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TMI Blog2014 (5) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... 49 of 2010, relates to the assessment year 2005-06 and Writ Petition No. 50 of 2010 relates to the assessment year 2006-07. Writ Petition No. 48 of 2010, relating to the Assessment Year 2003-04 The brief facts, giving rise to the present petitions, are that the petitioner is Company, incorporated under the Indian Companies Act, 1956, which is engaged in the manufacturing of Banaspati product. The petitioner-company was having the land measuring 77638 sq. yard at Amrit Nagar, G.T. Road, Ghaziabad since 1940-41, value of which has been shown in the Books of Accounts at Rs. 84,580/-. The petitioner-company has been declared as a sick unit by the Board of Industrial and Financial Reconstruction (in short 'BIFR') vide order dated 9.2.2001 wherein it has been observed that "The movable and the immovable assets of the Ghaziabad Vanaspati Unit, which had been closed down on 28th February, 1998 would be disposed of and the sale proceeds estimated at Rs.9 crores are proposed to be utilised for meeting the cost of rehabilitation and repayment of loans." It appears that in pursuance of the order passed by the BIFR, for the financial year 2001-02, the petitioner approached the U.P. G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any material fact and no such case has been made out, therefore, the limitation to issue the notice was four years. (ii) There existed no 'reason to believe' to initiate the proceeding under Section 147 as no fresh material came before the assessing authority to form the belief about the escaped assessment. On the basis of the material existed on the assessment record by re-appraisal of the fact and by inference on the basis of the change of the opinion, the proceeding has been initiated. (iii) Complete details relating to the 77638 sq. yard land situated at Amrit Nagar, G.T. Road, Ghaziabad and sale of land during the relevant assessment years have been furnished alongwith the returns and further on the queries being made by the assessing authority during the course of assessment proceeding under Section 143(3) of the Act. The details of the computation of 'Long Term Capital Gain' was furnished and on application of mind the Assessing authority has passed the assessment order under section 143(3) of the Act. To substantiate aforesaid submission, it is submitted that the complete details relating to the land were submitted before the assessing authority. Alongwi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e referred, paragraphs 18, 19 and 20, which have been replied in paragraph 14 of the counter affidavit wherein the averments made in the aforesaid paragraphs of the writ petition have not been disputed and it has been stated that the averments made in these paragraphs being argumentative in nature and refer to certain documents, the same shall be replied at the time of final hearing after exchange of affidavits. He also referred averments made in paragraphs 22 and 28 of the writ petition, reply of which has been given in paragraph 15 of the counter affidavit wherein the averments made in these paragraphs of the writ petitions have specifically not been denied. It has further been submitted that in the present case, Section 45(2) of the Act does not apply. Section 45(2) provides that "Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income tax......." For application of Section 45(2), it is necessary that the transfer by way of conversion should be (a) by the owner of the capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT v. Purolator India Ltd. : 343 ITR 155 (Del) C- Material facts refers only to "primary facts" 1- Calcutta Discount Co. v. ITO 41 ITR 191 (SC) 2- Oriental Carpet Manufacturers v. ITO 168 ITR 296 (P & H) 3- G.B. Bros & Konda Rajgopala v. ITO: 176 CTR 572 (AP) 4- ACIT v. Sarvamangala Properties: 257 ITR 722 (Cal) 5- CIT v. A.R. Enterprises: (2002) 255 ITR 121 (Raj) 6- Ranbaxy Laboratories Ltd. v. DCIT: 351 ITR 23 (Del) D- Notice of reassessment to re-examine not valid after expiry of four years--no specific finding by the assessing officer that the escapement of income was because of failure on part of the assessee to disclose fully and truly material facts necessary for assessment. 1- CIT v. Pradeshiya Ind'l & Invt Corp 230 CTR 131 (All) 2- Mahavir Spinning Mills Ltd. v. CIT: 270 ITR 290 (P&H) 3- Hindustan Lever Limited: 268 ITR 332 (Bom) 4-Jarshan Textile Mills (P) Ltd. v. DCIT 284 ITR 542 (Bom) 5- German Remedies Ltd. v. DCIT 287 ITR 494 (Bom) 6- CIT v. Shri Tirath Ram (HUF) 306 ITR 173 (Del) 7- Haryana Acrylic Mfg. Co. v. CIT: 175 Taxman 262 (Del) 8- CIT v. Motor & General Finance 184 Taxman 465 (Del) 9- Kaira District Cooperative v. ACIT 216 ITR 371 (Guj) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n v. Income-Tax Officer, reported in [1986] 26 Taxman 336 (SC) 3- Indi-Aden Salt Mfg. & Trading Co. (P.) Ltd. v. Commissioner of Income-Tax, reported in [1986] 25 Taxman 356 (SC). We have considered rival submissions and perused the materials on record. It would be appropriate to refer Section 147, relevant part of Section 148 (1) and Section 149 of the Income Tax Act, which are being reproduced below: "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 (hereinafter 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 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. 