2015 (8) TMI 271 - HC - Income Tax

Validity of reopening of assessment - when the reason recorded for reopening the assessment under section 147 itself does not survive, can tax be levied by the Assessing Officer for a totally different reason or issue, which was not the subject matter of reopening the assessment - assessment was reopened for the purpose of assessing the income from the sale of property under section 45(2) of the Act and denying the benefit of indexation. The reassessment was completed on total income of ₹ 29,90,672/-, which was for reasons other than the one recorded in the notice - Held that - Considering the provision of section 147 as well as its Explanation 3, and also keeping in view that section 147 is for the benefit of the Revenue and not the assessee and is aimed at garnering the escaped income of the assessee viz. Sun Engineering (1992 (9) TMI 1 - SUPREME Court) and also keeping in view that it is the constitutional obligation of every assessee to disclose his total income on which it is to pay tax, we are of the clear opinion that the two parts of section 147 (one relating to such income and the other to any other income ) are to be read independently. The phrase such income used in the first part of section 147 is with regard to which reasons have been recorded under section 148(2) of the Act, and the phrase any other income used in the second part of the section is with regard to where no reasons have been recorded before issuing notice and has come to the notice of the Assessing Officer subsequently during the course of the proceedings, which can be assessed independent of the first part, even when no addition can be made with regard to such income , but the notice on the basis of which proceedings have commenced, is found to be valid. It is true that if the foundation goes, then the structure cannot remain. Meaning thereby, if notice has no sufficient reason or is invalid, no proceedings can be initiated. But the same can be checked at the initial stage by challenging the notice. If the notice is challenged and found to be valid, or where the notice is not at all challenged, then in either case it cannot be said that notice is invalid. As such, if the notice is valid, then the foundation remains and the proceedings on the basis of such notice can go on. We may only reiterate here that once the proceedings have been initiated on a valid notice, it becomes the duty of the Assessing Officer to levy tax on the entire income (including any other income ) which may have escaped assessment and comes to his notice during the course of the proceedings initiated under section 147 of the Act. Tribunal was correct in upholding reassessment proceedings - Decided in favour of the Revenue and against the assessee. Determination of the fair market value as on 1.4.1981 - whether tribunal erred by not taking into consideration the material on record and the valuation report filed by the appellant and consequently passed a perverse order on the facts and circumstance of the case? - Held that - In the present case, the assessee had provided the reasons for determining ₹ 225/- per sq. ft. as the fair market value of the property by producing the relevant material, including valuation report of a registered valuer, which all have been ignored while arriving at the price of ₹ 84/- per sq. ft. The Assessing Officer assessed the value of the property as on 1.4.1981 on the basis of sale deeds of some nearby properties registered for such price in the year 1981 and thus, arrived at that figure. In our opinion, the same cannot be the proper mode of arriving at the fair market value of the property in question as on 1.4.1981, for the purpose of determining Capital gains under the Act. Tribunal was not justified in arriving at the fair market value of the property in question as on 1.4.1981 without taking into consideration the material on record, including the valuation report filed by the assessee. The matter thus requires to be remanded to the Assessing Officer for determination of the fair market value of the property in question in accordance with law and in the light of the observations made hereinabove. - Decided in favour of the assessee Disallowance of 50% of the expenditure towards brokerage incurred by the assessee - Whether tribunal was justified not allowing expenditure incurred wholly and exclusively in connection with the transfer more so when the payments are through banking channels? - Held that - Without assigning any reason, the Assessing Officer disallowed 50% of ₹ 7,50,000/-, which was the total expenditure claimed by the assessee towards transfer and brokerage charges, even when the same had been paid by cheque and the receipt of which was obtained from the broker. Merely saying that generally 1-2% of the sale consideration is the brokerage, would not suffice when the specific case of the assessee was that heavy brokerage had to be paid because of the property being under litigation and that it being occupied by unauthorized persons for which payment had to be made to get it vacated. In our view, when the said brokerage was paid by cheque and there was sufficient reason for paying higher brokerage, the entire amount ought to have been allowed and deduction of 50% amount i.e., ₹ 3,75,000/- cannot be justified in law. It is noteworthy that the Assessing Officer, after observing that what is normally allowed as brokerage in such deals is 1-2%, had himself allowed 5% brokerage, meaning thereby that in the facts of the case, higher brokerage was required to be paid. Once the Assessing Officer accepts that the facts required payment of higher brokerage and it is not disputed that the transaction of brokerage was through banking channel, reduction of allowance of brokerage paid from 10% to 5%, without assigning or giving any reasons for the same, cannot be justified in law. - Decided in favour of the assessee

