2014 (10) TMI 656 - AT - Income Tax

Jurisdiction of the CIT to invoke section 263 - Erroneous and prejudicial to the interest of revenue or not - Failure of AO to examine taxability of sale proceeds of the land as business income as against capital gains as offered in Return of Income or not Held that - As decided in Malabar Industrial Co. Ltd. vs. CIT 2000 (2) TMI 10 - SUPREME Court - no specific query was raised by the AO about the amounts received on sale of land as income from business - even after the receipt of reply about the details about the sale of various pieces of land, no further query was raised by the AO about the treatment of tax of the receipts on sale of land and the AO had accepted the submissions of the assessee - AO has not inquired about the details of the land development expenses, amount of advance received by the assessee, details of sales made to parties - CIT has rightly exercised the powers by invoking the provisions of Section 263 - It is true that the AO is not required to pass a very detailed order but his order must show that he has dealt with various aspects of the matter and should not be a general order - while setting aside the assessment, CIT has directed the A.O. to compute the assessee s income by treating the profit on sale of land as income from business instead of short term or long term gains - CIT cannot direct the AO to make the assessment in a particular way thus, the order of the CIT is to be modified to the extent of deleting the direction of CIT to treat the profits as business income and thus modify the direction to AO to decide the matter of taxation on sale of land as per law Decided against assessee.

Summary

Issues Involved:
1. Invocation of provisions of Section 263 of the Income Tax Act.
2. Treatment of profit on sale of land as business income versus capital gains.
3. Examination of the genuineness of cash advances and expenses incurred for land improvement.

Detailed Analysis:

1. Invocation of Provisions of Section 263 of the Income Tax Act:

The appeals were filed by the assessee against the order under Section 263 of the Income Tax Act by the Commissioner of Income Tax (CIT). The CIT observed that the Assessing Officer (AO) had finalized the assessment without making due inquiry and analyzing necessary details, rendering the AO's order erroneous and prejudicial to the interest of Revenue. The CIT issued a show-cause notice and, after considering the assessee's objections, held that the AO's order was based on incorrect assumptions and without proper inquiry, thus invoking Section 263 to set aside the AO's order and directing a fresh assessment.

2. Treatment of Profit on Sale of Land as Business Income Versus Capital Gains:

The CIT noted that the assessee and his family members, who were engaged in land development and real estate, had shown short-term and long-term gains from the sale of plots. The CIT argued that these should be treated as business receipts rather than capital gains, as the AO had accepted the returned income without examining the taxability of the sale of land. The assessee contended that the land was held for more than 36 months and not as "stock in trade," thus it should be considered as capital gains. The Tribunal found that the AO had not made specific inquiries regarding the nature of the income from the sale of land and had accepted the assessee's submissions without further probing.

3. Examination of the Genuineness of Cash Advances and Expenses Incurred for Land Improvement:

The CIT directed the AO to examine the genuineness of cash advances received by the assessee from co-operative societies and the expenses incurred on land improvement. The assessee argued that confirmations from the co-operative societies and details of expenses were provided during the assessment and revisional proceedings. However, the Tribunal noted that the AO had not inquired about the details of land development expenses, the amount of advance received, and the details of sales made to parties. The Tribunal upheld the CIT's directive for further inquiry but modified the CIT's order to remove the specific direction to treat the profits as business income, instead instructing the AO to decide the matter of taxation on the sale of land as per law.

Conclusion:

The Tribunal dismissed the appeals, upholding the CIT's invocation of Section 263 due to the AO's lack of inquiry and erroneous order. The Tribunal modified the CIT's order to allow the AO to determine the nature of the income from the sale of land based on further investigation. The appeals of the assessee were dismissed, and the Tribunal emphasized the necessity for the AO to conduct thorough inquiries and apply the law correctly.