2014 (11) TMI 265 - AT - Income Tax

Reopening of assessment u/ 147 Reason to believe - Held that - As decided in Assistant Commissioner of Income-tax, Circle-1(1), Panaji, Goa Versus Durgadas K. Prabhu Shastri 2014 (10) TMI 35 - THE ITAT PANAJI - The scope and effect of Sec.147 as substituted w.e.f. 1.4.1989 is substantially different from the provisions as stood prior to such substitution - The court has interpreted from time to time that there must be bona fide reason to believe - Where the AO has applied his mind to the material available with him, he cannot be permitted to review the assessment in the garb of reason to believe in ACIT vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd., 2007 (5) TMI 197 - SUPREME Court it has been held that the intimation u/s 143(1) cannot be treated to be an order of assessment - The AO is bound to accept the return as has been filed by the Assessee and process it. Since the AO is bound to process the return without making any addition, no question of application of mind by the AO arises - it cannot be said that the AO has applied his mind and if the AO is taking action u/s 147 on the basis of the material available on record for escapement of the income as per the definition given under explanation 2(b), it cannot be said that such an action is illegal and without jurisdiction - Sec. 147 permitted the AO to assess or re-assess the income chargeable to tax when he has reason to believe income escaping assessment - The mere failure to take steps u/s 143(3) would not render the AO powerless to initiate proceedings u/s 147 of the Act even when intimation u/s 143(1) had been issued - with the amendment brought to Sec. 147 of the Act on and from 1.4.1989 and the elucidation on the scope of the authority and jurisdiction of the officer u/s 147 of the Act, the proceedings initiated by the AO u/s 147 are valid and the AO could have taken the action u/s 147 on the basis of the material available and filed along with the return - There is no need of any fresh tangible material for coming to the reason to believe that the income has escaped assessment in view of explanation 2 clause (b) of Sec. 147 Decided against assessee. Adoption of FMV of agricultural land sold during the year as on 1.4.1981 - Whether the land sold by the Assessee is a Capital asset - Held that - Provisions of Sec. 2(14) be referred to as Capital asset is defined u/s 2(14) of the Income Tax Act - the property of any kind held by the Assessee whether or not connected with his business or profession are capital asset but the assets which are given under sub-clause (i), (ii) and (iii) are excluded from the capital asset - The Assessee claims that the land sold by the Assessee is an agricultural land in India while the claim of the Revenue is that the land cannot be regarded to be an agricultural land - No agricultural activities or operations being carried out on the land were found - the AO is directed to treat only 4/5th of the land to be the capital asset and the consideration received to that extent be treated as if said consideration has been received on the transfer of capital asset and the capital gain on the transfer of such land be computed in accordance with the provision of the Income Tax Act to the extent each of the co-owner has the share proportionately the capital gain so computed on 4/5th of the total consideration be assessed in the hands of respective assessee Decided in favour of assessee.

Issues Involved:
1. Jurisdiction under Section 147 of the Income Tax Act.
2. Validity of reasons for reopening the assessment.
3. Adoption of fair market value of agricultural land.
4. Classification of land as agricultural land or capital asset.

Issue-wise Detailed Analysis:

1. Jurisdiction under Section 147 of the Income Tax Act:
The Assessee argued that the Assessing Officer (AO) erred in assuming jurisdiction under Section 147 without fulfilling the jurisdictional conditions. The Tribunal referred to the Supreme Court decision in ACIT vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd., 291 ITR 500 (SC), which stated that processing a return under Section 143(1) is not an assessment and that the AO can initiate action under Section 147 if there is "reason to believe" that income has escaped assessment. The Tribunal concluded that the AO had the jurisdiction to reassess the income as the return was only processed under Section 143(1) and not assessed under Section 143(3). Therefore, the proceedings under Section 147 were valid.

2. Validity of reasons for reopening the assessment:
The Assessee contended that the AO did not have valid reasons to believe that income had escaped assessment. The Tribunal noted that the AO must have "reason to believe" based on relevant material, which need not conclusively prove the escapement of income at the initiation stage. The Tribunal emphasized that the sufficiency of reasons cannot be questioned if there is material to form the "reason to believe." The Tribunal found that the AO had relevant material and upheld the reopening of the assessment.

3. Adoption of fair market value of agricultural land:
The Assessee challenged the AO's adoption of the fair market value of the agricultural land sold during the year as of 1st April 1981 at Rs. 5 per sq. meter. The Tribunal noted that this issue was not examined and adjudicated by the CIT(A). Therefore, the Tribunal restored this issue to the file of the CIT(A) for a fresh finding after providing the Assessee with a proper opportunity to present their case.

4. Classification of land as agricultural land or capital asset:
The core issue was whether the land sold by the Assessee was agricultural land and thus not a capital asset under Section 2(14) of the Income Tax Act. The Tribunal referred to various judicial decisions and the definition of "agricultural land" under Section 2(14). It was observed that the land must be cultivable or capable of agricultural operations. The Tribunal personally visited the land and found that most of it was hilly, rocky, and not cultivable, although part of the land had trees and was used for dry crops. The Tribunal concluded that only the portion of the land with trees (approximately 1/5th of the total area) could be considered agricultural land, while the rest (4/5th) was a capital asset. Consequently, the AO was directed to compute the capital gains on the transfer of 4/5th of the land as a capital asset.

Conclusion:
The Tribunal dismissed the Assessee's grounds challenging the jurisdiction under Section 147 and the validity of reasons for reopening the assessment. The issue of fair market value was remanded to the CIT(A) for fresh consideration. The land was partly classified as agricultural (1/5th) and partly as a capital asset (4/5th), with directions to the AO to compute capital gains accordingly. The appeal filed by the Revenue was partly allowed, and the Cross objection filed by the Assessee was partly allowed for statistical purposes.

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