TMI Blog1980 (1) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... ri Naresh Khanna ... 1/20th " (ix) Shri Rajesh Khanna ... 1/20th " (x) Shri Dinesh Khanna ... 1/20th " (xi) Shri Ramesh Khanna ... 1/16th " (xii) Shri Jagdish Khanna ... 1/16th " (xiii) Shri Arun Khanna ... 1/12th " The background of the facts is that there is a spacious hotel building and some residential portion situated at No. 12, Aurangazeb Road, New Delhi. The entire complex was owned by the firm, Bhola Nath Brothers. Its partners, who were close relations, constituted another firm, named Claridges Hotel, in the year 1955. In this new firm those partners and some of their other relations joined as partners. This firm obtained lease of the hotel building from the firm, Bhola Nath Brothers, on December 21, 1955, on a monthly rent of Rs. 15,950. One of the clauses of the lease was that the lessees were at their own cost and expenses entitled to put in the demised premises all such office fittings as might be required from time to time for their use and business. It may be mentioned here that the residential building in that property continued to remain in possession of the owners, viz., the firm Bhola Nath Brothers. This portion was not let out under that lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the owners, for their residence. According to the 13 co-owners who had sold the property, the sale resulted in capital gains of Rs. 9,26,423 as the original cost of the building was stated to be Rs. 6,64,677. They, therefore, disclosed their respective shares in that capital gains in the separate returns which every one of them filed for the year 1973-74. However, when the assessments proceeded, the ITO was not satisfied that the sale price of Rs. 16 lakhs, as shown in the sale deed, represented the correct value of the property. He, therefore, obtained a report from the Valuation Officer of the department. That Valuation Officer evaluated the perty at Rs. 24,61,000. The co-owners on their part also obtained valuation of the property from an approved valuer who, after considering the nature of the property, the lease held by Claridges Hotel Pvt. Ltd., the terms and conditions of that lease and the circumstance that the land underneath (which measured 2.94 acres) was held on perpetual lease from the Governor-General from the year 1931, estimated the value at Rs. 15,71,224. The ITO, after considering the two reports, determined the value of the property at Rs. 24,61,000, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me from the operation of that hotel was assessed. However, in its case also a notice under s. 148 read with s. 147 of the Act was issued on March 29, 1978, proposing to effect reassessment. The assessee also raised various objections to the propriety of these reassessment proceedings. Since the ITO, it is stated, was not agreeable on those objections to drop the assessment proceedings initiated under ss. 147/148 of the Act, the present writ petitions were moved before this court. The writ petition by Claridges Hotel was filed on December 8, 1978, and the others by the coowners on February 16, 1979. It has been prayed that writs of certiorari or any other writs be issued quashing the impugned notices issued by the ITO under s. 148 of the Act. The respondents impleaded have been the ITO and the CIT. Prayers for writs of prohibition have also been made for restraining the respondents from proceeding with the reassessment proceedings. One of the grounds taken in these petitions was that the respondents had not disclosed the basis and the reasons which prevailed in the issue of notices under s. 148 and the commencement of the reassessment proceedings. These reasons were later file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der s. 148 read with s. 147 of the Act, there was no mention whether they were issued under s. 147(a) or 147(b), in the reasons which were filed during the present writ petitions, it was clarified that the reopening of the assessments were being effected under s. 147(b) of the Act. The sum and substance of the petitioners' cases before us in these writs has been that there was absolutely no basis for reopening of the assessments, that all the material and primary facts necessary for purposes of assessments had been fully and truly disclosed at the original assessment stages and no change of opinion was permissible by way of reassessments. The entire matter relating to the nature and extent of capital gains was open before the ITO at the original assessment stages and the controversy was agitated up to the Appellate Tribunal. The terms and conditions of the lease deeds were also stated to be before the ITO and the approved valuer after the co-owners had specifically made reference to the compensation which the co-owners were liable to pay to the lessee for the additions, improvements, etc., which the latter had effected in the property. Any different appraisement of those primary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udit and in the reasons recorded before the issue of notices under ss. 147/148 of the Act, were not produced at all by the assessee nor were before the ITO at the original assessment stage. The mere fact that they were filed in earlier years in the assessment of the different assessees, it has been urged, could not be treated as material already taken note of by the ITO at the original assessment stage of the present year. The position in this respect, it is pointed out, is well settled that even where certain material could be taken note of by deeper probe into the record of the assessee or otherwise and was not taken, the same cannot preclude commencement of reassessment proceedings when the existence and implication of that material are realised for the first time after the completion of the assessment. Particular reference in this regard was made to the following explanation in existence in s. 147 of the Act: " Explanation 2.--Production before the Income-tax Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in sections 148 to 153 referred to as the relevant assessment year). Explanation 1.