2021 (7) TMI 1039 - HC - Income Tax

Revision u/s 264 - computation of income from capital gains - HELD THAT - The expression capital asset is defined under Section 2(14) of the Act. While defining capital asset under the said provision, agricultural land in India is not included. However, by way of exception, certain agricultural lands are included which are stated in Section 2(14)(iii)(a) or (b) of the Act. Before applying Section 48 of the Act, it is necessary to ascertain whether the subject matter of transfer, namely immovable property or land is agricultural land or not. If it is to be construed to be agricultural land, then the parameters as stipulated under Section 2(14) has to be applied. In the instant case, we find that the Assessing Officer has not applied the parameters as stipulated under Section 2(14)(iii), inasmuch as either sub-clause (a) or sub-clause (b) would apply. Even while applying the said sub-clauses, there are certain criteria mentioned within the sub-clauses, which have been applied to the subject matter of transfer before demanding tax on capital gains on the transfer of land. Section 2(47) defines transfer in relation to a capital asset. Therefore, there has to be a transfer of a capital asset within the meaning of Section 2(47) of the Act, also before the said tax is attracted. Hence, if there is (i) transfer and (ii) of a capital asset, as defined under the provisions of Section 2 of the Act, then it would attract Section 48 and other related provisions of Chapter-IV of the Act, for the purpose of raising a demand with regard to capital gains . In the instant case, on perusal of the order of the AO, we find that the aforesaid provisions have not been applied to the facts of the case. Although, there is a detailed discussion with regard to the nature of the transaction, as to whether it is a transfer or not, we find there is no application of mind as to whether the subject lands are capital asset or not. We reiterate that unless the subject matter of transfer are capital assets, there cannot be any demand under Chapter-IV of the Act. Therefore, the assessees herein preferred a revision under Section 264 of the Act. Admittedly, the revision petition was filed in time, as the limitation period is one year from the date on which the order in question was communicated or the date on which the assessee otherwise came to know of it. There is no controversy with regard to the revision petition being belated in the instant case. However, we find that the revisional Authority had to consider the revision in light of the observations we have made above, as the Assessing Officer has not considered the case in that light. Thus we set aside the order of the revisional Authority - remand the matter to the concerned Assessing Officer to consider the case of the assessee.

Summary

Issues:
1. Correctness of order under Section 264 of the Income Tax Act.
2. Application of Section 48 of the Act to compute income from capital gains.
3. Definition of "capital asset" under Section 2(14) of the Act.
4. Assessment of whether the subject lands are capital assets.
5. Consideration of revision petition in light of observations made.

Analysis:
1. The judgment questions the legality of the order dated 20.2.2018 passed by the Single Judge in Writ Petition Nos. 54836-387/2017. The appellants had bypassed the remedy under Section 246A of the Income Tax Act and opted for a revision under Section 264. The High Court clarified that the assessees were within their rights to choose the revision remedy instead of filing an appeal, contrary to the Single Judge's observations.

2. The case involved lands subject to a joint development agreement, potentially attracting tax on capital gains. The computation of income from capital gains under Chapter-IV of the Act, specifically Section 48, requires deduction of certain amounts from the consideration received for the transfer of a capital asset. The definition of "capital asset" under Section 2(14) excludes agricultural land unless specified exceptions apply. The Assessing Officer failed to apply these parameters to determine if the lands in question were indeed capital assets.

3. Section 2(47) defines "transfer" in relation to a capital asset, necessitating both a transfer and a capital asset to attract tax under Section 48 and related provisions. The judgment highlighted the lack of application of these provisions by the Assessing Officer in the case, emphasizing the importance of establishing the subject lands as capital assets before raising a demand for capital gains tax.

4. While the revision petition was timely filed, the revisional Authority and the Assessing Officer did not adequately consider whether the subject lands qualified as capital assets. The Court set aside the orders and remanded the matter to the Assessing Officer for reconsideration in light of the observations made in the judgment and in accordance with the law.

5. The High Court criticized the Single Judge for not delving into the crucial aspect of whether the subject lands were indeed capital assets, which was pivotal to the case. By setting aside the previous orders and remanding the matter for reassessment, the Court ensured a proper evaluation based on the legal provisions and definitions relevant to capital gains taxation.