Shourya Infrastructure Pvt. Ltd. Vs ITO (Delhi High Court)
Conclusion: Reopening of the concluded scrutiny assessment was a serious business, therefore, senior officers like ACIT and PCIT were expected to apply their minds to such requests and, only after that, approve the initiation of reassessment proceedings.
Held: SIPL was in the real estate business, including constructing, buying, and selling immovable properties. Upon the assessee filing its Return of Income (ROI) for the AY in issue, AO took it up for scrutiny under Section 143(3). SIPL indicated to AO that although it had purchased the land, the funds were provided by a group company named STPL. According to SIPL, this arrangement was the subject matter of a Memorandum of Understanding (MoU)/agreement dated 02.03.2007 entered between itself and STPL. SIPL had also emphasized that under the MoU/agreement, it was empowered to sell the land if it was not used for any project for two to three years. Thus, as per SIPL, once the sale took place, it claimed as profit an amount calculated at the rate of Rs. 1,00,000/- per acre and remitted the balance to STPL. SIPL conveyed to AO that the amount remitted to STPL was claimed as expenditure, and the resultant profit earned, i.e., Rs. 1,73,002/-, was offered for levy of tax. AO framed the assessment order under Section 143(3) of the Act, without making any addition concerning the sale of the subject land; which had fetched a price of Rs. 1,51,00,000/-. AO, within barely a day’s gap, i.e., on 31.03.2018, issued a notice under Section 148 to SIPL, on the ground that he had reasons to believe that income chargeable to tax had escaped assessment. Accordingly, SIPL was asked to file a return in the prescribed form within 30 days of service of the said notice. AO’s view was that there was collusion between SIPL and STPL; therefore, the provisions of Section 50C were applicable. AO concluded that SIPL had earned income by way of capital gains amounting to Rs. 57,30,000/-. AO arrived at this figure by adjusting the sale consideration, i.e., Rs.1,51,00,000/-, against the value of the land arrived at based on the circle rate, i.e., Rs.2,08,30,000/-. It was held that it was no one’s case, not even the AO’s case, that SIPL had not executed the MOU/agreement with STPL. The burden of the AO’s order was that the sale of the subject land was a capital account transaction and, therefore, Section 50C of the Act was applicable. The Court observed that it was not a case where the AO sought to draw fresh inference, which it could have raised when he framed the original assessment order regarding the loan transaction based on the material placed before him. Therefore, the fresh information in that case, as observed by the Court, exposed the falsity of the statement made on behalf of assessee when the original assessment order was framed.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. This writ petition concerns Assessment Year (AY) 2011-12.
2. Via this writ petition, a challenge is laid to the order dated 13.11.2018 [hereafter referred to as “impugned order”]. Via the impugned order, the respondent/revenue [hereafter referred to as “Assessing Officer (AO)”] disposed of the objections preferred by the petitioner, i.e., Shourya Infrastructure Pvt. Ltd. [hereafter referred to as “SIPL”].
3. The objections preferred by SIPL were directed against the initiation of the reassessment proceeding by the AO under Section 147 of the Income Tax Act, 1961 [in short, “Act”].
4. The issue for consideration in the instant matter is whether the AO correctly triggered the reassessment proceeding qua SIPL. For adjudication, the following broad facts are noticed:
4.1. SIPL is in the real estate business, including constructing, buying, and selling immovable properties. SIPL was incorporated in 2006. Upon the petitioner filing its Return of Income (ROI) for the AY in issue, the AO took it up for scrutiny under Section 143(3) of the Act.
4.2. SIPL was issued various notices, which were accompanied by questionnaires. These notices are dated 02.09.2013, 14.10.2013 and 23.10.2013. Via these notices, among other things, information was sought concerning, broadly, the following aspects:
(i) The nature of the business in which SIPL was engaged.
(ii) The main objects of the business.
(iii) Information about the land sold and the amount received as consideration.
(iv) Details of directors.
(v) Copies of balance sheets and extracts from accounts.
4.3. SIPL was required to furnish information about the aforesaid aspects, including a transaction relating to the sale of land, qua which it had received consideration of Rs. 1,51,00,000/-.
