VIKAS JAIN,KANPUR vs. ACIT-CC 2(1)(1), KANPUR

The facts of the case are that the assessee filed a return for the A.Y. 2015- 16 declaring a total income of Rs. 45,39,070/-, which was processed under section 143(1) of the Income Tax Act, 1961. Subsequently, an information was received from the Income Tax Officer, Ward-3(5), Kanpur that the assessee had sold a property below the market value / stamp duty value. Therefore, the case was reopened under section 147 after the necessary approvals, by way of issue of notice under section 148 of the Income Tax Act. The information on the basis of which the case was reopened, was that the assessee who was a partner in M/s Gayatri Petroleum, had sold a petrol pump built over a part of Arazi No. 719 situated at Village Mohak, Tehsil Bindki, District Fatehpur, U.P. admeasuring 3240 Sq. Mts bearing khata No. 260 for a sales consideration of Rs. 89,65,000/- and paid stamp duty of Rs. 14,02,600/- for the same. The value of the property had been assessed by the stamp duty authority for the purpose of payment of stamp duty at Rs. 2,00,29,450/-. The ld. AO noted that as per the provisions of section 50C of the Vikas Jain A.Y. 2015-16 Income Tax Act, where the sale consideration received was less than the value adopted or assessed by the stamp duty authority, the value so adopted or assessed by the stamp duty authority would, for the purposes of section 48 of the Income Tax Act, be deemed to be the full value of consideration received on transfer of an asset. Accordingly, applying the provisions of section 50C, he held reasons to believe that assessee’s income chargeable to tax of Rs. 1,10,72,650/- had escaped assessment during the assessment year 2015-16 by virtue of the proviso of Explanation 2(a) of section 147.

In response to the said notice, the assessee filed objections wherein it was submitted that he was merely the owner of the land and not of the superstructure i.e. the building on the land. He also submitted a copy of the sale deed in which the value of land sold amounted to Rs. 42,12,000/-. It was submitted that he had already filed his return as required under section 139 of the Act and the provisions of section 147 had been invoked without looking into the assessment records. Since, the notice under section 148 had been issued on the premise that he had not filed his return of income, the reasons recorded were factually incorrect and the issue of the notice was mechanical due to which the notice itself was bad in law. The ld. AO considered the objections of the assessee, but thereafter held that the same was covered under section 292B of the Act, which held that no return of income, assessment, notice, summons or other proceeding furnished or made or issued or taken would be invalid or deemed to be invalid only because of any mistake, defect or omission in such return of income, assessment, notice, summon or other proceeding if such return of income, assessment, notice, summons or other proceeding was in substance and effect, in conformity with or according to the intent and purposes of the Act. The ld. AO also held that since the objection had been raised by the assessee beyond the 30 days period after the issue of notice under section 148, therefore also, it was not maintainable. It appears from the assessment order that there was some confusion in the replies furnished by the assessee, owing to the fact that the Department refused to receive an unsigned PDF file, but subsequently the same was rectified by the assessee and the reply was Vikas Jain A.Y. 2015-16 taken on record. However, in view of the fact that the assessee had objected to the value of the property as per the stamp duty value, therefore, in accordance with the provisions of section 50C, the matter was referred to the office of the Valuation Officer, Kanpur under section 55A of the Income Tax Act. As a result of the valuation, the value of the land was determined at Rs. 63,24,500/- as compared to the value of Rs. 42,12,000/- that was declared by the assessee. The assessee objected to the valuation on the grounds that the property under reference was under this agreement with Reliance Industries Limited for a period of 29 years and 11 months from 7.04.2005 and the term of expiry of lease was 28.02.2035. Accordingly, the property was not a free hold property and therefore, it was not marketable in the open market. In the circumstances, no prudent buyer could purchase it at market rate hence the sale consideration in respect of land value of Rs. 42,12,000/- as evidenced in the sale deed of the property under reference was the only and the actual fair market value of the property and nothing over and above the said value could be treated as fair market value of the property, as the assessee was bound to sell the property to only Reliance Industries Limited and no other buyer could have purchased the property. It was further submitted that the property under reference was being used as a retail outlet for sale of petrol by Reliance Industries Limited and a complete petrol pump was installed on the premises. Thus, Reliance Industries Limited had not only purchased the land, but also the superstructure on the land the machinery installed thereon and the ownership of the superstructure and machinery were that of the partnership firm, M/s Gayatri Petroleum, of which the assessee was only one of the partners. Accordingly, it was submitted that the sale of land was not in isolation, it was a composite sale, no person who was not intending to run a petrol pump could have purchased the superstructure and petrol pump machinery, as a result of which the assessee was compelled to sell same to M/s Reliance Industries Limited during the period of lease. Moreover, it was submitted that M/s Reliance Industries Limited was an internationally recognized company and nothing above the sale consideration had been received by the assessee. What had been received had Vikas Jain A.Y. 2015-16 been duly declared in the return of income and could not be substituted by any other fair market value. It was further submitted that only for execution of the sale deed under reference, Reliance Industries Limited had surrendered the lease hold rights of the property. All these facts had been ignored by the Valuation Officer and therefore, the value determined by the ld. Valuation Officer as the fair market value of the property under reference was incorrect. For this proposition, the assessee relied upon the judgment of the ITAT in the case of Atul Kumar Garg (HUF) vs. ITO reported in 2018 TaxPub (DT) 2859 (Luck-Trib).

