G.S Pannu, A.M:— The captioned proceedings relate to four assessees belonging to the same family and since the issue involved is common, all the appeals were heard together and are being disposed off by way of a consolidated order for the sake of convenience and brevity.

2. We shall take up the case of Shri Apoorva Patni vide ITA No. 582.PN/10 as the lead case. This appeal by the assessee is directed against the order under section 263 of the Income-tax Act, 1961 (in short “the Act”) dated 29.3.2010 passed by the Commissioner of Income-tax-II, Pune (in short “the Commissioner”) setting aside the assessment order dated 11.04.2007 passed by the Assessing Officer under section 143(3) of the Act for the assessment year 2005-2006 and directing the Assessing Officer to frame a fresh assessment after making detailed enquiries on various points as directed by the Commissioner.

3. In this case, assessment for the assessment year 2005-2006 was made by the Assessing Officer under section 143(3) of the Act determining the total income of the assessee at Rs. Rs. 9,79,58,390/- as against returned income of Rs. 9,79,58,390/-. On examination of record, the Commissioner noticed that the assessment order passed by the Assessing Officer is erroneous insofar as it is prejudicial to the interests of Revenue because, according to him, the gains of Rs. 3,38,40,379/- plus Rs. 1,19,77,765/- emanating from trading in shares ought to have been assessed under the head ‘Profits and Gains of business or profession’. In the opinion of the Commissioner, the transactions resulting in the gains had all the ingredients of a ‘business’ as inclusively defined in sub-section (13) of section 2 of the Act and the failure of the Assessing Officer to take cognizance of the said facts and consequently to ascertain the appropriate head of income under which the profit derived from sale of shares should have been taxed, rendered the assessment erroneous insofar as prejudicial to the interests of Revenue. The Commissioner accordingly issued a notice under section 263 of the Act requiring the assessee to explain its position. The assessee appeared and filed detailed written submissions. After hearing the assessee as well as considering the written submissions, the Commissioner held that the Assessing Officer failed to examine the various factual as well as legal aspects relating to assessee's transactions in shares, etc. According to the Commissioner, the Assessing Officer failed to examine the agreement between the assessee and the Portfolio Management Service (‘PMS’ in short) providers and that the Assessing Officer ought to have seen whether the PMS provider acted in the capacity of an agent or like a mutual fund. He further observed that if the PMS provider has acted in the capacity of an agent, then the Assessing Officer should have examined the manner in which the business of PMS provider was conducted. In the view of the Commissioner, the Assessing Officer failed to examine the share transactions from the point of:

a. Volume of transactions,

b. Frequency of transactions,

c. In whose DEMAT account the shares were purchased?

d. Whether the intention of the assessee was to hold the shares as investment e. Holding period of shares,

f. Whether the shares were sold before earning dividends,

g. Whether the assessee has repurchased same shares after selling them, i.e he has invested in the same scrips after booking profits,

h. Difference between the investment in mutual funds and PMS,

i. Whether the arrangement between the assessee and the PMS provider speak of the business relationship with regard to the investments an the share of profits/

j. Whether there was a component of risk involved in the share transactions?

The Commissioner further observed that the Assessing Officer has also not made any examination whatsoever in relation to investments in Mutual Funds and that the Assessing Officer failed to apply the tests of legal pronouncements with regard to the issue of deciding whether such income was assessable as Business income or Capital gains. The Commissioner finally concluded as under:

“13. The Assessing Officer has not examined the above issues which are vital to decide as to whether the transactions carried out by the assessee through the PMS provider and otherwise are in the nature of investments or business. For enabling such examinations, the assessment for the Assessment Year 2005-2006 is hereby remitted to the file of the assessing officer. The Assessing Officer shall give the assessee reasonable opportunity of being heard and decide the issues afresh, as per law.”

Being aggrieved, the assessee is in appeal before us.

