TMI Blog2014 (4) TMI 280X X X X Extracts X X X X X X X X Extracts X X X X ..... e wholly irrelevant, when the AO had raised specific queries in writing, elicited the assessee’s response and thereafter, however, silently, accepted the assessee’s stand - Within four years also reopening would not be allowed - the decision in CIT vs. Kelvinator of India Ltd. [2002 (4) TMI 37 - DELHI High Court] followed – Reassessment proceedings will be invalid in case the assessment order itself records that the issue was raised and is decided in favour of the assessee - Reassessment proceedings in the said cases will be hit by the principle of “change of opinion”. In a situation where the AO during scrutiny assessment, notices a claim of exemption, deduction or such like made by the assessee, having some prima facie doubt raises queries, asking the assessee to satisfy him with respect to such a claim and thereafter, does not make any addition in the final order of assessment, he can be stated to have formed an opinion whether or not in the final order he gives his reasons for not making the addition – Decided in favour of Assessee. - Special Civil Application No. 124 of 2014 - - - Dated:- 11-3-2014 - Akil Kureshi And Sonia Gokani,JJ. For the Appellant : Mr. Manish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioner replied that the profit arising on sale of capital asset is long term capital gain and not business income. This reply was considered by the Assessing Officer and the profit was treated as long term capital gain. However, the petitioner s claim for deduction under section 54G of the Act was rejected. The petitioner, therefore, contended that reopening of the assessment at this stage, now, therefore, would be based on a change of opinion. He relied on the decision of Supreme Court in the case of Commissioner of Income-tax vs. Kelvinator of India Ltd. reported in [2010] 320 ITR 561(SC) and of this Court in the case of Gujarat Power Corporation Ltd. vs. Assistant Commissioner of Income-tax reported in [2013] 350 ITR 266 (Guj). The petitioner also contended that the reopening at the instance of the audit party would also be bad in law. 4. The Assessing Officer, however, passed an order dated 16.12.2013 rejecting the objection of the petitioner that notice is based on the change of opinion. The Assessing Officer observed as under:- 3. The assessment was completed u/s.143 of the Act on 20.8.2010. Subsequently, it was noticed that before the sale of factory land by conv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trs as capital asset. Out of this, land area of 25282 sq.mtrs was converted into stock-in-trade with effect from 10.4.2006. The assessee subsequently entered into an agreement with one Spun Contra Developers for developing the said piece of land by signing an agreement on 18.11.2006. During the Assessment year 2008-09, 42 plots admeasuring 15310.41 sq.mtrs were sold. Though reasons recorded by the Assessing Officer suggested that the amount of Rs.5.77 crores represents the sale consideration of these plots; from various other documents on record, it appears that by way of total sale consideration, the petitioner company had to receive a larger amount as its share from partnership and the sum of Rs.5.77 crores represents the notional value of the land as on 10.4.2006 at the rate of Rs.351 per sq.feet (taken as fair market value as on that date) for the total area of the land sold as mentioned above. 9. This becomes particularly clear from the assessee s submission in the context of its claim for deduction under section 54G of the Act before CIT(Appeals), which reads as under:- Your honour has inquired in the course of hearing about the date of transfer within the meaning of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as capital gains. But according to section 28 of the Income-tax Act, the same is your business income. Please give your explanation. 3. Without prejudice to above, it was noticed that you have treated the profit on sale of land as long term capital gain and claimed deduction u/s.54EC and 54G. However, the same is not allowable to you in view of the provisions of section 45(2) of the Income-tax Act, 1961. (B) In response to such query, the petitioner replied under a communication dated 21.12.2010 and contended as under:- 7. A show cause notice is given by stating in the order sheet to the effect that since the capital gain has arisen on conversion from capital asset to stock in trade and not as a result of shifting since the purpose was to sale the assets and therefore it is stated that why Rs.5.77,81,269 being the sale proceeds received on sale of land during F.Y. 2008-2009 should be treated as business income and that why the claim under Sec.54G and 54EC should not rejected. 7.1 The kind attention is drawn to provision of Section 45(2). It provides that when the capital asset is converted into stock in trade or when it is so treated then the capital gain arises i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue of Rs.9,54,72,000 on the date of conversion. In this connection, it may please be noted that on the date of conversion, it is fair market value of Rs.9,54,72,000 as per Registered Valuer s Report but it is not realized. You will appreciate that unless the land is actually sold and unless the price is realized, the gain that may arise cannot be transferred to capital reserve account. Again it should be noted that what is material is nature of transaction rather than book entry. 