DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-5(2)(1), BANGALORE vs. M/S L K TRUST , BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B R BASKARAN, ACCOUNTANT MEMBER ITA No.1434/Bang/2017 Assessment year: 2008-09 The DCIT, Vs. M/s. L. K. Trust, Circle – 5(2)(1), #9, Seshadri Road, Bangalore – 560 009. Bangalore. PAN: AAATL 0522 A APPELLANT RESPONDENT Revenue by : Shri. Pradeep Kumar, CIT(DR)(ITAT), Bengaluru. Assessee by : Shri. V. Sridhar, CA Date of hearing : 08.03.2021 Date of Pronouncement : 19.03.2021 O R D E R Per N.V. Vasudevan, Vice President This is an appeal by the Revenue against the order dated 30.03.2017 of CIT(A)-5, Bangalore, relating to Assessment Year 2008-09.

ITA No.1434/Bang/2017 Page 2 of 14 cannot be regarded as having accrued to the assessee. In the course of assessment proceedings for Assessment Year 2007-08, the assessee submitted a letter dated 31.03.2008 in which the assessee gave the reasons as to why only 34% of the capital gain is declared in the return of income for Assessment Year 2007-08. The same reads as follows:

ITA No.1434/Bang/2017 Page 3 of 14 The AO passed an order of assessment on 31.03.2016 for Assessment Year 2007-08 accepting long term capital gain to the extent of 34% declared by the assessee.

ITA No.1434/Bang/2017 Page 4 of 14 respect of the undisputed property sold which amounted to 34% of the area of the total and did not arise or accrue in respect of 66% of the land sold, total area of the land being 11 acres and 20 guntas for the AY 2007-08. The relevant portion from the said letter of the assessee dated 17.2.2015 reads as under: Though the property sold has been registered, there have been disputes by way of following Civil Suits by third parties, the details of which are as under: No. Before Sl. No. Name of the Plaintiff Archaka Srinivas OS City Civil Court, No.1391/2008 CCH 10 Kanyakumari RFA.1485/2014 High Court of BuildersPvt.Ltd. Karnataka Rajesh 2770/2012( City Civil Court, Since dismissed) CCH 10 CCH-12, XVI Addl. Hanumaiah 1548/2008 City Civil and Sessions Judge

Archaka Srinivas v. L. K. Trust — O.S. No.1391/206/ - City Civil Court, CCH 10 The plaintiff filed a suit in 0.5. No.1391/2008 praying for permanent injunction restraining the assessee — Trust (defendants) from interfering with the plaintiff's peaceful possession and enjoyment of the premises in respect of 6 acres 10 guntas out of 11 acres 20 guntas in the property situated at Nagashettyhalli Village, Bengaluru North Taluk. The next date of hearing is posted on 18.02.2015 for cross examination of Pebble Bay Developers (one of the defendants). Kaynakumari Builders Pvt. Ltd. v L. K. Trust — O.S. No.6741J2008 Mayo Hall, CCH-18 Kanyakumari Builders Pvt. Ltd., the confirming party to the sale deed has filed a suit in O.S. No.6741/2008 praying for passing a judgement and Decree for a sum of ' 26,36,72,584/- being the principal and interest @ 18% p.a. thereon. Though the suit of the plaintiff was dismissed on 17.07.2014, a counter claim of the assessee trust- to recover a sum of ' 13.00 Crores from

ITA No.1434/Bang/2017 Page 5 of 14 Kanyakumari Builders Pvt. Ltd. has also been dismissed. We are not aware whether any appeal has been filed against the dismissal of suit. Further, against the dismissal of counter claim, a regular First Appeal has been filed before the High Court of Karnataka vide RFA.1485/2014. The RFA is pending for admission. Rajesh v BDA & Others — O.S.No.2770 of 2012 — City Civil Court, CCH 10 The plaintiff has filed a suit in 0.S.No.2770 of 2012 praying the Court to• Direct the Defendant No.1, 4, 5 and 6 to allot 5 sites of the dimension of 40 feet x 60 feet from out of suit schedule property bearing Survey No. 17, 18 and 19 situated at Nagashettyhalli Village, Kasaba Hobli, Bengaluru, and / or direct the Defendant No 1, i.e., BDA to allot 5 sites alternatively in a layout similar to RMV II Stage. The suit has since been dismissed on 08.04.2014 for default. We are not aware whether further appeal has been filed. Hanumaiah 0.S.1548/2008 — Before XVI Addl. City Civil and Sessions Judge Sri Hanumaiah had filed a suit in O.S.No.1548/2008, which came to be rejected on 12.07.2012. We are not aware whether the plaintiff is in further appeal. We will not know until we receive a notice from the court. Thus, there is dispute with regard to 7 acres and 23 guntas out of 11 acres 20 guntas sold which in terms of percentage works out to 66% of the area sold. In view of the above pending suits, the sale in respect of 66% of the area covered by the sale deed are part of the above suits for seeking Injunction against the property and cases are pending and the plaintiffs are being examined by the various courts as mentioned above. The sale made by us was subject to an indemnity as to the title vide Clause No.6 of the sale deed. The gain arising on sale of property did not crystallise and the right to receive the sale proceeds did not accrue in favour of the assessee trust. If the decision of the Court is adverse, there is no means by which we could get back the capital gain tax if it is offered in the assessment. In these circumstances, we are legally advised that we are bound to offer the income in respect of the undisputed 34% of the area of the property sold and pay tax. The balance are of land of 66% about which disputes are pending are shown as still "Assets" in the Balance Sheet and the balance consideration is shown as advance against sale of property.