The ld. AO refused to consider these submissions of the assessee on the grounds that the provisions of law could not be overridden through an agreement. Just because the assessee had entered into an agreement for sale of the land at a certain consideration which was lesser than the market rate, it does not mean that the assessee had no free will in deciding the value of the property later. The ld. AO also distinguished the case of Atul Kumar Garg (HUF) (supra) from that of the assessee pointing out that the case cited by the ld. AR involved issues like illegal acquisition of property by tenants and surrendering of property for road widening, issues that were beyond the control of that party. However, the case of the assessee stood on a different footing as the assessee was not bound by any force outside his control. The contract done by the assessee with Reliance Industries Limited was done by the assessee out of his own free will and therefore, could not be equated. Furthermore, section 50C was a special provision for deeming the stamp duty value to be the full consideration and there was no necessity for the deemed consideration to actually be paid for bringing the same to tax. The ld. AO pointed out that the property was a free hold property and it became binding on the assessee to sell the property to M/s Reliance Industries Limited only because of the assessee’s own actions therefore, the ld. AO did not accept the arguments of the assessee that the valuation determined by the Valuation Officer was not in accordance with the actual fair market value and he Vikas Jain A.Y. 2015-16 proceeded to bring the difference of Rs. 21,12,500/- to tax under the provisions of section 50C.

The ld. AR further argued that the assessment was rendered illegal because the reference for valuation was made under section 55A instead of section 50C which was the specific section for reference for valuation in cases where a property had been transacted for less than stamp duty value and since there was a difference in the forms, there would be a different valuation report which could not be utilized in the case of the present assessee. This was a legal infirmity which rendered the valuation inapplicable for making addition in the hands of the assessee as per the provisions of section 50C.

Coming to the merits of the case, the ld. AR submitted that the valuation done by the Valuation Officer had failed to appreciate the fact that the transaction undertaken by the assessee was not the transaction entered into in the open market and therefore, the fair market value as determined by the Valuation Officer could not be deemed to be the full value of consideration in such circumstances. It was pointed out that the property was under a 30-year lease to Reliance Industries Limited and the assessee did not have the right of terminating the lease. Therefore, the assessee was not at liberty to sell the property to any other party owing to the restricted clauses in the sub lease deed, which was contained in the paper book. It was further submitted that the lease was vacated by M/s Reliance Industries Limited only for the purposes of facilitating the same and therefore, since the assessee was not at liberty to sell the property to any willing buyer in the open Vikas Jain A.Y. 2015-16 market, the stamp duty value or the value determined by the Valuation Officer could not be regarded as the deemed value of consideration in the assessee’s case.