4.4. SIPL indicated to the AO that although it had purchased the land, the funds were provided by a group company named Shourya Towers Pvt. Ltd. [hereafter referred to as “STPL”]. According to SIPL, this arrangement was the subject matter of a Memorandum of Understanding (MoU)/agreement dated 02.03.2007 [hereafter referred to as “MOU/agreement”] entered between itself and STPL. SIPL had also emphasized that under the MoU/agreement, it was empowered to sell the land if it was not used for any project for two to three years. Thus, as per SIPL, once the sale took place, it claimed as profit an amount calculated at the rate of Rs. 1,00,000/- per acre and remitted the balance to STPL. SIPL conveyed to the AO that the amount remitted to STPL was claimed as expenditure, and the resultant profit earned, i.e., Rs. 1,73,002/-, was offered for levy of tax.
5. This explanation, broadly, formed part of the replies submitted by SIPL on various dates, i.e., 21.10.2013, 11.11.2013, 18.11.2013, 09.12.2013, and 16.01.2014.
6. In the backdrop of the explanation furnished by the petitioner/assessee that the AO framed the assessment order dated 28.02.2014 under Section 143(3) of the Act, without making any addition concerning the sale of the subject land; which had fetched a price of Rs. 1,51,00,000/-.
6.1. Despite detailed scrutiny, the AO served a notice dated 28.03.2018 on the petitioner’s Chartered Accountant (CA) concerning the AY in issue. 6.2. Once again, via this notice, the AO sought various documents, which included balance sheets for the Financial Year (FY) in issue as well as the immediately preceding FY; ROI for the AY in issue, i.e., AY 2011-12; statements of the accounts maintained with banks referred to therein, and a copy of the assessment order passed under Section 143(3) of the Act.
7. SIPL responded to the notice and furnished the documents sought under the cover of a letter dated 29.03.2018.
8. The AO, within barely a day’s gap, i.e., on 31.03.2018, issued a notice under Section 148 of the Act to SIPL, on the ground that he had reasons to believe that income chargeable to tax had escaped assessment. Accordingly, SIPL was asked to file a return in the prescribed form within 30 days of service of the said notice.
9. In response to the notice, a return was filed by SIPL on 21.04.2018. Since SIPL had not been furnished with a copy of the reasons recorded by the AO for reopening its assessment, a communication in that behalf dated 28.07.2018 was served on the AO. Via this communication, besides asking for a copy of the reasons recorded for reopening the assessment, SIPL also asked for a copy of the approval given by the specified authority, as mandated under Section 151 of the Act.
10. The record shows that the AO furnished the reasons recorded [which were penned on 30.03.2018] to SIPL, along with a communication dated 12.09.2018.
11. The reasons recorded by the AO, based on which the reassessment proceeding was triggered qua SIPL, broadly touched upon the following aspects:
11.1 Firstly, information had been received from the Income Tax Officer .(Investigation), OCM (Operation Clean Money) Cell-2, New Delhi, to the effect that SIPL had sold immovable properties for a value that was below the market value/value calculated at the circle rate which was applicable for the determination of stamp duty, by the valuation authority. Accordingly, the AO had pegged the value based on the circle rate of the subject land i.e., Rs. 2,08,30,000/-.
11.2 Secondly, the AO triggered the provisions of Section 50C of the Act based on his reasoning that SIPL was not in the business of trading in land. In this context, he referred to the balance sheet drawn up on 31.03.2011, in which current assets/stock-in-trade was shown only concerning the National Highway (NH)-58 project. According to the AO, SIPL never intended to use the land for development.
11.3 Thirdly, SIPL was one of the Special Purpose Vehicles (SPV) incorporated to purchase land, which it sold at a value much lower than the prevailing circle rate. In sum, as per the AO, since SIPL was not in the business of purchasing and selling land, its transactions with STPL were on capital account. In this context, it was also noticed that the funds received from STPL by SIPL were shown under the head “Sundry Creditors” and not as advances.
11.4 Fourthly, it was the AO’s view that the money received by SIPL was a loan and, therefore, any payment made by SIPL to STPL should result in scaling down the loan liability.
