THE ASSESSMENT ORDER IN A NOTICE ISSUED DATED 22.2.2011 ARE AS UNDER : AN ASSESSMENT U/S 143(3) OF THE INCOME-TAX ACT, 19 61 WAS MADE IN YOUR CASE, FOR THE A.Y. 2006-07, VIDE AN ORDER DT. 30.12 .2008. IN THE SAID ASSESSMENT THUS MADE, YOUR TOTAL INCOME WAS DETERMI NED AT RS. 20,64,07,560/-. 3. ON SUBSEQUENT REVIEW, IT IS NOTICED THAT THE ASS ESSMENT MADE U/S 143(3) HAS BEEN ERRONEOUS IN SO FAR AS IT IS PREJUD ICIAL TO THE INTEREST OF THE REVENUE FOR THE FOLLOWING REASONS:- 3.1 IN THE ORDER DT. 30.12.2008, THE ASSESSING OFFI CER COMPUTED SHORT TERM CAPITAL GAIN AT RS. 88,22,823/- ON THE PROFIT DERIVED FROM TRADING OF SHARES. IT IS, HOWEVER, SEEN THAT THE ASSESSING OF FICER DID NOT CONDUCT ANY ENQUIRY AS REGARDS THE PROPER HEAD OF INCOME UNDER WHICH THE PROFIT 3 ITA NO.554/PN/2011 SHRI PRAKASH H. PARAKH A.Y.2006-07 DERIVED FROM SALE OF SHARES WAS TAXABLE. HE ALSO D ID NOT VERIFY AS TO WHETHER THE SHARES HAD BEEN HELD AS INVESTMENT OR A S STOCK-IN-TRADE. FROM A PERUSAL OF THE CASE RECORD IT IS SEEN THAT S UCH PROFIT SHOULD HAVE BEEN COMPUTED UNDER THE HEAD PROFIT AND GAINS OF B USINESS AND PROFESSION FOR THE FOLLOWING REASONS: I. CONSIDERING THE HIGH VOLUME, FREQUENCY, CONTINUI TY AND REGULARITY OF THE SHARE TRANSACTIONS WHICH WERE DONE IN AN ORG ANIZED MANNER PATENTLY FOR DERIVING PROFITS, THE ACTIVITY OF SALE AND PURCHASE OF SHARES WOULD CONSTITUTE BUSINESS, AND, THEREFORE, THE PROF IT DERIVED FROM SUCH TRANSACTIONS WAS TAXABLE UNDER THE HEAD INCOME FRO M BUSINESS. II. FOR EARNING BUSINESS INCOME FROM SALE/PURCHASE OF SHARES, YOU HAD UTILIZED THE SERVICES OF PORTFOLIO MANAGEMENT SERVI CES (HEREINAFTER REFERRED AS PMS). THE ACTIVITY OF EARNING INCOME THROUGH THE PMS PROVIDER IS BUSINESS INCOME IN VIEW OF THE SYSTEMAT IC AND ORGANIZED NATURE OF TRANSACTIONS UNDERTAKEN BY THE PMS PROVID ER. THE TRANSACTIONS HANDLED BY THE PMS PROVIDER WERE CARRIED OUT IN A T HOROUGHLY PROFESSIONAL MANNER. THE ORGANIZED AND SYSTEMATIC APPROACHES TO THE TRANSACTIONS BY THE PMS PROVIDER CLEARLY SHOW THAT THE INTENTION WA S TO MAXIMIZE PROFITS BY RESORTING TO FREQUENT TRADING RATHER THAN TO EAR N DIVIDEND BY HOLDING THE SHARES FOR LONG DURATIONS. III. ALL THE TRANSACTIONS DURING THE PREVIOUS YEAR THROUGH PMS WERE SHORT-TERM IN NATURE AND THE MOTIVE OF PURCHASING T HE SHARES WAS CLEARLY PROFIT BOOKING BY SELLING AT HIGHER RATES AND NOT F OR EARNING DIVIDEND. IV. THE WAY IN WHICH BUSINESS WAS CONDUCTED SPEAKS OF PROFESSIONALISM. V. FROM