149. (1) No notice under section 148 shall be issued for the relevant assessment year,-- [(a) if four years have elapsed from the end of the relevant assessment year, unless the case falls under clause (b) [or clause (c)]; (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.] [(c) if four years, but not more than sixteen years, have elapsed from the end of the relevant assessment year unless the income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment.] Explanation.--In determining income chargeable to tax which has escaped assessment for the purposes of this sub-section, the provisions of Explanation 2 of section 147 shall apply as they apply for the purposes of that section.] (2) The provisions of sub-section (1) as to the issue of notice shall be sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into stock-in-trade, as per provisions of Section 45(2) of the IT Act, capital gain as well as income from business is chargeable to tax in the hands of the assessee in the previous year in which the stock-in-trade have been sold or otherwise transferred. In view of the above, there are two aspects which are applicable in the assessee's case, one is determination of long term capital gain on total area of land i.e. 77638 sq. yard by taking FMV in the year of conversion into stock-in-trade as a sale price. Secondly the business profit will also be assessable on actual sale price by reducing FMV as on date of conversion adding the cost of improvement/development charges into it. The assessee has shown profit on sale of land at Rs.16,70,285/- in its profit and loss account and in its computation of income the long term capital gain on sale of land was shown at Rs.10,87,593/-. The profit on sale of land has been deducted from the business income in its computation of income with the remarks that 'the same will be considered separately' under the head 'Long Term Capital Gain'. The calculation of long term capital gain given by the assessee is as under: Sale consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, no business profit was declared by the assessee on account of sale of land only capital gain was shown which was also not worked out correctly. ii) As per provisions of section 45(2) of IT Act, capital gain as well as income from business was also assessable in the hands of the company in the previous year in which the stock in trade was sold or otherwise transfer. Section 45(2) reads as under: "Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital assets into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income tax as his income of the previous year in which such stock in trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset." iii) Section 2(47) of IT Act treats the conversion of capital assets into stock in trade as transfer. iv) In view of above two things are applicable in this case, one is de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Paragraph nos. 18, 19 and 20 of the writ petition, which have been replied by paragraph 14 of the counter affidavit wherein the averments made in the said paragraph have not been disputed would be relevant to be referred, which are being quoted below: 18- It is emphatically submitted, at the cost of duplicity, that in the facts of the petitioner's case, the predecessor assessing officer of the petitioner was fully aware/conscious of transfer of land by the petitioner during the financial years 2002-03 to 2005-06, and accepted the capital gains declared by the petitioner only after making necessary enquiries and due application of mind. 19- To elaborate/substantiate the aforesaid, kind attention is invited to the following disclosures/enquiries conducted by the assessing officer in the assessment year 2003-04, the first year in which the assessee started selling the surplus land; In the return of income filed for the assessment year 2003-04, the petitioner-company separately declared 'Long-term capital gains on sale of land" in the computation of income. Along with the said return of income, the petitioner-company enclosed the following documents in support: (a) Workin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come'. Following Note 6 (a) was given explaining the nature of Extraordinary Income in Schedule 'P--Notes to Accounts': "6. The Extra-ordinary income comprises of-- (a) Profit from sale of surplus land belonging to the erstwhile Ghaziabad Vanaspati Unit (since closed) of the Company amounting to Rs.393.94 lacs. The Company has developed a township at Ghaziabad named as 'Gagan Enclave' where it is selling the developed plots; ........................." During the course of assessment proceedings, the assessing officer, vide order sheet dated 6th February, 2008 directed the petitioner-company to furnish, inter alia, the following details/documents: "(F) Fixed Assets (a) Furnish complete documents, regarding purchase of land as well as sale of land. Area of the land purchased as well as purchased cost be given. Similarly, are of the land sold, cost of acquisition, indexed cost of acquisition as well as selling price be given for the land sold. (H). Extra-ordinary income