KHODAY ESHWARSA AND SONS vs. THE PRINCIPAL COMMISSIONER OF INCOME-TAX

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WP/50526/2018HC KarnatakaKAHC01021933201825 September 2026Bench: S.R.KRISHNA KUMAR12 pages
AI SummaryAllowed

What did the High Court hold?

The High Court allowed the writ petition and quashed the impugned notice under Section 148 dated March 30, 2018, and the order dated October 31, 2018. The Court noted that while both parties had raised contentions on merits, the subsequent development of the revenue passing assessment orders for the very same properties, which were the subject matter of the impugned notice and order, rendered the challenge moot. The Court did not record any finding on the merits or demerits of the rival contentions. The operative direction was to quash the impugned notice and order. No issue was expressly left undecided, as the decision was based on the subsequent events.

What were the facts?

The petitioner, Khoday Eshwarsa and Sons, a partnership firm, filed a writ petition challenging a notice issued under Section 148 of the Income Tax Act, 1961, dated March 30, 2018, for Assessment Year (AY) 2011-12, and a subsequent order dated October 31, 2018, disposing of their objections. The notice proposed to reopen assessment for AY 2011-12 concerning properties at Brunton Road and Doddakallasandra. The petitioner had previously converted these properties into stock-in-trade during FY 2009-10, relevant to AY 2010-11, and later entered into joint development agreements. The petitioner argued that capital gains under Section 45(2) are taxable upon sale or transfer of stock-in-trade, not upon conversion or entering into a JDA. During the pendency of the writ petition, assessment orders were passed for AY 2019-20 (Brunton Road) and AY 2020-21 (Doddakallasandra) under Section 153A of the Act, which the petitioner presented as subsequent events.

What were the issues?

1. Whether the notice issued under Section 148 of the Income Tax Act, 1961, dated March 30, 2018, for AY 2011-12, proposing to reopen assessment based on the conversion of properties into stock-in-trade and entering into a Joint Development Agreement (JDA), is bad in law and liable to be quashed. 2. Whether the order dated October 31, 2018, disposing of the petitioner's objections to the reopening notice, is without jurisdiction and liable to be quashed. Assessee's Contentions: The petitioner argued that capital gains under Section 45(2) are taxable in the year the stock-in-trade is sold or otherwise transferred, not in the year of conversion or entering into a JDA. They contended that the JDA did not constitute a transfer of the property itself. Furthermore, the petitioner highlighted that subsequent assessment orders for AY 2019-20 and AY 2020-21, passed under Section 153A, had already assessed capital gains arising from these properties in later years, accepting the principle that gains are taxable upon actual transfer of stock-in-trade. This, they argued, made the impugned notice for AY 2011-12 unsustainable. Revenue's Contentions: The revenue refuted the petitioner's allegations on merits. However, the counsel fairly submitted that assessment orders for the same properties had been passed during the pendency of the writ petition, and appropriate orders could be passed in the present petition.

Which sections of the Income-tax Act were involved?

Section 148,Section 147,Section 45(2),Section 153A

AI-generated summary — verify with the full judgment below

HC-KAR IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 25TH DAY OF SEPTEMBER, 2026 BEFORE THE HON'BLE MR. JUSTICE S.R.KRISHNA KUMAR WRIT PETITION NO.50526 OF 2018 (T-IT) BETWEEN:

KHODAY ESHWARSA AND SONS A PARTNERSHIP FIRM HAVING ITS OFFICE AT NO.9 SESHADRI ROAD, GANDHI NAGAR BANGALORE – 560 009. REPRESETNED BY ITS PARTNER SRI K L SWAMY S/O LATE SRI K LAKSHMANSA …PETITIONER (BY SRI. A. SHANKAR, SENIOR COUNSEL FOR SRI. H.S. KUMAR, ADVOCATE)

AND:

1.

THE PRINCIPAL COMMISSIONER OF INCOME-TAX BENGALURU -5 BMTC BUILDING 80 FEET ROAD, 6TH BLOCK KORAMANGALA BENGALURU-560 095.