ITA No.1434/Bang/2017 Page 6 of 14 On further field enquiries and enquiries by this office through the issue of notice u/s 133(6) to M/s Pebble Bay Developers Pvt. Ltd., it was ascertained that Pebble Bay Developers Pvt. Ltd. has constructed an apartment" complex consisting of 6 towers comprising of total 394 flats whose construction started in 2007. Ws Pebble Bay Developers Pvt. Ltd. has sold the undivided interest in the land and the building to various other parties (buyers). In the year 2007 on 14.09.2007 the right in property at "Survey No.61, 6th.and 7th Floor, Tower No.2, Pebble Bay, Nagashettyhalli, Kasaba Hobli. Bengaluru North Taluk, (East) Nagashettyhalli Road (West) BDA Road (South) Private Property (North) NTI Dollar Apt. Note: (Schedule A :) Sy.No.61, 6th and 7th Floor, Tower No.2, Pebble Bay, Nagashettyhalli, Kasaba Hobli,Bengaluru North Taluk, measuring 4920 square feet of super built up area with 2 car park area and proportionate UDS in A Schedule Property" was pledged by Dr Hrudaya K Hegde and Savita H Hegde to Vijaya Bank and the consideration therein is for2,90,00,000/- after obtaining the right from Pebble Bay Developers Pvt Ltd. It is seen that with the khata, the undivided right and interest in the property is also transferred. Unless the balance 66% of land is handed-over, undivided right in interest in the land which is a notional interest cannot be transferred. The transaction with the above persons is on 14.09.2007 pertaining to asst. year 2008-09. In view of these facts it is obvious that the balance 66% of land has also been handed-over possession during the previous year relevant to asst. year 2008-09. Once the khata is transferred to the prospective buyers the liability on the assessee ceases. It is held that the balance sale proceeds which was reflected as advance in the balance sheet is no longer returnable and partakes the shape of revenue. The asset is also handed-over possession of-Hence, capital gains for 66% of the land has to be offered for asst. year 2008- 09. Though the sale deed has been registered on 31.01.2007 it is the case of the assessee that it was not in the position to hand-over possession during asst. year 2007-08 and hence the transfer was not complete. Now that an undivided right and interest is transferred to a third party, the possession is handed-over and transfer complete. In the event this third party sells this particular right/asset, the party shall be liable for capital gains. Under such circumstances it would be incongruous to even presume that the assessee would not be liable for capital gains being the original vendor. Therefore, the possession has been handed-i over to a third party from M/sL.K. Trust and the transfer is complete and irrevocable. Thus, as the assessee has transferred its right in property irrevocably, the income chargeable to tax attributable to the sale of undivided

ITA No.1434/Bang/2017 Page 7 of 14 interest in land and building has escaped assessment within the meaning of Sec. 147 of the I.T. Act, 1961. I therefore have reason to believe that income chargeable tb tax to the extent attributable to the sale of undivided interest in land and building has escaped assessment.”

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end of the assessment year in respect of an assessment which has been completed under section 143(3), he/she should have recorded satisfaction that the income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment for that assessment year. The reasons recorded does not indicate that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. The Assessing Officer did nave any tangible material which had come to her possession justifying initiation of reassessment proceedings. Therefore, the reopening of the assessment is bad in law.