11.5 Fifthly, the AO also noticed that SIPL had failed to substantiate its stand that it had used funds provided by STPL for purchasing the subject land.
11.6 Lastly, doubts were also raised concerning the MOU/agreement dated 02.03.2007 on the ground that it was executed on plain paper. In sum, the AO’s view was that there was collusion between SIPL and STPL; therefore, the provisions of Section 50C were applicable.
12. Pivoted on the aforesaid rationale, the AO concluded that SIPL had earned income by way of capital gains amounting to Rs. 57,30,000/-. The AO arrived at this figure by adjusting the sale consideration, i.e., Rs.1,51,00,000/-, against the value of the land arrived at based on the circle rate, i.e., Rs.2,08,30,000/-.
13. Significantly, the AO also alluded to the fact that STPL in the same FY, i.e., FY 2010-11 [AY 2011-12], had registered revenue amounting to Rs. 41.11 crores, against expenditure o Rs.41.75 crores.
14. Thus, according to the AO, even the nominal business income shown on the sale transaction had been diverted by SIPL to STPL.
15. Since SIPL disagreed with the reasons recorded by the AO, it preferred its objections by way of communication dated 26.10.2018. Broadly, via the objections filed on behalf of SIPL, the following assertions were made:
(i) It was, inter alia, in the business of buying, selling and developing properties.
(ii) The subject land was stock-in-trade; therefore, the provisions of Section 50C were not applicable.
(iii) STPL was also in the real estate projects and development business. The projects it executed were located in and around Noida and Ghaziabad.
(iv) To comply with the land-ceiling provisions in the state of UP and other States, the incorporation of SPVs was necessary to facilitate land purchase.
(vi) Since STPL was not able to execute any project on the subject parcels of land within two or three years of its purchase due to commercial non-viability, the SPV, i.e., SIPL, sold such parcels of land, in pursuance of the MoU/agreement dated 02.03.2007 executed between itself and STPL.
16. Under the said MoU/agreement, upon sale of land which SIPL purchased from funds made available by STPL, SIPL was entitled to receive, out of the sale consideration, an amount calculated at the rate of Rs.1,00,000/- per acre, which was declared as its profit earned on the sale transaction. The balance amount was to be remitted to STPL, treating it as the cost of land in the hands of SIPL and profit in the hands of STPL.
17. In the FY in issue, i.e., FY 2010-11, SIPL declared a profit of Rs.1,73,002 upon the sale of land, and the balance amount, i.e., Rs.46,93,536/-, was transferred to STPL.
18. Thus, according to SIPL, since the aforementioned facts were discernible from the assessment records, the reopening was not called for as, after thorough scrutiny, an assessment order under Section 143(3) had been framed by the AO. SIPL asserted that the law did not require registration of an agreement executed between group companies. The contract executed between SIPL and STPL is one such example. The submission was that parties could well have entered into an oral agreement.
19. It was contended by SIPL that since reopening was triggered after four (4) years from the end of relevant AY, as per the first proviso appended to Section 147 of the Act, a case had to be made out that there was a failure on the part of SIPL to disclose fully and truly all material facts which were relevant for assessment.
20. This assertion was sought to be supported by referring to the following judgements:
(i) Haryana Acrylic Manufacturing Co. v. CIT (2009) 308 ITR 38 (Delhi).
(ii) Wel Intertrade (P.) Ltd. v. ITO (2009) 308 ITR 22 (Delhi).
(iii) CIT v. Suren International (P.) Ltd., (2013) 357 ITR 24 CIT (Delhi).
21. Since the issue that triggered reassessment was an aspect that was inquired into by the AO while framing the assessment order dated 28.02.2014 under Section 143(3) of the Act, SIPL averred that this was a case of change of opinion, both concerning the nature of the transaction, and the applicability of provisions under Section 50 of the Act. Furthermore, because a query was raised and answered, the AO had no jurisdiction to reopen the assessment.
