Global Arkitekts P. Ltd. Vs ITO (ITAT Chennai)
ITAT Chennai held that AO having chosen not to scrutinize the return cannot resort to the provisions of section 147 of the Income Tax Act in absence of any new or fresh material indicating escapement of income.
Facts- The assessee mainly contended that the notice issued u/s. 148 is without any basis and without any reasonable belief. The reopening has been resorted to based on information already available in the return of income and therefore, reopening beyond 4 years is not permissible in terms of various judicial pronouncements.
Conclusion- The Hon’ble Court held that AO has power to reopen provided there is “tangible material” to come to the conclusion that there is escapement of income. There can be no review of an assessment in the guise of reopening and that a bare review without any tangible material would amount to abuse of the power.
In this case, the Ld. AO reached the belief of escapement of income on going through the return of income filed by the assessee after the return was accepted u/s 143(1). The Hon’ble Court held that it was nothing but a review of the earlier proceedings and an abuse of power by AO. The less strict interpretation of the words “reason to believe” vis-à-vis an intimation issued u/s 143(1) cannot be permitted. There is no whisper in the reasons recorded, of any tangible material which came to the possession of the AO subsequent to the issue of the intimation which reflects an arbitrary exercise of the power conferred under section 147.
Held that if AO, after issuing intimation u/s 143(1), does not issue a notice u/s. 143(2) of the Act to initiate proceedings for scrutiny of the return of income then the obvious conclusion is that he does not consider it necessary or expedient to do so, the inference being that the Return of Income filed is in order. It is this opinion that cannot be arbitrarily changed by the assessing officer, to re-assess income on the basis of stale material, already on record. If we thus keep in the mind the above fundamental requirement of section 147, it would be apparent that the exercise undertaken by the Revenue in this case is not one of re-assessment, but of review. Having missed the bus earlier, the Department cannot be permitted to avail the extended time limit in the absence of any new or tangible material, when the time for scrutiny assessment has already elapsed prior to issue of notice u/s. 148. The notice u/s 148 would be an arbitrary exercise of power and a review of proceedings which is impermissible in law. Having chosen not to scrutinize the return earlier, ld. AO cannot resort to the provisions of Sec.147 in the absence of any new or fresh material indicating escapement of income.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
1. Aforesaid appeal by assessee for Assessment Year (AY) 2009-10 arises out of the order of learned Commissioner of Income Tax (Appeals)-6, Chennai [CIT(A)] dated 18-03-2020 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s.143(3) r.w.s. 147 of the Act on 31-12-2016. The grounds taken by the assessee read as under:
1. The order of the Commissioner of Income Tax (Appeals) – 6, Chennai dated 18.03.2020 in I.T.A.No.457/CIT(A)-6/2016-17 for the above-mentioned Assessment Year is contrary to law, facts, and in the circumstances of the case.
2. The CIT (Appeals) erred in confirming the re-assessment completed u/s 143(3) read with section 147 of the Act without assigning proper reasons and justification and ought to have appreciated that the order of reassessment under consideration was passed out of time, invalid, passed without jurisdiction and not sustainable both on facts and in law.
3. The CIT (Appeals) failed to appreciate that the presumption of escapement of income was wholly unjustified and further ought to have appreciated that having not followed the procedure prescribed for conducting the re-assessment, the consequential re-assessment completed by the Assessing Officer should be reckoned as bad in law.
4. The CIT (Appeals) failed to appreciate that the re-opening initiated beyond four years in the absence of fresh/tangible materials would negate the assumption of jurisdiction u/s 147 of the Act thereby vitiating the consequential completion of reassessment on various facets.
5. The CIT (Appeals) failed to appreciate that there was no failure on the part of the appellant to disclose fully and truly material facts and ought to have appreciate that reappraisal of existing details provided by the Appellant right from the assessment year 2007-08 defying the law declared by the Supreme Court reported in 320 ITR 561 would vitiate the entire re-assessment proceedings under consideration.
6. The CIT (Appeals) erred in sustaining the treatment of the surplus from sale of exempted category of agricultural lands to the tune of Rs.17,86,27,910/- as income under the business while computing taxable total income without assigning reasons and justification.
