2014 (10) TMI 332 - AT - Income Tax

Reopening of assessment u/s 147 r.w section 148 Reason to believe - Land situated within 8 kilometers of municipal limits of Jhansi and hence, being a capital asset within the meaning of section 2(14) of the Act and the gain arising on sale of such land will be chargeable to capital gain tax or not - Held that - Following the decision in Shri Badam Singh Rajpali Vs. ITO 2012 (7) TMI 160 - ITAT, AGRA - the reasons for reopening of assessment have been incorporated in the order, which is also reproduced above - The words reason to believe suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the ITO may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour - The Income-tax Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the section - The court can always examine this aspect though the declaration or sufficiency of the reasons for the belief cannot be investigated by the court - the only information was that the assessee had taken a bogus entry of capital gains by paying cash along with some premium for taking a cheque for that amount - The information did not indicate the source of the capital gains which in this case were shares - There was no information which shares had been transferred and with whom the transaction had taken place - The AO did not verify the correctness of the information received by him but merely accepted the truth of the vague information in a mechanical manner - The AO had not even recorded his satisfaction about the correctness or otherwise of the information for issuing a notice u/s 148 - the AO has not satisfied the ingredients of section 147 of the Act in the reasons recorded for reopening of assessment - the AO has not correctly assumed jurisdiction u/s 147 / 148 of the IT Act the order of the CIT(A) is set aside Decided in favour of assessee.

Issues Involved:
1. Reopening of assessment under Section 148 of the I.T. Act.
2. Computation of long-term capital gain on the sale of agricultural land.
3. Validity of the valuation report submitted by the assessee.
4. Application of the principles of "reason to believe" under Section 147 of the I.T. Act.

Detailed Analysis:

1. Reopening of Assessment under Section 148 of the I.T. Act:
The assessee challenged the reopening of the assessment under Section 148 of the I.T. Act, which was initiated based on information received from another Income Tax Officer (ITO-6(3), Jhansi). The information indicated that the assessee had sold agricultural land for Rs. 88,50,000 on 30.05.2005 but had not filed any return of income for the assessment year 2006-07. The land was situated within 8 kilometers of municipal limits of Jhansi, making it a capital asset under Section 2(14) of the Act. The AO recorded reasons to believe that capital gain chargeable to tax had escaped assessment, leading to the issuance of a notice under Section 148 dated 02.08.2011.

2. Computation of Long-term Capital Gain on Sale of Agricultural Land:
The AO computed the long-term capital gain by taking the sale consideration as Rs. 42,75,000 and the cost of acquisition based on the value of the land as of 01.04.1981, computed at Rs. 800 per acre. The AO did not accept the valuation report submitted by the assessee, which had computed the cost of acquisition at Rs. 40 per sq. meter based on a Government Approved Valuer's report. The AO's computation included:
- Total area sold: 4.256 Hectare
- Assessee's share in sales: 2.128 Hectare
- Assessee's share in sales (1 Hect. = 2.47 Acre): 5.256 Acres
- Total cost of land (5.256 * Rs. 800): Rs. 4205
- Indexed cost of acquisition (Rs. 4205 * 497/100): Rs. 20,899
- Indexed cost of improvement: Rs. 3,24,237
- Income from long-term capital gain: Rs. 42,75,000 - Rs. 20,899 - Rs. 3,24,237 = Rs. 39,29,237

3. Validity of the Valuation Report Submitted by the Assessee:
The AO rejected the valuation report submitted by the assessee, citing incorrect location details of the land. The assessee's report had shown the cost of acquisition based on a Government Approved Valuer's report, which the AO found unreliable. Consequently, the AO relied on information collected from the Tehsildar under Section 133(6) of the Act for the valuation.

4. Application of the Principles of "Reason to Believe" under Section 147 of the I.T. Act:
The assessee argued that the reopening of the assessment was not justified as the AO had not independently verified the information received from ITO 6(3), Jhansi. The ITAT Agra Bench, in a similar case (Badam Singh Rajpali Vs. ITO), had quashed the reopening of the assessment, stating that the AO had not applied his mind to satisfy himself through his own enquiry but had acted on mere suspicion. The Tribunal held that the AO must have "reason to believe" that income chargeable to tax had escaped assessment, which was not evident in this case. The AO had acted on vague information without proper verification, making the reopening of the assessment invalid.

Conclusion:
The Tribunal found that the AO had not correctly assumed jurisdiction under Section 147/148 of the I.T. Act, as the reasons recorded for reopening the assessment did not satisfy the requirements of "reason to believe." Consequently, the orders of the authorities below were quashed, and the addition made was deleted. The appeal of the assessee was allowed.

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