21.1. In this context, reliance was placed on the Full Bench decision rendered by this Court in CIT v. Usha International Ltd., (2012) 348 ITR 485 (Delhi) and CIT v. Kelvinator of India Ltd., (2002) 174 CTR (Delhi) (FB), which was upheld by the Supreme Court in CIT v. Kelvinator of India Ltd. (2010) 187 Taxman 312 (SC).
22. It is also submitted on behalf of SIPL that the Principal Commissioner of Income Tax [in short, “PCIT”] did not apply its mind while granting his approval under Section 151 of the Act. It was emphasized that he had appended the word “approved” without examining whether notice under Section 148 of the Act was required to be issued in the instant matter.
23. In this regard, reliance was placed on the judgment rendered in United Electrical Company Pvt. Ltd. v. CIT 258 ITR 317 (Delhi), PCIT v. NC. Cables Ltd. passed in ITA No.335/2015 and CIT v. S. Goyanka Lime Chemicals Ltd. (2015) 64 com 313 (SC). It was highlighted that in S. Goyanka Lime, the approving authority had merely used the expression “Yes, I am satisfied”.
24. As noticed right at the outset, the objections filed by SIPL did not find favour with the AO, which led to the issuance of the impugned order, whereby SIPL’s objections were dismissed.
Submissions of Counsel
25. Given this backdrop, arguments for SIPL were advanced by Mr Ruchesh Sinha, Advocate, while Mr Vipul Agrawal, Senior Standing Counsel, advanced submissions on behalf of the respondents/revenue.
26. Mr Sinha re-emphasized the assertions made in the objections filed on behalf of SIPL, which we have broadly captured hereinabove. Therefore, for the sake of brevity, we do not intend to put them down once again.
27. As far as Mr Agrawal is concerned, according to him, the initiation of the reassessment proceeding against SIPL was in order, and in support of this stand, he made the following submissions:
(i) The arrangement between SIPL and STPL constituted a sham transaction. SIPL had sold the land and remitted almost the entire consideration to its flagship company, i.e., STPL. STPL, because of the loss incurred in the period in issue, showed the nominal amount received from SIPL as profit, which was set off against its losses, resulting in a large part of the revenue being lost.
(ii) The AO had not examined the subject arrangement while framing the original assessment order, from the perspective of it being a sham transaction. This aspect has been brought to the fore in the reasons recorded by the AO, once he received the report of the OCM Cell. In support of this plea, Mr Agrawal placed reliance on the judgment rendered by the Supreme Court in Phool Chand Bajranglal v. ITO (1993) 4 SCC 77.
(iii) Both the Additional Commissioner of Income Tax [in short, “ACIT”] and PCIT had applied their mind before approving the initiation of the reassessment proceeding against SIPL. The fact that PCIT clearly stated that the action was approved was sufficient for the purposes of Section 151 of the Act. [See PCIT v. Meenakshi Overseas Ltd. passed on 11.01.2016 in ITA No.651/2015]
(iv) The submission made on behalf of SIPL that this was a case of change of opinion was untenable for the reason that the AO had neither expressly nor by necessary implication expressed an opinion on the matter, which was the basis for triggering the reassessment proceeding qua SIPL [ITO v. Techspan India Private Ltd. (2018) 6 SCC 685].
Analysis and Reasons
28. We have heard learned counsel for the parties. The essential facts which have been set forth hereinabove are not in dispute. Thus, what requires our consideration is whether this case necessitated the initiation of a reassessment proceeding. To reiterate, what is not in dispute are the following facts:
(i) Both SIPL and STPL are in the real estate business. The subject land was sold during the FY in issue for Rs. 1.51 crores.
(ii) Under the MoU/agreement, which was executed between SIPL and STPL, SIPL retained Rs.1,73,002/-, calculated at the rate of Rs.1,00,000/-per acre, qua the parcel of land which ad-measured 1.7230 acres.
(iii) Accordingly, the profit that SIPL offered for the imposition of the tax was Rs. 1,73,002/-. The remaining profit, i.e., Rs. 46,93,536/- was transferred by SIPL to STPL after adjusting the cost of land, i.e., Rs.1,02,33,462/- against the sale consideration amounting to Rs.1,51,00,000/-. STPL had included the income earned in its profit and loss account, which was set off against losses incurred by it.