THE CHART SHOWING DETAILS OF CAPITAL GAINS SUBMITTED BY YOU DURING THE ASSESSMENT PROCEEDINGS, IT IS EVIDENT TH AT YOU HAD MADE 94 SALES TRANSACTIONS DURING THE YEAR. THIS IN ITSELF ESTABLISHES THAT THE INTENTIONS BEHIND THESE TRANSACTIONS WERE ONLY TO B OOK PROFITS. THIS IS FURTHER EVIDENCES BY THE QUANTUM OF SHARES SOLD. D URING THE YEAR THE TOTAL NUMBER OF SHARES SOLD WERE 1,65,163 INVOLVING TURNOVER OF RS. 88,37,805/- WHICH IS OF A HIGH MAGNITUDE. IT IS TH US APPARENT THAT THE TRANSACTIONS WERE NOTHING BUT BUSINESS ACTIVITY AND NOT ANY INVESTMENT ACTIVITY. SUCH AN ORGANIZED TRADING ACTIVITY ON YO UR PART WOULD CONSTITUTE BUSINESS AS INCLUSIVELY DEFINED IN SUB-SEC. (13) OF SEC. 2 OF THE INCOME- TAX ACT, 1961. 4. IN THE LIGHT OF THE ABOVE, THE ASSESSMENT MADE I N YOUR CASE FOR THE A.Y. 2006-07 VIDE ORDER U/S 143(3) DT. 30.12.2008 I S CONSIDERED AS ERRONEOUS IN SO FAR AS IT IS PREJUDICIAL TO THE INT EREST OF THE REVENUE. ACCORDINGLY, AND BY VIRTUE OF THE AUTHORITY VESTED IN THE UNDERSIGNED AS PER THE PROVISIONS OF SEC. 263 OF THE INCOME-TAX AC T, 1961, THE SUBJECT ASSESSMENT IS PROPOSED TO BE REVISED UNDER THE SAID SECTION. 5. YOU ARE HEREBY GIVEN AN OPPORTUNITY OF BEING HEA RD TO EXPLAIN AS TO WHY THE PROPOSED REVISION SHOULD NOT BE CARRIED OUT . FOR THIS PURPOSE, YOUR CASE IS POSTED FOR HEARING ON 10.03.2011 AT 04.00P.M. ON THE SCHEDULED DATE OF HEARING, YOU MAY EITHER APPEAR IN PERSON OR GET YOURSELF REPRESENTED BY A REPRESENTATIVE DULY AUTHO RIZED BY YOU AS PER SEC. 288 OF THE ACT. YOU MAY ALSO MAKE YOUR WRITTE N SUBMISSIONS IN LIEU 4 ITA NO.554/PN/2011 SHRI PRAKASH H. PARAKH A.Y.2006-07 OF PERSONAL APPEARANCE. IF SUCH WRITTEN SUBMISSION S ARE RECEIVED ON OR BEFORE THE SCHEDULED DATE OF HEARING, THE SAME SHAL L BE DULY CONSIDERED FOR THE PURPOSE OF THE PROCEEDINGS U/S 263 OF THE A CT. 5. IN SUM AND SUBSTANCE, THE LD CIT HAD A SERIOUS O BJECTION IN RESPECT OF THE HEAD UNDER WHICH THE SHORT TERM CAPITAL GAIN DECLARED BY THE ASSESSEE WAS TO BE COMPUTED. THE LD CIT OBSERVED T HAT THE A.O DID NOT CONDUCT ANY ENQUIRY AS REGARDS THE PROPER HEAD OF I NCOME UNDER WHICH THE PROFIT DERIVED FROM THE SALE OF SHARES WAS TAXA BLE. THE A.O. ALSO DID NOT VERIFY WHETHER THE SHARES HAVE BEEN HELD AS AN INVESTMENT OR AS A STOCK-IN-TRADE. IN THE OPINION OF THE LD CIT, UTIL IZING THE SERVICES OF PMS IS FOR DOING THE SYSTEMATIC AND ORGANIZED ACTIVITY IN THE NATURE OF THE BUSINESS. THE ASSESSEE OBJECTED TO THE SHOW