2014 (10) TMI 35 - AT - Income Tax

Reopening of assessment u/s 147 r.w. Section 148 Held that - Sec. 147 authorises the AO not only to re-assess but to assess any income chargeable to tax which has escaped assessment for any assessment year - The word chargeable to tax has escaped assessment is defined under explanation 2 under sub-clause (b). Sub-clause (b) clearly states that where return has been filed but no assessment has been made and the AO notices that the Assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return, it shall be deemed to be a case where income chargeable to tax has escaped assessment - the term income chargeable to tax has escaped assessment was defined u/s 147 prior to 1.4.1989 under explanation 1 to Sec. 147 but that definition was entirely different. No such clause as clause (b) under explanation 2 was there in the deeming provision given under explanation 1 in respect of income escaping assessment under the old section 147. We do not agree that Sec. 147 proceedings could cover only the reassessment. The material which is available with the AO even along with the return at the time of the processing of the return can be the basis for reason to believe as in view of clause (b) of explanation 2 it can be deemed that income chargeable to tax has escaped assessment. Clause (b) of explanation 2 does not require that the assessment must precede before taking any action u/s 147 - Sec. 147 cannot be read in a manner that it can be applied only in a case where the assessment has already been made following the decision in Assistant Commissioner of Income-Tax Versus Rajesh Jhaveri Stock Brokers P. Limited 2007 (5) TMI 197 - SUPREME Court - the AO had not made any assessment and had not formed any opinion - the AO in view of explanation 2(b) can take action u/s 147 in a case where the return has been processed u/s 143(1) thus, the reopening is invalid. Computation of capital gains for brokerage incurred Held that - Almost all the area of the land is hilly and rocky, even so much so that there is no easy access to the whole of the property and we had to go through one small rocky way - No agricultural activities or operations being carried out on the land were found - no source of water present for regular agricultural activities even though there is a small nalla in the property flowing downward and the joins the riverlet on the south boundary - This nalla was totally dry and it was explained to us that it is functional only in the rainy season - From the submission of the Assessee it is not denied that there are more than 3500 trees on total land admeasuring 2,18,250 sq. mtrs. The land does not have any cropped area except dry crop. Certificate has been issued by the officer in-charge, land records on 22.7.2006. These dry crops are only on part of the area - Rest of the area, it is apparent, has not been cultivated for the last several years and the land leaving aside the trees which are standing is not cultivable - If the land is not cultivable, no agricultural operations can be carried out. Opportunities were given from time to time but assessee expressed his inability to bring any decision on this issue which supports his case - Neither the Assessee nor the Revenue produced before us the exact measurement of the land on which the trees are standing and out of which dry crop is grown - To the extent the land is actually used for dry crop, the land has to be regarded to be an agricultural land - Since there are approximately 3500 trees standing on the land, which is not denied even by the Revenue and has been accepted assessee, thus, the estimate is to be made for atleast 10 mtrs area is required for one fruit tree and therefore, there are approximately 35000 sq.mtrs area of the land which can be regarded to be cultivable - this portion of the land is held to to be the agricultural land - The balance 4/5th of the land cannot be regarded to be the agricultural land the order of the CIT(A) is set aside and the AO is directed to treat only 4/5th of the land to be the capital asset and the consideration received to that extent be treated as if said consideration has been received on the transfer of capital asset and the capital gain on the transfer of such land be computed in accordance with the provision of the Income Tax Act to the extent each of the co-owner has the share proportionately the capital gain so computed on 4/5th of the total consideration be assessed in the hands of respective assessee Decided partly in favour of revenue.

Summary

Issues Involved:
1. Validity of proceedings initiated under Section 147.
2. Whether the land sold by the assessee is a capital asset as per Section 2(14) of the Income Tax Act.
3. Computation of capital gains, including fair market value as of 1.4.1981 and deduction for brokerage paid.

Detailed Analysis:

1. Validity of Proceedings Initiated Under Section 147:

The primary issue was whether the proceedings initiated under Section 147 were valid. The assessee argued that the Assessing Officer (AO) did not have fresh tangible material to justify reopening the assessment. The Tribunal noted that Section 147 allows the AO to assess or reassess income if there is "reason to believe" that income has escaped assessment. The Supreme Court in Rajesh Jhaveri Stock Brokers Pvt. Ltd. clarified that processing a return under Section 143(1) is not an assessment, and the AO can initiate action under Section 147 based on the material available. The Tribunal found that the AO had sufficient "reason to believe" that income had escaped assessment and dismissed the assessee's argument, validating the proceedings under Section 147.

2. Whether the Land Sold by the Assessee is a Capital Asset as per Section 2(14):

The core issue was whether the land sold was an agricultural land and thus not a capital asset under Section 2(14). The AO argued that the land was not used for agricultural purposes, citing the inspector's report which described the land as rocky and hilly with no evidence of agricultural activity. The CIT(A), however, ruled in favor of the assessee, citing documents like Form I & XIV and a certificate from the Zonal Agricultural Officer, which indicated the land was agricultural.

The Tribunal conducted a site inspection and found that while part of the land had trees, a significant portion was rocky and uncultivable. The Tribunal referred to several judicial precedents, including the Supreme Court's ruling in Raja Benoy Kumar Sahas Roy, which emphasized that for land to be considered agricultural, it must be cultivable. The Tribunal concluded that only the portion of the land with trees could be considered agricultural, while the rest was a capital asset. Thus, 4/5th of the land was treated as a capital asset, and the consideration received from its sale was subject to capital gains tax.

3. Computation of Capital Gains:

The assessee contested the AO's adoption of the fair market value of the land as of 1.4.1981 at Rs. 5 per sq. mtr. and the disallowance of brokerage paid. The Tribunal noted that these issues were not adjudicated by the CIT(A) and remanded them for reconsideration. The CIT(A) was directed to determine the fair market value as of 1.4.1981 and decide on the admissibility of brokerage as a deductible expense in computing capital gains.

Conclusion:

The Tribunal validated the proceedings under Section 147, partially upheld the AO's view that the land was a capital asset, and directed the CIT(A) to reconsider the fair market value and brokerage deduction issues. The appeals by the revenue were partly allowed, and the cross-objections by the assessee were also partly allowed.