2025 (3) TMI 350 - AT - Income Tax

Reopening of assessment u/s 147 - Notice after a lapse of 4 years - reason to believe - re-opening was proposed merely based on the audit objection - chargeability of capital gain on conversion of capital assets into stock-in-trade - HELD THAT - On perusal of the reasons so recorded we note that there is nothing on record which suggests that relevant documents or material information were not disclosed by the assessee during assessment proceedings. At the time of hearing of the appeal revenue vehemently supported the detailed reasoned recorded based on the inputs received from the Audit wing. That input was considered as tangible material which has been relied upon by the ld. Assessing Officer to justify initiation of reassessment proceedings. As is evident that the assessee while proceedings conducted by the revenue based on the provision of section 143(3) duly supplied and disclosed all the relevant details to decide the issue of chargeability of gain and modus-operandi of the transactions undertaken by the assessee and justified the returned income which was based on the submission so made was accepted by taking the plausible view on the matter. Based on the same material placed on record the audit team substituted their view. Revenue accepting that view on the same material started the re-opening proceeding that too after 4 years and that too at the last date of time barring of six-year reasons were recorded obtained the approval and notice alleged to have been served by way of affixture. As is evident from the reasons recorded that no allegation has been made in the reasons recorded that there was any failure on the part of assessee to disclose fully truly all material facts for the purpose of assessment. Thus reassessment proceedings were initiated by the Assessing Officer based on change of opinion which is impermissible as in the instant case the Assessing Officer has duly applied his mind on the disclosures made in the Audit Report and replies filed by the assessee while assessment proceedings and supporting documents thereto. Also in absence of any allegation in the reasons recorded against the assessee for failure at its end to disclose truly and fully material particulars the reassessment proceedings cannot be resorted to as in such case normal period of limitation available to the AO would be 4 years and the benefit of extended period of limitation of 6 years would not be available. The bench perused the order of ld. CIT(A) who has after detailed deliberations of the contentions has given his finding based on the provision of section 147 of the Act persuaded the reasons recorded and various clauses of development agreement entered by the assessee with the developer way back in 2001 and assessment order passed in the first round. After ascertaining all factum he considered the judicial precedent based on the facts and thereby ordered to quash the reassessment proceeding as bad because review of the order on the same set of fact is not permitted. CIT(A) hold a view that the initiation of proceedings u/s. 147 of the Act was not in conformity with the provision of section 147 of the Act after 4 years when the assessment in the first round was completed as per provisions of section 143(3) of the Act. Thus we do not find any infirmity in the finding so recorded by the ld. CIT(A). Conversion of capital asset into stock-in-trade thereby invoking the provisions of Section 45(2) - change on land use from Cinema Hall to Commercial Complex - The change on land use from Cinema Hall to Commercial Complex is not tantamount to conversion of capital asset into stock-in-trade. We are afraid to hold such a view and if such a proposition were to be approved then in such an eventuality every change of land use from agricultural to non-agricultural residential to commercial industrial to commercial or similar action could automatically lead to conversion of capital asset into stock-in-trade. Law has no intention nor section 45(2) provides for the same. To maximize the Gains by an assessee does not mean that the intention of the assessee could be meted out by carrying on the business. In all Development Agreements there are multiple units which could be sold / retained by the Land Owner as per its choice. Thus mere entering into the Development Agreement would not permit invocation of section 45(2) of the Act. It is a well-accepted principle of tax jurisprudence that the AO cannot decide what is to could have been done by the assessee and is evident from the facts on record that the intention of assessee is not the necessary criteria for invoking section 45(2) of the Act corroborate the intention along with the passing off necessary entries in books of accounts which is absent. Even on the aspect of the charging the capital assets or business assets the CBDT vide circular dated also at the help of the assessee and directed the revenue officers vide circular no. 4/2007 issued by the Central Board of Direct Taxes (CBDT) on June 15 2007 provides guidelines to distinguish between shares held as stock-in-trade and shares held as investments. This distinction is crucial because it affects how the income from the sale of these shares is taxed. Shares held as stock-in-trade are considered business income while shares held as investments are treated as capital gain. The terms of the development agreement entered into by and between the assessee and developer has been referred by the ld. CIT(A) in detail. The assessee was not in the business of real estate nor did it have any object clause for carrying out business of real estate. Entire responsibility of construction demolition of existing structure approval of maps etc. was of the Developer and the assessee had simply handed over the Land owned by it for the purpose of construction of commercial complex. There is no positive act which indicates that the assessee has treated capital asset as stock-in-trade. As discussed herein above if that version of the revenue is accepted then no one would be in a position to enter into Development Agreement since it would amount to carrying on the business which otherwise it is not permitted to do so to the even based on object also in the case of the assessee. The arguments advanced by ld. DR purely narrow down and without seeing the other facts as discussed as to decide the issue in a holistic manner. CIT(A) perused the object clause various clause of the development agreement consistently followed the accounting entries to demonstrate that the asset was considered as capital assets. He also touched upon the aspect of the subsequent action of the assessee when the assets received as exchange was also shown as investment and not stock in trade. Thus on the merits of the issue we do not find any infirmity in the finding so recorded by ld. CIT(A). Decided against revenue.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the reassessment proceedings under Section 147 of the Income Tax Act were validly initiated, particularly after the lapse of four years from the end of the relevant assessment year, and whether such reopening was based on a change of opinion.
• Whether the conversion of the capital asset (land of Cinema Hall) into stock-in-trade as per Section 45(2) of the Act was correctly assessed, and whether the income should be treated as business income or capital gains.
• The validity of the service of notice under Section 148 and whether the reasons for reopening the assessment were adequately communicated to the assessee.

