2024 (9) TMI 221 - HC - Income Tax

Validity of reopening of assessment u/s 147 - reasons to believe - difference between the change of opinion and reasons to believe - Classification of income as capital gains or business income - source and genuineness of investment made as well as short term capital gain received by the assesee remained unexplained - HELD THAT - No document has been produced by the respondents to show that they had any new information or documentary evidence for reopening of the case while the power is available with them. The same has to be exercised carefully and sanctity of assessments already done should be maintained. Merely because a new assessing officer may not be happy with the manner in which assessment was done earlier, cannot be a reason to review assessment. The power available, as noticed above, is of reassessment and not of review of earlier assessment. Petitioner had challenged the order and notice as well as show cause notice along with the draft assessment order before this Court. When the case came up before the Court, it was informed that the Revenue has passed the final assessment order which actually had not been passed. By that time when the case was taken up, the apology was accepted by this Court of giving a wrong statement in the Court, however, the petitioner was allowed to challenge the final assessment order. AO has now completely changed his stand from what he had taken while issuing the draft assessment order. There is no show cause notice issued to the petitioner alleging that the income was acquired as adventure in the nature of business . From the show cause notice, we find that the same was categorized as escape in assessment on account of treating it as a short-term capital gain and unexplained source of investment - Such change of reasons for reassessment and treating the income to be under the heading of adventure in the nature of business , is clearly based on surmises of the AO. There was no evidence produced in support of any agricultural activity and would now, therefore, claim under the capital gain under Section 10 (37) of Section 54 of the Act. But the assessee, as we find, had not claimed it as a capital gain, but has at all times asserted the same to be falling beyond the municipal limits and, therefore, beyond the provisions of Section 2 (14) (iii) of the Act. His contention has been supported by the report of the ITO (Intelligence). AO does not refer either to the report of the ITO (Intelligence) nor to the submissions of the assessee. We, thus, find it a case of colourable exercise of power. When an authority is empowered to exercise and pass orders in terms of the Act, it has to remain within the four corners of the manner in which the said power is required to be exercised. Once the basis for re-opening of the case u/s 147 of the Act is of non-disclosure of income under the capital gain and non-disclosure of sources of investment, the A.O. had no authority available in law to pass order holding that income had escaped assessment, which was following as adventure in the nature of business . We also find that the petitioner had purchased agricultural land from three agriculturists, namely, Manjeet Singh, Karnail Singh and Jarnail Singh. He had disclosed in his earlier return of the amount having been obtained from release of FDRs. Further selling of the agricultural land to M/s DSS Megacity Projects Private Limited would not even come within the ambit of capital asset and no capital gain was liable to be taxed. It is an admitted position that the land was agricultural and beyond the municipal limits, and therefore, would not come within the ambit of Section 2 (14) (iii) (a) of the Act which required conducting of agricultural activity and would be agricultural land within the ambit of Section 2 (14) (iii) (b) of the Act. In the present case, we are satisfied that there is no case of escaped income also as the said aspect stood already noticed vide final assessment order passed after conducting an enquiry by the A.O. at the relevant time based on the report of the ITO (Intelligence), Karnal. Thus, we are satisfied that the assessment proceedings as undertaken in 2016 did not warrant any interference or warrant any reopening for fresh assessment. The entire proceedings initiated vide notice dated 20.03.2020 are contrary to law and are found to be illegal. Accordingly, the same shall not be sustainable in the eyes of law. The writ petition is accordingly allowed.

Summary

Issues Involved:
1. Quashing of notice under Section 148 of the Income Tax Act, 1961.
2. Validity of the draft assessment order under Section 144 read with Section 147.
3. Rejection of objections filed by the assessee.
4. Final assessment order and its legality.
5. Alternative remedy and maintainability of writ petition.
6. Change of opinion vs. reasons to believe for reassessment.
7. Classification of income as capital gains or business income.

Detailed Analysis:

1. Quashing of Notice under Section 148 of the Income Tax Act, 1961:
The petitioner challenged the notice dated 20.03.2020 issued under Section 148 of the Act, alleging that the income chargeable for A.Y. 2013-14 had escaped assessment. The petitioner argued that there was no new material available to justify the reopening of the assessment, as all relevant documents and bank statements had already been submitted during the original assessment proceedings. The court found that the reopening was based on a change of opinion rather than new tangible material, which is not permissible under the law.

2. Validity of the Draft Assessment Order under Section 144 read with Section 147:
The draft assessment order dated 08.09.2021 added Rs. 19,34,10,000/- to the petitioner's income, treating Rs. 15,58,35,000/- as short-term capital gain and Rs. 3,75,75,000/- as unexplained investment. The petitioner contended that the draft order was based on the same material already considered during the original assessment, thus constituting a change of opinion. The court agreed with the petitioner, stating that the draft assessment order was not justified as it lacked new tangible material.

3. Rejection of Objections Filed by the Assessee:
The petitioner's objections to the draft assessment order were rejected on 22.09.2021. The court noted that the petitioner had provided all necessary documents and bank statements, and the rejection of objections was not based on any new evidence. The court found the rejection to be arbitrary and unsupported by new material.

4. Final Assessment Order and Its Legality:
The final assessment order dated 29.09.2021 treated the entire consideration received from the sale of agricultural land as an adventure in the nature of trade, contrary to the draft assessment order which treated it as capital gains. The court held that the final assessment order was based on different presumptions from the initial notice and draft order, making it arbitrary and unsustainable. The court emphasized that the assessing officer's change in stance without new evidence was a clear case of colorable exercise of power.

5. Alternative Remedy and Maintainability of Writ Petition:
The respondents argued that the writ petition should not be entertained due to the availability of an alternative remedy of appeal. However, the court cited precedents where writ petitions were entertained in cases of reassessment and reopening under Section 148. The court exercised discretion in favor of the assessee, considering the long pendency and complete pleadings, and decided to hear the case on merits.

6. Change of Opinion vs. Reasons to Believe for Reassessment:
The court reiterated that reassessment cannot be based on a mere change of opinion. It must be supported by new tangible material. The court referenced the Supreme Court's judgment in CIT vs Kelvinator of India Limited, which held that the concept of "change of opinion" is an in-built test to check the abuse of power by the assessing officer. The court found that the reassessment in this case was initiated based on a change of opinion, not new material, making it invalid.

7. Classification of Income as Capital Gains or Business Income:
The initial notice and draft assessment order treated the income from the sale of agricultural land as capital gains and unexplained investment. However, the final assessment order classified it as business income. The court found this reclassification without new evidence to be arbitrary and unsustainable. The court noted that the agricultural land was beyond municipal limits and did not qualify as a capital asset under Section 2(14)(iii) of the Act, thus not liable for capital gains tax.

Conclusion:
The court quashed the notice dated 20.03.2020, the orders dated 22.09.2021, 24.09.2021, and 29.09.2021, and the demand notice dated 29.09.2021, finding them to be illegal and unsustainable. The writ petition was allowed, and all pending applications were disposed of with no costs.