On the other hand, Sh. Amit Kumar, Sr. DR (hereinafter referred to as the ld. DR) submitted the objections of the assessee against the issue of notice under section 148 had been duly disposed of by the ld. AO during the assessment proceedings by taking note of the objections and considering the issue on its merits. It was argued that the specific prerequisite conditions for raising objections had not been made by the assessee as considered by the Hon’ble Supreme Court in the case GKN Driveshafts (India) vs. ITO (2003) 125 Taxman 963 (SC) because the assessee had not filed a return of income in response to the notice under section 148. Notwithstanding the fact, the ld. AO had considered and disposed the objections by pointing out that an irregularity and procedural / technical lapse cannot vitiate the assessment proceedings as it was a lapse which could be cured under section 292B. For this proposition, reliance was placed on the decision of the Hon’ble Supreme Court in the case of Sky Light Hospitality LLP vs. ACIT (supra). Reference was also invited to the decision of the Hon’ble Delhi High Court in the case of Sky Light Hospitality LLP vs. ACIT (2018) 90 taxman.com 413 (Delhi) wherein the Hon’ble High Court had held that reasons to believe refer to several facts and information that had come to the knowledge and was available with the ld. AO. At the stage where notice under section 148 of the Act was issued, firm and conclusive findings would not be required as the merits would be examined during the course of assessment proceedings, but as long as there was an honest and reasonable opinion found by the ld. AO and the reasons to believe were not merely reasons to suspect, the Courts should not interject to stop the adjudication process and scrutiny on merits. Absolute certainty was not required at the time of issue of notice and at the same time, the reasons to believe should not be based merely on suspicion, gossip or rumor. Relying upon the same, the ld. AR argued that there was a, ‘live link’ between the material available on record and the escaped income and because the ld. AO had reason to believe that the assessee had not disclosed fully and truly all the material facts necessary for assessment, Vikas Jain A.Y. 2015-16 there had been an escapement of income in the case of the assessee. It was submitted that the basic work of the competent authority was to check whether the incriminating material which is related to the escapement of income from taxation was placed in the file or not and on this ground, there was no lapse by the approving authority. Therefore, such approval could not be termed as mechanical approval as alleged by the assessee. It was also submitted that section 50C was a deeming provision, which was not concerned with the actual consideration received but held that where it was less than the stamp duty value, the latter had to be held to be the full value of consideration. It was also provided that where the assessee disputed the stamp duty value, the matter was to be referred to valuation. The ld. DR argued that in the present case, the matter had been referred to valuation and the Valuation Officer had determined the value of the sold land at a rate of Rs.63,24,500/-. Compared to this, the value of the land declared by the assessee was only Rs.42,12,000/-. The assessee had not been able to point out any discrepancy in the valuation report and therefore, as per the provisions of the Act, the ld. AO was obliged to make the addition in the hands of the assessee. It was submitted that even before the ld. AO, the assessee could not point out any infirmity in the valuation report submitted by the Valuation Officer and therefore, the ld. CIT(A) had confirmed the said addition. The ld. CIT(A) had noted that there was no pending litigation on the property and the Valuation Officer had determined the value of the land at a much lower rate from the stamp valuation. Thus, it was argued that any objections which the assessee may have had to the stamp duty value of the land had been duly addressed by the Valuation Officer. Accordingly, it was prayed that no interference was called for and the addition be confirmed. On the issue of remuneration of Rs. 7,02,335/- received by the assessee from the partnership firm M/s Gayatri Petroleum, first on account of addition under section 50C and then on account of business in the hands of the assessee, it was submitted that the ld. CIT(A) had correctly pointed out that the assessee had an opportunity to reduce his claim of income from remuneration when the ld. AO had called for a new return of income through notice under section 148, but had Vikas Jain A.Y. 2015-16 chosen not to exercise that option. Therefore, since the assessee had not exercised the option to reduce the remuneration, the ld. AO was justified in making the addition and it did not call for any interference.