2. ISSUE-WISE DETAILED ANALYSIS

Reassessment Proceedings under Section 147:

• Relevant Legal Framework and Precedents: Section 147 of the Income Tax Act allows for reassessment if the Assessing Officer has reason to believe that income has escaped assessment. The first proviso to Section 147 restricts reopening after four years unless there is a failure to disclose fully and truly all material facts.
• Court's Interpretation and Reasoning: The Tribunal found that the reassessment was initiated based on a mere change of opinion, which is impermissible. The original assessment was completed under Section 143(3), and all material facts were disclosed by the assessee during the original proceedings.
• Key Evidence and Findings: The Tribunal noted that the reasons recorded for reopening did not allege any failure by the assessee to disclose material facts. The reassessment was based on the same material already on record, indicating a change of opinion.
• Application of Law to Facts: The Tribunal applied the first proviso to Section 147, which bars reopening after four years in the absence of any failure by the assessee to disclose material facts.
• Treatment of Competing Arguments: The Revenue argued that the reassessment was based on new information from the audit wing, but the Tribunal held that such information did not constitute tangible material for reopening.
• Conclusions: The Tribunal quashed the reassessment proceedings, holding them as invalid due to the absence of any failure by the assessee to disclose material facts and the proceedings being based on a change of opinion.

Conversion of Capital Asset into Stock-in-Trade:

• Relevant Legal Framework and Precedents: Section 45(2) deals with the conversion of a capital asset into stock-in-trade, where the profits are chargeable to tax in the year the stock-in-trade is sold.
• Court's Interpretation and Reasoning: The Tribunal found no evidence that the land was converted into stock-in-trade. The land was consistently shown as an investment, and the assessee was not engaged in real estate business.
• Key Evidence and Findings: The Tribunal noted that the development agreement did not indicate any conversion into stock-in-trade, and the land use change was not sufficient to invoke Section 45(2).
• Application of Law to Facts: The Tribunal applied the principles that mere change of land use or entering into a development agreement does not automatically convert a capital asset into stock-in-trade.
• Treatment of Competing Arguments: The Revenue's argument that the land was converted into stock-in-trade was rejected due to lack of evidence and the consistent treatment of the asset as an investment.
• Conclusions: The Tribunal upheld the CIT(A)'s decision that Section 45(2) was not applicable, and the income should be treated as capital gains, not business income.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "The initiation of proceedings u/s 147 of the Act was not in conformity with the provision of section 147 of the Act, after 4 years when the assessment in the first round was completed as per provisions of section 143(3) of the Act."
• Core Principles Established: Reassessment cannot be initiated based on a change of opinion, and tangible new material is required. Mere change of land use does not convert a capital asset into stock-in-trade.
• Final Determinations on Each Issue: The reassessment proceedings were quashed, and the additions made under Section 45(2) were deleted, treating the income as capital gains.