--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 income chargeable to tax has been under-assessed ; or (b) where such income has been assessed at too low a rate; or (c) where such income has been made the subject of excessive relief under this Act or under the Indian Income-tax Act, 1922 (11 of 1922); or (d) where excessive loss or depreciation allowance has been computed. Explanation 2.--Production before the Income-tax Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section." Section 148 on its part requires the issue of notice by the ITO before he proceeds to make assessment or reassessment or recomputation under s. 147. Section 151 next provides that if the proposed action is sought to be taken after the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O should have received information after the original assessment, and such information may be of facts or law. The words " external source ", it was observed, cannot be construed as implying that the source must be outside the record. The information may be gathered from the assessment record itself which the ITO had failed for lack of diligence or proper investigation to collect at the previous assessment stage. In this case the report of the audit department on the interpretation of s. 23 of the Act, 1961, was considered as information to justify the reopening of assessment. Both these decisions of Kalyanji Mavji [1976] 102 ITR 287 (SC) and R. K. Malhotra's case [1977] 109 ITR 537 (SC) came up for review in the recent decision of the Supreme Court in the case of Indian and Eastern Newspaper Society [1979] 119 ITR 996 (SC). It has been held that in so far. as the earlier decision in the case of Kalyanji Mavji [1976] 102 ITR 287 (SC), purported to hold in category two as reproduced above that even a mistake committed by the ITO could justify reassessment, the same was too wide a proposition and travelled farther than the statute warranted. It was held that an error discovered on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw and the communication of law. The audit department, though not competent to expound, is fully within its power to communicate to the ITO that on a particular law point, a pronouncement by a competent court or Tribunal has already been given which the ITO has failed to take note of or abide. Such communication has been treated as valid information to justify reassessment. The following observations in the case of Indian and Eastern Newspaper Society [1979] 119 ITR 996 (SC) in this regard are significant : " But although an audit party does not possess the power to so pronounce on the law, it nevertheless may draw the attention of the ITO to it. Law is one thing, and its communication, another. If the distinction between the source of the law and the communicator of the law is carefully maintained the confusion which often results in applying s. 147(b) may be avoided. While the law may be enacted or laid down only by a person or body with authority in that behalf, the knowledge or awareness of the law may be communicated by anyone. No authority is required for the purpose." The word " information " in s. 34(1)(b) is of the widest amplitude and comprehends a variety of factors. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on their transfer have purported to enjoy considerable capital gains. This part of the controversy and the possible accrual of the income to the co-owners was not considered at the original assessment stage. There is no mention it all in those assessment orders of the impact of those terms and conditions in the lease deeds and whether they did create valuable rights in favour of the co-owners. Similarly, in the assessment of the Claridges Hotel Pvt. Ltd. it was not taken note that under those terms and conditions, this company was entitled to receive substantial compensation for the additions, alterations, affixtures, etc., effected in the hotel building. It could not, therefore, be said that at the original assessment stage all these matters were considered by the ITO. He had, therefore, no occasion to form any opinion on this aspect of the matter. It need hardly be said that change of opinion pre-supposes that there was a prior formation of opinion. Where such formation never took place in the past, it is meaningless to plead that a change in its formation is sought to be made. As regards the contention of the petitioners that the ITO should be deemed to have considered all t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these original assessment proceedings. In the circumstances, the ITO had no occasion to look into the terms and conditions of the lease deeds and their full import. In any case he did not at all apply his mind to these new aspects which have been highlighted in the reasons recorded before the issue of notices under s. 147(b). Thus, the existence and implications of the terms and conditions of the lease deeds in the context of the transfer of the property and the accrual of the capital gains did not, at any time, come for consideration before the ITO at the original assessment stage, nor were in his conscious knowledge. Rather, the controversy relating to accrual of capital gains or income by virtue of the sale effected of the property has arisen in the present year only when the sale took place. It was not an issue at any time in earlier years. As regards the audit report, we are of opinion that in the present case, the same cannot be taken as exposition of law simpliciter by that department. It rather brought to the notice of the ITO those particular terms and conditions in the lease deeds and that their implications can result in certain consequences. The audit reports of thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the reassessment proceedings remaining in abeyance for long. It is only in exceptional circumstances that remedy by way of writs can be invoked. Where it is found that on the face of it or palpably the initiation