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Income Tax Appellate Tribunal, HYDERABAD ‘B-SMC’ BENCH : Hyderabad
Before: Smt. P. Madhavi Devi
O R D E R This is assessee’s appeal for A.Y. 2007-08 against the order of Ld.CIT(A)-6, Hyderabad dated 25.03.2019.
Brief facts of the case are that the assessee, an individual, filed his return of income for A.Y. 2007-08 on 14.08.2008 admitting total income at Rs.1,14,120/-. The case was selected for scrutiny and the assessment was completed u/s 143(3) of the Income Tax Act, 1961 (the Act) vide order dated 24.12.2009 by bringing to tax the capital gain which has arisen on account of the joint development agreement entered into by the assessee with a developer for development of his plot of land admeasuring 1184 sq.yards. The agreement was dated 24.07.2003 according to which, the assessee is eligible for 50% of the developed area which works out to 12,155 sq.feet consisting of 6 flats. The flats were handed over to the assessee in the FY 2005-06 and subsequent sale of flats to prospective buyers took place in the financial years 2005-06 and 2006-07. During the assessment of the assessee for the AY 2007-08, the A.O. made an addition of Rs.51,19,683/- as short term capital gain by considering Rs.70 lakhs as sale consideration for sale of 5 flats. Aggrieved, the assessee preferred an appeal before the CIT(A) who confirmed the order of the AO by accepting the sale consideration at Rs.38,56,040/- as against Rs.70 lakhs taken by the AO. For this purpose, the CIT(A) considered the SRO value as on the date of transfer. On further appeal to ITAT by both the parties, the Tribunal allowed the appeal in favour of the assessee. ITAT, in its order dated 04.04.2014 in & 896/H/2013 and also vide order dated 16.7.2014 in MA No.89 & 90/H/2014 has allowed appeal in favour of assessee for the A.Y. 2004-05 (the year in which assessee entered into development agreement) and for AY 2007-08, the ITAT has directed that the sale consideration has to be arrived at considering the provisions of the Act as per section 50C of the Act and it was also held that the finally determined capital gains cannot exceed the capital gains originally assessed in the assessment order.
2.1. In the meantime,, the AO reopened the assessment for the A.Y.2007-08 u/s 147 of the Act by observing that the development agreement was dated 24.7.2003 and some of the terms or Clauses in the said agreement necessitate the charging of capital gains to tax in the year in which the land was given for development. He further observed that the assessee had handed over the possession of the property within one week of entering into of the development agreement, and authorised the developer to construct the apartments and the assessee has got the right over 50% of the built up area which shall be their property and have the right to alienate the same to prospective purchasers. He therefore concluded that the assessee has relinquished his right over the 50% of land in exchange for the 50% built up area to be constructed and given by the developer. Therefore, according to him, the first stage of capital gain has arisen in AY 2004-05, as there was a transfer within the meaning of Sec.2(47) during the Previous Year 2003-04 relevant to AY 2004-05. Therefore, the assessment for AY 2004-05 was reopened u/s 147 and assessment was completed u/s 143(3) r.w.s. 147 of the Act on 24/12/2010 assessing the first stage of capital gain at Rs.44,47,200/- Aggrieved, the assessee preferred an appeal before the CIT(A) who deleted the addition made by the AO by placing reliance on the decision of ITAT in the case of Smt. K. Radika and others in ITA 208/Hyd/2011 dt. 09.08.2011 and also directed that the addition is to be considered in the subsequent years. As per directions of the CIT(A), the AO reopened assessment for the AY 2007-08, by issuance of notices u/s 147 and 143(2) of the Act. In response to said notices, assessee submitted a reply stating that the issuance of notice u/s 148 of the Act is not correct as the first reassessment order dated 24.12.2010 on the same issue was already decided by CIT(A)-3 and thus the doctrine of merger applies and therefore, no reassessment proceedings can be initiated against the same.
2.2. The AO, however, did not accept this contention of the assessee and that while computing capital gain income, in the order passed on 24.10.2010 for A.Y. 2007-08, the AO has adopted the cost of acquisition on the basis of directions of the Tribunal in the case of Dr. Maya Shenoy (23 DTR), Secunderabad, treating the same as second stage of capital gain and also the CIT(A)-3, Hyderabad, had directed to follow the case of Smt. Radhika and others. Therefore, to protect the interest of revenue, the deleted addition in AY 2004-05 by the CIT(A), was proportionately (basing on the flats sold) added back to the assessed income in AY 2007-08 and accordingly, assessment was completed on protective basis. The AO, accordingly, brought additional income of Rs.8,63,463/- to tax.
