2012 (11) TMI 133 - AT - Income Tax

Reopening - notice u/s. 148 - it was argued that the AO could not go into any question regarding computation of capital gain because the only reason for doubting the computation of capital gain was that the relief u/s.54EC of the Act could not be allowed to the Assessee as the investment in specified long term capital assets were made in the succeeding assessment year. Held that - the provisions of Sec.54EC do not make any reference to the Assessment year in which the investment is to be made but only lay down a condition of 6 months period of time after the date of transfer of the capital asset. The belief entertained by the AO regarding escapement of income cannot therefore be said to be a bona fide belief. Therefore initiation of reassessment proceedings on the basis of the aforesaid reason cannot be sustained. AO concluded that it is an arrangement done to facilitate the developer to load TDR on the plot of land hence not a transfer falling within the provisions of section 45 of the I.T. Act and was a case the Assessee getting a compensation for loading and developing TDR by new structure and therefore the proceeds received by the Assessee are in the nature of income from other sources - what was transferred by the Assessee was Development Rights in respect of the property. On the plot of land owned by the Assessee which was subject-matter of development right, a certain area of construction was permissible, which was the normal FSI permissible as per the Development Control Rules - consideration received by the Assessee is for transfer of rights over such capital asset. The fact that a third party purchaser has no interest over the land is not relevant. The permission to load TDR on the FSI permissible allowed by the owner of the land is by itself a transfer of right in or over immovable property and would therefore clearly fall within the provisions of Sec. 45 of the Act - belief entertained by the AO in the reasons recorded that the third party does not own any interest in land and therefore there is no transfer of capital asset cannot be said to be a honest belief based on reasonable grounds - initiation of reassessment proceedings on the basis of the reasons recorded by the AO cannot be sustained in favor of assessee

Summary

Issues Involved:
1. Treatment of transfer of development rights (TDR) as "Income from Other Sources" vs. "Capital Gains."
2. Validity of the reopening of assessment under section 148.
3. Applicability of section 50C.
4. Compliance with principles of natural justice.

Detailed Analysis:

1. Treatment of Transfer of Development Rights (TDR):
The primary issue was whether the transfer of development rights should be taxed under "Income from Other Sources" or "Capital Gains." The CIT(A) held that the transfer of development rights should be taxed under "Capital Gains" and not "Income from Other Sources." The CIT(A) further ruled that the amount received towards the transfer of development rights is a "Capital Receipt" with a cost of acquisition being Nil, hence not chargeable to Capital Gains tax. The revenue contended that the loading of TDR was possible due to the ownership of land and building, and therefore, the income should be treated as "Income from Other Sources."

2. Validity of Reopening of Assessment:
The assessee challenged the reopening of the assessment under section 148, arguing that the issuance of notice was illegal and bad in law. The Tribunal examined whether the Assessing Officer (AO) had "reason to believe" that income had escaped assessment. The Tribunal noted that the AO's belief regarding the escapement of income was not bona fide, as the investment in long-term specified assets was made within the permissible period of six months after the date of transfer, as required under section 54EC. The Tribunal relied on the Bombay High Court's decision in C.I.T. v. Jet Airways (I) Ltd., which held that the AO must assess or reassess the income which escaped assessment and was the basis of the formation of belief. If the AO accepts that the income initially believed to have escaped assessment did not escape, he cannot independently assess some other income without issuing a new notice under section 148.

3. Applicability of Section 50C:
The revenue argued that section 50C should apply as the assessee received flats in exchange for a building, which falls under the definition of assets as per section 50C. However, the CIT(A) ruled that section 50C is not applicable in the case of transfer of development rights as there was no transfer of land or building. The Tribunal did not specifically address this issue in detail, as it annulled the reassessment proceedings based on the invalidity of the reopening.

4. Compliance with Principles of Natural Justice:
The assessee argued that the reassessment order was passed without complying with the principles of natural justice. The Tribunal did not delve deeply into this issue, as it had already annulled the reassessment proceedings on the grounds of invalid initiation.

Conclusion:
The Tribunal annulled the reassessment proceedings, holding that the initiation was not legal. The Tribunal found that the AO's belief regarding the escapement of income was not bona fide, as the investment in specified long-term assets was made within the permissible period. The Tribunal also noted that the AO recorded mutually contradictory reasons for reopening the assessment, which could not form a bona fide belief. Consequently, the Tribunal allowed the cross-objection and dismissed the revenue's appeal.