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2016 (3) TMI 734 - KARNATAKA HIGH COURT

2016 (3) TMI 734 - KARNATAKA HIGH COURT - TMI - Reopening of assessment - escapement of income proved or not? - Held that:- Whether it was a case of change of opinion or the non-disclosure of true and correct facts, if considered in light of the report, one may say that such may fall in the arena of question of fact which may include the consideration of the earlier proceedings of the assessment. The Tribunal having found that the relevant material including that of transfer by the assessee to P .....

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OF INDIA ) as held one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of "mere change of opinion", which cannot be per se reason to re-open - The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of "change of opinion" is remo .....

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antial questions of law: 1. Whether the Tribunal was correct in holding that the reasons recorded by the assessing officer did not spell out that escapement of income was due to the assessee not fully and truly disclosing all material facts necessary for completion of assessment for the relevant assessment year without considering the fact that the assessing officer recorded that the assessee did not file any information regarding incidence of capital gains? 2. Whether the Tribunal was correct i .....

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aid aspects has observed from paragraph 12 to paragraph 26 as under: 12. It could be seen from the facts narrated as above that the proceeding u/s. 147 of the Act were sought to be initiated after a period of four years from the end of the relevant assessment year. It is also clear from the facts narrated as above that in the case of assessee for the A.Y. 2005-06, an order of assessment u/s. 143(3) of the Act had already been made. Therefore, proviso to section 147 of the Act will apply. 13. It .....

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tion of the provisions of Sec. 45(2) of the Act. As we have already seen the Assessee held the Whitefield property as investment and converted the same as stock-in-trade of business. This fact has also been recorded by the AO in the order of assessment passed u/s. 143(3) of the Act. Sec. 45(2) of the Act provides that 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 .....

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overlooked the applicability of those provisions or because he thought that the point of time at which tax is to be levied u/s. 45(2) of the Act, viz., sale of the stock-in-trade had not occurred during the previous year. In the reasons recorded by the AO, the AO makes a reference to the provisions of Sec. 45(2) of the Act and claims that the said provisions are applicable because the assessee had entered into agreement for development of the Whitefield property on 5.2.2005 with M/S.PEPL and fur .....

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easons recorded the AO has referred to judicial pronouncements wherein a view has been expressed that whenever property is given on Joint Development, the date of transfer would be the date of the Joint Development Agreement for the purpose of levy of capital gains tax. In the remaining paragraphs, the AO has computed capital gain that has to be brought to tax which in his opinion has escaped assessment. 14. On the facts as narrated above and on the basis of provisions of section 147 as well as .....

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erefore bad in law. 14.1 On point (a) as above, the learned counsel for the Assessee submitted that the fact that assessee owned 100.02 acres of land in Whitefield and the fact that the aforesaid property was treated as investment as on 31.3.2004 and shown as stock-in-trade as on 31.3.2005 are all facts within the knowledge of the AO, while completing the original assessment u/s. 143(3) of the Act. The fact that the property was subject matter of the joint development agreement ("JDA") .....

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d by the AO in the order of assessment passed u/s. 143(3) dated 31.12.2007. 14.2 Our attention was drawn to the provisions of section 147 of the Act and proviso to section 147 which reads as under:- "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 .....

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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:" 14.3 As per the prov .....

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ear. He drew our attention to the reasons recorded by the AO u/s. 147 of the Act before issue of notice u/s. 148 of the Act and submitted that in the reasons so recorded by the AO, there has been no allegation that there was escapement of income due to failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment of income of the assessee for A.Y. 2002-03. 14.4 Our attention was also drawn to the decision of the Hon'ble Karnataka High Court in th .....

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assessee to disclose fully and truly all material facts necessary for the assessment of that assessment year. It is for the Assessing Officer to disclose and open his mind through reasons. He has to speak through his reasons. It is for the Assessing Officer to reach the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the-concerned assessment year. It is for the Assessing Officer to form his opi .....

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tate anywhere that there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that year. All that has been stated in the order is that the assessee has appended the note and at no point of time, the assessee has disclosed as to the nexus between the amount of ₹ 10,06,617/-and the 10A unit. The disclosure has to be full and true. Both the criteria have to be met. In the assessee's case, by failing to bring out the nexus .....

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ible for exemption under Section 10A, even that nexus is manifest. The Assessing Authority has not properly applied his mind towards the statutory provisions and has not taken into consideration that the original assessment passed under Section 143(3) which was also reopened once and adjustment was made. It is for the second time, he was raising all these objections. When admittedly the second reopening of the assessment is beyond four years, under law, it is barred by time and the findings reco .....

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otice u/s 148 of the Act had been issued on 27/4/2011 in relation to the Assessment Year 2005-06. Hence, admittedly the same had been issued after expiry of a period of four years from the end of the relevant assessment year. Under the circumstances, in light of the proviso to section 147 of the Act, in case, where assessment has been framed under section 143(3) of the Act, no action can be taken under section 147, unless income chargeable to tax has escaped assessment by reason of the failure o .....

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idavit-in-reply filed, there was no allegation of any such failure on the part of the assessee. The AO was not in a position to satisfy the Court with respect to compliance/satisfaction of the requirement of the proviso to section 147 of the Act. Under the circumstances, it was apparent that the requirement of the proviso to section 147 was not satisfied. Secondly, in absence of any satisfaction having been recorded by the Assessing Officer that the income has escaped by reason of the failure on .....

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Assessing Officer, the Division Bench of this Court has quashed and set aside the notice of reassessment u/s 148. In view of the above and for the reasons stated above notice of reassessment u/s 148 quashed and set aside." (emphasis Supplied) 14.6 It was thus submitted by the ld. counsel for the assessee that reopening of the assessment should be held to be bad in law, as the AO in the present case has not recorded specifically that escapement of income was due to the failure on the part o .....

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original assessment proceedings. It was emphasized that no new material whatsoever has been referred to in the reasons recorded. 15. The ld. DR, on the other hand submitted that there was a failure on the part of the Assessee to fully and truly disclose material facts and in this regard drew our attention to para-19 of the reasons recorded wherein the AO has recorded the fact that the Assessee has not filed any information to the effect that there was incidence of capital gain u/s. 45(2) of the .....

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n page-10 and 11 of the CIT (A)'s order wherein the CIT (A) has upheld the action of the AO in initiating proceedings u/s. 147 of the Act. 16. The ld. counsel for the assessee, in rejoinder, pointed out to Explanation 1 to section 147 of the Act, which reads as under:- "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 .....

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d in Expln.-1 as above, will only mean that one has to look into the facts and circumstances of the given case to come to a conclusion, whether there was failure on the part of the assessee to fully and truly disclose all necessary facts for his assessment for that assessment year. The fact that the Assessee filed all documents and accounts and other evidence from which material evidence could with diligence have been discovered by the AO, will not be conclusive in the matter. According to him, .....

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be said to have failed to disclose fully and truly material facts. In this regard, it was submitted by him that reasons recorded only mention the fact that assessee has not filed any information regarding capital gains u/s. 45(2) of the Act in the return of income filed. According to him, this allegation cannot tantamount to an allegation by the AO that assessee has failed to fully and truly disclose all material facts. 18. On the reopening of assessment being merely on a change of opinion, the .....

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o a Development agreement in respect of the property as resulting to a transfer giving raise to charge of capital gain u/s. 45(2) of the Act. It was pointed out by him that in the reasons recorded the AO has not referred to any material which had come into his possession subsequent to the passing of the order u/s. 143(3) of the Act based on which he entertained belief that Development Agreement resulted in a Transfer and thereby provisions of Sec. 45(2) of the Act became applicable. There being .....

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er section 263 of the Act. It was his submission that the law is well settled that to assume jurisdiction u/s. 147 of the Act, there should be reason to believe that income chargeable to tax has escaped assessment. Such reason to believe cannot be on a mere change of opinion. This position is well settled by the decision of the Hon'ble Supreme Court in the case of CIT Vs. Kelvinator of India Ltd. 320 ITR 561 (SC). Attention was also drawn to a decision of the Hon'ble Karnataka High Court .....

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on of the ld. DR regarding change of opinion, ld. counsel for the assessee brought to our notice the following observations of the Hon'ble Supreme Court in the case of Kelvinator of India Ltd.:- "On going through the changes, quoted above, made to s. 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, reopening could be done under above two conditions and fulfilment of the said conditions alone conferred jurisdiction on the AO to make a back assessment, but in .....

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is of "mere change of opinion", which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The AO has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain pre-condition and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One mus .....

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nt of income from assessment. According to him, the present action of the AO is clearly a case of resort to reassessment proceedings merely on change of opinion. 21. We have given a very careful consideration to the rival submissions. As we have already seen the Assessee held the Whitefield property as investment and converted the same as stock-in-trade of business during the previous year relevant to AY 05-06. This fact has also been recorded by the AO in the order of assessment passed u/s. 143 .....

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int of time at which tax is levied is the year in which the stock-in-trade is sold. When the original assessment was completed u/s. 143(3) of the Act, the AO did not think it fit to invoke provisions of Sec. 45(2) of the Act either because he overlooked the applicability of those provisions or because he thought that the point of time at which tax is to be levied u/s. 45(2) of the Act, viz., sale of the stock-in-trade had not occurred during the previous year. It is clear from a perusal of the o .....

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itefield was stock-in-trade of the business of the assessee and that it was subject matter of joint development agreement, by which property was to be developed as a residential complex, did not consider the JDA dated 5.2.2005 as giving rise to a transfer within the meaning of section 45(2) of the Act. In the reasons recorded by the AO before issue of notice u/s. 148 of the Act, the AO has come to the conclusion that by virtue of JDA dated 5.2.2005, there was a transfer of the capital asset givi .....

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resaid conclusion, the AO has placed reliance on the decision of the Hon'ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia Vs. CIT 260 ITR 491 (Bom.) rendered on 13.2.2007, which was much before when the AO concluded the original assessment proceedings u/s. 143(3) of the Act on 31.12.2007. The other decision referred to by the AO in the reasons recorded is CIT Vs. T.K. Dayalu 202 Taxman 531. This decision was rendered on 20.6.2011, after the conclusion of the original assessm .....

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, the facts on record and reasons recorded clearly show that all facts were available before the AO when he completed the original assessment proceedings u/s. 143(3) of the Act. There is no tangible material which has come to the possession of the AO justifying initiation of reassessment proceedings. On the facts and circumstances of the present case, we are of the view that initiation of reassessment proceedings has been merely on the basis of change of opinion and in view of the law laid down .....

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regard, we are also of the view that allegations in para 19 of the reasons recorded do not spell out the belief that there was a failure on the part of the assessee to fully and truly disclose all material facts. In fact, the assessee had disclosed all facts in the original assessment proceedings u/s. 143(3) of the Act. 24. With regard to reliance placed by the ld. DR on Explanation to section 147, we are of the view that Explanation 1 only lays down that facts and circumstances of each case wil .....

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as we have already seen, evidence was produced before the AO in the course of the original assessment proceedings u/s. 143(3) of the Act and the same was perused by the AO and he had not chosen to draw any conclusion that there was a transfer by the assessee to PEPL. The fact that assessee was following completion method of accounting for income from the JDA, has also been acknowledged by the AO. In the given circumstances, we are of the view that Explanation 1 cannot be resorted to by the reve .....

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