“11. I have examined the facts of the case, considered the written submissions and the assessment order. After careful consideration of the matter now I proceed adjudicating the

ITA No.1434/Bang/2017 Page 9 of 14 grounds and my decision is given as under: The first ground of is general in nature no adjudication is needed. The second ground of appeal is challenging the notice issued uls.148 of the Act. The appellant has raised objection towards the material relied on by the assessing officer as evidence of escapement of the income. The Assessing Officer has relied on the document being Deed of Mortgage executed by one Dr. Hrudaya K Hegde & Mrs.Kavitha H. Hegde (purchaser of flat from M/s. Pebble Bay Developers P Ltd) in favour of Vijaya Bank for a consideration of Rs.2,90,00,000/- on 14.09.2007. The Assessing Officer has concluded that the above mortgage by the Flat purchaser is only after the transfer of the entire land and has taken the 14.09.2007 as base of conclusion that the balance land i.e. 66% disputed land has been given in possession of the Pebble Bay Developers P Ltd by the appellant. It is to note that the Mortgage deed is for the property purchased by the Dr. Hegde and Pebble Bay Developers P Ltd. The appellant is not a party to this document nor to the agreement between Dr. Hegde and Pebble Bay Developers P Ltd for purchase of the said residential house. This is normal business practice to mortgage the flat to take the housing loan and such mortgage cannot be said to have impact on the tax liability of the person who hastransferred the land to the builder, who has purchased the land for construction. Further, the Assessing Officer has not brought anything on record to demonstrate that how the mortgage deed establishes that the part of the capital gain is chargeable pertaining to A.Y 2008-09. The reason recorded for reopening the assessment is based on above mortgage deed, which itself is not evidence in case of the appellant. Thus, the reasons recorded lack the material evidence and amount to Change of Opinion and no constructive reasons. I do not agree with the conclusion of the Assessing Officer and find merit in the objection raised by the appellant for the reliance by Assessing Officer on the said mortgage deed as material for evidence of the escapement of the income. 11.1 The appellant has brought on record that the assessment for AY 2008-09 was completed under Section 143(3) of the Act and the assessment order was passed vide dated 15.12.2010. Further, the appellant has submitted the letter dated 31.03.2008 to the Assessing Officer communicating the reasons for declaring only portion of the capital gain. This establishes the fact that the regular assessment concluded by order u/s.143(3)

ITA No.1434/Bang/2017 Page 10 of 14 of the Act dated 15.12.2010 is after considering the facts disclosed by the appellant vide letter dated 31.03.2008. The appellant suo-moto has brought out the fact to the notice of revenue that the capital gains on 66% of the disputed land has not been cffered and reasons thereof. The revenue has accepted the same and has neither challenged in assessment proceedings of AY 2007-08 or AY 2008-09. The appellant has discharged his onus by disclosing the entire facts in relation to the income subject to appeal. The notice u/s.148 of the Act for AY 2008-09 dated 27.03.2015 is after a of 4 years from the end of relevant AY i.e. AY 2008-09 and in case where the where assessment has been completed u/s. 143(3) of the Act. Here, the relevant first proviso to Section 147 requires to be analysed: “Provided that where an assessment under sub- section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of relevant assessment Year, unless any income chargeable to tax has escaped assessment for such assessment year by reasons 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." 11.2 In the appeal before me, the appellant has made full disclosure of the facts much before the regular assessment and hence the alleged escapement of income, if any cannot be attributed to the failure on part of the assessee to disclose full and tn.: y a material facts. The Assessing Officer has not brought any such failure on record. Thus. the said notice u/s.148 of the Act, which is issued after period of 4 years from the end of impugned AY 2008-09, where the assessment is completed u/s. 143(3) of the Act is bad in law and does not stand to the test of the law. 11.3 The order dated 10.02.2016 of the Assessing Office disposing the objections raised by the appellant is also silent on the tangible reasons for escapement of income for AY 2008-09. Further, it does not deal with the specific objections raised by the appellant in its objection for reopening the assessment. The Assessing Officer's observation in the Assessment order particularly at point no 4.4 contradicts her conclusion. The

ITA No.1434/Bang/2017 Page 11 of 14 Assessing Officer has relied upon an unreported decision of ITAT in ITA No.590/Bang/2011 in the case of Smt. Uma Prasad vs. DCIT. The facts of the case and the case of the appellant are clearly distinguishable. The ratio of the decision of the ITAT can be confined to the case decided and not to the appellant's case. The Assessing Officer has wrongly brought to tax the capital gains for the assessment year :7.7.-09 as held by her in the order of assessment. 11.4 The appellant on conclusion of the litigation with the parties in relation to the FY 2015-16, has offered the impugned capital gains in relevant AY Officer has failed to establish the preponing of the tax liability I do not find any reason to tax the same again in AY 2008-09. 11.5 On the basis of above conclusions and also relying on the various judicial decisions discussed earlier in this order, I hold that the notice u/s.148 of the Act issued by the Assessing Officer is bad in law in the absence of evidence and due to issuance after expiry of 4 years from end of AY 2008-09 as the Assessing Officer has not bought on record any failure on part of the appellant to disclose fully and truly all material facts. Therefore, the second ground is allowed.”

