2019 (12) TMI 1103 - AT - Income Tax

Revision u/s 263 - Capital gains declared by the assessee from the sale of ancestral property as the AO has not applied the provisions of Section 45(2)and consequently the profit arising from sale of the property ought to have been bifurcated into capital gains as well as business income - HELD THAT - In the case in hand, the fair market value of the asset shall be taken as the valuation adopted by the stamp duty authority as provided u/s 50C of the Act being full value consideration and therefore, for the purpose of computing the capital gains the said amount of ₹ 1,08,25,150/- would be deemed to be full value consideration which is the actual sale consideration. Therefore, there will be no change in the capital gains computed and declared by the assessee even after applying the provisions of section 45(2) of the Act. Resultantly, the business income, if any, from the said transfer under the provisions of Section 45(2) of the Act would be Nil being the cost of acquisition of stock in trade and the sale consideration of the said property is the same. Even after invoking the provisions of Section 45(2) of the Act, there would be no change in the tax liability of the assessee and hence the order passed by the AO cannot be said prejudicial to the interest of the Revenue. It is undisputed proposition of law that for exercising the power u/s 263 of the Act, the Commissioner has to satisfy itself that the order passed by the AO is erroneous as well as prejudicial to the interest of the Revenue. Without satisfaction of the twin conditions that the order passed by the AO is erroneous as well as prejudicial to the interest of the Revenue, the provisions of Section 263 cant be invoked. Therefore, in the case in hand, when there will be no Revenue loss even if provisions of section 45(2) is applied then in such a situation the Commissioner is not allowed to exercise its power u/s 263 of the Act merely because the AO has accepted the capital gains declared by the assessee. Hence, impugned ex-parte order passed by the ld.PR. CIT without proper opportunity of hearing to the assessee and without establishing the order of the AO is prejudicial to the interest of the Revenue is not sustainable in law and consequently the same is quashed and set aside.

Issues:
1. Taxability of profit on sale of ancestral property under Capital gain.
2. Applicability of Apex Court Judgment.
3. Scope of revisionary jurisdiction of Pr. CIT.
4. Prejudice to the interest of Revenue in AO's order.
5. Legality of revision based on mere change in opinion.
6. Consideration of two passable views.
7. Violation of natural justice principles.
8. Adequacy of enquiry conducted by AO.

Issue 1: Taxability of profit on sale of ancestral property under Capital gain:
The appeal challenged the revision order under Section 263 of the Income Tax Act, 1961, regarding the tax treatment of profit on the sale of ancestral property. The contention was that the AO's acceptance of capital gains from the sale as declared by the assessee was appropriate, while the Pr. CIT argued for treating the transaction as business income instead of capital gains under Section 45(2) of the Act due to the plotting of the property to multiple buyers. The Tribunal noted that even if Section 45(2) applied, the capital gains would remain unchanged, resulting in no revenue effect, thus ruling in favor of the assessee.

Issue 2: Applicability of Apex Court Judgment:
The appeal disputed the reliance on the judgment of Raja J Rameshwar Rao vs CIT by the Pr. CIT, arguing that the facts were not identical. The Tribunal emphasized that the nature of the transaction should be judged based on the specific circumstances, and the mere fact of selling the ancestral property by plotting did not automatically convert it into a business activity. The appeal successfully contended that the judgment was not directly applicable to the case at hand.

Issue 3: Scope of revisionary jurisdiction of Pr. CIT:
The appeal challenged the Pr. CIT's exercise of revisionary power under Section 263, arguing that the AO's decision was not erroneous or prejudicial to revenue. The Tribunal held that for invoking Section 263, both conditions of error and prejudice to revenue must be met. It emphasized that the Pr. CIT's revision should not be based solely on a different opinion without actual prejudice to revenue, highlighting the need for proper satisfaction of the twin conditions for invoking Section 263.

Issue 4: Prejudice to the interest of Revenue in AO's order:
The Pr. CIT alleged that the AO's order was prejudicial to the revenue due to the failure to apply Section 45(2) on the sale of ancestral property. However, the Tribunal found that the sale consideration matched the stamp duty valuation, negating the need for Section 45(2) application. The Tribunal ruled that there was no revenue loss even if Section 45(2) was applied, leading to the conclusion that the AO's order was not prejudicial to revenue, thereby allowing the appeal.

Issue 5: Legality of revision based on mere change in opinion:
The appeal contended that the revision was unlawful as it was based on a mere change in opinion by the Pr. CIT without proper grounds for prejudice to revenue. The Tribunal emphasized that the Pr. CIT cannot revise an order solely due to a differing opinion without actual revenue impact. It highlighted the necessity of meeting the conditions of error and prejudice for invoking Section 263, ultimately ruling in favor of the assessee.

Issue 6: Consideration of two passable views:
The appeal argued that the AO's acceptance of the capital gains as declared by the assessee was a permissible view, and the Pr. CIT should not substitute its opinion without valid grounds. The Tribunal stressed the importance of considering multiple views, especially when one view is beneficial to the assessee, citing relevant case law. It upheld the assessee's position that the AO's decision was legally permissible, leading to the allowance of the appeal.

Issue 7: Violation of natural justice principles:
The appeal raised concerns regarding the lack of proper opportunity provided to represent the case, alleging a violation of natural justice principles. The Tribunal noted the importance of providing a fair hearing and opportunity to present arguments, as mandated by the Act. It considered the violation of natural justice in the revision process, contributing to the decision to quash the Pr. CIT's order.

Issue 8: Adequacy of enquiry conducted by AO:
The Pr. CIT argued that the AO's order was erroneous due to a lack of proper enquiry on the applicability of Section 45(2). However, the Tribunal found that the AO's acceptance of capital gains without invoking Section 45(2) was justified based on the specific circumstances of the case. It ruled that the AO's decision did not warrant revision under Section 263, emphasizing the need for proper satisfaction of error and prejudice conditions.

In conclusion, the Tribunal allowed the appeal, setting aside the Pr. CIT's revision order and emphasizing the importance of meeting the conditions of error and prejudice for invoking Section 263 of the Income Tax Act, 1961. The detailed analysis of each issue highlighted the legal complexities involved in determining the tax treatment of the profit on the sale of ancestral property and the necessity of proper enquiry, consideration of multiple views, and adherence to natural justice principles in the revision process.

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