2021 (10) TMI 1194 - AT - Income Tax

Revision u/s 263 by CIT - As per CIT sale of land parcels as taxed under the head Capital Gains - AO found that the actual sale consideration of land parcels shown as business assets/stock-in-trade in the books of accounts is lesser than the corresponding value assessable for the purposes as stamp duty - HELD THAT - If the course suggested by the PCIT is adopted and on profits arising on sale of land parcels are taxed under the head Capital Gains , the assessed income could be lower than the income assessed by the AO. The tabular statement demonstrating the aforesaid fact is self-speaking in this regard and does not require much delineation. Consequently, where the course suggested by the PCIT results in greater prejudice to the Revenue and the course adopted by the AO has resulted in lesser prejudice, the action of the PCIT under Section 263 falls flat on the ground. In order to usurp jurisdiction u/s 263, both the conditions, i.e. order being erroneous as well as prejudicial to the interest of the revenue, must simultaneously coexist. In absence of any prejudice caused to the Revenue by the action of the Assessing Officer, the order cannot be revised even if it is momentarily considered to be erroneous. Hence, the revisionary action of the PCIT requires to be set aside on this ground alone without going into other aspect of arguments. We also take into account the other line of arguments propounded on behalf of the assessee that the nature and character of an income depends on host of factors which are required to be cumulatively weighed and thus is inherently a very highly subjective exercise. There is no straight jacket formula to determine whether an asset held by the assessee should be treated as capital asset or business asset. Such issues are inherently highly debatable and arguable in nature. One cannot definitely say with precision and more so under the revisional jurisdiction that the action of the AO in adopting one course of view is erroneous per se. There is invariably a scope of argument on determination of character of income. Indulgence on such aspect under the revisional jurisdiction is not appropriate in the absence of cogent facts adverse to the assessee. We do not see any such material which can make the conclusion of the PCIT indefeasible. This being so, the action of the PCIT cannot be endorsed on this ground also. Hence, looking from any angle, the revisional action of the PCIT under Section 263 is not sustainable in law. Consequently, the revisional order under Section 263 of the Act is quashed and set aside. - Decided in favour of assessee.

Summary

Issues Involved:
1. Assumption of jurisdiction by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961.
2. Classification of land parcels as capital assets versus business assets/stock-in-trade.
3. Determination of income from the sale of land parcels under the head "Capital Gains" versus "Business Income."

Detailed Analysis:

1. Assumption of Jurisdiction by the PCIT under Section 263:
The assessee challenged the revisional action of the PCIT, arguing that the assessment order under revision was neither erroneous nor prejudicial to the interest of the revenue. The Tribunal noted that for the PCIT to invoke revision jurisdiction under Section 263, the twin conditions of the order being erroneous and prejudicial to the interest of the Revenue must be cumulatively satisfied. The Tribunal observed that if the course suggested by the PCIT was adopted, the assessed income could be lower than the income assessed by the Assessing Officer (AO). This would result in greater prejudice to the Revenue, thus failing the twin conditions required for invoking Section 263. Consequently, the Tribunal set aside the revisionary action of the PCIT on this ground alone.

2. Classification of Land Parcels as Capital Assets versus Business Assets/Stock-in-Trade:
The PCIT alleged that the land parcels sold should have been treated as capital assets held for investment instead of business assets held as stock-in-trade. The assessee argued that the land parcels were shown as business assets/stock-in-trade in the audited books of account and were treated as such by the AO during the original assessment proceedings. The Tribunal noted that the nature and character of an income depend on a host of factors and is inherently a highly subjective exercise. There is no straightjacket formula to determine whether an asset should be treated as a capital asset or business asset. The Tribunal found that such issues are inherently debatable and arguable in nature, and indulgence on such aspects under revisional jurisdiction is not appropriate without cogent facts adverse to the assessee. Therefore, the Tribunal did not endorse the action of the PCIT on this ground as well.

3. Determination of Income from Sale of Land Parcels under "Capital Gains" versus "Business Income":
The AO had assessed the income from the sale of land parcels under the head "Business Income" and made an addition under Section 43CA of the Act. The PCIT directed the AO to treat the land parcels as capital assets and compute capital gains on their sale. The assessee provided a detailed computation showing that if the land parcels were treated as capital assets, the resultant income would be lower than the assessed income under the head "Business Income." The Tribunal observed that the issue of whether the profit on the sale of land could be assessed under "Income from Business" (IFB) or "Capital Gains" is a debatable issue. The Tribunal cited various case laws, including Malabar Industrial Co Ltd. (2000) (SC) and Gabriel India Ltd. (1993) (Bom), to support the view that a debatable issue cannot be the subject matter of revision proceedings under Section 263. The Tribunal concluded that the view taken by the AO in the scrutiny assessment order could be construed as one of the possible views and hence, the order passed by the AO could not be termed as erroneous.

Conclusion:
The Tribunal quashed and set aside the revisional order under Section 263 of the Act, thereby allowing the appeal of the assessee. The Tribunal emphasized that the twin conditions of the order being erroneous and prejudicial to the interest of the Revenue must be satisfied for invoking Section 263, and in this case, those conditions were not met. The Tribunal also highlighted that the classification of assets and determination of the nature of income are inherently debatable issues, and the AO's view could not be considered erroneous in such circumstances.