2021 (9) TMI 800 - AT - Income Tax

Revision u/s 263 by CIT - case of the assessee was selected for limited scrutiny through CASS - Characterization of assessee income - capital receipt OR Business income - activity of purchasing land by the assessee and then converting it into flats and selling after construction to other co-owners - HELD THAT - PCIT while deciding this issue has completely ignored and overlooked the specific assertions made by the assessee by filing its written submissions dated 11/02/2021 wherein it was specifically pleaded as to why the ld. PCIT has misconstrued the facts of the present case. Apart from this, the ld. PCIT has ignored the very important fact that the same activity on the same land was carried out by the assesse in the previous year i.e. A.Y. 2015-16 as well wherein also the then A.O. had treated the activity of the assessee as business activity and the income of the assesse was considered as business income instead of capital gains. The said order passed by the A.O. was challenged before the ld. CIT(A) and thereafter before the ITAT. The Coordinate Bench of the ITAT after considering the entire facts and circumstances of the case of the assessee had finally decided and concluded that the activities of the assessee is to be taxed under the head capital gains by treating the assets/income as capital asset/income instead of business asset/income and all the expenses borne by the assessee were also construed as part of cost of improvement. Thus the order of the A.O. for the year under consideration treating the asset as capital asset and allowing the claim of exemption U/s 54F of the Act etc. cannot be termed as improper or made without verification or prejudicial to the interest of Revenue. Moreover, after perusal of the record, we found that the A.O. had carried out all the required verifications and had taken the same view as has been taken by the Coordinate bench of the ITAT in assessee s own case 2020 (5) TMI 236 - ITAT JODHPUR . We draw strength from the decision of Union of India Vs Kamalakshmi Finance Corpn. Ltd 1991 (9) TMI 72 - SUPREME COURT wherein it was held that the order passed by the Income Tax Appellate Tribunal are having binding effect upon all the subordinate authorities under the jurisdiction of the said Tribunal, therefore, in order to judicial discipline, the ld. PCIT was not empowered to invoke the provisions of Section 263 of the Act more particularly when he was made aware of the fact that identical issue had already been decided and attained finality by the decision of the Coordinate Bench of the ITAT in assessee s own case for the A.Y. 2015-16 under the identical facts and circumstances. Therefore, order passed by the A.O. cannot be termed as erroneous and prejudicial to the interest of the Revenue, hence, we quash the order passed U/s 263 of the Act. - Decided against revenue.

Issues Involved:
1. Validity of the order under Section 263 due to non-quotation of Document Identification Number (DIN).
2. Classification of gains from the transfer of capital assets as Capital Gains versus Business Income.
3. Enhancement of the scope of limited scrutiny by the Principal Commissioner of Income Tax (Pr.CIT).
4. Directions to the Assessing Officer (AO) to examine the source of investment in land purchase.

Issue-wise Detailed Analysis:

1. Validity of the Order under Section 263 due to Non-quotation of DIN:
The assessee argued that the order framed by the Pr.CIT invoking Section 263 is void ab initio as it did not quote a computer-generated Document Identification Number (DIN) as mandated by CBDT Circular No. 19/2019 dated 14/08/2019. The circular specifies that any communication without a DIN is invalid and shall be deemed to have never been issued unless issued manually under exceptional circumstances with prior written approval. The order under consideration lacked a DIN and did not state it was issued manually with the required approval, rendering it invalid.

2. Classification of Gains from Transfer of Capital Assets:
The Pr.CIT held that the gains from the transfer of capital assets should be taxed as Business Income, overriding the ITAT's binding judgment in the assessee's own case for AY 2015-16, which treated similar gains as Capital Gains. The assessee contended that the Pr.CIT misconstrued facts, as the land was purchased long ago, and there was no frequent purchase or construction of flats. The ITAT in AY 2015-16 had already decided that such activities should be taxed under Capital Gains, considering the long-term holding and the lack of business intent. The ITAT reaffirmed its previous decision, emphasizing that the Pr.CIT should have followed the binding precedent, and thus, the AO's order treating the asset as a capital asset was neither erroneous nor prejudicial to the interest of revenue.

3. Enhancement of the Scope of Limited Scrutiny:
The case was selected for limited scrutiny to examine whether investment and income relating to properties were duly disclosed and whether deductions from capital gains were claimed correctly. The Pr.CIT's directions to the AO to examine and verify the source of investment and the nature of sales transactions effectively converted the limited scrutiny into a complete scrutiny. This was beyond the permissible scope as per CBDT instructions, which restrict the scope of inquiry in limited scrutiny cases. The ITAT held that the Pr.CIT's enhancement of the scope was not permissible under law.

4. Directions to AO to Examine Source of Investment:
The Pr.CIT directed the AO to examine the source of investment made by the assessee and his brother in the purchase of land. The assessee argued that the purchase of land was made in an earlier year, and the source of investment was irrelevant to the computation of taxable income for the year under consideration. Additionally, the source of investment by the brother of the assessee had no relevance to the assessment of the assessee. The ITAT found that such directions were beyond the scope of Section 263, as they did not pertain to the year under consideration and were irrelevant to the assessee's assessment.

Conclusion:
The ITAT quashed the Pr.CIT's order under Section 263, holding that the AO's order was not erroneous or prejudicial to the interest of revenue. The ITAT emphasized the importance of adhering to binding precedents and the limitations of the scope of limited scrutiny. The appeals of the assessee were allowed, reaffirming the classification of gains as Capital Gains and invalidating the Pr.CIT's directions.

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