2015 (4) TMI 465 - AT - Income Tax

Reopening of assessment - validity of initiation of proceedings u/s. 147 - AO has come to the conclusion that by virtue of JDA dated 5.2.2005, there was a transfer of the capital asset giving rise to capital gains u/s. 45(2) - Held that - t. As we have already seen the Assessee held the Whitefield property as investment and converted the same as stock-in-trade of business. This fact has also been recorded by the AO in the order of assessment passed u/s.143(3) of the Act. Sec.45(2) of the Act provides that the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him. The taxable event for application of Sec.45(2) is conversion of capital asset into stock-in-trade of business. The point of time at which tax is levied is the year in which the stock-intrade is sold. When the original assessment was completed u/s.143(3) of the Act, the AO did not think it fit to invoke provisions of Sec.45(2) of the Act either because he overlooked the applicability of those provisions or because he thought that the point of time at which tax is to be levied u/s.45(2) of the Act, viz., sale of the stock-in-trade had not occurred during the previous year. AO has relied on two important factors viz., (i) assessee has executed POA in favour of developer and the fact that assessee received refundable and nonrefundable deposits under the JDA, and (ii) the fact that several courts have held that capital gains is liable to tax on account of JDA entered into by the land owners with the builder on handing over of the possession of the property for joint development. In coming to the aforesaid conclusion, the AO has placed reliance on the decision of the Hon ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia v. CIT, (2003 (2) TMI 62 - BOMBAY High Court) which was much before when the AO concluded the original assessment proceedings u/s. 143(3) of the Act on 31.12.2007. The other decision referred to by the AO in the reasons recorded is CIT v. T.K. Dayalu 2012 (6) TMI 405 - Karnataka High Court . This decision was rendered on 20.6.2011, after the conclusion of the original assessment proceedings. The decision rendered subsequent to the original assessment proceedings will not mean that assessee did not fully and truly disclose material facts. If reassessment proceedings are initiated on the basis of a subsequent judicial decision, then that would also be a case of change of opinion, as was held by the Hon ble Bombay High Court in the case of Sesa Goa Ltd. v. JCIT,(2004 (5) TMI 54 - BOMBAY High Court) on which reliance was placed by ld. counsel for the assessee. In the present case, the facts on record and reasons recorded clearly show that all facts were available before the AO when he completed the original assessment proceedings u/s. 143(3) of the Act. There is no tangible material which has come to the possession of the AO justifying initiation of reassessment proceedings. On the facts and circumstances of the present case, we are of the view that initiation of reassessment proceedings has been merely on the basis of change of opinion and in view of the law laid down by the Hon ble Supreme Court in the case of Kelvinator of India Ltd. (2010 (1) TMI 11 - SUPREME COURT OF INDIA) initiation of reassessment proceedings has to be held as not proper.We are, therefore, of the view that in the given facts and circumstances of the case, initiation of reassessment proceedings u/s 147 of the Act is held to be illegal and consequently, order passed u/s. 147 of the Act is cancelled on this ground. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of initiation of proceedings under Section 147 of the Income Tax Act, 1961.
2. Whether the sum of Rs. 14,27,65,043 claimed as compensation in lieu of cancellation of contract can be allowed as revenue expenditure.

Issue-wise Detailed Analysis:

1. Validity of initiation of proceedings under Section 147 of the Income Tax Act, 1961:

The primary issue is whether the reassessment proceedings initiated under Section 147 of the Income Tax Act, 1961, were valid. The original assessment was completed under Section 143(3) of the Act, and the reassessment proceedings were initiated after four years from the end of the relevant assessment year. The proviso to Section 147 stipulates that such action can only be taken if there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment.

The tribunal noted that all facts, including the joint development agreement (JDA) between the assessee and PEPL and the conversion of the Whitefield property from investment to stock-in-trade, were within the knowledge of the Assessing Officer (AO) during the original assessment. The reasons recorded by the AO for initiating reassessment did not allege that there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. The tribunal emphasized that mere production of documents before the AO, from which material evidence could be discovered, does not necessarily amount to disclosure within the meaning of the proviso to Section 147.

The tribunal referred to several judicial precedents, including the Hon'ble Karnataka High Court's decision in CIT v. Hewlett Packard Digital Global Solutions Ltd. and the Hon'ble Gujarat High Court's decision in General Motors India Pvt. Ltd. v. DCIT, which held that reopening of assessment after four years requires a clear indication of failure on the part of the assessee to disclose material facts. The tribunal concluded that the initiation of reassessment proceedings was merely based on a change of opinion, which is not permissible under the law as laid down by the Hon'ble Supreme Court in CIT v. Kelvinator of India Ltd.

2. Whether the sum of Rs. 14,27,65,043 claimed as compensation in lieu of cancellation of contract can be allowed as revenue expenditure:

The assessee had claimed a deduction of Rs. 14,27,65,043 as compensation paid to Unitech Ltd. for the cancellation of a joint development agreement. The AO disallowed the claim, treating the expenditure as attributable to the increase in the value of the land, which should be recognized as project expenditure and added to the value of work-in-progress. The AO held that the assessee was entitled to set off the expenditure in the year in which revenue is realized from the work-in-progress.

The CIT(A) allowed the assessee's claim, but the Bangalore ITAT, in a separate appeal (ITA No.1183/Bang/2008), restored the AO's order, disallowing the deduction of Rs. 14.27 crores. The tribunal noted that the reassessment proceedings were initiated on the basis that the AO overlooked the applicability of Section 45(2) of the Act during the original assessment. Section 45(2) provides that profits or gains arising from the conversion of a capital asset into stock-in-trade are chargeable to tax in the year in which the stock-in-trade is sold or otherwise transferred.

The AO's reasons for initiating reassessment included the execution of a power of attorney in favor of PEPL and the receipt of refundable and non-refundable deposits under the JDA, which the AO considered as transfer/relinquishment/sale of stock-in-trade. However, the tribunal held that these facts were already within the AO's knowledge during the original assessment, and there was no new tangible material justifying the initiation of reassessment proceedings.

Conclusion:

The tribunal concluded that the initiation of reassessment proceedings under Section 147 was invalid, as it was based on a mere change of opinion and did not meet the requirements of the proviso to Section 147. Consequently, the reassessment order was canceled, and the appeal by the assessee was allowed. The tribunal did not address the other issues on merits due to the conclusion on the validity of the reassessment proceedings.