2024 (8) TMI 339 - AT - Income Tax

Reopening of assessment u/s 147 - method of computation of income by the assessee was erroneous and the provisions under section 50C of the Act are applicable in respect of the sale transaction held on 21/01/2009 - HELD THAT - Hon ble Apex Court in the cases of P.V.S. Beedies (P.) Ltd 1997 (10) TMI 5 - SUPREME COURT and R.K. Malhotra, Income-tax Officer 1977 (8) TMI 3 - SUPREME COURT held that the audit department was the proper machinery to scrutinise assessments made by the ITO and to point out errors of law contained therein, but such a view was disapproved in a subsequent decision in the case of Indian Eastern Newspaper Society 1979 (8) TMI 1 - SUPREME COURT wherein it was held that the expression information is an indispensable ingredient and it shall be in respect of either fact or law, and if it is in respect of law, it must flow from a formal source. AO himself must interpret and determine the law applicable to the facts of the case, but any interpretation of law from any external source cannot constitute the requisite information for the purposes of section 147 of the Act. Other than the Revenue Audit Report, there is no new material as to the fact or law. Revenue audit pointed out the discrepancy in the method of computation of the long term capital gains. Revenue audit party was obviously referring to the applicability of section 50C of the Act to the sale that took place on 21/01/2009. The report of the Revenue Audit Party on the question whether or not section 50C of the Act is applicable to the sale dated 21/01/2009 is only its interpretation and opinion on that aspect and never will it partake the character of law and, therefore, such an interpretation of Revenue Audit Party is not information of law, but it is only its interpretation of law. Interpretation of law is no basis for reopening of proceedings u/s 147 of the Act. Knowledge gained by the AO about a law from a formal source subsequent to the conclusion of the assessment proceedings, stands on a different footing than the interpretation of the existing law by the Revenue Audit Party. We, therefore, find it difficult to agree with the learned DR that the internal audit report constitutes the information under section 147 of the Act. The reasons recorded by AO further show that the issue requires verification through scrutiny proceedings by reopening the assessment also further shows that the basis for reopening is not the reason to believe, but it is only a reason to suspect as has been held in the case of Mukesh Modi 2015 (2) TMI 640 - RAJASTHAN HIGH COURT held that action of reopening by the AO per se, founded on mere change of opinion and the same cannot satisfy the legislative intent that the learned AO had reason to believe that any income chargeable to tax had escaped. Applicability of section 50C - According to the assessee, prior to its conversion into stock in trade on 02/01/2008 such an asset was capital asset in nature, but it was converted into stock in trade - HELD THAT - Section 50C of the Act has no application to the sale of the property after its conversion into stock in trade in view of the binding precedents reported in the cases of Thiruvengadam Investments Pvt. Ltd 2009 (12) TMI 48 - MADRAS HIGH COURT and Inderlok Hotels Pvt. Ltd. 2009 (2) TMI 235 - ITAT BOMBAY-I and, therefore, on merits also, the assessee succeeds. Grounds are answered in favour of assessee.

Summary

Issues Involved:
1. Legality of reopening the assessment under section 147 of the Income Tax Act.
2. Applicability of section 50C of the Income Tax Act to the sale of property converted from capital asset to stock in trade.

Detailed Analysis:

1. Legality of Reopening the Assessment under Section 147 of the Income Tax Act:
The primary issue in this appeal is whether the reopening of the assessment by the Assessing Officer (AO) under section 147 of the Income Tax Act was lawful. The assessee challenged the reopening on the grounds that the reasons for reopening were not furnished and that the internal audit report cannot be a source of new information for the purposes of section 147.

The court examined the submissions and relevant case laws. The assessee relied on the decision in Indian & Eastern Newspaper Society vs. CIT, which held that the interpretation of law by an external source, such as an audit party, does not constitute 'information' under section 147. The court noted that the AO did not refer to any external source of information other than the internal audit report. The audit report pointed out discrepancies in the computation of long-term capital gains, but this interpretation of law by the audit party does not qualify as 'information' for reopening the assessment.

The court also referred to Mukesh Modi vs. DCIT, where it was held that reopening based on verification or suspicion does not satisfy the legislative intent of 'reason to believe' that income has escaped assessment. The court concluded that the reopening of the assessment in this case was based on suspicion rather than concrete information, making it unsustainable under law.

2. Applicability of Section 50C of the Income Tax Act to the Sale of Property Converted from Capital Asset to Stock in Trade:
The second issue pertains to whether section 50C of the Income Tax Act applies to the sale of property that had been converted from a capital asset to stock in trade. The assessee argued that section 50C, which deals with the valuation of capital assets for the purpose of computing capital gains, does not apply to property sold as stock in trade.

The court examined the facts and noted that the property in question was converted from a capital asset to stock in trade on 02/01/2008 and subsequently sold on 21/01/2009. The court referred to precedents, including CIT vs. Thiruvengadam Investments Pvt. Ltd. and Inderlok Hotels Pvt. Ltd. vs. ITO, which held that section 50C applies only to capital assets and not to stock in trade.

The court found that the Revenue authorities did not provide any reasons to counter the assessee's contention that section 50C does not apply to stock in trade. The court also noted that the conversion of the property from a capital asset to stock in trade was not disputed and had been judicially recognized in the assessee's own case for the assessment year 2008-09.

Based on the binding precedents and the undisputed conversion of the property, the court held that section 50C does not apply to the sale of the property after its conversion into stock in trade. Consequently, the addition made by the AO under section 50C was not justified.

Conclusion:
The court concluded that the reopening of the assessment under section 147 was erroneous and unsustainable under law. Additionally, section 50C of the Income Tax Act does not apply to the sale of property converted from a capital asset to stock in trade. Therefore, the appeal of the assessee was allowed.