CAUSE NOTICE BY FILING HIS WRITTEN SUBMISSIONS ON 25 TH MARCH 2011, PART OF WHICH IS REPRODUCED ON PAGE NO. 4 OF THE IMPUGNED ORDER. THE CORE REASON GIVEN BY THE LD CIT FOR SETTING ASIDE THE ASSESSMENT ORDER AND REMITTIN G THE ISSUE OF SHORT TERM CAPITAL GAIN TO THE FILE OF THE A.O ARE AS UND ER : 4.1. ON A CAREFUL EXAMINATION OF THE CASE RECORDS IT IS CLEAR THAT THE ASSESSING OFFICER DID NOT DEAL WITH THIS ISSUE DURI NG THE COURSE OF THE ASSESSMENT PROCEEDINGS. THE MERE MENTION IN THE AS SESSMENT ORDER THAT THE ASSESSEE HAD MADE INVESTMENTS IN SHARES THROUGH ENAM SECURITIES, A PORTFOLIO MANAGEMENT SERVICES (PMS), WOULD NOT BY I TSELF LEAD TO A CONCLUSION OR INFERENCE THAT THE ASSESSING OFFICER HAS DULY CONSIDERED THIS ISSUE. THIS ASPECT IS ALSO EVIDENT FROM THE I NFORMATION CALLED FOR VIDE THE ORDER SHEET NOTING DT. 04.12.2008 AND THE ASSES SEES RESPONSE THERETO VIDE LETTER DATED NIL. THE ASSESSEE HAD ME RELY SUBMITTED THAT AS PER THE AGREEMENT WITH ENAM, THE PMS PROVIDER, IT H AD DISCRETION TO INVEST THE FUNDS ON BEHALF OF THE ASSESSEE AND THAT THE ASSESSEE WOULD NOT BE GIVING DIRECTIONS TO INVEST IN STOCK MARKET. IT WAS ALSO CONTENDED THAT THE FUNDS WERE ENTRUSTED TO ENAM SINCE IT HAD EXPERTISE AND THAT THE ASSESSEE HAD INVESTED ONLY SURPLUS FUNDS AND NOT BY WAY OF BORROWED FUNDS. NO DISCUSSION HAS BEEN MADE BY THE ASSESSING OFFICER ON THIS ASPECT IN THE ASSESSMENT ORDER. IN FACT, THERE IS NOTHING ON RECORDS TO INDICATE THAT THE QUERY RAISED AS TO THE NATURE OF THE TRANSACTIONS WAS PURSUED IN ANY MANNER. IN THE CASE OF RAJLAKSHMI M ILLS LTD. VS. ITO, THE ITAT, BENCH D CHENNAI, (SPECIAL BENCH) ITA NO. 10 74/MDS/1087 DATED 24/04/2009) HAS HELD THAT IT IS INCUMBENT ON AN ASS ESSING OFFICER TO MAKE ENQUIRIES BEFORE THE ASSESSMENT IS MADE AND TO INVESTIGATE THE FACTS AS STATED BY THE ASSESSEE IN THE RETURN. WHE N PRUDENCE WARRANT THAT SUCH ENQUIRY SHOULD BE MADE, THE FAILURE TO DO SO WOULD RENDER THE ASSESSMENT ORDER ERRONEOUS IN WHICH EVENT SECTION 2 63 CAN BE VALIDLY INVOKED. IN THE CASE OF CIT VS. SUNBEAM AUTO LTD. (DATED 11/09/2009), THE HONBLE DELHI HIGH COURT HAS HELD WHERE THERE I S LACK OF ENQUIRY BY THE ASSESSING OFFICER, IT WOULD BE OPEN FOR THE CIT TO INVOKE SECTION 263. IN THE CASE OF JYOTI ELECTRIC MOTORS LTD. VS. CIT ( 1999), 237 ITR 583, THE HONBLE GUJARAT HIGH COURT HELD THAT EVEN WHERE FAC TS HAVE BEEN DISCLOSED BY THE ASSESSEE, THE ORDER OF ASSESSMENT CAN STILL BE REVISED IF THE PROVISIONS