2.

THE ADDITIONAL COMMISSIONER OF INCOME TAX RANGE -5 (2) BMTC BUILDING 80 FEET ROAD, 6TH BLOCK KORAMANGALA BENGALURU-560 095.

3.

THE ASSISTANT COMMISSIONER OF INCOME-TAX CIRCLE 5 (2) (1) BMTC BUILDING 6TH BLOCK 80 FEET ROAD, KORAMANGALA BENGALURU-560 095. …RESPONDENTS (BY SRI. E.I.SANMATHI, ADVOCATE)

Digitally signed by VANDANA S Location: High Court of Karnataka HC-KAR THIS W.P IS FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA PRAYING TO QUASH THE NOTICE ISSUED U/S 148 DATED 30.03.2018 BY R-3 MARKED AS ANNEXURE-A1 FOR THE A.Y.2011-12 AS BAD IN LAW AND ETC.

THIS PETITION, COMING ON FOR PRELIMINARY HEARING IN ‘B’ GROUP, THIS DAY, ORDER WAS MADE THEREIN AS UNDER:

CORAM: HON'BLE MR. JUSTICE S.R.KRISHNA KUMAR

ORAL ORDER

In this petition, petitioner seeks the following reliefs: (a) Issue a writ of certiorari or direction in the nature of a writ of certiorari or order quashing the notice issued under Section 148 dated 30.03.2018 by respondent No.3 FNO AACFK 8629 H/148/C-5(2) (1)/17-18 marked as Annexure- A1 for the A.Y.2011-12 as bad in law.

(b) Issue a writ of certiorari or direction in the nature of a writ of certiorari or order quashing the letter dated 31.10.2018 issued by respondent No.3 disposing of the legal objections raised by the petitioner for reopening of the assessment under section 147 marked as Annexure-K for the A.Y.2011-12 as one without jurisdiction.

(c) Declare that Respondent No.3 erred in law in invoking the provisions of Section 147 of the Act on mere surmises, conjectures and suspicion without having any reasons to believe as contemplated under the provisions of Section 147 of the Act.

HC-KAR (d) Issue a writ of certiorari or direction in the nature of a writ of certiorari or order to forebear the respondent No.3 from giving effect and / or taking any step whatsoever pursuant to and / or in furtherance of the notice u/s.148 of the Act dated 30.03.2018 and / or in any proceedings initiated thereunder for the assessment year 2011-12.

(e) Such other order or orders as this Hon'ble Court may deem fit and proper in the facts and circumstances of the case, in the interest d justice and equity.

2.

Heard learned Senior Counsel for the petitioner and learned counsel for the respondents and perused the material on record. 3. A perusal of the material on record will indicate that in relation the assessment year (AY 2011-12), the respondent issued notice dated 30.03.2018 under Section 148 of the Income Tax Act to the petitioner, who submitted his reply / objections dated 29.09.2018 in pursuance of which, the respondents passed the impugned order disposing of the said objections of the petitioner by rejecting his claim and as such, the petitioner is before this Court by way of the present petition. It is relevant to state that the subject matter of the aforesaid proceedings are in relation to the properties HC-KAR of the petitioner at Brunton Road and Doddakallasandra. In this context, it is pertinent to note that during the course of assessment proceedings for the AY 2010-11, the petitioner submitted that he has converted both the aforesaid properties into stock-in-trade during FY 2009-10, which was relevant to AY 2010-11. Under these circumstances, petitioner contended in his objections that he had entered into a joint development agreement subsequently in relation to the said properties and on account of the same, a part of the properties had been transferred to the developers and therefore, the provisions of Section 45(2) of the Income Tax Act are attracted to the facts of the instant case and consequently, the impugned notice and order deserve to be quashed. It is also contended that during pendency of the present petition, the Assessing Officer had issued a notice under Section 153A of the I.T.Act for AY 2019-20 in respect of Brunton Road property and a notice under Section 153A of the IT Act for AY 2020-21 in relation to Doddakallasandra property, in pursuance of which, the respondents have passed Assessment Orders for both the properties in respect of AY 2019-20 and AY 2020-21, respectively, which have been produced by the petitioner in the present petition.