4. Before us, the learned counsel for the appellant has assailed the order of the Commissioner on the ground that the invoking of section 263 of the Act in the present case was not justified. The learned Counsel submitted that the assessee is an individual who had declared income from house property, capital gains on share investments and also business income from trading of shares, apart from earning dividend and interest income under the head income from other sources. The learned Counsel pointed out that along with the return of income, assessee had annexed detailed statement of the long term and short term capital gains earned by the assessee by utilizing the Portfolio Management services of DSP Merrill Lynch Fund Managers Ltd. and Kotak Securities Ltd. It was pointed out that the return of income was accompanied by the Personal Income & Expenditure account, Capital account and Balance sheet. Apart therefrom, the assessee was carrying on share trading business in a proprietary concern whose Balance sheet and Profit & Loss account was separately enclosed. It was thus contended that the assessee had declared capital gain on share dealings separately, whereas the trading in shares carried out in the proprietary concern was declared as business income. The learned Counsel submitted that the Assessing Officer in para 3 of the assessment order has noted the distinction, inasmuch as the engagement of the assessee in the business of trading in shares and also deriving income from long term capital gains has been noted. The learned Counsel also pointed out that in the course of assessment proceedings the Assessing Officer had raised queries vide letter dated 15.3.2007 whereby the assessee was required to inter-alia, furnish month-wise print out of mutual fund account, details of mutual fund reinvested with supporting evidence, books of account in respect of the business of trading in shares, etc. In this manner, the learned Counsel has pointed out that the Assessing Officer was aware of the dealing in shares carried out by the assessee, wherein one segment was treated as a trading activity in the proprietary concern, whereas the other activity which was carried out through the portfolio managers was declared as capital gains. The learned Counsel also pointed out that in the subsequent assessment year of 2006-2007, the Assessing Officer in an assessment made under section 143(3) of the Act dated 12.2.2008 had treated the income from portfolio management services as business income and that the same has not been upheld by the Commissioner of Income-tax (Appeals) in its order dated 28.12.2010 It is submitted that the Commissioner of Income-tax (Appeals), after analyzing the factual aspects of the portfolio management services engaged by the assessee, held that it was a discretionary portfolio management services where the PMS provider had got absolute independence in taking day to day decisions so far as investment in shares, etc are concerned. The Commissioner of Income-tax (Appeals) referred to the decision of the ITAT Pune Bench in the case of ARA Trading & Investments Pvt. Ltd. (ITA No. 499.PN/08 dated 31.8.2009 for assessment year 2004-2005) and held that activity of transactions in shares/mutual funds by engaging a PMS provider carried on by the assessee was an investment activity and the resultant gain was assessable under the head capital gains. It was, therefore contended that in this view of the matter the assessment order dated 11.4.2007 in the instant year cannot be considered as erroneous and prejudicial to the interests of Revenue, because the Assessing Officer had taken a possible view. Moreover, the learned Counsel submitted that the Commissioner has merely held that the Assessing Officer had failed to make enquiry in a particular manner and such an objection is not valid for the purposes of section 263 of the Act. In this regard, it was submitted that there is a difference between lack of enquiry vis-à-vis inadequate enquiry and it is only in the case of former, invoking of section 263 is justified. In the present case, as per the Commissioner it is a case of inadequate enquiry and according to the assessee, the same is not a ground for invoking of section 263 and in this regard, reliance has been placed on judgment of the Hon'ble Bombay High Court in the case of CIT v. Design & Automation Engineers (Bombay) P. Ltd. 323 ITR 632 (Bom). In nut-shell, it is the case of the assessee that it is only a case of difference of perception between the Commissioner and the Assessing Officer on the issue of share transactions which cannot be a ground for invoking section 263 of the Act.

5. On the other hand, learned Departmental Representative, appearing for the Revenue, has vehemently argued that the Commissioner has established in detail that no enquiry has been conducted by the Assessing Officer with regard to the manner of earning of capital gains through the PMS providers and, therefore, it is a case where assessee's claim for assessment of the income from shares as capital gain has been accepted without application of mind. Thus, the assessment order dated 11.4.2007 passed by the Assessing Officer has been rightly held to be erroneous and prejudicial to the interests of Revenue within the meaning of section 263 of the Act. The learned Departmental Representative referred to a judgment of the Hon'ble Punjab & Haryana High Court in the case of Commissioner Of Income-Tax v. Assam Tea House (2010) 48 DTR (P & H) 112 to submit that in the absence of any material to show that the Assessing Officer had carried out verification on certain issues, the invoking of section 263 of the Act by the Commissioner to set aside such assessment was justified, even if the Commissioner had not come to a firm conclusion regarding evasion of tax. Reliance was also placed on the judgment of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. (2000) 243 ITR 83 (SC).