OF LAW HAVE NOT BEEN EXAMINED AND CO RRECTLY APPLIED. IN 5 ITA NO.554/PN/2011 SHRI PRAKASH H. PARAKH A.Y.2006-07 THE PRESENT CASE IT IS APPARENT THAT THE ASSESSING OFFICER DID NOT MAKE ANY ENQUIRY WHATSOEVER INTO THE NATURE OF THE INCOM E DISCLOSED BY THE ASSESSEE AS SHORT TERM CAPITAL GAIN. IN THE CIRCU MSTANCES, THE AFOREMENTIONED DECISIONS ARE SQUARELY APPLICABLE TO THE FACTS OF THE ASSESSEES CASE. FOR THE SAME REASONS, IT CANNOT B E GAINSAID THAT THE ORDER OF THE ASSESSING OFFICER PASSED WITHOUT ANY D ISCUSSION, LET ALONE EXAMINATION, OF THE ISSUE AT HAND, IS ERRONEOUS IN SO FAR AS IT IS PREJUDICIAL TO THE INTEREST OF THE REVENUE. AS A COROLLARY, TH E PROVISIONS OF SECTION 263 ARE PATENTLY APPLICABLE. HENCE, THE ARGUMENTS RAISED BY THE ASSESSEE ON THIS SCORE MUST BE CONSIDERED AS DEVOID OF ANY MERIT. THE SAME ARE ACCORDINGLY REJECTED. AS SUCH THE ASSESSE ES ARGUMENTS SUMMARIZED AT PARA 3.1 AND 3.2 ABOVE DO NOT HOLD GR OUND. 5.1 VERIFICATION OF THE DETAILS OF CAPITAL GAINS SU BMITTED BY THE ASSESSEE SHOW THAT HE HAD CARRIED OUT 94 SALES TRANSACTIONS DURING THE YEAR. THIS IN ITSELF INDICATES THAT THE INTENTIONS BEHIND THES E TRANSACTIONS WERE TO BOOK PROFITS. VOLUME OF TRANSACTIONS IN YET ANOTHE R CRUCIALINDICATOR. DURING THE YEAR THE TOTAL NUMBER OF SHARES SOLD WER E 1,65,163 INVOLVING TURNOVER OF RS.88,37,805/-WHICH IS OF A HIGH MAGNIT UDE. IT IS THUS APPARENT THAT THE TRANSACTIONS WERE INTENDED AS BUS INESS ACTIVITY AND NOT ANY INVESTMENT ACTIVITY. AN ORGANIZED TRADING ACTI VITY WOULD CONSTITUTE BUSINESS AS INCLUSIVELY DEFINED IN SUB-SEC. (13) OF SEC. 2 OF THE INCOME- TAX ACT, 1961. THEREFORE, CONSIDERING THE HIGH VOLU ME, FREQUENCY, CONTINUITY AND REGULARITY OF THE SHARE TRANSACTIONS WHICH WERE DONE IN AN ORGANIZED MANNER PATENTLY FOR DERIVING PROFITS, THE ELEMENT OF BUSINESS CAN BE EASILY ATTRIBUTED TO SUCH TRANSACTIONS. IN SUCH CIRCUMSTANCES THE TRANSACTIONS ARE LIABLE TO BE TAXED UNDER THE HEAD INCOME FROM BUSINESS. 5.2 FOR EARNING BUSINESS INCOME FROM SALE/PURCHASE OF SHARES, THE ASSESSEE HAD UTILIZED THE SERVICES OF PORTFOLIO MAN AGEMENT SERVICES (HEREINAFTER REFERRED AS PMS). THE TRANSACTIONS HANDLED BY THE PMS PROVIDER WERE CARRIED OUT IN A THOROUGHLY PROFESSIO NAL MANNER. THE ORGANIZED AND SYSTEMATIC APPROACHES TO THE TRANSACT IONS BY THE PMS PROVIDER WOULD GO TO SHOW THAT THE INTENTION WAS TO MAXIMIZE PROFITS BY RESORTING TO FREQUENT TRADING . IN ANY CASE, THE IN TENTION WAS NOT TO EARN DIVIDEND BY HOLDING THE SHARES FOR LONG DURATIONS. THE ABOVE INFERENCE DERIVES FURTHER STRENGTH FROM THE FACT THAT ALL THE TRANSACTIONS DURING THE PREVIOUS YEAR THROUGH THE PMS WERE SHORT-TERM IN NA TURE. THIS IN ITSELF THROWS LIGHT ON THE MOTIVE. 