4.2 The company has already given a treatment of conversion of capital asset in the stock in trade as per the Notes Forming Part of Accounts, Clause No.12A of Tax Audit Report and Para No.3 of Director s Report. Therefore, the passing of book entry is not relevant. 5. The factory land of book value of which is Rs.5,21,543 and not Rs.5,20,193 as stated in the Notice so converted is sold for Rs.5,77,81,269 during A.Y.2008-2009. It is stated that the profit of Rs.5,77,81,269 should not be considered as business income under Section 28. In this connection, it may please be noted that any profit that may be earned in the course of carrying on business is taxable as business income. The assessee till date o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee for the purpose of its business of industrial undertaking, but was a land which converted, as admitted and submitted by the assessee, into stock-in-trade in respect of its business as developers . Thus, it is an admitted factual position by the assessee itself that the land in question sold during the year is not a land used for the purpose as specified in section 54G of the Income-tax Act, 1961. If is evidently clear from the provisions of section 54G that the benefit of deduction from the capital gains is available only in a case where any land, machinery or plant used for the purpose of business of an industrial undertaking. However, in the instant case, as stated hereinabove, the land formed part of stock-in-trade of the business of developers carried on by the assessee and not for the business of any industrial undertaking. 3.5 Further, deduction u/s.54G is allowable provided the assessee has, out of capital gains, purchased new machinery or plant or building or land etc. for the purpose of shifting of industrial undertaking to new area. Such acquisition of new machinery, plant, etc. has to be within a period of one year before or three years after the date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion under section 54G of the Act should be rejected. 12. From the above, it clearly emerges that the Assessing Officer had a full innings of complete scrutiny of the question and the manner in which the income should be taxed. He initially held a belief that such income was a business income of the assessee. This is precisely why he called upon the assessee to explain. The assessee gave two detailed replies and relied on section 45(2) of the Act. It was only thereupon that the Assessing Officer did not change the head of the income but made disallowance by not accepting the petitioner s claim for deduction under section 54G of the Act. Thus the Assessing Officer accepted the petitioner s claim of treating the income as capital gain. Only then the question of granting or refusing deduction under section 54G would arise. 13. It is precisely this ground which the Assessing Officer wishes to press in service for reopening of assessment. According to him such income should be treated as a business income and not capital gain. We fail to see how he can be permitted to do so. In the original assessment having examined the issue fully, any attempt on the part of the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtment, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of change of opinion as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is tangible material to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to Section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words reason to believe but also inserted the word opinion in Section 147 of the Act. However, on receipt of representations from the Companies against omission of the words reason to believe , Parliament re-introduced the said expression and deleted the word opinion on the ground that it would vest arbitrary powers in the Assessing Officer. 15. Division Bench of this Court in the case of Gujarat Power Corporation Ltd. vs. Assistant Commissioner of Income-tax (supra),observed as under:- 42. Bearing in mind these conflicting interests, if we revert back ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It may be a nonreasoned order but not of acceptance of a claim without formation of opinion. Any other view would give arbitrary powers to the Assessing Officer. 43. We are, therefore, of the opinion that in a situation where the Assessing Officer during scrutiny assessment, notices a claim of exemption, deduction or such like made by the assessee, having some prima facie doubt raises queries, asking the assessee to satisfy him with respect to such a claim and thereafter, does not make any addition in the final order of assessment, he can be stated to have formed an opinion whether or not in the final order he gives his reasons for not making the addition. 16. Similar issue came up before the Full Bench of Delhi High Court in the case of Commissioner of Income-tax vs. Usha International Ltd. reported in [2012] 348 ITR 485 (Delhi), where the reference was in the context of true interpretation of the decision of five Judge Bench of the Delhi High Court in the case of CIT vs. Kelvinator of India Ltd reported in [2002] 256 ITR 1(Delhi) (FB). The Full Bench by a majority judgment, observed as under:- 13. It is, therefore, clear from the aforesaid position that: (1) Reasse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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