2017 (2) TMI 493 - HC - Income Tax

Initiation of reassessment proceeding under section 147 - attribution of income from collection of parking fee from the trucks - maintainability of proceeding under section 260A - Held that - The reason to believe to conclude that tax has escaped assessment is not at all reflected, in the order passed by the Assessing Officer. The Assessing Officer has not said that income from collection of parking fee from the trucks is attributable to building and not to the parking facility provided for the trucks. Even if the order recorded by the Assessing Officer on April 10, 2007 is liberally construed, we do not find the requisite material or the nexus on the basis of which, the reasonable belief is reached, for ordering the reassessment proceeding. Therefore in our understanding, the action initiated against the assessee under section 147/148 appears to be without any jurisdiction and it is declared so accordingly. The jurisdictional question of law arises from the fact found by the Income-tax authority, i.e., earning from parking fee collected from truck terminus and since tax liability of the assessee is dependent on this very issue, the contention raised by the learned counsel for the Revenue that this question cannot be examined by us in this proceeding under section 260A of the Income-tax Act is rejected. The ratio in National Thermal Power Co. Ltd. v. CIT reported in 1996 (12) TMI 7 - SUPREME Court supports our decision. Substantial questions of law are answered in favour of the assessee and we further declare that the Gotanagar truck terminus is a plant and not building, for the purpose of claiming depreciation under section 32 read with section 43 of the Income-tax Act. Consequently the assessee is held entitled to depreciation at the rate of 25 per cent. as prescribed for plant and not at 10 per cent., as applicable for building. - Decided against revenue

Summary

Issues Involved:
1. Justification of reopening of assessment under Section 148 of the Income-tax Act, 1961.
2. Classification of "Gotanagar Truck Terminus" as a "plant" or "building" for the purpose of claiming depreciation under Section 32 read with Section 43 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Justification of Reopening of Assessment under Section 148 of the Income-tax Act, 1961:

The appeals were admitted on the substantial question of whether the Tribunal was justified in holding that there was justifiable material/reasons to issue notice under Section 148 for reopening the assessment for the years 2004-05. The Assessing Officer (AO) issued a notice for reassessment under Section 148, believing that income had escaped assessment due to an excess claim towards depreciation. The assessee contended that the AO's reasons for reopening the assessment were not disclosed, making the proceedings without jurisdiction. The court emphasized that the AO must have "reason to believe" that income had escaped assessment, which should be based on tangible and intelligible materials. The court referred to various judicial pronouncements, including CIT v. Kelvinator of India Ltd. and CIT v. Shiv Shakti Flour Mills P. Ltd., to assert that the "reason to believe" must have a material bearing on the question of escapement of income and must be based on reasonable grounds, not mere suspicion.

The court found that the AO's order did not reflect the requisite material or nexus on which the reasonable belief was reached for ordering the reassessment proceeding. Therefore, the action initiated under Section 147/148 was declared without jurisdiction.

2. Classification of "Gotanagar Truck Terminus" as a "Plant" or "Building" for Depreciation:

The second substantial question was whether the Tribunal was justified in holding that "Gotanagar Truck Terminus" is not a "plant" but a "building" for the purpose of claiming depreciation. The assessee claimed 25% depreciation by considering the truck terminus as a plant, whereas the AO treated it as a building, allowing only 10% depreciation. The AO and subsequent appellate authorities observed that the truck terminus, with its superstructure and land, could not be considered a plant as per Section 43(3) of the Income-tax Act, which excludes buildings from the definition of plant. They concluded that the facilities provided (parking yards, RCC ramps, dormitories, toilets, etc.) were permanent structures without any predominant plant or machinery, thus qualifying for lower depreciation applicable to buildings.

The court, however, referred to the functional test and the wide definition of "plant" under Section 43(3), which includes facilities or tools used for generating income. It noted that the truck terminus generated income from parking fees, not from renting out buildings. The court cited the Madhya Pradesh High Court's decision in Babulal Agrawal v. CIT, emphasizing that the functional test is crucial in determining whether an asset is a plant. The court concluded that the truck terminus should be considered a plant, as the income was derived from the parking facility and not from the ancillary structures.

Conclusion:

The court answered the substantial questions of law in favor of the assessee, declaring that the Gotanagar truck terminus is a plant and not a building for the purpose of claiming depreciation. Consequently, the assessee is entitled to a 25% depreciation rate applicable to plants. The reassessment proceedings and the orders passed by the AO, Commissioner of Income-tax (Appeals), and the Income-tax Appellate Tribunal were quashed. The appeals were allowed, and parties were ordered to bear their own costs.