2023 (12) TMI 284 - HC - Income Tax

Reopening of assessment u/s 147 - Change of opinion - Machinal approval by CIT / PCIT - capital account transaction - 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 - reopening 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 - Whether AO committed an error in taking recourse to Section 50C of the Act - HELD 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.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.This, according to us, was a fatal error. 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, thusit cannot be said that the subject transaction was not scrutinized by the AO. It is well-known that the AOs often issue questionnaires, seek answers to their queries and if satisfied, may decide to accept the explanation and consequently, the return. Therefore, in our view, it is correctly argued on behalf of SIPL by Mr Sinha that this was a case of change in opinion. Whether the PCIT applied his mind while granting approval? - The form for obtaining approval is what appears to have been placed before the ACIT and PCIT. The mandatory entries were not made. Therefore, the weight of the evidence seems to suggest that the ACIT cleared the path without delving into the aspect that this was, indeed, a case of under-assessment and, likewise, the PCIT rubberstamped the request made by the AO for initiating the reassessment proceeding qua SIPL without applying his mind to the requisite aspects. According to us, the reopening of the concluded scrutiny assessment is a serious business. The Act provides for a layered approach precisely for this reason. Senior officers like ACIT and PCIT are expected to apply their minds to such requests and, only after that, approve the initiation of reassessment proceedings. Several pitfalls that the Court's notice can be avoided if the concerned authorities were to look closely at the request made for re-opening. Clearly, in SIPL s case, these aspects were not examined by the concerned AO or by the ACIT/PCIT. Whether the impugned transaction was a sham and, therefore, reassessment was rightly triggered ? - A sham transaction is something that is not what it seems , i.e., a counterfeit document. See Black s Law Dictionary 8th Edition, page 1407 It is 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 is that the sale of the subject land was a capital account transaction and, therefore, Section 50C of the Act was applicable. Thus, reliance on the observations made in the Phool Chand Bajranglal case 1993 (7) TMI 1 - SUPREME COURT has no applicability. The facts therein are entirely distinguishable. That was a case wherein the appellant/assessee had claimed that he had borrowed a certain sum from an entity. Accordingly, the money borrowed was shown as a liability in the balance sheet. The appellant/assessee also claimed that the money had been borrowed and returned in cash, although interest was paid via cheque/bank draft. Based on this broad assertion, the AO allowed a deduction of the interest claimed by the appellant/assessee to the lender company. However, the AO had doubts about the genuineness of the loan transaction, and therefore, he wrote to the AO of the lender company. AO of the lender company informed his counterpart that the director of the lender company had confessed that it was a dummy entity and had not advanced any loan to any person. This letter conveyed that the so-called lender company lends money to different companies to launder their unaccounted money. It is against this backdrop that the court sustained the action taken to reopen the reassessment proceedings. Given this backdrop, 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 the appellant/assessee when the original assessment order was framed. Thus, we are of the opinion that for the reasons given above, this is not a case in which the reassessment proceedings ought to have been triggered against SIPL. Assessee appeal allowed.

Summary

Issues Involved:

1. Whether the Assessing Officer (AO) correctly initiated reassessment proceedings under Section 147 of the Income Tax Act, 1961.
2. Applicability of Section 50C of the Income Tax Act.
3. Whether the reassessment was a case of change of opinion.
4. Validity of the approval granted by the Principal Commissioner of Income Tax (PCIT) under Section 151 of the Act.

Summary:

1. Whether the AO correctly initiated reassessment proceedings under Section 147 of the Income Tax Act, 1961:

The court examined whether the AO had valid reasons to believe that income chargeable to tax had escaped assessment. The AO issued a notice under Section 148 based on information from the Income Tax Officer (Investigation) indicating that the petitioner had sold immovable properties below the market value. The AO's reasons included the application of Section 50C, the nature of the transaction as a capital account, the treatment of funds from Shourya Towers Pvt. Ltd. (STPL) as loans, and doubts about the Memorandum of Understanding (MoU) between the petitioner and STPL. However, the court found that the AO did not allege that the petitioner failed to disclose fully and truly all material facts necessary for assessment, which is a grave folly when reopening is triggered after four years from the end of the relevant assessment year.

2. Applicability of Section 50C of the Income Tax Act:

The AO applied Section 50C, which pertains to the transfer of capital assets, to determine the value of the land based on the circle rate. The court found this application erroneous as the subject land was stock-in-trade, not a capital asset. The AO's reliance on Section 50C was a fatal error since the petitioner was in the real estate business, and the land was treated as stock-in-trade.

3. Whether the reassessment was a case of change of opinion:

The court agreed with the petitioner that this was a case of change of opinion. The original assessment order under Section 143(3) had scrutinized the transaction, and the AO had accepted the returned income after detailed inquiries. The court cited precedents establishing that an assessee has no control over how the assessment order is framed, and the absence of detailed reasoning in the assessment order does not imply non-examination of the transaction.

4. Validity of the approval granted by the PCIT under Section 151 of the Act:

The court scrutinized the form used for recording reasons for initiating reassessment and obtaining PCIT's approval. It found that mandatory entries were not filled, and the PCIT merely endorsed "approved" without due application of mind. This lack of detailed examination by the ACIT and PCIT indicated a failure to apply their minds to the requisite aspects, making the approval process flawed.

Conclusion:

The court concluded that the reassessment proceedings were not justified. The impugned order dated 13.11.2018 was quashed, and the court emphasized the importance of a thorough and mindful approach in reopening concluded scrutiny assessments.