High Court Of Allahabad
Amar Nath Agrawal vs. CIT
Section 2(29B), 45 and 148
Assessment year 2000-01
Tarun Agarwala And Dr. Satish Chandra, JJ.
Civil Misc. Writ Petition (Tax) No. 1492 Of 2007
September 26, 2014
ORDER
Tarun Agarwala, J. – By means of this writ petition, the petitioner Sri Amar Nath Agrawal is challenging the validity and legality of the notice dated 26th March, 2007 issued under Section 143(2) of the Income Tax Act.
2. The facts leading to the filing of the writ petition is, that the petitioner along with four other persons had obtained a lease deed dated 25th December, 1953 and is in possession since then. The lease expired on 7th June, 1969 and was renewed for a period of 30 years with a further option of renewal for another term of 30 years. The lease deed permitted transfer by succession, sale, assignment, etc. with the previous approval of the State Government.
3. The State Government introduced a policy for conversion of lease land into free hold. The petitioner applied for conversion of lease hold land into free hold land before the District Magistrate, Allahabad on 2nd August, 1997. The petitioner deposited the necessary charges as demanded by the State Government and, thereafter, a free hold sale deed dated 25th March, 1998 was executed by the District Magistrate, Allahabad.
4. The petitioner sold a portion of the property during the Financial Year 1999-00 relevant to the assessment year 2000-01 for a sum of Rs.5,26,694/-. The petitioner received a notice dated 13th March, 2007 under Section 133(6) of the Act directing the petitioner to furnish certain information. The petitioner vide his letter dated 16th March, 2007 furnished the requisite information, inspite of which, the Assessing Officer issued the impugned notice dated 26th March, 2007 under Section 148 of the Act.
5. The petitioner vide letter dated 4th April, 2007 approached the Assessing Officer to supply a copy of the reasons, which was supplied. The reasons so recorded by the Assessing Officer is reproduced in paragraph 24 of the writ petition, which is extracted hereunder:—
“REASONS FOR INITIATING PROCEEDINGS u/s 148 OF THE I.T. Act, 1961
During the F.Y. 1999-2000 relevant to A.Y. 2000-2001 Shri Amar Nath Agarwal, S/o Vishweshwar Prasad Agarwal, R/o 5, Tashkent Marg, Allahabad has sold property/land within three years after converting the lease land into free-hold, resulting into Short Term Capital Gain in view of judgement of Hon’ble Karnataka High Court in the case of CIT vs. Dr. V.V. Mody (218 ITR page 1).
I have, therefore, reasons to believe that income chargeable to tax under the head Short Term Capital Gains has escaped assessment for which notice U/s 148 has been issued. Prior approval of learned Addl. CIT, Range-I, Allahabad has been obtained.
Sd/-(C.K. Bartariya) Income Tax Officer, Range1(I), Allahabad”
6. The reasons indicate that the petitioner after converting the lease land into free hold sold off the property within three years resulting into short term capital gain in view of the judgment of the Karnataka High Court in CIT v. Dr. V.V. Mody [1996] 218 ITR 1/85 Taxman 125 (Kar.) and, therefore, has reasons to believe that income chargeable to tax had escaped assessment under the head Short Term Capital Gains.
7. Subsequently, the petitioner received a notice dated 13th August, 2007 under Section 142. In response, the petitioner filed a copy of the return along with a detailed computation sheet of total income in respect of assessment year 2000-01. The petitioner also filed a detailed objection dated 24th August, 2007 objecting to the notice under Section 148 of the Act praying that the proceedings be dropped. This objection was filed in view of the decision of the Supreme Court in GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19/[2002] 125 Taxman 963.
8. The petitioner in his objection contended that the decision of the Karnataka High Court is distinguishable as it was a case of hire purchase agreement, whereas the petitioner case was one of conversion from lease hold to free hold, which was only an improvement of his title and existing rights. It was also contended that short term capital gains tax was not applicable, inasmuch as the petitioner held the capital assets for more than three years.
9. Inspite of filing the objection, the Assessing Officer did not decide the matter, instead issued a notice dated 9th October, 2007 under Section 143(2) of the Act. The petitioner, at this stage, approached the writ Court and filed the present writ petition for the quashing of the notice issued under Section 148 of the Act.
10.During the pendency of the writ petition, the petitioner died and, in his place, his son has been substituted.
11. We have heard Sri Nikhil Agrawal along with Rahul Agarwal, the learned counsel for the petitioner and Sri Shambhu Chopra, the learned counsel for the department.
12. The learned counsel for the petitioner contended that the notice issued under Section 148 of the Act was without jurisdiction. The learned counsel contended that admittedly four years had elapsed from the end of the relevant assessment year and, consequently, it was imperative for the Assessing Officer to record in his reasons, as per Section 149(1)(b) of the Act that income chargeable to tax, which has escaped assessment amounts to or in likely to amount to Rs.1 lac or more for that year. Since no reasons to that effect was given, the satisfaction recorded by the competent authority under Section 151 of the Act was wholly illegal and that the notice issued under Section 148 of the Act was barred by time.