Aggrieved, the assessee preferred an appeal before the CIT(A) challenging the validity of the re-assessment proceedings and also the addition made by the AO. The CIT(A), upheld the validity of re-assessment proceedings and confirmed the addition made by the AO, thus dismissing the assessee’s appeal.
Thus, the assessee is in second appeal before the Tribunal by raising the following grounds of appeal.
The order of the CIT (A) is erroneous both on facts and in law.
2. The Ld. CIT (A) erred in dismissing the appeal. 3. The Ld. CIT (A) has erred in holding that the reopening of the assessment is in accordance with the provisions of the Act. 4. The Ld. CIT (A) ought to have appreciated that 'doctrine of merger' applies in the assessee's case on the ground that the issue involved is "taxing under the head Income from Capital Gains. 5. The Ld. CIT (A) ought to have appreciated that in both the impugned assessment orders, there exists the common issue of "mode of computation of capital gains u/s 48 of the Act" and therefore, the 'doctrine of merger' applies in the assessee's case.
6. As per the ratio laid down by the Honourable Supreme Court of India in the case of National Thermal Power Co. Ltd v. CIT (1998) 229 ITR 383 (SC), the Hon'ble ITAT has jurisdiction to examine the question of law which has been taken before the ITAT for the first time though not taken before the first appellate authority.
7. Without prejudice to other grounds, the assessment dated 18.03.2016 made u/s 143(3) r.w.s. 254 is invalid on the ground that the re-assessment made u/s 143(3) r.w.s 147 of the Act dated 31.03.2014 which is the origin and which has been reopened merely on the basis of passing remarks of the Ld. CIT (A)-III, Hyderabad in her order dated 29.06.2012 for the assessment year 2004-05 in the assessee's own case. 8. Without prejudice to other grounds, the Ld. CIT (A) erred in upholding the addition of Rs.8,63,463/- which has been made without referring the matter to the DVO as per the directions of the Hon'ble ITAT 9. Without prejudice to other grounds, the Ld. CIT (A) ought to have annulled the order u/s 143(3) r.w.s. 254 of the Act on the ground that it has not been passed as per the directions of the Hon'ble ITAT vide their order in & ITA No.896/Hyd/2013 dated 04.04.2014 r.w.s their order in MA Nos.89 & 90/Hyd/2014 dated 16.07.2014. 10. Without prejudice to other grounds, the Ld. CIT (A) ought to have appreciated that the assessee's request before the Assessing Officer to adopt the SRO value has no locus standee before the directions of the Hon'ble ITAT for referring the impugned property to the DVO. 11. The appellant may add, alter or modify any other points to the grounds of appeal at any time before or at the time of hearing of the appeal.
The Ld.Counsel for the assessee while reiterating the submissions made by the assessee before the authorities below, submitted that the first assessment order for the AY 2007-08 in case of the assessee was passed u/s 143(3) of the Act on 24.12.2009 by making an addition of Rs.51,19,683/- as short term capital gain. He submitted that this assessment order was challenged before the CIT(A) u/s 250 of the Act and that the CIT(A) has granted partial relief to the assessee. Therefore, according to him, the assessment order dated 24/12/2009 has already merged with the order of the CIT(A) and, therefore, it cannot be reopened by the AO subsequently.
He further submitted that the ITAT, in its order dated 04.04.2014 in & 896/H/2013 and also in its order dated 16.07.2014 in M.A.Nos. 89 & 90/H/2014 has allowed the appeal in favour of the assessee for the AY 2004-05 (i.e. the year in which assessee entered into development agreement) and for AY 2007-08, the Tribunal has ordered that the sale consideration has to be arrived at considering the provisions of sec.50C of the Act. He submitted that while the matter is pending before the ITAT the AO has initiated reassessment proceedings and passed order on 31.3.2014 i.e. just few days before the order passed by ITAT that too on protective basis. He submitted that for re-opening of an assessment completed u/s 143(3) of the Act, the AO has to record reasons for coming to the conclusion that there is escapement of income. The fact that the assessment has been completed under protective basis, itself proves that the AO was not satisfied that there was escapement of income and therefore the reassessment framed u/s 147 of the Act itself, is against the provisions of S.147 and hence should be declared as null and void. He further argued that assessment u/s 147 cannot be made to conduct roving enquiries and without there being any new tangible material. In support of this contention, he placed reliance upon the judgement of Hon’ble Supreme Court in the case of Kelvinator of India Ltd. (2010) 187 taxman 312(SC).
