2023 (11) TMI 934 - AT - Income Tax

Reopening of assessment - Correct head of income - LTCG or business income - disallowing indexation on cost of acquisition and treating LTCG as business income - assessee contributed in the form of land in the Joint Development Agreement - as argued assessee itself has converted its investment into stock in trade, therefore, the income generated from transfer of such investment should be considered as business receipt and not the income chargeable under the head capital gains - HELD THAT - In the present case since the assessee company as the owner has agreed to sell and transfer its rights, title, and interest in the land in favour of the developer as per the requirement of Developer, thus has contributed in the form of land in the Joint Development Agreement, in turn the assessee as consideration towards the extinguishment of rights in the land has received 29% of the properties constructed apart from cash consideration. In such a case taxability of the income which the assessee has credited on accrual basis and offered for taxation in the relevant assessment years requires to be worked out under the provisions of section 45(2) r.w.s. 48, i.e. long-term capital gain for the sale of the land as well as profit from the sale of the developed property would be computed in accordance with the provisions of s. 45(2) r.w.s. 48 of the Act and under the head Income from business respectively. Thus, the reasons recorded by the Ld AO u/s 148(2) treating the income to chargeable under the head Business and Profession are found to be under wrong appreciation of facts and erroneous application of law, which is not permissible. This aspect is covered by the judgment relied upon by the assessee, in the case of Prakriya Pharmacem 2016 (1) TMI 946 - GUJARAT HIGH COURT wherein as categorically held that, under the circumstances, the reasons recorded by the Assessing Officer to form belief that the income chargeable to tax had escaped assessment lack validity for the simple reason that an attempt was as made by the AO to apply certain provisions of the Act, which were not apply in the case on hand.Thus, the notice u/s 147 for reopening is set aside. Thus the belief formed by the Ld. AO was misconceived, which lead to recording of reasons without considering the provision of sections 45(2) r.w.s. 2(47) and section 48 of the Act, therefore, such proceedings for initiating the reopening assessment under the provisions of section 147/148 to charge the income escaped assessment was bad in law, thus, can not be held as valid. Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the jurisdiction assumed under Section 147.
2. Classification of income as business income or long-term capital gains (LTCG).
3. Validity of the notice issued under Section 148.

Summary:

1. Validity of the jurisdiction assumed under Section 147:
The assessee contended that the reasons recorded for the escaped income of Rs. 1,92,42,016/- were based on presumption and lacked tangible material, violating Section 45(2) r.w.s. 2(47)(v). The tribunal noted that the reasons recorded by the Assessing Officer (AO) were based on erroneous application of law and wrong appreciation of facts. The tribunal referred to the case of Prakriya Pharmacem vs ITO, where the Hon'ble Gujarat High Court held that reasons recorded by the AO lacked validity if they were based on incorrect application of law. Consequently, the tribunal quashed the reopening of the assessment under Section 147.

2. Classification of income as business income or LTCG:
The AO treated the entire amount of Rs. 5,55,16,600/- as business receipt, arguing that the assessee had converted the land into stock-in-trade. However, the tribunal observed that the assessee had entered into a joint development agreement and was entitled to a share of the developed property. The tribunal referred to the case of DCIT Vs. Nagam Suguna, which clarified that in joint development agreements, the income should be computed under Section 45(2) r.w.s. 48, i.e., long-term capital gain for the sale of land and profit from the sale of developed property under "Income from business." The tribunal found that the AO's belief was misconceived and the income should be classified accordingly.

3. Validity of the notice issued under Section 148:
The assessee argued that the notice under Section 148 was invalid due to delayed delivery and incorrect address. The AO relied on Section 292B, which allows for correction of clerical errors. The tribunal, however, found that the reasons for reopening were based on incorrect application of law, rendering the notice under Section 148 invalid. The tribunal quashed the notice and the subsequent order passed under Section 147.

Conclusion:
The tribunal allowed the cross-objection filed by the assessee, quashed the order passed under Section 147, and dismissed the appeal filed by the revenue. The tribunal held that the reopening of the assessment was invalid due to incorrect application of law and lack of tangible material. The income should be classified under the appropriate heads as per the joint development agreement and relevant sections of the Income Tax Act.