13. The learned counsel consequently submitted that the proceedings initiated under Section 148 of the Act was barred by limitation. It was further contended that the reasons to believe recorded by the Assessing Officer was nothing else but a change of opinion based on a decision of the Karnataka High Court in Dr. V.V. Mody case (supra).
14.On the other hand, the learned counsel for the department contended that the Assessing Officer has wide powers to reopen the assessment, if he has reasons to believe that the income had escaped assessment. The learned counsel submitted that even after the expiry of four years, reassessment proceedings could be opened upon permission being granted by the competent authority, which in the instant case was taken and, therefore, the notice was not barred by limitation. The learned counsel submitted that in the instant case the petitioner was liable to pay short term capital gains tax and, therefore, urged that the reasons disclosed by the Assessing Officer justified his action in issuing a notice under Section 148 of the Act.
15. Before proceeding further, it would be appropriate to peruse Section 147 and 148 of the Act which existed at the relevant moment of time and which is extracted hereunder:—
“147. Income escaping assessment.— If the Assessing Officer has reason to believe] that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year)
Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year:
Provided further that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.
Explanation 1 : Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso.
Explanation 2 : For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :—
(a) Where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax;
(b) Where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;
(c) Where an assessment has been made, but —
(i) Income chargeable to tax has been under assessed; or
(ii) Such income has been assessed at too low a rate; or
(iii) Such income has been made the subject of excessive relief under this Act; or
(iv) Excessive loss or depreciation allowance or any other allowance under this Act has been computed.”
Explanation 3. — For the purpose of assessment or reassessment under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this Section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-section (2) of section 148.
“148. Issue of notice where income has escaped assessment.— (1) Before making the assessment, reassessment or recomputation under section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139.
Provided that in a case —
(a) where a return has been furnished during the period commencing on the 1st day of October, 1991 and ending on the 30th day of September, 2005 in response to a notice served under this section, and
(b) Subsequently a notice has been served under sub-section (2) of section 143 after the expiry of twelve months specified in the proviso to subsection (2) of section 143, as it stood immediately before the amendment of said subsection by the Finance Act, 2002 (20 of 2002) but before the expiry of the time limit for making the assessment, reassessment or recomputation as specified sub-section (2) of section 153, every such notice referred to in this clause shall be deemed to be a valid notice:
Provided further that in a case —
(a) where a return has been furnished during period commencing on the 1st day of October, 1991 and ending on the 30th day of September, 2005, in response to a notice served under this section, and
(b) Subsequently a notice has been served under sub-clause (ii) of sub-section (2) of section 143 after the expiry of twelve months specified in the proviso to clause (ii) of sub-section (2) of section143, but before the expiry of the time limit for making the assessment, reassessment or recomputation as specified sub-section (2) of section 153, every such notice referred to in this clause shall be deemed to be a valid notice.
Explanation. — For the removal of doubts, it is hereby declared that nothing contained in the first proviso or the second proviso shall apply to any return which has been furnished on or after the 1st day of October, 2005 in response to a notice served under this section.
(2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so.”
Section 149 provides a time limit for issuance of a notice under Section 148 of the Act and, if a notice after four years but before six years is issued, the same could only be issued if the income chargeable to tax has escaped assessment amounts to or is likely to amount to Rs.1 lac or more for that year. For facility, Section 149(1(b) of the Act is extracted hereunder:—
“149. Time limit for notice.— (1) No notice under section 148 shall be issued for the relevant assessment year —
(a)**
(b)if four years, but not more than six years, have elapsed from the end of the relevant assessment year unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to one lakh rupees or more for that year.’
16. From the aforesaid, it is clear that two distinct conditions must be satisfied before the Assessing Officer can assume jurisdiction to issue a notice under Section 148 of the Act, namely, that he must have reasons to believe that the income of the assessee had escaped assessment and, that he must have reasons to believe that such escapement was by reasons of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions are not fulfilled, the notice issued by the Assessing Officer would be without jurisdiction.
17.Further, from a perusal of Section 149(1)(b) of the Act, it is imperative that the Assessing Officer, in his reasons, should also state that the escaped income is likely to be Rs.1 lac or more, which is an essential ingredient for seeking the approval and satisfaction that is to be recorded by the Competent Authority under Section 151 of the Act.
18. Consequently, before taking any action, the Assessing Officer is required to substantiate his satisfaction in the reasons recorded by him. If the conditions mentioned are not satisfied, then the issuance of notice would be invalid.
19.The reasons recorded by the Assessing Officer is, that the assessee had sold the property within three years after converting lease hold land to free hold resulting into short term capital gains in view of the judgment in Dr. V.V. Mody (supra).