HC-KAR It is therefore contended that in view of the said subsequent events that have transpired during the pendency of the present petition, the impugned notice and orders deserve to be quashed and a synopsis along with Assessment orders are filed by the petitioner as hereunder: SYNOPSIS BY THE PETITIONER 1. The present writ petition is filed for the A.Y. 2011-12 challenging the notice dated 30.03.2018 issued under section 148 of the Act and the order disposing the objections to the notice issued under section 148 of the Act dated 30.10.2018.

2.

The petitioner filed income tax return for the A.Y.2011-12 on 30.09.2011 declaring total loss of Rs.50,72,897/- (Page 40 to 44 of writ petition).

3.

The Respondent No.1 issued notice dated 30.03.2018 under section 148 of the Act proposing to assess / reassess the income / loss of the petitioner for A.Y.2011-12 (Page 91 of the writ petition).

4.

The Respondent No.1 furnished copy of the reasons recorded for re-opening of assessment vide letter dated 23.08.2018 (Page 94 - 96 of the writ petition).

5.

As per the reasons recorded, it was alleged that - HC-KAR a) During the course of assessment proceedings for A.Y. 2010-11, the petitioner submitted that it has converted the Brunton Road Property and Doddakallasandra property into stock in trade during the F.Y.2009-10 relevant to A.Y. 2011.

b) Subsequently, the petitioner has entered into joint development agreement in respect of the said properties.

c) On account of the joint development agreement, a part of the properties were transferred to the developers.

d) Therefore, provisions of section 45(2) of the Act are attracted in the instant case.

6.

The petitioner filed objections to the notice issued under section 148 of the Act vide letter dated 29.09.2018 (Pages 104 to 119 of the petition).

7.

The Respondent No.3 vide letter dated 31.10.2018 disposed the objections filed by the petitioner (Pages 121 to 124 of the petition).

8.

The petitioner submits the following with respect of the issue of capital gains pertaining to the Brunton Road property - a) The property at No.19, Brunton Road Road, Bangalore was converted from capital asset to stock-in-trade on 02.04.2009 during the F.Y. 2009-10 relevant to A.Y. 2010-11 (Noted by the Respondent No.3 at Page 94 of the petition).

HC-KAR b) As per the provisions of section 45(2) of the Act, when a capital asset is converted into stock-in-trade, the capital gains arising from transfer by way of such conversion shall be chargeable to income tax as income of the previous year in which such stock-in-trade is sold or other transferred.

c) The petitioner along with other co-owners of the property entered into Joint Development Agreement dt. 21.07.2010 for development of the property (Pages 140 to 184 of the petition).

d) The Respondent No.3 has alleged that entering into the JDA dt. 21.07.2010 has resulted in the property being "otherwise transferred" resulting in capital gains as per the provisions of section 45(2) of the Act.

e) The petitioner submits that there is no transfer of property to the developer pursuant to the JDA entered into with the developer. Therefore, the question of the stock-in-trade being sold or otherwise transferred vide the JDA does not arise.

f) The petitioner has in fact offered the capital gains as per the provisions of section 45(2) of the Act in respect of the Brunton Road property HC-KAR in the return filed for A.Y. 2019-20. The property was developed into a commercial building named as Prestige Falcon Tower.

g) It is relevant to state that the developer's share of the land is transferred by the co- owners of the land including the petitioner vide registered sale deed dated 17.09.2018 i.e., during the F.Y. 2018-19 relevant to A.Y. 2019- 20.

h) The Assessing Officer has issued notice under section 153A of the Act for the A.Y. 2019- 20 and re-computed the long term capital gains arising on conversion of land from capital asset to stock in trade. The Assessing Officer has not disputed the year of taxation of capital gains as per section 45(2) of the Act and consequently, it is not open to the department to now contend that the capital gains arises for the A.Y. 2011- 12 which is challenged in the impugned petition (Copy of the assessment order for A.Y. 2019-20 is enclosed along with this synopsis - Please see Page 22 of the assessment order).

