2016 (12) TMI 235 - AT - Income Tax

Income offered to tax under section 42(2)(b) - business for prospecting, etc., for mineral oil - Assessment u/s 143 - nature of receipts - assessment of business income or capital gain - taxability in the hands of the assessee as business income under section 44(2)(b) - classification of income - eligible assessee - selection of assessment year Held that - The Assessing Officer was justified in directly issuing the assessment order under section 143(3), without first issuing a draft assessment order, even though the assessee was an eligible assessee under section 144C, as the Assessing Officer did not propose to make any variations in the income returned by the assessee. The mere fact that the assessee had offered the income of ₹ 14,52,08,040 to tax as business income, by itself, cannot justify the said income being taxed as business income. The receipt of ₹ 14,52,08,400 which was brought to tax in the hands of the assessee as business income under section 44(2)(b) could not be taxed in the hands of the assessee as a business income, since section 44(2)(b) only seeks to reverse, under certain circumstances, the deduction for prospecting expenses already granted to the assessee in computation of business income but no part of the prospecting expenses incurred by the assessee, in respect of the participation interests sold, was ever allowed as deduction in computation of business income. The receipt of ₹ 14,52,08,400, which was in the nature of part consideration for sale of participation interests in PY-1 and CT-OSN-97/1 oil and natural gas exploration site, was liable to be taxed in the hands of the assessee as capital gain. However, such capital gain could be taxed in the hands of the assessee only in the assessment year 2006-07 as transfer of related capital asset, i.e. participation interests in PY-1 and CT-OSN-97/1 oil and natural gas exploration site, took place in the previous year relevant to the assessment year 2006-07. It was for this reason that the said capital gain could not be taxed in the assessment year before us, i.e. 2010-11. In view of the fact that the Assessing Officer has the power, as indeed the corresponding duty, under section 153(6) read with Explanation 2 thereto, to bring the said amount of ₹ 14,52,08,400 to tax in the hands of the assessee for the assessment year 2006-07, we see no reasons to hold that in the event of the said income not being taxed in the present assessment year, i.e. 2010-11, the revenue will be put to undue loss, and that, for this reason, the assessee s offer for taxability of this capital gain in the assessment year 2010-11 should be accepted.

Issues Involved:
1. Non-issuance of draft assessment order under section 144C.
2. Classification of income as business income vs. capital gains.
3. Taxability of the receipts in the relevant assessment year.
4. Applicability of Section 42(2)(b) and Section 45 of the Income Tax Act.
5. Levy of interest under sections 234B and 234C.

Detailed Analysis:

1. Non-Issuance of Draft Assessment Order under Section 144C:
The assessee contended that the Assessing Officer (AO) should have issued a draft assessment order under section 144C before finalizing the assessment. Section 144C mandates a draft order for eligible assessees, including foreign companies, if there is any variation in the income or loss returned which is prejudicial to the assessee. The Tribunal found that since the AO did not propose any variation in the returned income, the issuance of a draft order was not necessary. The AO merely accepted the income as filed by the assessee and only corrected the computation of tax payable. Therefore, the AO’s action of directly issuing the assessment order was justified.

2. Classification of Income as Business Income vs. Capital Gains:
The assessee initially disclosed the income as business income in the return but later claimed it was a capital gain. The Tribunal emphasized that tax cannot be levied based on a mistake or concession by the assessee. The income must be computed in accordance with the law. The Tribunal referred to the jurisdictional High Court's decision, which allows an assessee to correct a bona fide mistake at the appellate stage. Therefore, the Tribunal held that the income should be examined on merits as capital gains, not business income, despite the initial incorrect classification.

3. Taxability of the Receipts in the Relevant Assessment Year:
The Tribunal had to determine whether the receipts of $30,00,000 and $1,97,152 (?14,52,08,040) should be taxed in the assessment year 2010-11 or 2006-07. According to Section 45, capital gains are taxable in the year the asset is transferred. The Tribunal concluded that since the transfer occurred in the assessment year 2006-07, the capital gains should be taxed in that year, not in 2010-11. The Tribunal rejected the assessee's argument that the income should be taxed in 2010-11 due to the timing of the receipt.

4. Applicability of Section 42(2)(b) and Section 45:
Section 42(2)(b) deals with the taxability of proceeds from the transfer of business interests in oil and gas exploration. The Tribunal found that since no part of the prospecting expenses was ever allowed as a deduction, Section 42(2)(b) was not applicable. The receipts were part of the consideration for the transfer of participation interests, which are capital assets. Therefore, the gains should be taxed as capital gains under Section 45, which mandates taxability in the year of transfer (2006-07).

5. Levy of Interest under Sections 234B and 234C:
The Tribunal did not specifically address the issue of interest under sections 234B and 234C in detail, as the primary focus was on the correct classification and taxability of the income.

Conclusion:
(a) The AO was justified in issuing the assessment order without a draft order under section 144C.
(b) The income of ?14,52,08,040 should not be taxed as business income merely because it was initially disclosed as such.
(c) The receipts in question should be taxed as capital gains, not business income.
(d) The capital gains should be taxed in the assessment year 2006-07, not 2010-11.
(e) The AO has the power to bring the capital gains to tax in the assessment year 2006-07 under section 153(6).

The appeal was partly allowed, and the Tribunal directed that the capital gains be taxed in the assessment year 2006-07.

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