2014 (4) TMI 280 - HC - Income Tax

Validity of Reopening of assessment - Treatment of amount Capital gain OR Business income Assessee converted the landed property into stock in trade Claim of deduction u/s 54G of the Act Held that - AO gave no reasons for not treating the income as a business income instead of capital gain but gave detailed reasons why assessee s further claim for deduction under section 54G of the Act should be rejected - the AO had a full innings of complete scrutiny of the question and the manner in which the income should be taxed - In the original assessment having examined the issue fully, any attempt on the part of the AO to reopen the assessment would be nothing but a change of opinion. The Revenue contended that the AO did not scrutinize the issue - This was the main if not the sole issue before the Assessing Officer alongside the question of deduction u/s 54G of the Act - The question of granting or rejecting such deduction would arise only once the petitioner s claim that such income should be treated as capital gain was accepted thus, would be wholly irrelevant, when the AO had raised specific queries in writing, elicited the assessee s response and thereafter, however, silently, accepted the assessee s stand - Within four years also reopening would not be allowed - the decision in CIT vs. Kelvinator of India Ltd. 2002 (4) TMI 37 - DELHI High Court followed Reassessment proceedings will be invalid in case the assessment order itself records that the issue was raised and is decided in favour of the assessee - Reassessment proceedings in the said cases will be hit by the principle of change of opinion . In a situation where the AO during scrutiny assessment, notices a claim of exemption, deduction or such like made by the assessee, having some prima facie doubt raises queries, asking the assessee to satisfy him with respect to such a claim and thereafter, does not make any addition in the final order of assessment, he can be stated to have formed an opinion whether or not in the final order he gives his reasons for not making the addition Decided in favour of Assessee.

Summary

Issues Involved:
1. Validity of the notice for reopening the assessment under Section 147 of the Income Tax Act, 1961.
2. Whether the income from the sale of land should be treated as capital gain or business income.
3. Whether the reopening of the assessment is based on a change of opinion.
4. Compliance with Section 45(2) of the Income Tax Act, 1961.
5. Entitlement to deductions under Sections 54EC and 54G of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Validity of the Notice for Reopening the Assessment:
The petitioner challenged the notice dated 25.3.2013 issued by the Assessing Officer for reopening the assessment for the Assessment Year 2008-09. The original assessment was framed under Section 143(3) of the Income Tax Act, 1961. The notice was issued within four years from the end of the relevant assessment year. The reasons recorded for reopening were based on the conversion of factory land into stock-in-trade and the subsequent sale of plots, which the Assessing Officer believed should be treated as business income rather than capital gain.

2. Treatment of Income from Sale of Land:
The petitioner argued that the land was held as a capital asset and later converted into stock-in-trade on 10.4.2006. The profit on the difference between the fair market value on the date of conversion and the cost of acquisition was treated as capital gain under Section 45(2) of the Act. The Assessing Officer, during the original assessment, had considered this and treated the surplus as capital gain. The petitioner contended that any attempt to treat this income as business income was incorrect and unsupported by Section 45(2) of the Act.

3. Reopening Based on Change of Opinion:
The petitioner contended that the reopening of the assessment was based on a change of opinion, which is not permissible. The original assessment had thoroughly scrutinized the issue of whether the income should be treated as capital gain or business income. The Assessing Officer had raised specific queries, and the petitioner had provided detailed responses. The Assessing Officer had accepted the petitioner's claim of treating the income as capital gain and had only disallowed the deduction under Section 54G. The court agreed with the petitioner, stating that the reopening was indeed based on a change of opinion, which is not allowed.

4. Compliance with Section 45(2):
The petitioner argued that under Section 45(2) of the Act, the income up to the point of conversion should be treated as long-term capital gain. This section provides that the capital gain arising from the conversion of a capital asset into stock-in-trade is chargeable in the year the stock-in-trade is sold. The court noted that the Assessing Officer had considered this during the original assessment and had accepted the petitioner's claim of capital gain. Therefore, the reopening on this ground was not justified.

5. Deductions under Sections 54EC and 54G:
The petitioner had claimed deductions under Sections 54EC and 54G of the Act. The original assessment had disallowed the deduction under Section 54G on the grounds that the land was not used for the purpose of an industrial undertaking and that the petitioner had not acquired new machinery, plant, etc., within the specified period. The court noted that the issue of treating the income as capital gain was thoroughly examined during the original assessment, and the reopening on this ground was not permissible.

Conclusion:
The court quashed the impugned notice dated 25.3.2013, allowing the petition on the grounds that the reopening of the assessment was based on a change of opinion, which is not permissible. The court also noted that the Assessing Officer had thoroughly scrutinized the issue during the original assessment and had accepted the petitioner's claim of treating the income as capital gain. The petition was allowed, and the notice for reopening the assessment was quashed.