2021 (9) TMI 565 - HC - Income Tax

Validity of Reopening of assessment u/s 147 - Eligibility of reason to believe - Capital gain u/s 45 on partners transfer of capital asset - whether the revenue is justified in reopening the assessment for the year under consideration ? - writ applicants being partners of the partnership firm transferred their capital assets received by them in the form of gift to the partnership firm by way of capital contribution at a market rate and therefore, they are liable for capital gain u/s 45 (3) - whether the writ applicants were engaged in trading business of gold and gold ornaments before the partnership firm came into existence ? - HELD THAT - The reasons for reopening are merely based on the observations made by the AO while framing the assessment of the partnership firm vide order dated 31.12.2017. It is pertinent to note that, against the assessment order dated 31.12.2017, the firm is in appeal before the appellate authority and the appeal is still pending. Thus, while recording the reasons, the AO has considered the relevant facts like issue of stock in trade, the way in which the stock of proprietary concern came to be gifted to the family members by proprietor Mr. Ashok Zinzuvadia. It could be said that there was proper application of mind on the part of the AO while recording the reasons for reopening. When the return of income of both the assessees was processed under Section 143(1) of the Act and not under Section 143 (3) of the Act, the AO is justified in arriving at the conclusion that the income has escaped assessment. As held by the Apex court in the case of Central Provinces Manganese Ore Company Ltd. 1991 (8) TMI 4 - SUPREME COURT and Rajesh Jhaveri 2007 (5) TMI 197 - SUPREME COURT that the word reason in the phrase reason to believe in Section 147 would mean cause or justification. If the AO has cause or justification to know or suppose that income has escaped assessment, he can be said to have reason to believe that income has escaped assessment. The expression cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. We are convinced that there was tangible material before the AO to initiate the proceedings U/s. 147 of the Act. In our view, the AO is justified in reopening the assessment of both the assessees and it cannot be said that the impugned Notice is without jurisdiction or contrary to Section 147 - Decided against assessee.

Issues Involved:
1. Legality and validity of the notice issued under Section 148 read with Section 147 of the Income Tax Act, 1961 for reopening the income tax assessment.
2. Applicability of Section 45(3) of the Income Tax Act, 1961 concerning the transfer of capital assets as capital contribution to a partnership firm.
3. Whether the Assessing Officer (AO) applied independent mind and had valid reasons to believe that income had escaped assessment.
4. Examination of whether the assets introduced were stock-in-trade or capital assets.
5. Jurisdiction of the AO in reopening the assessment under Section 147 of the Income Tax Act, 1961.

Detailed Analysis:

1. Legality and Validity of the Notice Issued under Section 148 read with Section 147:
The writ applicants challenged the notice dated 28.03.2018 issued under Section 148 of the Income Tax Act, 1961, seeking to reopen their income tax assessment for the A.Y. 2015-16. The notice was based on the grounds that the applicants had transferred capital assets received as gifts to a partnership firm by way of capital contribution at market rates, making them liable for capital gains under Section 45(3) of the Act. The applicants argued that the reasons for reopening were erroneous and lacked validity, asserting that the assets introduced were stock-in-trade, not capital assets.

2. Applicability of Section 45(3) of the Income Tax Act, 1961:
The applicants contended that Section 45(3) applies only when a capital asset is introduced by a partner towards credit in the capital account of the firm. Since they introduced stock-in-trade, not capital assets, they argued that Section 45(3) was inapplicable. They emphasized that the gifted gold was treated as stock-in-trade before being introduced as capital in the firm, thus not liable for capital gains under Section 45(3).

3. Independent Mind and Valid Reasons by AO:
The applicants argued that the AO did not apply an independent mind and borrowed satisfaction from the observations made during the assessment of the partnership firm, M/s. Radhika Jewelers. They claimed that the AO’s reasons for reopening were based on borrowed satisfaction, which is impermissible in law. The court, however, found that the AO had considered relevant facts and applied proper reasoning in reopening the assessment, thus justifying the notice under Section 148.

4. Examination of Stock-in-Trade vs. Capital Assets:
The court examined whether the assets introduced were stock-in-trade or capital assets. The applicants claimed they were engaged in trading gold and gold ornaments, treating the gifted stock as stock-in-trade. However, the AO noted discrepancies, such as the absence of the gifted stock in the trading account and balance sheets, and the lack of evidence showing the applicants' trading activities before the partnership firm was formed. The court found these discrepancies significant, supporting the AO’s decision to reopen the assessment.

5. Jurisdiction of AO under Section 147:
The court emphasized that for reopening an assessment under Section 147, the AO must have reason to believe that income has escaped assessment. The AO must have cause or justification, not final legal evidence, to form this belief. The court found that the AO had tangible material and valid reasons to believe that the income had escaped assessment, thus justifying the reopening of the assessment under Section 147.

Conclusion:
The court concluded that the AO was justified in reopening the assessment of both assessees. The reasons recorded for reopening were valid, and the AO had applied an independent mind based on tangible material. The court rejected the writ applications, upholding the legality and validity of the notice issued under Section 148, and confirmed that the AO had proper jurisdiction under Section 147 of the Income Tax Act, 1961. The interim relief granted earlier was vacated, and the writ applications were dismissed.

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