2016 (3) TMI 579 - AT - Income Tax

Validity of reopening of assessment - whether non sanction was duly granted / approved by the competent authority? - Held that - In response to the objections, the learned Departmental Representative has produced the assessment record before us indicating the requisite sanction was duly granted by the CIT. On perusal of the record, we find that the notice under Section 148 dt.16.3.2012 issued by the Assessing Officer after the sanction was duly granted / approved by the competent authority. Therefore, in view of the fact that the Assessing Officer obtained the necessary approval / sanction of the competent authority, the objections raised by the learned Authorised Representative against the validity of the notice under Section 148 does not survive. Addition on capital gains - Held that - We find that the Assessing Officer has not conducted any enquiry to but just adopted the figure as given in the report of the Investigation Wing sent to the Assessing Officer for reopening of the assessment. There is no dispute that at the time of execution of the sale deed dt.15.2.2006, the parties have determined the value of the constructed share of the assessee to the extent of 53% at ₹ 6,22,72,000. There is also no dispute that the cost of land in question was ₹ 6,22,72,000 which has been admitted by the Assessing Officer in the assessment order. Therefore as per the claim of the assessee there was no capital gains on transfer of land in question in favour of the developer because cost as well as the sale consideration is same. The learned Authorised Representative has also relied upon the guideline value as notified by the Govt. of Karnataka in respect of the area in question and thus contended that the guideline value prescribed by the Govt. is much less than the sale consideration agreed between the parties. We find force in the contention of the learned Authorised Representative that the cost recorded by the developer in the books of accounts may also include some of the expenditure which have not directly related to the construction activity but may have been incurred in relation to the general administration and other business expenditure. Since income in the hands of the developer is assessed to tax as business income, therefore, the said expenditure which are in the nature of business expenditure are allowable from the sale consideration of the constructed area belongs to the developer. Accordingly, in the absence of any enquiry or any other material or evidence to show that the actual cost of construction or the value of the constructed area belonging to the assessee is more than the value shown by the assessee at ₹ 6,22,72,000 we do not approve the action of the Assessing Officer to compute the capital gains by adopting the figure of expenditure recorded in the books of the developer. There is a substantial difference between the cost of construction for the purpose of computing the capital gains on sale of capital asset and expenditure booked by the developer in the course of construction activity being the business activity of the developer. Therefore, the expenditure recorded by the developer being business expenditure having no direct nexus with construction cannot be adopted as cost of construction for the purpose of capital gains in the hands of the assessee. Accordingly, we delete the addition made by the Assessing Officer on account of capital gains. - Decided in favour of assessee

Issues Involved:
1. Validity of reopening the assessment.
2. Incidence of capital gains during the assessment year.
3. Computation of capital gains.

Detailed Analysis:

1. Validity of Reopening the Assessment:
The assessee contested the validity of the reopening of the assessment, arguing that the notice under Section 148 was issued beyond four years without the requisite approval. The Assessing Officer (AO) received information that capital gains amounting to Rs. 49,98,089 had escaped assessment due to a transaction involving the transfer of immovable property. The AO reopened the assessment under Section 147 by issuing a notice under Section 148. The Tribunal found that the AO had obtained the necessary approval from the competent authority before issuing the notice. Therefore, the objections raised by the assessee against the validity of the notice under Section 148 were rejected, and the reopening of the assessment was upheld.

2. Incidence of Capital Gains During the Assessment Year:
The assessee argued that the transfer of the land in question took place in the subsequent assessment year (2006-07) and not in the year under consideration (2005-06). The assessee had entered into a Joint Development Agreement (JDA) with a developer, allowing the developer to construct a commercial building and receive 47% of the built-up area, while the assessee would receive 53%. The Tribunal noted that the assessee had allowed the developer to take possession of the land and had executed a Power of Attorney in favor of the developer. This constituted a transfer under Section 2(47)(v) of the Income Tax Act and Section 53A of the Transfer of Property Act. The Tribunal held that the transfer of the undivided share of land to the extent of 47% in favor of the developer took place during the year under consideration, and the incidence of capital gains arose in the assessment year 2005-06.

3. Computation of Capital Gains:
The assessee contended that the AO computed the capital gains by taking the cost of construction as recorded by the developer in its books of accounts without conducting any enquiry. The Tribunal found that the AO had adopted the figure provided in the report of the Investigation Wing without independent verification. The assessee had disclosed the value of the constructed share at Rs. 6,22,72,000, which was also the cost of the land. The Tribunal agreed with the assessee that the cost recorded by the developer might include expenditures not directly related to construction. The Tribunal held that in the absence of any enquiry or evidence to show that the actual cost of construction was more than the value shown by the assessee, the AO's computation of capital gains was not justified. Therefore, the addition made by the AO on account of capital gains was deleted.

Conclusion:
The Tribunal upheld the validity of the reopening of the assessment but ruled in favor of the assessee on the incidence and computation of capital gains, thereby allowing the appeal and deleting the addition made by the AO.

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