2021 (7) TMI 64 - HC - Income Tax

Reopening of assessment u/s 147 - non-disclosure of capital gain - sale of assets which were transferred to the partnership firm as capital contribution - whether the revenue is justified in reopening the assessment for the year under consideration? - assessment sought to be reopened by the revenue mainly on the ground that the assessee had received the amount as referred in the reasons recorded, from the partnership firm namely M/s. Swaminarayan Enterprises against the transfer of his land as capital contribution is chargeable to tax under the head Capital Gain in the hands of partners - HELD THAT - It appears from the record that the assessee had transferred his land to M/s. Swaminarayan Enterprise as part of capital contribution in the partnership firm as per Partnership Deed duly executed on 15.08.2008. Undisputedly, the land in question was not transferred in the name of Firm. It is a settled law that where immovable property is transferred by a partner to the firm as a capital contribution and registration does not take place by paying stamp duty, the case would be covered under Section 45(3) - As per Section 45(3) of the Act, whenever a partner contributes any capital asset in the partnership firm, then the value of capital asset recorded in the books of account of the firm is to be considered as the full value consideration for the purpose of computing capital gain. In the present case, we find that no any amount was credited by the firm in the account of the assessee as a consideration for the land in question during the year AY 2009-10. The record further indicates that the full value of consideration of the transfer of said land being recorded was NIL. Under such circumstances, we are of the view that since the transfer of land as a part of capital contribution the partnership firm took place in the year 2008, the same can be assessed only in the AY 2009-10 and not in the AY 2011-12. Therefore, for the year under consideration no amount of capital gain could be said to have taxable. Reasons lack validity and the AO had proceeded on erroneous premise and there was no sufficient material before the AO to take a prima-facie view that income of the assessee for the year under consideration has escaped assessment. Information received by the AO is too vague and he proceeded for further verification of the land transactions and income received by the Firm and the assessee from the sale of the constructed flats. Therefore, the reopening of the assessment to carryout roving and fishing enquiry is not permissible in law. No hesitation to hold that the reasons recorded for the reassessment for the year under consideration could not said to have led to formation of any belief that income had escaped assessment within the meaning of Section 147 - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Validity of the reasons recorded for reopening the assessment.
3. Application of Section 45(3) of the Income Tax Act regarding the transfer of capital assets to a partnership firm.
4. Jurisdiction of the Assessing Officer (AO) in reopening the assessment based on received information.
5. Sufficiency of material for the AO to form a belief that income had escaped assessment.
6. Permissibility of reopening assessments for conducting fishing and roving inquiries.

Detailed Analysis:

1. Legality of the notice issued under Section 148 of the Income Tax Act, 1961:
The writ applicant challenged the notice dated 30.03.2018 issued under Section 148 of the Income Tax Act, 1961, seeking to reopen the applicant’s income tax assessment for the A.Y. 2011-12 and 2012-13. The applicant contended that the notice was bad in law and against the provisions of Section 147 of the Act. The court examined whether the revenue was justified in reopening the assessment for the years under consideration.

2. Validity of the reasons recorded for reopening the assessment:
The reasons for reopening the assessment were based on information received from the Income Tax Officer, indicating that the assessee had sold land to M/s. Swaminarayan Enterprises and received significant amounts. The AO aimed to verify the genuineness of the transactions and the actual amount of capital gain earned by the assessee. The applicant argued that the reasons recorded were vague and based on suspicion, which is not permissible for reopening assessments.

3. Application of Section 45(3) of the Income Tax Act regarding the transfer of capital assets to a partnership firm:
The applicant transferred land to M/s. Swaminarayan Enterprises as part of a capital contribution in a partnership firm as per a deed executed on 15.08.2008. The court noted that, under Section 45(3) of the Act, the value of the capital asset recorded in the firm's books is considered the full value consideration for computing capital gain. Since no amount was credited by the firm in the applicant's account during AY 2009-10, and the full value of consideration recorded was NIL, the court held that the transfer could only be assessed in AY 2009-10, not in AY 2011-12.

4. Jurisdiction of the Assessing Officer (AO) in reopening the assessment based on received information:
The applicant argued that the AO did not independently apply his mind and merely relied on information from the Investigation Wing, which is impermissible. The court found that the AO's reasons for reopening lacked validity and were based on an erroneous premise, with insufficient material to form a prima-facie view that income had escaped assessment.

5. Sufficiency of material for the AO to form a belief that income had escaped assessment:
The court observed that the information received by the AO was too vague and that the AO proceeded for further verification of land transactions and income received from the sale of constructed flats. The court held that the reopening of the assessment for further verification amounted to a fishing and roving inquiry, which is not permissible under the law.

6. Permissibility of reopening assessments for conducting fishing and roving inquiries:
The court concluded that the reasons recorded for reassessment did not lead to the formation of any belief that income had escaped assessment within the meaning of Section 147 of the Act. The reopening of the assessment to conduct a fishing and roving inquiry was deemed impermissible.

Judgment:
The court allowed both writ applications, quashing and setting aside the impugned notices dated 30.03.2018 and 27.03.2018. There was no order as to costs.