2007 (12) TMI 241 - AT - Income Tax

Reopening of assessment - invalid notice - Income Escaping Assessment - issuance of notice u/s 148 by assuming jurisdiction - Valuation of agricultural land - invoking the provisions of section 131 (d) - HELD THAT - It is clear that the capital gain is to be computed by deducting from the 'full value' of the consideration received or accruing as a result of the transfer of the capital asset i.e., the cost of acquisition and expenditure incurred in connection with the transfer are to be deducted from the full market value of the asset. The expression 'full value of the consideration' does not mean 'market value' or 'fair market value' of the asset transferred. Hence, capital gain tax cannot be computed and levied with reference to the market value determined on the basis of valuation report. Hence, from this angle also the basis for reopening of the assessment for taxing capital gain in the hands of the assessee, being market value as estimated by the Departmental Valuation Officer cannot be a proper basis under the relevant provisions of law contained under section 48 of the Income-tax Act for the reopening of the assessment. There is another aspect of the matter. The valuation report is an expert opinion at the most. In relation to the transaction of transfer such report cannot be treated to be proof of the fact that there is some under hand dealing and consideration has passed more than what is disclosed. Since in the present case the reasons recorded for reopening and the facts taken into account for formation of belief by the Assessing Officer that income of the assessee has escaped assessment is based on the report of DVO, in view of the above authorities, the assumption of jurisdiction under section 148 by the Assessing Officer on this basis is not legally justified. The contention of the assessee that the 'reason to believe' should be considered with reference to the relevant provisions of the Act under which the income is chargeable to tax also carries force. In the instant case, therefore, the Assessing Officer was required to base his reasons for reopening of the assessment with reference to the provisions of section 48. He has not done so. On the other hand, he has gone on totally irrelevant consideration which is estimated value of the land, which aspect is not relevant so far as section 48 is concerned. The issuance of notice under section 148 by assuming jurisdiction on the basis of such irrelevant material, is not justified in law. Since notice issued under section 148 in the instant case has not been issued after testing the grounds of issuing such notice in the light of section 48, the jurisdiction of the Assessing Officer in issuing such a notice on the basis of such material, as has been taken by the Assessing Officer in this case, is not justified. In view of the above discussion, ground Nos. 1, 2 and 3 as taken in this appeal are allowed. In view of our finding on ground Nos. 1 to 4, the assessment order is quashed and on these grounds the appeal of the assessee is allowed - As we have quashed the assessment order, we are not required to adjudicate other grounds raised in this appeal and go into the merits of the case. Assessee's appeal stands allowed accordingly.

Issues Involved:
1. Applicability of sections 147/148 of the Income-tax Act, 1961.
2. Validity of the reference to the Valuation Officer under section 131(1)(d).
3. Legality of the reopening of the assessment based on the valuation report.
4. Computation of capital gains under section 48 of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Applicability of sections 147/148 of the Income-tax Act, 1961:
The assessee contended that the provisions of sections 147/148 were not applicable as the Assessing Officer (AO) had no valid material to believe that income had escaped assessment. The AO issued a notice under section 148 based on a valuation report estimating the value of agricultural land at a higher figure than declared by the assessee. The Tribunal found that the AO did not examine any material other than the valuation report before reopening the assessment, which indicated a lack of judicial application of mind. Therefore, the reopening of the assessment was deemed invalid.

2. Validity of the reference to the Valuation Officer under section 131(1)(d):
The assessee argued that the reference to the Valuation Officer was illegal as it was made when no proceedings were pending before the AO. The Tribunal noted that the reference was made on 31-3-2000, prior to the filing of the return, and hence, no proceedings were pending. The Tribunal relied on various judicial precedents, including the decisions of the Patna High Court in Smt. Rina Sen v. CIT and the Madhya Pradesh High Court in CIT v. Nevendram Ahuja, which held that the existence of pending proceedings is a condition precedent for exercising power under section 131(1). Consequently, the reference was deemed invalid.

3. Legality of the reopening of the assessment based on the valuation report:
The Tribunal observed that the AO's belief regarding the escapement of income was solely based on the valuation report without any other material or inquiry. The Tribunal cited the Rajasthan High Court's decision in Brig. B. Lall v. ITO and the Madhya Pradesh High Court's decision in Bhagwandas Jain v. Dy. CIT, which held that reopening based on a valuation report is not valid. As the reference itself was illegal, the subsequent reopening of the assessment based on such a report was also deemed illegal.

4. Computation of capital gains under section 48 of the Income-tax Act:
The assessee contended that capital gains should be computed based on the provisions of section 48, which involve deducting the cost of acquisition and expenditure from the full value of the consideration received. The Tribunal noted that the AO had based the reopening on the estimated market value rather than the actual consideration received. The Tribunal referred to the Supreme Court's decision in CIT v. George Henderson & Co. Ltd., which clarified that 'full value of the consideration' means the actual price received and not the market value. Therefore, the basis for reopening the assessment on the estimated market value was not legally justified.

Conclusion:
The Tribunal quashed the assessment order on the grounds that the reference to the Valuation Officer was invalid, the reopening of the assessment based on the valuation report was illegal, and the computation of capital gains should be based on the actual consideration received as per section 48. The appeal of the assessee was allowed, and other grounds raised in the appeal were not adjudicated.

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