6.1. He further argued that protective assessment is usually made by the department only where the department is not sure about the person in whose hands the income is to be taxed or is not sure of the year in which the income is to be taxed. He placed reliance upon the decision of Hon’ble Bombay High Court in case of DHLF Venture Capital Fund vs. ITO (2013) reported in 358 ITR 471 (Bom) in support of his contention that protective assessment cannot be made in reassessment proceedings. He also placed reliance upon the judgment of Bombay High Court in the case of CIT vs. Jet Airways (I) Ltd. (2011) 331 ITR 236 (Bom.) wherein it was held that if the AO does not make any addition of income for which the assessment was reopened u/s 147 of the Act, he cannot assess any other income u/s 147.
6.2. Without prejudice to the above arguments, the Ld.Counsel for the assessee also submitted that the assessee, while filing income tax returns for AY 2007-08, has computed the capital gain by reducing only the land cost and has not taken any advantage towards cost of built up area incurred by developers for construction of flats, and, therefore there was no loss to the revenue on account of development agreement entered into by assessee. Thus, he prayed for relief as claimed in the grounds of appeal.
The Ld. DR, on the other hand, supported the orders of the authorities below and submitted that though the development agreement was entered into in the AY 2004-05, the assessee had not offered any capital gain to tax on 50% of right of land transferred to the developer and has offered capital gai to tax only for the flats sold during the relevant AY i.e. AY 2007-08. Therefore, according to him, the assessee had not offered the capital gain to tax in AY 2004-05 and the ITAT in AY 2004-05 has held that the capital gain has to be brought to tax in subsequent years. Therefore, he supported the action of AO in reopening of assessment in AY 2007-08, because the Tribunal has held that the capital gain on transfer of land is to be brought to tax in the AY 2007-08. Therefore, he prayed for dismissal of the appeal of the assessee.
7.1. Having regard to rival contentions and material placed on record, I find that the development agreement was entered into in F.Y. 2003-04 relevant to AY 2004-05 and the assessee had to offer the capital gain to tax on account of joint development agreement wherein assessee had transferred 50% of the land in favour of the developer. In FY 2006-07, assessee had sold flats received by him and during the relevant AY, i.e., 2007-08, the assessee is liable to capital gain tax on transfer of the flats. Therefore assessee was liable to pay capital gain tax on parting with 50% of the plot of land to the developer in AY 2004-05. However, the coordinate Bench of the Tribunal had considered the judicial precedent of a coordinate Bench at that point of time to hold that the capital gains is to be taxed in the subsequent years i.e., the year of receipt and sale of flats. The Revenue had filed an appeal to the High Court and the same was dismissed vide order dated 01/03/2016 and thus, the said decision had not become final when the notice U/s. 148 was issued to the assessee. Thus, on the date of issuance of the notice U/s. 148, the stand of the Revenue was that the capital gain arising on account of JDA was taxable in AY 2004-05 only. This is evident from the reasons recorded by the AO which are reproduced in the assessment order as under:
“As per the information received the assessee has purchased plot of land at Jubilee Hills admeasuring 1184 sq.yds and the said plot was given to M/s. Yashoda Builders and Developers to construct residential apartments / flats in July, 2003 vide agreement dated 24/07/2003. Ass per the assessee is eligible for 50% of the developed area that works out to 12155 sq ft consisting of 6 flats.
