2014 (10) TMI 8 - HC - Income Tax

Reopening of assessment u/s 148 Held that - Two distinct conditions must be satisfied before the AO can assume jurisdiction to issue a notice u/s 148 of the Act, that he must have reasons to believe that the income of the assessee had escaped assessment and, that he must have reasons to believe that such escapement was by reasons of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment - If either of these conditions are not fulfilled, the notice issued by the Assessing Officer would be without jurisdiction - the AO in his reasons should also state that the escaped income is likely to be ₹ 1 lac or more, which is an essential ingredient for seeking the approval and satisfaction that is to be recorded by the Competent Authority u/s 151 of the Act. The difference between short term capital asset and long term capital asset is the period over which the property has been held by the assessee - It has nothing to do with the nature of the title over the property assessee already had rights as owner of the property subject to the covenant of the lease for all purposes such as transfer of the lease hold rights of the property with the previous consent of the lessor - The conversion of the rights of the lessee in the property from lease hold to free hold was only an improvement of the rights over the property, which the petitioner enjoyed and this would not have any effect on the taxibility of capital gains from such property - the property was held for more than three years, short term capital gains would not be applicable - The conversion from lease hold to a free hold being an improvement of the title, does not have any effect on the taxibility of profits as short term capital gains - the notices issued u/s 148 of the Act does not comply with the proviso to Section 147 and 149 of the Act - The reasons recorded does not indicate that the assessee has failed to disclose fully and truly all material facts necessary for his assessment and that the escaped income was likely to be ₹ 1 lac or more the notice issued u/s 148 cannot be sustained and is to be set aside Decided in favour of assessee.

Issues Involved:
1. Validity and legality of the notice issued under Section 148 of the Income Tax Act.
2. Jurisdiction of the Assessing Officer in issuing the notice.
3. Compliance with Section 149(1)(b) of the Income Tax Act.
4. Applicability of short-term capital gains tax.
5. Distinguishability of the Karnataka High Court judgment in CIT Vs. Dr. V.V. Mody.

Issue-wise Detailed Analysis:

1. Validity and Legality of the Notice Issued Under Section 148 of the Income Tax Act:
The petitioner challenged the notice dated 26th March 2007 issued under Section 148 of the Income Tax Act. The court examined whether the notice complied with the necessary legal provisions, particularly focusing on the reasons recorded by the Assessing Officer. The court found that the reasons did not indicate that the escaped income was likely to be Rs. 1 lakh or more, which is a mandatory requirement under Section 149(1)(b). Consequently, the court held that the notice could not be sustained and quashed it along with all subsequent proceedings.

2. Jurisdiction of the Assessing Officer in Issuing the Notice:
The court scrutinized the jurisdiction of the Assessing Officer to issue the notice under Section 148. It was emphasized that two distinct conditions must be satisfied: the officer must have reasons to believe that the income had escaped assessment, and such escapement was due to the assessee's failure to disclose fully and truly all material facts. The court concluded that these conditions were not fulfilled, rendering the notice without jurisdiction.

3. Compliance with Section 149(1)(b) of the Income Tax Act:
Section 149(1)(b) stipulates that a notice issued after four years but before six years from the end of the relevant assessment year must state that the escaped income is likely to be Rs. 1 lakh or more. The court noted that the reasons recorded by the Assessing Officer did not include this essential detail. Citing precedents such as Mahesh Kumar Gupta Vs. Commissioner of Income Tax and Jai Kishan Srivastava Vs. Income-Tax Officer, the court held that the failure to record this reason was fatal to the issuance of the notice, making the reassessment proceedings barred by time.

4. Applicability of Short-Term Capital Gains Tax:
The Assessing Officer's reasons suggested that the petitioner was liable to pay short-term capital gains tax as the property was sold within three years of converting leasehold land into freehold. The court examined the definitions of "short-term capital asset" and "long-term capital asset" under Sections 2(42A) and 2(29B) respectively. It concluded that the conversion from leasehold to freehold was merely an improvement of the title and did not affect the taxability of capital gains. Since the property was held for more than three years, short-term capital gains tax was not applicable.

5. Distinguishability of the Karnataka High Court Judgment in CIT Vs. Dr. V.V. Mody:
The court distinguished the case of CIT Vs. Dr. V.V. Mody, where the assessee had sold property within three years of becoming the owner through a sale agreement. In contrast, the petitioner had been in possession of the property since 1958 and only improved his title by converting leasehold rights into freehold rights. The court found that the Karnataka High Court's decision was not applicable to the petitioner's case. Similarly, reliance on the Bombay High Court's decision in Commissioner of Income Tax Vs. Dr. D.A. Irani was also deemed misplaced.

Conclusion:
The court concluded that the notice issued under Section 148 did not comply with the provisions of Sections 147 and 149 of the Income Tax Act. The reasons recorded did not indicate that the assessee failed to disclose all material facts or that the escaped income was likely to be Rs. 1 lakh or more. Consequently, the notice and all subsequent proceedings were quashed, and the writ petition was allowed. Both parties were ordered to bear their own costs.

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