20.The aforesaid reasons, makes it clear that the assessee was required to pay short term capital gains tax instead of long term capital gains tax and, therefore, the Assessing Officer had reasons to believe that the income had escaped assessment. In the instant case, admittedly, the notice was issued after four years but before six years. In our opinion, the reasons so recorded by the Assessing Officer was not sufficient to intiate proceedings under Section 148 of the Act. We find from the reasons recorded by the Assessing Officer that no such reasons has been recorded to the effect that the escaped income is likely to be Rs.1 lac or more except for the assessment year 2001-02.
21. In Mahesh Kumar Gupta v. CIT [2014] 363 ITR 300/[2013] 215 Taxman 114/33 taxmann.com 409 (All) a coordinate Bench of this Court held that it is imperative for the Assessing Officer to record in his reasons that the escaped income is likely to be Rs.1 lac or more so that the Chief Commissioner or Commissioner may record his satisfaction under Section 151 of the Act. The Court further held that if the said reason has not been recorded by the Assessing Officer, the initiation of the reassessment proceedings after more than four years would be clearly barred by time.
22. A similar provision, namely, Section 34(1A)(ii) existed under the Income Tax Act, 1922. A Full Bench of this Court in Jai Kishan Srivastava v. ITO [1960] 40 ITR 222 (All) held that non-recording of the reason by the Assessing Officer that the escaped income was likely to be Rs.1 lac or more was fatal to the issuance of the notice for reassessment.
23. In K.S. Rashid & Son v. ITO [1964] 52 ITR 355 (SC) a Constitutional Bench of the Supreme Court held:
“The second point which is very important is that in regard to the cases falling under Section 34(1A), action can be taken only where the income which has escaped assessment is likely to amount to Rs.1 lakh or more. In other words, it is only in regard to cases where the escaped income is of a high magnitude that the restriction of the period of limitation has been removed.”
24. Since no reasons were recorded that the escaped income is likely to be Rs.1 lac or more so that the Chief Commissioner or Commissioner may record his satisfaction under Section 151, the initiation of reassessment proceedings after more than four years was clearly barred by time.
25. There is yet another aspect of the matter. The reason so recorded by the Assessing Officer is, that the petitioner has indicated the computation of long term capital gains tax liability, whereas the petitioner was liable to pay short term capital gains tax since the petitioner had sold off a portion of the property within three years from the date of conversion of lease land into a free hold land.
26. Short term capital asset is defined under Section 2(42A), which is extracted hereunder:—
“2(42A) ‘short-term capital asset’ means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer.”
27. Section 2(29B) of the Act defines long term capital gains as under:
“2(29B). ‘long term capital gain’ means capital gain arising from the transfer of a long-term capital asset .”
28. The difference between “short term capital asset” and “long term capital asset” is the period over which the property has been held by the assessee. It has nothing to do with the nature of the title over the property. The petitioner already had rights as owner of the property subject to the covenant of the lease for all purposes such as transfer of the lease hold rights of the property with the previous consent of the lessor. The petitioner’s father was the lessee since 1958. The conversion of the rights of the lessee in the property from lease hold to free hold was only an improvement of the rights over the property, which the petitioner enjoyed and this would not have any effect on the taxibility of capital gains from such property. Since the property was held by the petitioner for more than three years, short term capital gains would not be applicable. The conversion from lease hold to a free hold being an improvement of the title, does not have any effect on the taxibility of profits as short term capital gains.
29. Reliance by the Assessing Officer in his reasons to believe on a decision of Karnataka High Court in Dr. V.V. Mody (supra) case is misplaced. In that case, the assessee was allotted a site by the Banglore Development Authority. The assessee had no transferable right. Subsequently, a sale agreement was executed pursuant to which the assessee became the owner and landlord and thereafter, within a period of three years, the said assessee sold the land. In that scenario, the Assessing Officer held that it was a case of short term capital gains since the assessee had sold the same within three years from the date of becoming the owner. The order of the Assessing Officer was upheld by the Karnataka High Court. The said decision is clearly distinguishable and is not applicable in the instant case. Similarly, reliance by the department on the decision of the Bombay High Court in CIT v. Dr. D.A. Irani [1998] 234 ITR 850/[2000] 111 Taxman 600 is also misplaced and is clearly distinguishable, in as much as in the instant case, the petitioner continued to remain in possession of the property and only improved his title, when it converted its lease hold rights into free hold rights.
30. For the reasons stated aforesaid, we are of the opinion that the notices issued under Section 148 of the Act does not comply with the proviso to Section 147 and 149 of the Act. The reasons recorded does not indicate that the assessee has failed to disclose fully and truly all material facts necessary for his assessment and that the escaped income was likely to be Rs.1 lac or more.
31. Consequently, the notice issued under Section 148 of the Act cannot be sustained and is quashed. All proceedings initiated in pursuance of the notice under Section 148 of the Act would be wholly illegal and without jurisdiction and are also quashed. The writ petition is allowed.
32. In the circumstances of the case, parties shall bear their own costs.
[Citation : 371 ITR 183]
