2022 (12) TMI 503 - AT - Income Tax

Reopening of assessment u/s 147 - reasons to believe that the long term capital gain from the said transaction is taxable, and the income, to that extent, has escaped assessment - year of transfer in which the taxability arises - AO noted that the assessee was a director of M/s Abid Steels Co Ltd (ASCL, in short) and the assessee had given his personal guarantee to, on behalf of the ASCL and in respect of its commercial borrowings from, the State Bank of India - HELD THAT - Transaction before us is concerned, that is between the ARC and the end buyer but the very fact that ARC is selling the property as the owner of the property does indicate that the transfer from the assessee to the ARC, via SBI perhaps, taken place at an earlier stage. That is the year of transfer in which the taxability arises so far as the assessee is concerned. There is no categorical finding about that aspect of the matter at any stage. It is also not clear as to what is the date on which the transfer took place from the assessee to the State Bank of India, and what is the documentation or court/ DRT orders in this regard. This aspect of the matter has simply not been examined. We deem it fit and proper to remit the matter to the file of the CIT(A) for recording a specific finding in this regard, after giving a due and reasonable opportunity of hearing to the assessee, in accordance with the law and by way of a speaking order. The question of taxability of capital gains will arise only in the year in which such a transfer takes place. As the matter is being reknitted to the file of the CIT(A) for this purpose, all contentions remain open. There is, also, a fundamental point regarding the protection of legitimate interests of the revenue. In most of the cases in which the assets are taken over, as part of the recovery of commercial borrowings, by the bankers, or by the ARCs, the owners of these assets are not in a position to pay their dues, and that is the reasons that these assets get taken over. On a conceptual note, that is an undesirable situation, and it is time that the Government seriously considers protecting its legitimate interests by ensuring some mechanism to ensure that the tax liability on the capital gains is duly recovered from the borrower whose property is sold, and when it is not possible to do so on account of the borrower‟s genuine financial difficulties, from the person who receives the proceeds of the sale of such assets. As we have remitted the matter to the file of the CIT(A) for fresh adjudication, after taking a call on the year in which the actual transfer has taken place, the issues raised by the assessee with respect to the correct quantification of capital gains are academic at this stage. Appeal is allowed for statistical purposes.

Summary

Issues:
Challenge to correctness of order dated 3rd September 2015 under section 143(3) r.w.s. 147 for assessment year 2006-07.

Analysis:
The appeal challenges the order passed by the CIT(A) regarding the assessment under section 143(3) r.w.s. 147 of the Income Tax Act, 1961, for the assessment year 2006-07. The case involves a reopened assessment due to the sale of immovable property by the assessee. The Assessing Officer noted that the assessee was a director of a company and had given a personal guarantee for its borrowings. The property owned by the assessee was given as collateral security to a bank, which later assigned it to another company. The property was eventually sold to a developer. The Assessing Officer taxed the entire sale amount as long-term capital gain, leading to the appeal by the assessee.

The Tribunal observed that the crucial aspect for taxability is the year in which the transfer of the property took place from the assessee. The transfer from the assessee to the Asset Reconstruction Company (ARC) was considered significant, and the Tribunal found a lack of examination on this matter. Therefore, the Tribunal remitted the case back to the CIT(A) for a specific finding on the year of transfer, ensuring due process and a speaking order. The question of taxability of capital gains is linked to the year of transfer, which needs clarification.

Furthermore, the Tribunal highlighted the issue of protecting the revenue's interests in cases where assets are taken over for recovery by banks or ARCs. The concern raised was that the tax liability on capital gains falls on the asset owner, even if the sale proceeds go entirely to the banks, leaving the revenue at a loss. The Tribunal suggested the government consider mechanisms to secure tax liabilities in such transactions to prevent revenue losses and avoid subsidizing banks unintentionally.

Given the remittance of the case to the CIT(A) for reevaluation, the Tribunal deemed the issues raised by the assessee on capital gains quantification premature. The CIT(A) was directed to reexamine the capital gains calculation, considering indexed cost of acquisition and improvements, based on the clarified year of transfer. The appeal was allowed for statistical purposes, emphasizing the need for a comprehensive reassessment by the CIT(A) in light of the clarified transfer year.

In conclusion, the Tribunal's judgment focused on clarifying the year of transfer for taxability, addressing revenue protection concerns in asset sale transactions, and directing a fresh assessment by the CIT(A) on capital gains quantification based on the revised findings.