6. THE LD CIT DIRECTED THE A.O. TO MAKE THE FRESH A SSESSMENT ON THE ISSUE OF THE SHORT TERM CAPITAL GAIN WHETHER THE SA ME IS TO BE ASSESSED UNDER THE HEAD PROFIT OR GAIN FROM THE BUSINESS O R PROFESSION OR CAPITAL GAIN. NOW THE ASSESSEE IS IN APPEAL BEFORE US. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PARTI ES AND PERUSED THE RECORD. THE LD. COUNSEL REFERRED TO THE PAPER BOOK , MORE PARTICULARLY THE COPIES OF THE ORDER SHEET OF THE ASSESSMENT RECORD, PAGE NOS. 60 & 61. HE SUBMITS THAT SO FAR AS THE ISSUE OF SHORT TERM C APITAL GAIN IS CONCERNED, THE A.O HAS IN DETAIL MADE THE ENQUIRY A ND THE ASSESSEE ALSO FILED THE REPLY (PAGE NOS. 1, 2 & 3 OF THE PAPER BO OK WHERE THE COPIES ARE 6 ITA NO.554/PN/2011 SHRI PRAKASH H. PARAKH A.Y.2006-07 IS PLACED). HE SUBMITS THAT THE ORDER SHEET ENTRY DATED 4.12.2008 SUPPORTS THE CASE OF THE ASSESSEE THAT DETAIL ENQU IRY WAS MADE BY THE A.O IN RESPECT OF THE SALE OF SHARES WITH ENAM SEC URITIES THROUGH THE PMS AND MERELY BECAUSE THE SAME IS NOT DISCUSSED IN THE ASSESSMENT ORDER, IT CANNOT BE SAID THAT ASSESSMENT ORDER IS E RRONEOUS. HE FURTHER SUBMITS THAT THE JURISDICTION EXERCISED BY THE LD C IT IS TOTALLY ILLEGAL AS THE ASSESSMENT ORDER CANNOT BE SAID TO BE ERRONEOUS . HE PLEADED FOR QUASHING THE ORDER PASSED U/S. 263 OF THE ACT BY TH E LD. CIT. THE LD. COUNSEL RELIED ON THE FOLLOWING DECISIONS : I) MALABAR INDUSTRIAL CO. LTD. 243 ITR 83 (SC) II) CIT VS. ANILKUMAR SHARMA, 335 ITR 83 (DEL.) III) CIT VS. SUNBEAM AUTO LTD., 332 ITR 167 (DEL.) IV) GABRIAL INDIA LTD., 203 ITR 108 (BOM.) PER CONTRA, THE LD. D.R. SUPPORTED THE ORDER OF THE LD. CIT. 8. THE ISSUE IN CONTROVERSY IS IN NARROW COMPASS I. E. IN RESPECT OF THE HEAD OF INCOME UNDER WHICH THE GAIN ON SALE OF SHAR ES OF RS. 88,22,823/- IS TO BE ASSESSED WHETHER AS A BUSINESS INCOME OR A S A CAPITAL GAIN. ON PERUSAL OF THE ASSESSMENT ORDER, WE FIND THAT IN TH E COMPUTATION MADE BY THE A.O, NO SEPARATE HEADING IS GIVEN BUT DISALL OWANCE HAS BEEN MADE IN RESPECT OF THE EXPENDITURE AND COMMISSION TO THE EXTENT OF RS.22,89,649/-. SAME IS SHOWN SEPARATELY BY MAKING ADDITION TO THE INCOME DECLARED BY THE ASSESSEE IN THE RETURN OF I NCOME. WE FIND THT THE A.O HAS DISCUSSED