and other income. (a) Give complete working of profit on sale of land along with names and addresses of the parties to whom land has been sold. (b) Give a descriptive note regarding income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1st March, 2008." Section 147 of the Act says that if the assessing office has 'reasonable belief' that any income chargeable to tax has escaped assessment for any assessment year, he may assess or re-assess the said income. First proviso to Section 147 provides that where an assessment under sub-section (3) of Section 143 has been made, no action shall be taken under this Section after expiry of four years from the end of the relevant assessment year, unless an income chargeable to the tax has escaped assessment of such assessment year by reason of failure on the part of the assessee to make a return under Section 139 or in response to a notice 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. Therefore, unless a case of 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 failure to disclose fully and truly all material facts necessary for the assessment of the relevant assessment year is made out, no assessment can be made after the expiry of four years. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supplementary Affidavit. Alongwith the return, the balance sheet, profit and loss account, the details of the assets and the computation chart of the taxable income have been furnished. The averments made in this regard made in paragraphs 18, 19, 20, 22 and 28 of the writ petition have not been disputed. As stated in Paragraph-22 of the writ petition, in the assessment year 2006-07, the assessing authority has sought the details regarding purchase of land as well as sale of the land, area of the land purchased as well as the purchase cost. Index cost of acquisition as well as selling price of the land has also been demanded. The petitioner filed elaborate details relating to the land in dispute vide letter dated 1st March, 2008. In the assessment order itself, the details are mentioned as follows: "(D). SALE OF LAND Assessee-company has been engaged in sale of plots of land year after year since A.Y. 2003-04. It was having 46232 sq. yards of land out of which 27864.006 was available for sale as on 1st April, 2005. Rest of the land had been sold in earlier years. Out of this, 13480.727 sq.yards of land was sold in the assessment year under consideration. The cost of this land wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is apparent that on the basis of of same material, the assessing authority intended to infer that there was a conversion of the capital asset into the stock-in-trade and as such the income is chargeable to tax under Section 45(2) of a business carried on by him. It is pertinent to mention here that in the order dated 16.12.2009, the assessing authority has observed that "it is a clearcut case of erroneous application of law. There is no second thought to it as by way of conduct, the land was converted into into stock-in-trade in Financial year 2002-03. It does not provide you option to treat the same as and when desired. Since you have failed to offer the business profit on sale of plots and further the capital gain income was also not correctly worked out in Assessment year 2003-04 to 2006-07, therefore, income chargeable to tax has not been truly disclosed and the income was under assessed". The aforesaid observation shows that that on the existing material fact, the assessing authority intended to infer that the capital asset has been converted into the stock-in-trade. The assessing authority, on the basis of material on record assessed the 'Long Term Capital Gain' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. Section 45(2) is applicable in a situation where there is a transfer by way of conversion by the owner of a capital asset into stock-in-trade of a business or owner has treated such capital asset as stock-n-trade of a business. To make the provision application, there must be a positive act on the part of the owner of the capital asset to transfer the asset by way of conversion into stock-in-trade or treating such capital asset as stock-in-trade of a business. In the absence of such a positive act on the part of the owner of the capital asset, the provision of Section 45(2) does not apply. In the present case, it is not the case of the revenue that the owner has transferred, by way of conversion of the capital asset, converted the capital asset into stock-in-trade or has treated such capital asset as stock-in-trade of a business. There is no such material in this regard on record. The assessing authority, while initiating the proceeding, under Section 148, read with Section 147, has inferred such convers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be issued beyond the period of 4 years but within 6 years under Section 149 (1) (b). (iv) In case when the escaped income is less than rupees one lac the limitation to issue the notice under Section 148 is only four years, even if the case falls under the exception of proviso to Section 147. 