of reassessment proceedings is wholly unwarranted and the reasons which have prevailed in their initiation are entirely imaginary, fanciful or baseless and that the reassessment will not be sustainable at all, that the extraordinary remedy by way of writ may become permissible. In other words, it should be shown that the overwhelming circumstances of the case bring out that the entire course of reassessment proceedings will be an exercise in futility. We, therefore, now proceed to consider whether, in the present cases, there were circumstances which did not warrant at all the commencement of reassessment proceedings and that it will be entirely an exercise in futility. The parties have addressed arguments in this regard. From the side of the revenue specific reference has been made to the definition of the term " transfer " as given in s. 2(47) of the Act. The same is to the following effect: " 2(47) " transfer ", in relation to a capital asset, includes the sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comes obvious that there was little scope for accrual of capital gains in the hands of co-owners on account of those additions and affixtures. Those co-owners would have first paid compensation to the lessee for these additions, affixtures, etc. The cost of the property would have thus correspondingly increased. At the time of the sale again if they got back any price for transfer of those additions, affixtures, etc., the same would have only gone to equalise and balance up what they had earlier paid. The payments and receipts would square up and there can remain little further scope for accrual of capital gains. Looked at from this angle, the case of the revenue that capital gains accrued to the co-owners is entirely fanciful and baseless. Moreover, the occasion for the vesting or passing over of the ownership of the additions, affixtures, etc., in the co-owners would have arisen only if the lease was surrendered or terminated. No such occasion arose in the present case. Instead, the lessee itself purchased the entire property. There was no interregnum during which it could be said that the lease stood surrendered. The lessee's rights instead merged with the ownership rights on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion Officer, the assessee had placed the lease deeds as well as the sale deed. It is also found that the Valuation Officer in his report has made a reference to the relevant clauses of the lease deeds. The Valuation Officer has referred to clause 12 of the lease deed and also the fact that the company had spent Rs. 56,94,475 during the period from 1955 to 1972, in putting up additions and structures for which compensation would be payable to the company in the event of termination of the lease agreement. There was also a valuer's report furnished by the assessee which referred to the details. It is after considering the two valuation reports that the ITO completed the original assessment. While it is true that the value determined for the property in question by the Valuation Officer was binding on the ITO who could not go behind the same (s. 55A of the I.T. Act read with s. 16A(6) of the W.T. Act) the same cannot be said of the ITO's right to determine the nature and extent of the property which had passed under the sale deed read with the lease deeds. Despite these facts, my learned brother has held that the ITO had not applied his mind to the material aspects involved in this ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e an aspect which had not been considered by the ITO at the original assessment, for without some oversight of, or inadvertence to, a particular aspect, there would be no escapement of income from assessment at all. In fact, even where the ITO has discussed and arrived at a particular conclusion, it could always be said that he had overlooked some aspect which he should have considered. It appears to me that the extent to which a reassessment can be justified on the basis that though the ITO had considered an issue at the time of the original assessment he had failed to consider an aspect which someone else considers important is a question that calls for more careful and detailed consideration in an appropriate case. Prima facie, it seems to me this is so wide and general an argument that hardly any case of s. 147(b) will fall outside its ambit. I have, therefore, some hesitation in accepting the pleas put forward on behalf of the revenue on this aspect of the case. In the case of Claridges Hotel, the difficulty in supporting the action under s. 147(b) arises in another way also. The assessee has pointed out, and this has not been denied, that the question as to how far the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of individual co-owners of the property as well as the limited company, the basic fact (the realisation of which is said to have led to the impugned action), namely, that a certain part of the premises belonged not to the co-owners but to the company, was present before the ITO even at the time of original assessment. The lease deeds and sale deeds were within the knowledge of the ITO, in the case of the co-owners, from the valuation reports and in the case of the company from the past history also. The audit party has not added anything to the facts within the knowledge of the ITO; it has only suggested an interpretation of law which, may be, did not occur to the ITO at the time of the original assessment. As the Supreme Court has pointed out, the information of the audit party as to the effect of the various clauses of the lease deed cannot constitute information within the meaning of s. 147(b). I, therefore, think that on this aspect the writ petitioners have an arguable case which requires more detailed consideration. Since however, I am agreeing with my learned brother that the writ petitions have to be allowed on the ground that even if the interpretation sought t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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