THE ISSUE OF SHORT TERM CAPIT AL GAIN IN PARA NO.8 OF THE ASSESSMENT ORDER. WE FURTHER FIND THAT AS P ER THE ORDER SHEET ENTRY DATED 4.12.2008 IN THE ASSESSMENT RECORD OF T HE A.O, THERE IS A SPECIFIC QUERY BY THE A.O AS UNDER : A HAS CLAIMED STG OF RS.65,53,179/- AGAINST THE SA LE OF SHARES WITH ENAM SECURITIES (PMS). A WAS ASKED AS TO WHY THE SAME SHALL NOT BE CONSIDERED AS BUSINESS INCOME. AGAIN AS PER THE ORDER SHEET ENTRY DATED 22 DECEMBE R 2008, THE A.O HAS MADE THE NOTING IN RESPECT OF THE EXPENSES CLAIMED BY THE ASSESSEE AGAINST THE SHORT TERM CAPITAL GAIN. THE GRIEVANCE OF THE LD CIT IS THAT THERE IS A LACK OF ENQUIRY ON THE PART OF THE A.O O N THIS ISSUE. WE ARE UNABLE TO ACCEPT THE VIEW TAKEN BY THE LD CIT ON TH E ISSUE OF ASSESSING SHORT TERM CAPITAL GAIN UNDER THE HEAD CAPITAL GAI N. AFTER EXAMINING 7 ITA NO.554/PN/2011 SHRI PRAKASH H. PARAKH A.Y.2006-07 THE EXPLANATION AND INFORMATION FILED BY THE ASSESS EE, THE A.O. CAME TO THE CONCLUSION THAT THE GAIN ON THE SALE OF THE SHA RES IS TO BE ASSESSED UNDER THE HEAD CAPITAL GAIN. ONCE IT IS SEEN THA T THE A.O HAS MADE THE ENQUIRY ON THE ISSUE, THEN THE LD CIT, EVEN IF HE I S NOT CONVINCED WITH THE VIEW TAKEN BY THE A.O, CANNOT EVOKE THE PROVISIONS OF SEC. 263. 9. IN THE CASE OF SUNBEAM AUTO LTD. (SUPRA), THE HO NBLE DELHI HIGH COURT HAS EXPLAINED THE DIFFERENCE BETWEEN THE EXP RESSIONS LACK OF ENQUIRY AND INADEQUATE ENQUIRY. IN THE SAID CASE, THEIR LORDSHIPS HAVE FOLLOWED THE DECISION OF THE HONBLE HIGH COURT OF BOMBAY IN THE CASE OF GABRIAL INDIA LTD. (SUPRA) (HEADNOTE). IT IS HELD A S UNDER : THE SUBMISSION OF THE COUNSEL FOR THE REVENUE WAS THAT WHILE PASSING THE ASSESSMENT ORDER, THE AO DID NOT CONSIDER THE A SPECT SPECIFICALLY WHETHER THE EXPENDITURE IN QUESTION WAS REVENUE OR CAPITAL EXPENDITURE. THIS ARGUMENT PREDICATES ON THE ASSESSMENT ORDER, W HICH APPARENTLY DOES NOT GIVE ANY REASONS WHILE ALLOWING THE ENTIRE EXPE NDITURE AS REVENUE EXPENDITURE. HOWEVER, THAT BY ITSELF WOULD NOT BE INDICATIVE OF THE FACT THAT THE AO HAD NOT APPLIED HIS MIND ON THE ISSUE. THE A.O IN THE ASSESSING ORDER IS NOT REQUIRED TO GIVE DETAILED RE ASON IN RESPECT OF EACH AND EVERY ITEM OF DEDUCTION, ETC. THEREFORE, ONE H AS TO SEE FROM THE RECORD AS TO WHETHER THERE WAS APPLICATION OF MIND BEFORE ALLOWING THE EXPENDITURE IN QUESTION AS REVENUE EXPENDITURE. T HE COUNSEL FOR THE ASSESSEE IS RIGHT IN HIS SUBMISSION THAT ONE HAS TO KEEP IN MIND THE DISTINCTION BETWEEN