2013 (4) TMI 677 - HC - Income Tax

Re opening of assessment - evasion of tax on the short terms capital gain arising in its hand on sale of land - as per AO Actual sale deeds executed by the society in favour of other signatories to the MOU was only a device to avoid liability to pay tax on short term capital gain - Petitioner had filed return of income for the said assessment year 2005-06 which was accepted without scrutiny - Held that - Merely because an assessment was not previously framed after scrutiny, would not give unlimited right to the AO to reopen by merely issuing a notice without valid reasons. As decided in Inductotherm (India) Pvt. Ltd. Vs. M. Gopalan, Dy. CIT 2012 (9) TMI 16 - Gujarat High Court referring to Rajesh Jhaveri Stock Brokers P. Ltd. (2007 (5) TMI 197 - SUPREME Court) it is well settled that absence of notice under section 143(2) within the time permitted, scrutiny assessment under section 143(3) cannot be framed. However, merely because no such notice was issued, to contend that the assessment cannot be reopened, is not backed by any statutory provisions. Thus AO has committed a grave error in issuing impugned notice as petitioner had first entered into MOU to form a consortium of different entities to bid for a large piece of land which would require sizable investment & thereupon, entered into an agreement to sale with the society. Ultimately, as per the terms of the agreement and the understanding between the petitioner and other signatories to the MOU at the instance of the petitioner, the society entered into a separate sale deeds in favour of various parties. Thus failure to see how the revenue can contend that under such circumstances, there was escapement of income under the head of short term capital gain. Merely because the petitioner entered into an agreement with the said society which agreement contained a clause that the final sale deed would be executed in favour of such other persons as the petitioner may indicate, by itself cannot give rise to a presumption that the land in question stood transferred in favour of the petitioner on the date of such agreement as contended by the revenue. The society had not, by virtue of agreement dated 08.04.2004, transferred the property in favour of the petitioner. The society had only agreed to do so on certain terms and conditions. Most important condition being that of the purchaser paying remaining purchase price without which the sale could never be completed. In the meantime the possession of the land was retained by the society. An agreement to sale without there being anything more,obviously cannot be equated with transfer of property. Section 5 of the Transfer of Property Act also enforces this view. Reassessment notice quashed. In favour of assessee.

Issues Involved:
1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Whether the Assessing Officer had valid reasons to believe that income chargeable to tax had escaped assessment.
3. Applicability of capital gains tax on the transaction in question.
4. Interpretation of the agreement to sale and its implications under the Transfer of Property Act.

Detailed Analysis:

1. Validity of the Notice Issued under Section 148 of the Income Tax Act, 1961:
The petitioner challenged a notice dated 28.03.2012 issued by the respondent-Assessing Officer under Section 148 of the Income Tax Act, 1961, to reopen the assessment for the assessment year 2005-06. The petitioner had filed a return for the said assessment year, which was accepted without scrutiny. The Assessing Officer issued the notice to reopen the assessment, citing reasons that the petitioner had purchased land and allegedly evaded tax on short-term capital gains.

2. Whether the Assessing Officer Had Valid Reasons to Believe that Income Chargeable to Tax Had Escaped Assessment:
The petitioner raised objections to the reopening of the assessment, which were rejected by the Assessing Officer. The petitioner contended that the notice lacked validity as the reasons recorded did not indicate that the income chargeable to tax had escaped assessment. It was argued that the notice was issued beyond the period of four years from the end of the relevant assessment year, and the reasons recorded did not mention the amount of tax that might have escaped assessment. The court noted that even if the assessment was not previously framed after scrutiny, the Assessing Officer must have valid reasons to believe that income chargeable to tax had escaped assessment.

3. Applicability of Capital Gains Tax on the Transaction in Question:
The petitioner argued that the liability to pay capital gains did not arise during the year under consideration as no capital asset was transferred. The court examined the facts and found that the petitioner had entered into a Memorandum of Understanding (MOU) with other entities to bid for a large piece of land and subsequently entered into an agreement to sale with the society. The court observed that the agreement to sale did not amount to the transfer of property, and therefore, there was no escapement of income under the head of short-term capital gains.

4. Interpretation of the Agreement to Sale and Its Implications under the Transfer of Property Act:
The court analyzed the provisions of Section 45 of the Income Tax Act and Sections 19 and 5 of the Transfer of Property Act. It concluded that the agreement to sale dated 08.04.2004 did not result in the transfer of property. The agreement was a simple agreement to sell immovable property, with the petitioner paying part of the sale price and the possession of the property retained by the seller until full payment was made. The court held that creating a vested right in the petitioner to compel the society to execute the sale deed at a later stage did not amount to an actual transfer of property on the date of the agreement.

Conclusion:
The court found that the reasons recorded by the Assessing Officer for issuing the impugned notice lacked validity. The notice dated 28.03.2012 was quashed, and the petition was disposed of. The court emphasized that an agreement to sale without further conditions does not equate to the transfer of property, and the revenue's attempt to equate it with a sale deed lacked a valid basis in law.

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