9.

The petitioner submits the following with respect of the issue of capital gains pertaining to the Doddakallasandra property - HC-KAR a) The property at Doddakallasandra was converted from capital asset to stock-in-trade on 31.03.2010 during the F.Y. 2009-10 relevant to A.Υ. 2010-11.

b) As per the provisions of section 45(2) of the Act, when a capital asset is converted into stock-in-trade, the capital gains arising from transfer by way of such conversion shall be chargeable to income tax as income of the previous year in which such stock-in-trade is sold or other transferred.

c) The petitioner along with other co-owners of the property entered into Joint Development Agreement dt. 30.03.2011 for development of the property.

d) The Respondent No.3 has alleged that entering into the JDA dt. 30.03.2011 has resulted in the property being "otherwise transferred" resulting in capital gains as per the provisions of section 45(2) of the Act.

i) The petitioner submits that there is no transfer of property to the developer pursuant to the JDA entered into with the developer. Therefore, the question of the stock-in-trade being sold or otherwise transferred vide the JDA does not arise.

HC-KAR j) The petitioner has in fact offered the capital gains as per the provisions of section 45(2) of the Act in respect of the Doddakallasandra property in the years in which the built up area was received from the developer i.e., in the A.Ys. 2020-21, 2021-22 and 2022-23. The property was developed into residential apartments named as Prestige Falcon City.

e) The Assessing Officer has issued notice under section 153A of the Act for the A.Y. 2020- 21 and re-computed the long term capital gains arising on conversion of land from capital asset to stock in trade. The Assessing Officer has assessed the entire capital gains arising as per the provisions of section 45(2) of the Act in the A.Y.2020-21 based on the occupancy certificate dated 20.05.2019 and consequently, it is not open to the department to now contend that the capital gains arises for the A.Y. 2011-12 which is challenged in the impugned petition (Copy of the assessment order for A.Y. 2020-21 is enclosed along with this synopsis – Please see Page 39 of the assessment order).

10.

The petitioner submits that the capital gains as per section 45(2) of the Act in respect of both the properties have been assessed to tax in the A.Y. 2019-20 (Brunton Road property) and A.Y. 2020-21 (Doddakallasandra HC-KAR property). The Assessing Officer has therefore accepted that the capital gains is not assessable in the year of entering in the JDA i.e., A.Y. 2011-12 and consequently the impugned notice issued under section 148 of the Act are unsustainable in law.

11.

In view of the above submissions the petitioner prays this Hon'ble Court to allow the petition filed by the petitioner and pass such other orders as this Hon'ble Court deems fit and proper in the interest of justice and equity.”

4.

Per contra, learned counsel for the respondent – Revenue would refute the various allegations and claim made by the petitioner on merits of their contentions; however, he would fairly submit that during the pendency of the present proceedings, the respondents have passed Assessment orders in relation to the very same properties, which are subject matter of the impugned notice and order and consequently, appropriate orders may be passed in the instant petition. 5. A perusal of the material on record will indicate that by way of subsequent events, the respondetns themselves have passed assessment orders in relation to the subject matter of the impugned notice and order and consequently, though several HC-KAR contentions have been urged by both sides in support of their respective claims on merits, in the light of the subsequent development / event that has occurred and transpired during the pendency of the present petition, i.e., passing of assessment orders by the respondents themselves in relation to the very same subject matter of the impugned notice and order, without recording any finding on the merits / demerits of the rival contentions, I am of the considered opinion that the impugned notice and order deserve to the quashed. 6. In the result, I pass the following: ORDER

(i) The petition is hereby allowed.

(ii) The impugned notice at Annexure – A1 dated 30.03.2018 and the order at Annexure –K dated 31.10.2018 passed by respondent No.3 are hereby quashed.

Sd/- (S.R.KRISHNA KUMAR) JUDGE

SV List No.: 2

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