Issues Involved:
1. Validity of reassessment proceedings under Section 147 of the Income Tax Act.
2. Levy of tax on issues not mentioned in the notice for reopening the assessment.
3. Determination of the fair market value of the property as of 1.4.1981.
4. Disallowance of 50% of the expenditure incurred in connection with the transfer.

Detailed Analysis:

1. Validity of Reassessment Proceedings under Section 147:
The court examined whether the reassessment proceedings could be upheld when the reason recorded for reopening the assessment under Section 147 itself does not survive. It was noted that if the reasons for reopening are found to be invalid, the entire reassessment proceedings would lapse. However, if the notice under Section 148 is found to be valid, the Assessing Officer has the power to reassess the entire income that may have escaped assessment. The court concluded that the two parts of Section 147 (relating to 'such income' and 'any other income') are to be read independently. Thus, even if the reason for reopening does not survive, the Assessing Officer can still assess any other income that comes to his notice during the course of the proceedings.

2. Levy of Tax on Issues Not Mentioned in the Notice:
The court considered whether tax could be levied on issues not mentioned in the notice for reopening the assessment. It was observed that Explanation 3 to Section 147, inserted by the Finance Act, 2009, clarifies that the Assessing Officer may assess any issue that comes to his notice during the reassessment proceedings, even if the reasons for such issue were not included in the reasons recorded under Section 148(2). The court held that this provision is for the benefit of the Revenue and allows the Assessing Officer to tax any other income that may have escaped assessment, notwithstanding that the reasons for such issue were not included in the original notice.

3. Determination of Fair Market Value of the Property as of 1.4.1981:
The court addressed the issue of determining the fair market value of the property as of 1.4.1981. It was noted that the assessee had provided a valuation report from a registered valuer, valuing the property at Rs. 225/- per sq. ft. However, the Assessing Officer had assessed the value at Rs. 84/- per sq. ft. based on sale deeds of nearby properties. The court held that the Assessing Officer had wrongly ignored the valuation report and other relevant material provided by the assessee. The matter was remanded to the Assessing Officer for a fresh determination of the fair market value in accordance with the law.

4. Disallowance of 50% of Expenditure Incurred in Connection with the Transfer:
The court examined the disallowance of 50% of the expenditure towards brokerage incurred by the assessee. The Assessing Officer had disallowed Rs. 3,75,000/- out of the total Rs. 7,50,000/- claimed by the assessee, stating that generally 1-2% of the sale consideration is the brokerage. The court found that the brokerage was paid by cheque and there were sufficient reasons for paying higher brokerage due to the property being under litigation and occupied by unauthorized persons. The court held that the entire amount of Rs. 7,50,000/- ought to have been allowed and the disallowance was not justified in law.

Conclusion:
The court answered the first two questions of law in favor of the Revenue, upholding the validity of the reassessment proceedings and the levy of tax on issues not mentioned in the notice. The third and fourth questions were answered in favor of the assessee, directing the Assessing Officer to re-determine the fair market value of the property and allow the full expenditure incurred towards brokerage. The matter was remanded back to the Assessing Officer for re-determination of the taxable income in light of these observations. No order as to costs was made.

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