LACK OF INQUIRY AND INADEQUA TE INQUIRY. IF THERE WAS ANY INQUIRY, EVEN INADEQUATE THAT WOULD NOT BY ITSELF GIVE OCCASION TO THE CIT TO PASS ORDERS UNDER S. 263, MERELY BECAUSE HE HAS DIFFERENT OPINION IN THE MATTER. IT IS ONLY IN CASES OF LAC K OF INQUIRY THAT SUCH A COURSE OF ACTION WOULD BE OPEN. THE AO HAD CALLED FOR EXPLANATION ON THIS VERY ITEM FROM THE ASSESSEE AND THE ASSESSEE HAD FU RNISHED HIS EXPLANATION VIDE LETTER DT. 26 TH SEPT., 2002. THIS FACT IS EVEN TAKEN NOTE OF BY THE CIT HIMSELF IN PARA 3 OF HIS ORDER. THIS CLEARLY SHOWS THAT THE AO HAD UNDERTAKEN THE EXERCISE OF EXAMINING AS TO W HETHER THE EXPENDITURE INCURRED BY THE ASSESSEE IN THE REPLAC EMENT OF DYES AND TOOLS IS TO BE TREATED AS REVENUE EXPENDITURE OR NO T. IT APPEARS THAT SINCE THE AO WAS SATISFIED WITH THE AFORESAID EXPLANATION , HE ACCEPTED THE SAME. THE CIT IN HIS IMPUGNED ORDER EVEN ACCEPTS T HIS. THUS, EVEN THE CIT CONCEDED THE POSITION THAT THE AO MADE THE INQU IRIES, ELICITED REPLIES AND THEREAFTER PASSED THE ASSESSMENT ORDER. THE GR IEVANCE OF THE CIT WAS THAT THE AO SHOULD HAVE MADE FURTHER INQUIRIES RATHER THAN ACCEPTING THE EXPLANATION. THEREFORE, IT CANNOT BE SAID THAT IT IS A CASE OF LACK OF INQUIRY. CIT VS. GABRIAL INDIA LTD. (1993) 114 CTR (BOM) 81 : ( 203 ITR 108 (BOM) RELIED ON. 10. SO FAR AS THE PRESENT CASE IS CONCERNED, IN OUR OPINION, THE A.O HAS MADE THE ENQUIRY ON THE ISSUE OF ASSESSMENT OF GAI N ON THE SALE OF SHARES OF THE ENAM SECURITIES. THE LAW IS WELL SET TLED THAT FOR EXERCISING THE JURISDICTION U/S. 263, TWO MANDATORY CONDITIONS MUST BE FULFILLED THAT 8 ITA NO.554/PN/2011 SHRI PRAKASH H. PARAKH A.Y.2006-07 (1) ORDER MUST BE ERRONEOUS AND (2) IT SHOULD ALSO BE PREJUDICIAL TO THE INTEREST OF THE REVENUE. IF IT IS THE CASE OF LACK OF ENQUIRY, THEN ORDER MUST BE SAID TO BE ERRONEOUS BUT IT IS NOT SO IN TH IS CASE. WE ARE, THEREFORE, OF THE OPINION THAT THE ASSESSMENT ORDE R CANNOT BE SAID TO SUFFER FROM LACK OF ENQUIRY NOR IT IS ERRONEOUS. W E, THEREFORE, HAVE NO OPTION BUT TO CANCEL THE SAME. ACCORDINGLY, WE DO SO. 11. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 19TH OCTOBER 2012. SD/- SD/- (G.S. PANNU) ACCOUNTANT MEMBER (R.S.PADVEKAR ) JUDICIAL MEMBER PUNE, DATED THE 19TH OCTOBER, 2012 US COPY OF THE ORDER IS FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT -II, PUNE 4. THE D.R. A BENCH, PUNE 5. GUARD FILE /- TRUE COPY-/ BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL PUNE