7. The CIT (Appeals) failed to appreciate that the intention of the Appellant to hold the asset as a fixed asset would not change solely based on the short period of holding which is determined/influenced by various external factors thereby vitiating the conclusions drawn in the impugned order.
8. The CIT (Appeals) failed to appreciate that the decision of the Appellant at the time of purchase and the decision taken by the Appellant immediately after the date of purchase for selling the impugned asset was wrongly questioned and doubted and further ought to have appreciated that the Revenue should not sit in the arm chair of the Appellant to come to the conclusion for taxing the surplus as business profits while further ought to have appreciated that the conduct of the Appellant including the maintaining of the character of the asset as exempted category of agricultural land from the date of purchase till the date of sale in the previous relating to the assessment year under consideration by virtue of the sale deed executed was wrongly misunderstood thereby vitiating all the related findings.
9. The CIT (Appeals) failed to appreciate that having not shown/proved the conduct of the real estate business by the Appellant in any of the assessment years, the incorporated objects should not be considered as decisive to ascertain the intention of the Appellant with regard to the purchase and sale of the agricultural land while further ought to have appreciated that the holding of exempted category of agricultural lands including the impugned lands as fixed assets being not disputed, the sustenance of the treatment of the surplus of the sale of exempted category of agricultural lands as business profit was wrong, erroneous, incorrect and wholly unjustified.
10. The CIT (Appeals) failed to appreciate that having impliedly accepted the transfer of exempted category of agricultural lands in the assessment year 2007-08, the sustenance of the decision of the Assessing Officer should be only viewed to overcome the said admitted position by changing the head of income thereby vitiating all the related findings in the impugned order.
11. The CIT (Appeals) failed to appreciate that in any event having not disputed the grant of possession as on 24.01.2007 coupled with the extinguishment of rights by the Appellant, the business income derived from sale of the impugned asset shall not be chargeable to tax during the assessment year under consideration.
12. The CIT (Appeals) failed to appreciate that the entire computation of taxable total income on various facets was wrong, erroneous and unsustainable both on facts and law.
13. The CIT (Appeals) failed to appreciate that there was no proper opportunity given before passing of the impugned order and any order passed in violation of the principles natural justice would be nullity in law.
As is evident, the assessee challenges the validity of reassessment proceedings on legal grounds. The assessee also challenges the quantum additions on merits. The subject matter of appeal is computation of capital gains on certain parcel of land sold by the assessee.
2. The Ld. AR advanced arguments assailing the validity of reassessment proceedings on the ground that no fresh tangible was available before Ld. AO to reopen the case of the assessee. To support the same, Ld. AR drew attention to various documents on records. The Ld. AR also assailed quantum additions on merits.
The Ld. Sr. DR, on the other hand, submitted that there was sufficient formation of belief by Ld. AO that there was escapement of income. Both sides filed written submissions which have duly been considered while adjudicating the issues.
The assessee, in its written submissions has submitted that the land under consideration was sold under sale agreement to M/s Shoreline Developers Ltd. (SDL). The payment was received spanning over AYs 2007-08 to 2009-10 and the physical possession of the land was handed over to M/s SDL on 24.01.2007. The land was shown as an investment in the Books of Accounts. It has further been submitted that the land, as per revenue records, was an agricultural land and the same was situated beyond 8 Kms from nearest municipal limits. The assessee recorded the sale of land in the books in AY 2009-10 when entire payment was received from the vendor. Assailing the reasons recorded to reopen the case, it has been submitted that the land was neither purchased nor sold in this year. The reasons do not indicate any escapement of income. There was no tangible material with Ld. AO suggesting any escapement of income during the year under consideration. The notice issued u/s 148 is without any basis and without any reasonable belief. The reopening has been resorted to based on information already available in the return of income and therefore, reopening beyond 4 years is not permissible in terms of various judicial pronouncements.