15. It may be mentioned here that our above view is supported by the decision of the Bombay High Court in the case of Anil Radhakrishna Wani Vs. Income-tax Officer and others, reported in (2010) 323 ITR, 564 (Bom), in the case of Multiscreen Media P. Ltd. Vs. Union of India and another (No.1), reported in (2010) 324 ITR 48 (Bom), in the case of IPCA Laboratories Ltd. Vs. Gajanand Meena, Deputy Commissioner of Income-Tax and others (No.2), reported in (2001) 251 ITR, 416, and in the case of Supreme Treves Pvt. Ltd. Vs. Deputy Commissioner of Income-Tax and others, reported in (2010) 323 ITR, 323 (Bom) and the decision of the Gujrat High Court in the case of Arvind Mills Ltd. Vs. Deputy Commissioner of Income-Tax (Assessment), reported in (2000) 242 ITR, 173, in the case of Gujarat Fluorochemicals Ltd. Vs. Deputy Commissioner of Income-tax, reported in (2009) 319 ITR, 282 (Guj.) and in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onable grounds and that the Income-tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. The Income-tax Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the section. The court can always examine this aspect though the declaration or sufficiency of the reasons for the belief cannot be investigated by the court. There is no material or fact which has been stated in the reasons for starting proceedings in the present case on which any belief could be founded of the nature contemplated by section 34(1A). The so-called reasons are stated to be beliefs thus leading to an obvious self-contradiction. We are satisfied that the requirements of section 34(1A) were not satisfied and, therefore, the notice which had been issued were wholly illegal and invalid." In the case of Income Tax Officer, I Ward, Distt. VI, Calcutta and others v. Lakmani Mewal Das (Supra), the Apex Court has observed as follows: "..The duty of the assessee in any case does not extend beyond making a true and full disclosure of primary facts. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive link or close nexus which should be there between the material before the Income-tax Officer in the present case and the belief which he was to form regarding the escapement of the income of the assess from assessment because of the latter's failure of omission to disclose fully and truly all material facts was missing in the case. In any event, the link was too tenuous to provide a legally sound basis for reopening the assessment....." In the case of Commissioner of Income Tax v. (1) Kelvinator of India Ltd. (Supra), the Apex Court held as follows: "On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, re-opening could be done under above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act [with effect from 1st April, 1989], they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re- open the assessment. Therefore, post-1st April, 1989, power to re-open i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Amending Act, 1989, has again amended section 147 to reintroduce the expression 'has reason to believe' in place of the words 'for reasons to be recorded by him in writing, is of the opinion'. Other provisions of the new section 147, however, remain the same." Now let us examine various decisions relied upon by the learned counsel for the respondent. The decision of the Division Bench of this Court in the case of M/s. Rohilkhand Educational Charitable Trust v. CIT & others (Supra) is based on its own fact. In the said case, a complaint was received from one Mr. Jitendra Kumar, alleging that the expenditure disclosed by the assessee therein was not genuine. In his statement he alleged that the trust is debiting various expenditure, especially salary of teachers, doctors which are not genuine and are inflated, and the capitation fee received from students is being shown as donation to the trust and further that though the assessee has made addition in corpus of Rs.11,20,010/-, but no comment has been made in the assessment order. On the facts of the said case, it has been held by the Court that the assessing authority has relevant material in its possession ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The issue involved in the present writ petition is similar to the issue involved in Writ Petition No. 48 of 2010. The limitation in the present case to take action, under Section 147, was upto 31st March, 2009, while notice, under Section 148 was issued on 8.7.2009, which is barred by limitation. . For the reasons stated above, the notice issued under Section 148 of the Income Tax Act and the proceedings in pursuance thereof are illegal and barred by limitation and as such are liable to be quashed. Writ Petition Nos. 49 & 50 of 2010 These two writ petitions relate to the assessment years 2005-06 and 2006-07. In both the writ petitions, the issue involved is similar to the issue involved in Writ Petition No.48 of 2010, except the question of limitation, which is not involved in these petitions. In these cases, the notices, under Section 148, have been issued within time. For the reasons stated above, the notices issued under Section 148 of the Income Tax Act are illegal and the proceedings in pursuance there of are also invalid and are liable to be set aside. In view of what has been discussed above, in the result, all the four writ petitions stand allowed. The notices issued u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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