ITA No.1434/Bang/2017 Page 12 of 14 argument of the AO is accepted then AY 2008-09 is not the year of Transfer and admitted position is that the year in which the capital asset was transferred is AY 2007-08. The admitted position is that the reopening of assessment for Assessment Year 2008-09 has ben done after a period of 4 years from the end of the relevant Assessment Year. There was already an order under section 143(3) of the Act passed for Assessment Year 2008-09. In such circumstances, the reopening of the assessment beyond a period of 4 years from the end of the relevant Assessment Year can be initiated only when there has been a failure on the part of the assessee to fully and truly disclose material facts regarding assessment of income for Assessment Year 2008-09. We have already seen that in the Assessment Year 2007-08, transfer of the property had taken place but only part of the capital gain was declared by the assessee. As far as Assessment Year 2008-09 is concerned, there was no transfer by the assessee at all. The Revenue seems to rely on a deed of mortgage executed by a purchaser of the proposed construction of flats by M/s. Pebble Bay Developers Pvt. Ltd., in favour of Vijaya Bank for availing of a housing loan. This fact cannot be the basis to come to a conclusion that there was a transfer of the property by the assessee in Assessment Year 2008-09. The reopening of the assessment based on the aforesaid mortgage deed was rightly held to be not proper by the CIT(A). The Deed of Mortgage executed by one Dr. Hrudaya K Hegde & Mrs.Kavitha H. Hegde (purchaser of flat from M/s. Pebble Bay Developers P Ltd) in favour of Vijaya Bank for a consideration of Rs.2,90,00,000/- on 14.09.2007, cannot lead to a conclusion that the Assessee transferred the property in the previous year relevant to AY 2008-09. The Assessing Officer has concluded that the above mortgage by the Flat purchaser is only after the transfer of the entire land and has taken the 14.09.2007 as base of conclusion that the balance land i.e. 66% disputed land has been given in possession of

ITA No.1434/Bang/2017 Page 13 of 14 the Pebble Bay Developers P Ltd by the Assessee. As rightly held by the CIT(A), the Mortgage deed is for the property purchased by Dr. Hegde from Pebble Bay Developers P Ltd. The Assessee is not a party to this document nor to the agreement between Dr. Hegde and Pebble Bay Developers P Ltd for purchase of the said residential house. Moreover, neither in the reasons recorded nor in the order of assessment, facts with regard to the assessee’s failure to fully and truly disclose material facts have been spelt out. The provisions to section 147 of the Act are meant as a safeguard against reopening of assessment arbitrarily. The requirement of existence of reasons to believe based on tangible material coming into possession of the AO after the conclusion of the original assessment and other procedural safeguards provided in section 147 of the Act and the proviso to Sec.147 of the Act have to be followed. In fact all facts with regard to LTCG were declared by the Assessee in the return of income filed for AY 2007-08. It cannot be said that there was any failure on the part of the Assessee to truly and fully disclose material facts relating to his income for AY 2008-09 as the previous year relating to AY 2008-09 was not the year of transfer nor was it a year in which the disputes were ultimately settled and the Assessee recognized accrual of capital gain on sale of the property. It is also noticed from the order of the CIT(A) that ultimately 66% of the capital gain on transfer of the property in Assessment Year 2007-08 was offered to tax in Assessment Year 2016-17 and taxed by the Revenue and in these circumstances, we are of the view that the CIT(A) was fully justified in coming to the conclusion that the reopening of the Assessment was bad in law and was justified in annulling the order of assessment passed under section 147 r.w.s. 143(3) of the Act. We find no ground to interfere in the order of CIT(A). Consequently, the appeal of the Revenue is dismissed.

ITA No.1434/Bang/2017 Page 14 of 14 11. In the result, appeal by the Revenue is dismissed.

Pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/-

( B. R. BASKARAN ) ( N. V. VASUDEVAN) Accountant Member Vice President Bangalore, Dated: 19.03.2021. /NS/* Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file

By order

Assistant Registrar ITAT, Bangalore.