2013 (6) TMI 461 - AT - Income Tax

Jurisdiction power u/s 263 by CIT(A) - doctrine of merger - specific direction to AO to consider the entire sale consideration for determining the long term capital gain in the assessment year under dispute - Held that - As decided in CIT V/s. Shri Arbuda Mills Ltd. 1996 (1) TMI 11 - SUPREME Court the power u/s 263 shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in an appeal. Following the aforesaid decision supra the Hon ble AP High Court in case of CIT V/s. New Srinivasa Construction Co. 1998 (8) TMI 71 - ANDHRA PRADESH High Court has laid down the principle that only the untouched parts of the assessment order, which did not fall for consideration before the CIT(A) are still open to the CIT to revise u/s 263. Thus, considered in the light of the ratio laid down as aforesaid, the assessment order so far as relating to the capital gain arising out of the sale consideration having merged with the order passed by the first appellate authority is no longer available to be subjected to the proceeding u/s 263. In the aforesaid view of the matter, the order passed u/s 263 is legally unsustainable and therefore liable to be set aside. So far as the merits of the issue is concerned, it is very much clear from the facts on record that the assessee has only transferred 50% of the land to the developer under the development agreement in-lieu of 50% of the constructed area to be received by her. Therefore, the assessee retained 50% share in the land. At the time of sale of flats the assessee not only transferred the constructed are but along with it her undivided share in the land. Therefore, the CIT was completely wrong in considering the entire amount of Rs. 1,79,00,000/- as sale consideration of flats only without reducing the cost of land there from while computing the short term capital gain . Thus order passed u/s 263 cannot be sustained.In favour of assessee.

Summary

Issues Involved:
1. Validity of the order passed under Section 263 of the Income Tax Act.
2. Correctness of the computation of capital gains (both long-term and short-term).
3. Applicability of the doctrine of merger.
4. Jurisdiction of CIT to revise the assessment order.

Detailed Analysis:

1. Validity of the Order Passed under Section 263 of the Income Tax Act:
The CIT invoked Section 263, claiming the assessment order was erroneous and prejudicial to the interests of the revenue. The CIT argued that the AO failed to correctly compute the capital gains, particularly by not recognizing the short-term capital gains involved in the sale of flats. The CIT relied on the judicially approved method of two-stage computation of capital gains, as seen in the case of Smt. Vasavi Pratap Chand Vs Dy. Commissioner of Income Tax 89 ITD 73 (2004). However, the Tribunal noted that the AO had applied his mind to the facts and materials on record and had taken a view, which may not be acceptable to the CIT but was a possible view. Therefore, the assessment order could not be considered erroneous and prejudicial to the interests of the revenue solely based on the CIT's disagreement.

2. Correctness of the Computation of Capital Gains:
The CIT contended that the AO's method of computation was erroneous as it did not follow the two-stage determination of capital gains. The CIT recalculated the long-term and short-term capital gains, arriving at Rs. 64,55,105/- and Rs. 90,12,450/-, respectively. The Tribunal, however, found that the AO had considered the issue in detail and had adopted one of the permissible methods. The Tribunal also noted that the CIT(A) had already directed the AO to consider the entire sale consideration of Rs. 1,79,00,000/- for determining the long-term capital gain, indicating that the issue had been properly examined.

3. Applicability of the Doctrine of Merger:
The assessee argued that the assessment order had merged with the CIT(A)'s order and thus could not be revised under Section 263. The Tribunal agreed, noting that the CIT(A) had specifically directed the AO to consider the entire sale consideration for determining the long-term capital gain. The Tribunal cited the Hon'ble Supreme Court's decision in CIT V/s. Shri Arbuda Mills Ltd., which held that the power under Section 263 does not extend to matters already considered and decided in an appeal. Therefore, the assessment order relating to the capital gain had merged with the CIT(A)'s order and was not open to revision under Section 263.

4. Jurisdiction of CIT to Revise the Assessment Order:
The Tribunal concluded that the CIT's assumption of jurisdiction under Section 263 was invalid. The AO had applied his mind and adopted a permissible view, and the issue of capital gain had already been adjudicated by the CIT(A). The Tribunal emphasized that merely because the CIT disagreed with the AO's view did not make the assessment order erroneous and prejudicial to the interests of the revenue. The Tribunal also highlighted that the CIT's computation of capital gains was incorrect as it did not account for the cost of land included in the sale consideration of flats.

Conclusion:
The Tribunal set aside the order passed under Section 263, allowing the assessee's appeal. The Tribunal held that the assessment order was not erroneous and prejudicial to the interests of the revenue, the issue of capital gain had merged with the CIT(A)'s order, and the CIT's assumption of jurisdiction under Section 263 was invalid. The Tribunal also found merit in the assessee's computation of capital gains, which included the cost of land in the sale consideration of flats.