29. There is nothing on record to suggest or, at least, no information was furnished to us, about when the reassessment proceeding qua this transaction was triggered against STPL.
30. Undoubtedly, it is this very transaction that triggered reassessment vis-à-vis the petitioner/assessee. This is evident on a perusal of the reasons recorded by the AO on 30.03.2018.
31. The AO, however, among other things, took a view that this was a capital account transaction and, therefore, the provisions of Section 50C of the Act were applicable. Thus, keeping this in the backdrop, the AO concluded that the difference between the consideration received by SIPL against the sale of the subject parcel of land and its value calculated based on the then prevailing circle rate was the income that had escaped assessment.
32. As indicated above, the AO pegged the escaped income at Rs. 57,30,000/-.
33. Although Mr Agrawal vehemently argued that the provisions of Section 50C of the Act were not the foundation of the reasons that were recorded, the plain text reads otherwise.
34. Quite obviously, Mr Agrawal wanted to move away from this aspect of the matter, as Section 50C of the Act has no application in the facts of this case. Section 50C applies only when there is a transfer of a capital asset. However, it is clear that the subject land was a stock-in-trade, since SIPL was involved in the real estate business. This fact emerges from a perusal of the assessment order dated 28.02.2014 as well, wherein the AO has observed the following:
“The assessee company is engaged in the business of real estate and land development.”
34.1. This conclusion is buttressed by the fact that the subject land was treated as stock-in-trade in the hands of SIPL as well as STPL. Thus, the AO, according to us, committed an error in taking recourse to Section 50C of the Act.
34.2. Because the AO took recourse to Section 50C of the Act, he proceeded to arrive at the escaped income by calculating the value of the land based on the then prevailing circle rate, after adjusting it against the sale consideration.
34.3. This, according to us, was a fatal error.
34.4. Apart from the above, what has emerged is that although reassessment had been triggered, concededly, after the end of four (4) years from the date of the end of relevant AY and at the end of the cusp of the sixth (6) year, i.e., on 31.03.2018, the AO did not allege that SIPL had failed to disclose fully and truly all material facts which were necessary for carrying out the assessment. This, according to us, was a grave folly. The reason, perhaps, why the AO did not allude to this aspect was because queries were raised during the original assessment, which included questions concerning the sale of the subject land. More particularly, answers were furnished by SIPL, along with the relevant documents and material sought by the AO. By way of illustration, extracts of the pertinent queries raised and answered are set forth hereafter:
“F. No. ITO Ward 8(2)/Scrutiny/2013-14/
Dated: 23.10.2013
To,
The Principal Officer,
M/s Shourya Infrastructure (P) Ltd.
78-B, Sector D-2
DDA Flats, Kondli Gharoli Mayur Vihar Phase-3
Delhi-110096
Sir,
Subject: Assessment proceedings in your case – Questionnaire Information called for u/s 142(1) for AY 2011-12- reg-
******************
In connection with the ongoing assessment proceedings for the AY 201112 in your case. you are requested to furnish the following information/documents:-
1. Note of nature of business, main objects and date of incorporation. File relevant resolution in case the main objects as indicated above has changed.
2. Copy of Memorandum & Article of Association.
xxx xxx xxx
7. Party wise details sale of land with name, address, PAN, amount received and property which was sold.
xxx xxx xxx
Yours faithfully –
s/d-
Income Tax Officer
Ward 8(2), New Delhi.”
“Date: 18.11.2013
To
The Assessing Officer
Ward 8(2)
Room No.197A
CR Building
New Delhi-110001
Dear Sir,
RE : SHOURYA INFRASTRUCTURE PRIVATE LIMITED, PAN: AAJCS9570M
SUB : YOUR NOTICE U/S 142(1) OF THE INCOME TAX ACT, 1961 DATED 23.10.2013 FOR THE AY 2011-12.
In the matter of the assessment proceedings of the above-named assessee, we are submitting replies to the remaining queries from the questionnaire dated 23.10.2013 as follows:
1. The assessee sold some of its project and as follows:
