TMI Blog2020 (6) TMI 325X X X X Extracts X X X X X X X X Extracts X X X X ..... principles of commercial accounting unless such principles have been superseded or modified by legislative enactments, it would be a misconception to think that any profit arises out of valuation of the closing stock. Computation of capital gains - stand of the assessee is that it had rightly deducted the cost incurred in acquiring the property from the fair market value of the land converted into stock-in-trade - HELD THAT:- For computing the income under the head capital gains , the full value of consideration received as a result of transfer of the capital asset shall be deducted by the expenditure incurred in connection with such transfer, cost of acquisition of the asset and the cost incurred in improvement of the asset. The expression the full value of the consideration would mean the fair market value of the asset on the date of such conversion. The meaning of the expressions cost of improvement and cost of acquisition are explained in Sections 55(1) and 55(2) of the Act respectively. In the case of Miss Piroja C. Patel [ 1999 (3) TMI 38 - BOMBAY HIGH COURT] the question before this Court was whether the Tribunal was justified in holding that the amount in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aheb Yewale and Ms Rupali Vasaikar i/b. Rajesh Shah Co. for Petitioner. JUDGEMENT: 1. By filing this petition under Article 226 of the Constitution of India, petitioner has assailed the legality and validity of the four impugned notices, all dated 25.02.2000, issued under Section 148 of the Income Tax Act, 1961 (briefly the Act hereinafter) proposing to re-assess the income of the petitioner for the assessment years 1992-93, 1993-94, 1994-95 and 1995-96 on the ground that income chargeable to tax for the said assessment years had escaped assessment within the meaning of Section 147 of the Act. 2. In other words, subject matter of the present writ petition relates to challenge to the notices proposing to re-open the assessments for the aforesaid four assessment years. 3. We have heard Mr. Percy Pardiwalla, learned senior counsel along with Mr. Balasaheb Yewale and Ms Rupali Vasaikar, learned counsel for the petitioner. However none has appeared for the respondents. 4. Case of the petitioner is that it is a partnership firm constituted by a deed of partnership dated 21.10.1977. Object of the petitioner is to carry out the business of builders and developers. At ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Borivali property was made into stock-in-trade and the liability to tax under Section 45(2) of the Act would arise as and when the flats were sold. 11. During the previous year relevant to the assessment year 1992-93, petitioner had entered into fourteen agreements for sale of fourteen flats, total area of which admeasured 10,960 square feet. 12. For the assessment year 1992-93 petitioner filed return of income on 02.11.1992 declaring a total income of ₹ 17,55,760.00. Petitioner declared income chargeable under the head profits and gains of business or profession at ₹ 9,37,385.00 and the income chargeable under the head capital gains at ₹ 8,10,993.00. The capital gains was arrived at by determining the difference between the market value of the land converted into stock-in-trade as on 01.10.1987 and the cost incurred by the petitioner which came to a figure of ₹ 55,87,591.00. Having regard to the total built up area of 37,411 square feet, the capital gains per square feet was computed at ₹ 149.36 on a pro-rata basis. Accordingly, having regard to the area of 10,960 square feet sold, the capital gains was determined at ₹ 16,36,9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old as well as the manner of computing profit in terms of Section 45(2) of the Act. Be that as it may, petitioner s assessment for the assessment year 1995-96 was completed and thereafter assessment order was passed on 15.05.1996 under Section 143(3) of the Act determining the taxable income at ₹ 1,32,930.00. 16. According to the petitioner, it received on 08.03.2000 four notices, all dated 25.02.2000, issued under Section 148 of the Act for the four assessment years i.e. assessment years 1992-93 to 1995-96 proposing to re-assess the petitioner for the said assessment years. It was mentioned in the notices that respondent No.1 had reason to believe that income of the petitioner chargeable to tax for the said assessment years had escaped assessment within the meaning of Section 147 of the Act. Therefore the notices were issued after obtaining necessary satisfaction of respondent No.2. Respondent No.1 stated that he proposed to re-assess the income of the petitioner for each of the four assessment years and therefore it was called upon to submit returns of income in the prescribed format for each of the assessment years. 17. Petitioner through its chartered accountant wro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... version of the land into stock-intrade ought to have been assessed only in the year in which the land was sold or otherwise transferred. As the land was not conveyed to the co-operative society, petitioner was not justified in offering to tax the capital gains in terms of Section 45(2) of the Act on the basis of the flats sold during each of the previous years relevant to the four assessment years under consideration. 20. Aggrieved by the issuance of the impugned notices under Section 148 of the Act, petitioner has preferred the present writ petition seeking the reliefs as indicated above. 21. This Court by order dated 31.01.2002 had admitted the writ petition for final hearing and passed an interim order to the effect that assessment should be subject to result of the writ petition and that respondents should not raise any demand pursuant to the re-assessment during pendency of the writ petition. 22. Thereafter respondent No.1 filed affidavit in reply through Shri Pramod Kumar, the then Joint Commissioner of Income Tax, Special Range-9, Mumbai. It is stated that his predecessor in office after recording reasons and after obtaining sanction from the Commissioner of Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o that inference and would not justify re-opening of assessment. The reasons for formation of the belief that income had escaped assessment must have a rational connection on the formation of the belief. In other words, there should be live link or close nexus between the materials before the Assessing Officer and the belief formed by him regarding escapement of income from assessment. He submits that the above jurisdictional facts are totally absent in the present case thereby vitiating the impugned notices. In this connection, he has also placed reliance on a decision of this Court in Prashant S. Joshi Vs. ITO, 324 ITR 154. 23.1. Mr. Pardiwalla further submits that petitioner had fully complied with the requirement of Section 45(2) of the Act and the capital gains arising on the conversion of the land into stock-in-trade was offered and rightly assessed to tax in the years in which the flats were sold on the footing that on the sale of the flat there was also a proportionate sale of the land. This methodology adopted by the petitioner is in accordance with law. Adverting to the various figures pertaining to the market value of the stock-in-trade as well as the cost of acqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sic postulate which underlines Section 147 is formation of the belief by the Assesing Officer that any income chargeable to tax has escaped assessment for any assessment year. In other words, the Assessing Officer must have reason to believe that income chargeable to tax for a particular assessment year has escaped assessment for the relevant assessment year before he procceeds to issue notice under Section 148. The reasons which are recorded by the Assessing Officer for re-opening an assessment are the only reasons which can be considered when the formation of the belief is impugned. Recording of reasons distinguishes an objective from a subjective exercise of power and is a check against arbitrary exercise of power. The reasons which are recorded cannot be supplemented subsequently by affidavits. The question as to whether there was reason to believe within the meaning of Section 147 that income has escaped assessment must be determined with reference to the reasons recorded by the Assessing Officer. Even in a case where only an intimation is issued under Section 143(1), the touchstone to be applied is as to whether there was reason to believe that income had escaped asessment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o as the area of the flat sold bore to the total constructed area. However, assessee valued the closing stock at market price prevailing as on 01.10.1987. According to the Assessing Officer the closing stock should have been valued at market price on close of each accounting year. This resulted into under-valuation of closing stock and consequent reduction of profit. 28.2. Secondly, land as an asset is separate and distinct from the building. Building was shown as a work in progress in the profit and loss account prepared by the asessee and filed with the return. Even after construction of building and sale of flat, the stock i.e., the land was still under the ownership of the assessee. Ownership of land was not transferred. As the land continued under the ownership of the assessee, its value could not be reduced on the plea that flat was sold. The whole of the land under ownership of the assessee constituted its stock-in-trade and it should have been valued at the market price as on the date of closing of the accounts for the year under consideration. Therefore, the Assessing Officer alleged that the assessee had suppressed the market price of the closing stock, thus reducing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a stock was different from the flats. Selling of the flats did not amount to selling of proportionate quantity of land. Under Section 45(2) of the Act, capital gains for land should be considered in the year when land was sold or otherwise transferred by the assessee. Though flats were sold, ownership of the land continued to remain with the assessee. Capital gains would be chargeable to tax only in the year when the land was sold or transferred to the co-operative society formed by the flat purchasers and not in the year when individual flats were sold. 29. Regarding ground Nos.1 and 2, contention of the petitioner is that respondent No.1 proceeded on the erroneous presumption that stock-in-trade had to be valued at the present market value. There is merit in the contention of the assessee if we analyse the decision of the Supreme Court in Chainrup Sampatram (supra). In that case, Supreme Court held that it would be wrong to assume that the valuation of the closing stock at market rate has for its object the bringing into charge any appreciation in the value of such stock. The true purpose of crediting the value of unsold stock is to balance the cost of those goods ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome of the assessee for the previous year in which the transfer took place and shall be chargeable to income tax under the head capital gains . The two key expressions in this provision are transfer and capital asset but before we deliberate upon these two expressions, it would be useful to refer to sub-section (2) of Section 45 and Section 48. 30.3. Sub-section (2) of Section 45 starts with a non-obstante clause. It says 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 as his income of the previous year in which such stock-in-trade is sold or is 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. Therefore, sub-section (2) which had overriding effect over sub-section (1) says that the profits or gains arising from the transfer of a cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owner into stock-in-trade of the business carried on by him, such conversion or any transaction involving the allowing of possession of any immovable property to be taken or retained in part performance of a contract or any transaction whether by way of becoming a member of or acquiring shares in a co-operative society etc. which has the effect of transferring or enabling the enjoyment of any immovable property. 30.8. In the case of Miss Piroja C. Patel (supra), the question before this Court was whether the Tribunal was justified in holding that the amount in question being compensation paid by the assessee to the hutment dwellers for vacating the land was an allowable expenditure within the meaning of Section 48 read with Section 55 of the Act. This Court held that on eviction of the hutment dwellers from the land in question, the value of the land increases and therefore, the expenditure incurred for having the land vacated would certainly amount to cost of improvement. 30.9. Thus in so far the third ground is concerned, we do not find any rationale in the view taken by the Assessing Officer. The cost incurred on stamp duty etc. together with the cost incurred in carr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons for issuing such notices. Petitioner in that case was a partner in a particular firm who subsequently retired from the partnership. On his retirement, he received certain amount during the relevant assessment year in full and final settlement of his dues. In the return of income while the assessee disclosed receipt of the said amount, he however did not offer the same to tax on the ground that it was a capital receipt. In the appellate proceeding arising out of the assessment of the partnership firm, the first appellate authority allowed the claim of the partnership firm that the payment of the said amount to the retiring partners should be treated as revenue expenditure. Since the assessee had claimed this to be exempt from income tax by treating it as capital receipt, Assessing Officer stated that there was reason to believe that such receipt had escaped assessment within the meaning of Section 147 of the Act. It was in that context that this Court referred to the judgment of the Supreme Court in Additional CIT Vs. Mohanbhai Pamabhai, 165 ITR 166 wherein the Supreme Court relied upon its earlier judgments in Sunil Siddharthbhai Vs. CIT, 156 ITR 509 and Addanki Narayanap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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