1987 (9) TMI 114 - AT - Income Tax

Summary

Issues Involved:
1. Validity of reopening the assessment under section 147(b).
2. Whether the capital gains from property sold in Malaysia are taxable in India.
3. Correctness of the cost of acquisition date used for calculating capital gains.

Detailed Analysis:

1. Validity of Reopening the Assessment Under Section 147(b):

The primary issue was whether the reopening of the assessment under section 147(b) was valid. The assessee contested the reopening, arguing that the Income Tax Officer (ITO) did not properly record the reasons for initiating proceedings under section 147(b) before issuing the notice under section 148, as required by section 148(2). The Tribunal examined the order sheet entries and other documents, including a letter dated 16.11.1983 from the ITO to the Commissioner of Income Tax (CIT), and concluded that the ITO had not recorded his reasons for reopening the assessment. The Tribunal emphasized that the recording of reasons is a mandatory requirement under section 148(2) and that mere compliance with a directive from the Inspecting Assistant Commissioner (IAC) does not fulfill this requirement. Consequently, the Tribunal held that the initiation of action under section 148 was invalid, and the reassessment order dated 05.03.1985 was quashed.

2. Whether the Capital Gains from Property Sold in Malaysia are Taxable in India:

The Tribunal referred to its earlier decision in ITA No. 525/Mad/84 dated 26th October 1984, where it had upheld the CIT (A)'s decision to exclude capital gains from the assessment on the grounds that such gains were not chargeable to tax in India by virtue of Article 6 of the Agreement for the Avoidance of Double Taxation between India and Malaysia. Although the CIT (A) had upheld the reopening of the assessment, he had deleted the quantum of the capital gains included, following the Tribunal's earlier decision. Since the reassessment was quashed on procedural grounds, the Tribunal did not express any further opinion on the merits of the capital gains taxation issue.

3. Correctness of the Cost of Acquisition Date Used for Calculating Capital Gains:

The original assessment had used the market value as of 01.01.1964 to calculate the capital gains. However, the Internal Audit Party raised an objection, suggesting that the cost of the properties as recorded in the books should have been used instead, based on judicial precedents from the Madras High Court. The ITO, influenced by the audit objection and judicial pronouncements, initiated reassessment proceedings to correct the cost of acquisition date. However, as the Tribunal found the reopening of the assessment invalid due to the failure to record reasons, the reassessment order was quashed, and the Tribunal did not delve into the merits of the cost of acquisition date issue.

Conclusion:

The Tribunal allowed the assessee's appeal, quashing the reassessment order dated 05.03.1985 due to the invalid initiation of proceedings under section 147(b). Consequently, the appeal of the Revenue was dismissed. The Tribunal did not express any further opinion on the merits of the capital gains taxation or the correctness of the cost of acquisition date used.