6. We have carefully considered the rival submissions. Section 263 of the Act empowers a Commissioner to 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 interests of the Revenue, he may after giving the assessee an opportunity of being heard and making such enquiries he may deem fit, 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. In the present case, the Commissioner has held the assessment order dated 11.4.2007 as erroneous and prejudicial to the interests of Revenue and the same has been set aside and directed to be made afresh on three issues, namely, (a) treatment of gains in respect of investment through PMS as business income; (b) treatment of loss on account of derivative transactions as speculative loss, and, (c) disallowance under section 40A of the Act. At the time of hearing, the appellant has contested before us the invocation of section 263 by the Commissioner only on a single issue relating to the gains in respect of investment through PMS. The Assessing Officer had accepted the return of income filed by the assessee qua the transactions in shares undertaken through engagement of a PMS provider as assessable under the head ‘capital gains’. The Commissioner, in an elaborately written order, has made out a case that the Assessing Officer has not examined various factual and legal aspects relating to such activity which was critical to conclude as to whether such income was assessable as ‘business income’ or as ‘capital gains’. The Commissioner has referred to the CBDT Circulars in para 8.3, some of the relevant case laws in para 8.2 and thereafter in para 8.4 he has enumerated various tests to decide as to whether the impugned activity constituted business activity or investment activity. Consequently, in paras 12 and 13 of the order, the Commissioner has pointed out the non-examination of the impugned activity in the context of the aforesaid tests. Quite clearly, the case made out by the Commissioner is that the Assessing Officer has failed to apply his mind to the legal and factual aspects before determining as to whether the impugned activity constituted business or an investment activity. In this background, we have examined the query letter dated 15.3.2007 issued by the Assessing Officer and which has been referred by the appellant before us. We have also perused the assessment order and also the reply of the assessee to the Assessing Officer on 21.3.2007 which has been placed before us. The claim of the assessee is that the Assessing Officer duly applied his mind, though the enquiry was not conducted in the manner stated by the Commissioner and in any case, as per the appellant, it is not a case of lack of enquiry. In our considered opinion, after having perused the entire material on record, it clearly emerges that the Assessing Officer has not applied his mind in the manner in which the assessee has earned income from its PMS dealings. Undoubtedly, the assessee has made investment through the PMS provider in terms of written agreements, copies of which have been placed on record. There is nothing brought on record to say that the Assessing Officer was aware of such agreements, much less the terms and conditions of such agreements so as to appreciate appropriately the nature and the manner of earning of income by the assessee through the PMS provider. Therefore, factually speaking, the Commissioner is correct in asserting that the Assessing Officer failed to apply his mind to the facts and related legal aspects of the impugned activity and, therefore, such an approach of the Assessing Officer, in our view, clearly falls within the meaning of expression “erroneous in so far as it is prejudicial to the interests of the revenue”, as contained in section 263 of the Act. An assessment order passed without application of mind certainly falls within the purview of section 263 of the Act in terms of the judgment of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. (supra). In so far as the plea set up by the assessee that it is a case of inadequate enquiry and not lack of enquiry is concerned, in our view, the factual aspects clearly point out that it is a case where the Assessing Officer has failed to make enquiries and it is a case of lack of application of mind, which clearly justifies invoking of section 263 of the Act.

7. The other aspect argued is on the basis of the order of the Commissioner of Income-tax (Appeals) dated 28.12.2010 for the assessment year 2006-2007 wherein assessee's stand has been upheld. On this basis, it is argued that it is a case of a mere difference of perception between the Assessing Officer and the Commissioner and in any case, a possible view has been taken by the Assessing Officer in the assessment order dated 11.4.2007 In our considered opinion, having regard to the factual situation in the instant case, the aforesaid argument of the assessee has to fail. As noted earlier, in this case, the Assessing Officer has failed to examine the relevant facts thereby leading to determination of an assessment without proper application of mind on the issue of share transactions undertaken by the assessee through the services of a PMS. Once it is established that the return of income on a particular aspect has been accepted without application of mind, the same would tantamount to be an assessment which is erroneous and prejudicial to the interests of the revenue within the meaning of section 263 of the Act and the same cannot be defended on the plea that it was a possible view. Rather, it is a case where the view contained in the return of income has been accepted by default and not a case where a conscious view has been taken by the Assessing Officer after due application of mind on the relevant factual and legal aspects of the matter. Therefore, the impugned order of the Commissioner invoking section 263 of the Act on the impugned issue cannot be defeated on the aforesaid plea set up by the assessee.

8. In the result, we uphold the order of the Commissioner qua the plea raised by the assessee and accordingly the assessee has to fail in this appeal.

9. Before parting, we may add that our decision to reject the pleas of the assessee is no reflection on the merits of the controversy, which is liable to be adjudicated in the appropriate proceedings as per law.

10. Resultantly, the appeal of the assessee is dismissed.

11. The facts and submissions of rival sides being similar in the other captioned appeals, viz. ITA Nos. 585.PN/10, 586.PN/10 & 588.PN/10 in the cases of Mrs. Sadhana Patni, Mrs. Ruchi Patni & Shri Arihant Patni respectively, our decision given in the case of Shri Apoorva Patni, vide ITA No. 582.PN/10, will apply mutatis mutandis to those appeals also. On the parity of reasoning, therefore, ITA Nos. 585.PN/10, 586.PN/10 & 588.PN/10 are also dismissed.