2018 (10) TMI 493 - AT - Income Tax

Assessment u/s 153A - head of income for the purposes of assessment of gain arising on sale of plot of lands has been changed from capital gains offered by the assessee to business income assessed by the AO - Held that - Referring to decision in the case of Kabul Chawla 2015 (9) TMI 80 - DELHI HIGH COURT , we are of the view that various additions/disallowances made by the AO are clearly beyond the scope of the authority vested under s. 153A of the Act owing to absence of any incriminat ing material or evidence deduced as a result of search. No reference of such incriminat ing material, if any, is found in the assessment year. We hold that routine adjustments in the nature of change of head of income of reported income without any nexus to incriminating material found, if any, as a result of search operations are not sustainable in the eyes of law in Section 153A proceedings. Hence, the re-alignment of head of income towards gain on sale of land for the purposes of taxability requires to be quashed. Thus, we find merit in the legal ground raised by the assessee. In this view of the matter, we do not intend to adjudicate the merits of the adjustments / re-alignment. Capital gains arising from the sale of Sanavad land under the head of business income - Held that - Due to the large size of the land, it was divided and sub-divided and sold to the interested customers. These facts do not exclusively suggest that the ent ire exercise was to exploit the land commercially in the nature of adventure which is akin to the business. In the light of the decision of the Hon ble Gujarat High Court in the case of Premji Gopalbhai (1977 (8) TMI 43 - GUJARAT HIGH COURT) and the decision of Ahmedabad Tribunal in the case of Hiteshkumar Ashokkumar Vaswani (2017 (7) TMI 954 - ITAT AHMEDABAD), we find merit in the plea of the assessee for treating the same to be gain arising for capital nature and thus, assessable under the head of capital gains .

Summary

Issues Involved:
1. Jurisdictional validity of assessment under Section 153A in absence of incriminating material.
2. Re-alignment of head of income from 'capital gains' to 'business income'.

Issue-wise Detailed Analysis:

1. Jurisdictional Validity of Assessment under Section 153A:

The primary legal issue raised by the assessee pertains to the jurisdictional validity of assessments framed under Section 153A of the Income Tax Act, 1961, in the absence of any incriminating material found during the search. The assessee argued that since no incriminating material was found during the search and the time limit for issuing notice under Section 143(2) had expired, the assessment under Section 153A should be quashed. The Tribunal admitted this additional ground, recognizing its jurisdictional nature and its potential to affect the root of the matter.

The Tribunal noted that the search action was conducted on 06.11.2012, and subsequent proceedings under Section 153A were initiated. The assessee filed returns under Section 153A, which were subjected to scrutiny. The Assessing Officer (AO) re-aligned the head of income from 'capital gains' to 'business income' without referring to any incriminating material found during the search. The Tribunal emphasized that without any incriminating material, the AO's action to change the head of income was not justified. The Tribunal referenced several judicial precedents, including the Gujarat High Court's decision in Pr.CIT vs. Saumya Construction (P.) Ltd. and the Delhi High Court's decision in Kabul Chawla, to support its conclusion that additions or disallowances cannot be made under Section 153A in the absence of incriminating material.

2. Re-alignment of Head of Income from 'Capital Gains' to 'Business Income':

The assessee challenged the AO's action of changing the head of income from 'capital gains' to 'business income' on the sale of plotted land. The AO considered the activity of purchasing agricultural land, converting it into non-agricultural land, and selling it as plots to various customers as a business activity. The Tribunal observed that the AO's decision was based on the nature of the activity rather than any incriminating material found during the search.

The Tribunal noted that the assessee had declared the income from the sale of plots under the head 'capital gains' in the original returns. The Tribunal found merit in the assessee's argument that the activity of selling plots did not constitute a business activity, as the land was divided into plots due to zoning changes and not for commercial exploitation. The Tribunal referenced the Gujarat High Court's decision in CIT vs. Premji Gopalbhai and the Ahmedabad Tribunal's decision in Hiteshkumar Ashokkumar Vaswani to support the assessee's claim that the gains should be taxed under 'capital gains'.

The Tribunal concluded that the re-alignment of the head of income from 'capital gains' to 'business income' was not sustainable in the absence of any incriminating material found during the search. Consequently, the Tribunal quashed the AO's action and restored the treatment given by the assessee in its returns.

Conclusion:

The Tribunal allowed all the appeals filed by the respective assessees, holding that the re-alignment of the head of income from 'capital gains' to 'business income' was not justified in the absence of any incriminating material found during the search. The Tribunal emphasized that routine adjustments in the nature of change of head of income without any nexus to incriminating material are not sustainable under Section 153A proceedings.