2024 (6) TMI 1054 - AT - Income Tax

Reopening of assessment u/s 147 - gain on sale of property - real owner - determination of ownership of the property - land belonged to the firm or partners - AO had apparently proceeded on the premise that it is the assessee firm which had sold the land - notice issued in the address of the property which has already been sold HELD THAT - It is not in dispute that assessee s case is non-PAN case and the assessee had not filed its return of income for AY 2011-12, even in response to notice issued u/s 148 of the Act. It is not in dispute that the notice u/s 148 has been issued by speed post in the address of the property which has already been sold. Hence the notice u/s 148 of the Act could not be served at all on the assessee. Though the ld AO had stated that the said notice was duly served on the assessee, the same is factually incorrect. In view of the fact that the address mentioned in the notice is the very same property address which had already been sold even according to the ld AO. But the crucial fact remain is that the land never belonged to the firm and it was owned and belonged to the partners. In fact, the notice issued u/s 148 of the Act has been returned unserved. The remark very clearly shows that the assessee firm existed in the said address and was merely using the property owned by the partners as the address of the assessee firm and that since the properties were sold by the partners prior to the issuance of notice u/s 148 of the Act, the assessee firm was not existent in that address and the notice u/s 148 of the Act had to be returned undelivered by the postal authorities. The sale deeds were indeed executed only by few individuals who are partners in the firm. This fact was duly brought on record by the assessee before the ld AO himself in response to show cause notice which have been completely ignored by the ld AO. The details of name of the persons who owned the property, together with the area owned by him, date of purchase of the property by that individual, value of purchase of property by that individual and the details of sale made by those individuals to third-party were duly tabulated by the CIT(A). All these facts very clearly goes to prove that the property was never owned by the firm and that it was owned only by the partners. It is also not the case of the revenue that the subject mentioned property was brought as capital contribution by the partners in the assessee firm in terms of section 45(3) of the Act. It is also pertinent to note that the said property along with stone crusher machines were sold at ₹ 91,74,000/-, and the said sums were credited in the bank accounts of the concerned individuals. None of the credits were made in the bank account of the assessee firm. Hence, the entire facts recorded by the AO and the reasons recorded for reopening the assessment and the assessment order are factually incorrect. Since, the reopening has been made on incorrect assumption of facts by the ld. AO, we have no hesitation in quashing the entire re-assessment proceedings. Decided in favour of assessee.

Summary

Issues:
1. Validity of proceedings under section 147 of the Income-tax Act, 1961.
2. Service of jurisdictional notice under section 148.
3. Treatment of short-term capital gains in the reassessment.
4. Admission of additional evidence by the CIT(A).

Issue 1: Validity of proceedings under section 147:
The appeal challenged the initiation of proceedings under section 147 based on vague information without proper verification. The AO issued a notice under section 148 for reassessment due to alleged undisclosed income from the sale of property. The AO's reasons for reopening the assessment included non-filing of returns and unexplained cash deposits. However, the property in question was owned by individual partners, not the assessee firm. The AO failed to consider this crucial fact, leading to an incorrect assumption of facts. The CIT(A) dismissed additional evidence without proper evaluation, resulting in the quashing of the reassessment proceedings due to incorrect factual assumptions.

Issue 2: Service of jurisdictional notice under section 148:
The notice under section 148 was sent by speed post to the property address, which had already been sold by the partners. Since the property did not belong to the firm and the partners had sold it before the notice, the notice was returned undelivered. The AO incorrectly claimed that the notice was duly served, disregarding the fact that the property was no longer owned by the firm. The CIT(A) failed to acknowledge this discrepancy, leading to the quashing of the reassessment proceedings.

Issue 3: Treatment of short-term capital gains in the reassessment:
The AO treated the sale consideration of the property as short-term capital gains of the assessee firm without considering that the property belonged to individual partners. The partners had sold the property, and the sale proceeds were credited to their bank accounts, not the firm's account. Despite the explanation provided by the assessee, the AO proceeded to assess the gains as income of the firm. The CIT(A) upheld this action without admitting crucial additional evidence, resulting in an incorrect assessment of short-term capital gains.

Issue 4: Admission of additional evidence by the CIT(A):
The assessee submitted additional evidence, including sale deeds and bank statements of individual partners, to prove that the property belonged to the partners, not the firm. However, the CIT(A) refused to admit these documents under Rule 46A(1) of the Income Tax Rules, leading to the dismissal of the evidence without proper consideration. This failure to evaluate the additional evidence contributed to upholding the incorrect assessment by the AO.

In conclusion, the Appellate Tribunal quashed the reassessment proceedings due to incorrect assumptions of facts by the AO and the CIT(A)'s failure to consider crucial evidence. The incorrect treatment of short-term capital gains and the improper service of the notice under section 148 were pivotal factors in the decision to allow the appeal raised by the assessee.