The ld. SR. DR, in his written submissions, has submitted that AO had tangible and specific information from records / other wings of the department resulting into formation of reasons about income escaping assessment. On merits, Ld. Sr. DR submitted that the assessee did not carry out any agricultural operations and no income was admitted on this account. The buyer made full payment and took possession of the land in this year and the assessee also declared the profits in this year by crediting the surplus to ‘Reserves and Surplus Account’. The sale deed executed on 15.05.2009 would not be of much relevance. The assessee as well as the buyer was not engaged in agricultural activity. The intention to carry out this transaction was not for agricultural even though as per revenue records it was mentioned as agricultural land. Reliance has been placed on the decision of Hyderabad Tribunal in D.S. Karunakar Reddy (ITA No.752-757/hyd/2011 dated 30.11.2011 wherein it was held that entry in revenue records is not conclusive proof that the land is agricultural land in the absence of evidence that the land is put to use for agricultural purposes. Reliance has also been placed on the decision of Chennai Tribunal in Shri A. V. Anoop vs. ACIT (ITA No.461/Mds/2013) as well as the decision in ITO V/s Aboobukcer (67 Taxmann.com 114). The Ld. Sr. DR also controverted the fact that the possession was handed over on 24.01.2007 since the document was not registered one and the same was not endorsed by any witnesses.
Having heard rival submissions and considering the case laws cited before us, our adjudication would be as under. The assessee being resident corporate assessee is stated to be engaged in real estate business.
Assessment Proceedings
3.1 The original return of income as field by the assessee was processed u/s 143(1). However, subsequently while going through the return of income, Ld. AO noted that the assessee company credited an amount of Rs.1786.27 Lacs to ‘Reserves and Surplus account’. On scrutiny of records, it came to light that the assessee had purchased land measuring 8.55 Acres for an amount of Rs.7 Crores on 19.10.2006. The assessee entered into a sale agreement with M/s Shoreline Development Ltd. (SDL) for sale of the land for Rs.26.68 Crores. Accordingly, forming a belief that the income escaped assessment, Ld. AO proceeded to reopen the case for this year and issued notice u/s 148 which was served on 31.03.2016. Thus, the reopening was done beyond 4 years from the end of relevant assessment year.
3.2 The assessee offered original return and demanded reasons for reopening. The same were supplied to the assessee. The statutory notices were issued in due course of time requiring the assessee to filed requisite documents.
3.3 A notice u/s 133(6) was issued to Sub Registrar, Thirupporur calling for copy of purchase deed and encumbrance certification and reply was received which was taken on record.
3.4 The assessee submitted that agricultural land was purchased purely for agricultural purposes and was shown as ‘Fixed Asset’ in the Balance Sheet. The Company entered into sale agreement dated 08.11.2006 with M/s SDL. This transaction was stated to be completed by the year 2009. The assessee submitted that the intention was to keep the land as investment and the land was always held as ‘fixed asset’ and not as stock-in-trade which was amply evident from the financial statements. It was further submitted that the sale transaction constituted only sale of agricultural land and the same could not be considered as Business Transaction. In support, various arguments were put forth.
3.5 The assessee further submitted that the land is not a capital asset as defined u/s 2(14) since is situated in Muttukadu Village, Chengalpet Taluk, Kancheepuram District which is rural area and do not fall within the prescribed 8 Kms. Jurisdiction of a nearest Municipality or Cantonment Board or a Municipal Corporation or a notified area committee or town committee. The land is also not situated within the jurisdiction of Municipality or a Cantonment Board which has a population not less than ten thousand according to the latest preceding census. The land is about 12-15 Kms away from Uthandi Village and hence do not fall with the jurisdiction of nearest municipality of corporation limits.
3.6 The assessee further submitted that the possession of the land was given as early as on 24.01.2007 and the same was never treated as stock-in-trade. The assessee did not carry out any commercial activity with respect to the land such as getting approval for converting stated land into sites, plotting of the same into sites etc.
3.7 However, Ld. AO held that the assessee was engaged in the business of real estate and any asset so purchased would be for the purpose of business only. The income arising therefrom would constitute Business Income only. The amount received by the assessee, against sale of land, could be tabulated as under: –
