2004 (7) TMI 649 - AT - Income Tax

Character of the sale agreement and taxability of capital gains - erroneous nor prejudicial to the interest - difference of opinion between the learned Accountant Member and the learned Judicial Member - Third member order - Whether or not, the impugned order u/s 263 made by the learned CIT is justified and sustainable ? - HELD THAT - In the present case what I find is that the CIT has mentioned that the fair market value disclosed by the assessee at ₹ 1 crore as on 1-4-1981 as per the valuation report furnished by the assessee was on the higher side. The CIT or the Assessing Officer assumes power under the sub-clause (a) of section 55A only when in his opinion the fair market value disclosed by the assessee is less. Therefore neither the Assessing Officer nor the CIT can assume power to give such a direction where the value of the property disclosed by the assessee based on the approved valuer';s report is on a higher side i.e. ₹ 1 crore in this case. As such, invoking jurisdiction u/s 263 on the above basis is illegal. In this case I find that the Commissioner invoked jurisdiction u/s 263 by mentioning that the assessment order under revision is grossly erroneous and prejudicial to the interest of the revenue because the correctness of the valuation report filed by the assessee has not been examined by the Assessing Officer and hence there is no application of mind by the Assessing Officer and his order is not a fully discussed order. In this connection, I would like to mention here that the Assessing Officer started the assessment proceedings w.e.f. 17-6-1997 and completed the same on 10-12-1998 after about one and a half year. Several dates were given and several queries were raised by the Assessing Officer through the Chartered Accountant of the assessee. It is clear that the Chartered Accountant filed the details called for by the Assessing Officer. The Assessing Officer had called for comparable sale instances in the vicinity of the property situated at Bangalore. It is an admitted position that the assessee could not produce comparable sale instances. Therefore, from the beginning to the end thorough inquiries were made by the Assessing Officer before accepting the capital gain returned by the assessee. Thus, I find that there is no material on record to show that the assessee has received anything more than ₹ 5.5 crores. Therefore, the assessment order cannot be held to be erroneous. There is also another aspect of the matter. The Income-tax department in the case of the assessee when reopened the assessment under section 143(3) r.w.s. 147 by order dated 24-2-2004 has mentioned that Shri Shahrooq Alikhan in the return filed before the ITO Bangalore has shown capital gain from sale of his property taking cost at ₹ 5.5 crores and sale consideration of ₹ 11.87 crores. Therefore it is clear that the rest of the amount has also been offered for taxation by Shri Shahrooq Alikhan. Thus, the assessment order cannot be held to be prejudicial to the interest of the Revenue. I am of the opinion that the order of the Assessing Officer is neither erroneous nor prejudicial to the interest of the revenue. Therefore, the CIT is not justified in assuming jurisdiction u/s 263 of the Income-tax Act. His order is not sustainable in the eye of law. I therefore, agree with the view taken by the learned Judicial Member where he has cancelled the order passed u/s 263. In the result, and in accordance with the majority view, the appeal is allowed.

Summary

Issues Involved:
1. Justification and sustainability of the order u/s 263.
2. Correct taxability of capital gain and the appropriate assessment year.
3. Validity of the valuation report and fair market value determination.

Summary:

1. Justification and Sustainability of the Order u/s 263:
The primary issue was whether the CIT's order u/s 263 was justified and sustainable. The CIT invoked jurisdiction u/s 263, arguing that the Assessing Officer (AO) did not properly examine the correctness of the assessee's claim of long-term capital gain. The CIT's concerns included the substantial payment to the second party, the failure to file Form No. 37-I for the MOU, and the valuation of the property as on 1-4-1981. The CIT concluded that the AO's order was erroneous and prejudicial to the interest of the revenue, thus justifying the revision.

2. Correct Taxability of Capital Gain and the Appropriate Assessment Year:
The CIT argued that the correct assessment year for the capital gain should be 2000-01, not 1996-97, because the agreement for sale was registered in April 1999. The Accountant Member agreed, stating that the MOU did not constitute a transfer as it was not registered. However, the Judicial Member disagreed, stating that the assessee received Rs. 5.5 crores under the MOU and declared the capital gain in the assessment year 1996-97. The Judicial Member emphasized that the assessee should be taxed on the actual income received, not on potential or speculative amounts.

3. Validity of the Valuation Report and Fair Market Value Determination:
The CIT questioned the fair market value of Rs. 1 crore as on 1-4-1981, arguing that it was excessive and not properly verified by the AO. The Judicial Member countered that the AO had conducted a thorough inquiry over one and a half years and accepted the valuation report after due consideration. The Judicial Member highlighted that the AO's acceptance of the valuation report could not be deemed erroneous simply because the CIT had a different opinion.

Conclusion:
The Third Member concurred with the Judicial Member, holding that the CIT was not justified in assuming jurisdiction u/s 263. The AO had conducted sufficient inquiries, and there was no evidence that the assessee received more than Rs. 5.5 crores. The order of the AO was neither erroneous nor prejudicial to the interest of the revenue. Consequently, the Tribunal, following the majority view, cancelled the CIT's order u/s 263 and allowed the appeal in favor of the assessee.