In this case, the development agreement dated 24/07/2003 is perused and some salient features in some of the terms or clause in the said agreement necessitate the charging of capital gains in the year in which the land is given for development. On going the clauses of the development agreement, it is clear that the assessee has handed over the possession of the property within one week of the development agreement, the developer is authorised to construct and has got the right over to alienate the same to prospective purchasers. Considering all these terms of the development agreement, it is clear that the assessee has relinquished his right over the 50% of the area in exchange for the 50% built up area to be considered and given by the developer. Therefore, the first stage of capital gains in the case of the assessee arisen for the Asst. Year 2004-05 as the transfer was within the meaning of Sec. 2(47) during the previous year 2003-04 relevant to the AY 2004-05. In view of the assessment for the AY 2004-05 reopened U/s. 147 and assessment was completed U/s. 143(3) r.w.s 147 on 24/12/2010 assessing the first stage of capital gains at Rs. 44,47,200/-. Aggrieved by the order of the assessee filed an appeal before the CIT (A). The CIT (A) vide her order in dated 29/06/2012 deleted the addition made by the AO and placing the order of the Hon’ble ITAT in the case of Smt. K. Radhika and other dated 09/08/2011. Further, the CIT (A) stated that the addition is to be considered for subsequent years following the Hon’ble ITAT’s decision. In view of the Hon’ble CIT (A)-III, Hyderabad, this case is reopened after taking proper approval and notice U/ss. 148 was issued and subsequently the notice U/ss. 143(2) also issued.” 7.2 Further, the AO in the last paragraph of his order has held as under:- “However, the assessee request is not accepted, because while computing the capital gain income in the order passed on 24/10/2010 for the AY 2007-08, the AO has adopted the cost of acquisition basing on the case of Dr. Maya Shenoy (23 DTR), Secunderabad case (treating the same ass second stage of capital gain). But the Hon’ble CIT (A)-III, Hyderabad order in ITA No. 0631/11-12, dated 29/06/2012 directed to follow the case of Smt. K. Radhika & others, therefore to protect the interest of Revenue the disallowed amount in the AY 2004-05 by the CIT (A) is proportionately (basing on the flats sale) added back to this Asst. Year and accordingly the assessment is completed on protective basis as under……”
Therefore, it is clear that the AO has made the protective assessment in order to save the interest of the revenue if it fails before the higher forums. The Hon’ble Bombay High Court in the case of DHFL Venture Capital Fund vs. ITO, reported in (2013) 34 taxmann.com 300 (Bombay) has held that it would be impermissible for the AO to make protective assessment by reopening an assessment on the ground that a contingency may arise in future resulting in escapement of income. In this case also, the AO had reopened the assessment on the hypothesis that if the Tribunal were to grant relief to the assessee, it would escape assessment. The relevant paras of the Hon’ble Bombay High Court’s decision are reproduced hereunder for ready reference:- “15. The jurisdictional requirement for reopening an assessment under Section 148 is the formation of a reason to believe by the Assessing Officer that income has escaped assessment. The formation of the reason to believe and the existence of that reason must be in the present . Recourse can be taken to the provisions of Section 148 where the Assessing Officer has a reason in present, meaning thereby, a reason which is present to his mind when he forms his reason to believe, that income has escaped assessment. Recourse to Section 148 cannot be founded in law on a hypothesis of what would be the position in future should an appeal before the appellate authority, being the Tribunal or the High Court, result in a particular outcome. The statute does not contemplate the reopening of an assessment under Section 148 on such a hypothesis or a contingency which may emerge in the future.
The basis on which the Assessing Officer has purported to reopen the assessment is placed beyond any doubt by the affidavit which has been filed in reply to the Petition. As we have noted, there is no ambiguity whatsoever in the reasons which have been communicated to the assessee in the order dated 18 May 2012, but in the affidavit in reply, it has been stated that the income of Rs.32.83 Crores arising from the investment of contributions of the contributors to the Venture Capital Fund which has been claimed as exempt in the hands of the Petitioner should be assessed as income in the hands of the AOP of the contributors of the Petitioner "on a protective basis". Again it has been stated that the issue of taxing the AOP of the contributors of the Petitioner "has arisen from the submission of the Petitioner before the appellate authorities" where the Petitioner has contended that the transactions amount to a revocable transfer and that the income which would arise should be taxed in the hands of the individual contributors. The reopening of an assessment under Section 148 on the basis of a submission which is raised before the appellate authority by the assessee is clearly impermissible because what Section 147 requires is a formation of a reason to believe by the Assessing Officer. In the present case, there is clearly a want of compliance with the jurisdictional condition. The Assessing Officer has not formed a reason to believe that income has escaped assessment since the reopening is based purely on a contingency that may arise upon a particular outcome before the appellate tribunal.”
Thus, it can be seen that an assessment completed u/s. 143(3) of the Act, cannot be reopened on a presumption that it may escape assessment in future, if the revenue failed in its litigation before the Hon’ble High Court. Thus, I am satisfied that the reassessment proceedings initiated and completed on protective basis are null and void. The ground of appeal no.3 is allowed. Since the reassessment is held to be null and void, the other grounds, which are on merits of the addition are not adjudicated at this stage as it would only be an academic exercise at this stage. Thus, the assessee’s appeal is partly allowed.