2020 (2) TMI 776 - AT - Income Tax

Reopening of assessment u/s 147 - nature of land sold - capital asset under section 2(14) or agricultural land - HELD THAT - AO had information coming into his possession that the assessee had sold the property in question but had not returned / paid the capital gains tax, however, he was also aware that the necessary enquiries were made in this respect not only by his office but also by the Investigation Wing that too not only during the survey action at the premises of the assessee carried out u/s 133A of the Act but also thereafter. The assessee duly explained about the transaction and explained that the land being agricultural and not falling within the definition of capital asset under section 2(14) of the Act, hence, was not exigible to capital gains Tax. AO without having met with the reply and explanations given by the assessee and even not mentioning a word about reports thereof of the concerned officers, proceeded to reopen the assessment on the same premise. The Assessing Officer, fully knowing that if he will rely upon those proceedings, he will have to meet and discard the reply and explanations of the assessee and also the reports, if any, given by his predecessor and by the concerned investigation authorities and under the circumstances his action of reopening might not pass the test of reasons to believe , hence, he skipped the entire episode of earlier proceedings, based his reasons for reopening of the assessment on the alleged information received from DCIT, central circle, Panaji, which even does not support the reasoning given by the AO. When the very reasons on the basis of which the reopening, allegedly could not form the basis of forming the belief by the AO that the income of the assessee had escaped assessment, the consequential reassessment order formed by the AO u/s 147 of the Act is illegal and the same is accordingly quashed. Nature of land sold - The assessee furnished the evidence before the lower authorities that it had employed two employees and further developed the orchard by putting efforts i.e. by weeding undesired growth of wild plants, by clearing bushes grown between the food bearing trees, pruning the food bearing trees and to further develop and enhance the yield of fruit crops such as cashew, mangoes, jackfruit and coconut. AO has denied relief on the ground that the assessee could not produce the evidence of tilling and ploughing of the fields and harvesting of crop etc. The Assessing officer, in our view, could not differentiate between traditional agriculture and horticulture. The case of the assessee specifically is that it has been developing and maintaining an orchard. The assessee in this case has placed certificates from Gram Panchayat and Land Revenue officials, apart from the report and affidavit of Regd. Land Valuer cum Engineer to the effect that the land in question is situated at a distance of about 10.5 Km from the Panaji Municipal limits, whereas, the Department has relied upon the vague and uncertain statements of Income tax inspector and that of assessing Officer, which as discussed above can not be relied upon. Moreover, the certificate procured by the assessing officer during appellate proceedings from the office of Municipal Council, Mapusa Goa states the distance of village Reis Magos from Municipal Corporation Goa and not of the land of the assessee. Even the Ld. CIT(A) has also not given any finding that the evidence furnished or relied upon by the AO inspires any confidence. Rather, he has opined from the appraisal of the evidence on the file that it is a disputed issue and has chosen to base his findings on the first issue holding that the land in question is not an agricultural land. However, in the light of reliable evidences furnished by the assessee, it can be safely concluded that the land is situated beyond 8 KMs from the Municipal Limits of Panaji. So far as the observation of the lower authorities that the earlier purchaser has not claimed the said land as agricultural land not falling in the definition of capital asset is concerned, it is to be noted that Reis Magos Estate Pvt. Ltd. has not paid any capital gains tax on the sale of the said land to the assessee. The said seller has returned the income from the above sale of land as business income, which means that the said company has treated the land as stock in trade and not as an investment or a capital asset. The question of exemption from capital gains tax would have arisen, if the previous owner would have treated the said land as an investment asset and not as stock in trade. Further, even though the said company did not continue to maintain and develop the land as orchard for the purpose of earning agricultural income, yet, the fact on the file is that it even did not alter its character. If the previous owner did not carry out agricultural activity on an agricultural land, however did not alter or change its nature and character, but the subsequent owner of land starts the agricultural activity on the said land, under the circumstances, it can be safely held that the land remains the agricultural land and has not lost its original characteristic. In view of the above discussion of the matter, the issue on factual matrix is also decided in favour of the assessee.

Summary

Issues Involved:
1. Validity of reopening of assessment under Section 147/148 of the Income Tax Act.
2. Classification of the land as agricultural or non-agricultural for capital gains tax purposes.
3. Reliance on the statement of a third party recorded at the back of the assessee.
4. Documentary evidence regarding the distance of the land from municipal limits.
5. Nature and classification of the land as per revenue records and its actual use.

Issue-wise Detailed Analysis:

1. Validity of Reopening of Assessment under Section 147/148 of the Income Tax Act:
The assessee contested the reopening of the assessment, arguing that there was no cogent material for the Assessing Officer (AO) to form a belief that income had escaped assessment. The AO cited information from a search at the residence of Mr. Suresh V. Parulekar, where a sale deed was found, leading to the belief that the assessee had not disclosed capital gains from a land sale. However, the Tribunal found discrepancies in the AO's reasons for reopening, noting that the AO incorrectly stated that a sale deed between the assessee and M/s Delanco Home & Resorts Pvt. Ltd. was found during the search. The Tribunal held that the AO's belief was based on incorrect facts and did not meet the requirement of "reason to believe" under Section 147. Consequently, the reopening of the assessment was deemed invalid.

2. Classification of the Land as Agricultural or Non-Agricultural for Capital Gains Tax Purposes:
The AO argued that the land was not agricultural, citing its classification as residential in the Master Development Plan of Goa, lack of agricultural operations, and the assessee's intention to develop the land for residential purposes. The Tribunal, however, found that the land was classified as an orchard in revenue records and that no actual change in its use had occurred. The assessee provided evidence of maintaining the land as an orchard, including employing workers and selling fruit crops. The Tribunal concluded that the land retained its agricultural character and was not subject to capital gains tax.

3. Reliance on the Statement of a Third Party Recorded at the Back of the Assessee:
The AO and the Commissioner of Income Tax (Appeals) [CIT(A)] relied on the statement of Mr. Suresh Parulekar, recorded during a search, to support their findings. The Tribunal noted that the statement was recorded without the assessee's knowledge and opportunity to cross-examine, violating principles of natural justice. The Tribunal emphasized that reliance on such statements is unjust and contrary to the Supreme Court's rulings in Kishinchand Chellaram and Tek Ram.

4. Documentary Evidence Regarding the Distance of the Land from Municipal Limits:
The assessee provided certificates from the Village Panchayat, Talathi, and a Registered Land Valuer, indicating that the land was more than 10 kilometers from Panaji's municipal limits. The AO's claim of measuring the distance by aerial route was rejected as the law required measuring by the shortest motorable road. The Tribunal found the assessee's evidence credible and concluded that the land was beyond the specified distance, qualifying it as agricultural land.

5. Nature and Classification of the Land as per Revenue Records and Its Actual Use:
The AO's contention that the land was purchased and sold for residential purposes, with no agricultural operations, was rejected. The Tribunal highlighted that the land was classified as an orchard in revenue records and that the assessee maintained it as such. The Tribunal also noted that the previous owner treated the land as business stock, not as a capital asset, and did not alter its agricultural character. The Tribunal concluded that the land was agricultural and exempt from capital gains tax.

Conclusion:
The Tribunal allowed the appeal, quashing the reassessment order and deleting the additions made by the lower authorities. The Tribunal emphasized the importance of accurate facts, adherence to legal principles, and credible evidence in tax assessments.