We have duly considered the facts and circumstances of the case and the arguments made by both parties. We have also seen copies of the decisions filed by both parties. We believe that the answer to the question of whether the notice under section 148 was a valid notice and whether the mistake committed by the ld. AO in referring to Explanation 2(a) of section 147 can be cured by invoking of section 292B or not, is best answered by going through the reasons to believe themselves. The reasons to believe as recorded by the ld. AO, and as reproduced in the assessment order revealed that the ld. AO had received information that the assessee had sold the impugned property for a consideration of Rs. 89,65,800/- and paid stamp duty of Rs. 14,02,600/- on the same. However, the value of the property as assessed by the stamp duty authority was Rs. 2,00,29,450/-. On the basis of this, the ld. AO had recorded his satisfaction that the provisions of section 50C of the Income Tax Act, 1961 were attracted and he therefore, came to the conclusion that assessee’s income chargeable to tax to the extent of “Rs. 1,10,72,650/-“had escaped assessment. While doing so, he referred to proviso of Explanation 2(a) to section 147 of the Income Tax Act, 1961. The assessee has filed a number of case laws including that of the Hon’ble Gujarat High Court in the case of Mumtaz Haji Mohammad Memon vs. ITO, Ward-6(1)(1) in SCA No.21030 of 2017. In that case, the Hon’ble High Court had held that the notice issued was invalid because the Hon’ble High Court had observed that the ld. AO had not invoked the provisions of section 50C, had held that the stamp duty value was the actual sale consideration and had observed that the assessee had not filed a return of income. The said judgment has been followed by the ITAT in the case of Kunwar Ayyub Ali vs. ITO, Ward-1(3), Ghaziabad in where also the ld. AO had recorded the fact that the assessee had not filed a return of income (when he had) and where the total sale consideration had been considered in the hands of the assessee even though he only was owner of a part of the property. Vikas Jain A.Y. 2015-16 Similarly, it has been held by the Delhi Bench of the ITAT in the case of Nikita Mahajan vs. ITO that where jurisdiction was assumed by the AO under section 147 of the Act on the premise that the assessee had not filed any return of income and the assessee had in fact filed a return of income, the Tribunal held that the same was the foundation of the reason to believe that since it was flawed, the notice issued subsequently could not be sustained. In the case of Viswanathan Securities Pvt. Ltd. vs. ACIT, Circle-26(2), New Delhi in the Hon’ble Delhi Bench of the ITAT has held that section 292B of the Act takes care certain situations and enables the income tax authorities to cure defects in orders, notices etc., but the jurisdiction to reopen emerges from the reasons recorded in writing under section 148(2) on the strength of, ‘reason to believe’ towards escapement of income. It is those reasons that confer assumption of jurisdiction of a substantive nature. A fundamental defect in the basis for holding, ‘reason to believe’ cannot be seen as a mere irregularity and thus cannot be cured with the aid of section 292B of the Act. There is a marked distinction between want of basic or inherent jurisdiction and irregular exercise of jurisdiction. A defect or irregular exercise of jurisdiction alone can possibly be cured under section 292B of the Act but when there is a jurisdictional defect, that cannot be rectified by invoking the provisions of section 292B of the Act. The ld. AR has also our attention to the order of the Hon’ble Bombay High Court in W.P. No. 2545 of 2010 in the matter of Tata Sons Limited vs. DCIT, Mumbai wherein the ld. AO had recorded that the sale of shares of TCS Division was nothing but, ‘ business income’ and therefore, profits arising out of sale of these shares in the group companies should be treated as the assessee’s income from business and not profits arising out of sale of investment. The Hon’ble High Court had held that if the ld. AO had held so then the amount that was treated as escaping assessment also indicated non application of mind.

On the other hand, ld. DRs have placed reliance upon the decision of the Hon’ble Delhi High Court in the case of Sky Light Hospitality LLP vs. ACIT (2018) 90 taxman.com 413 (Delhi), where the Hon’ble Delhi High Court had held that a re- Vikas Jain A.Y. 2015-16 assessment issued in the name of erstwhile private limited company which had been converted to an LLP, would not invalidate the re-assessment proceedings but it was only an irregularity that could be cured under section 292B and decisions of the Hon’ble Supreme Court in the case of Sky Light Hospitality LLP vs. ACIT (2018) 92 taxman.com 93 and Reymond Wollen Mills Limited vs. ITO, (1999) 236 CTR (SC) 34. Ongoing through these various case laws, we find from the reasons to believe, that have been recorded by the ld. AO, that the ld. AO has referred to, ‘the proviso of Explanation 2(a) to section 147 of the Income Tax Act, 1961’. In fact, there exists no such proviso in the Act. Therefore, the reference is to a non-existent provision. Furthermore, if we are to see the wordings of the reason to believe, it is quite clear that the ld. AO considered the fact that a property had been sold for Rs. 89,65,800/-, the stamp duty value of which was Rs. 2,00,29,450/- and that the provision of section 50C applied to this situation. Therefore, he came to a conclusion that assessee’s “income to the extent of Rs. 1,10,72,650/-” had escaped assessment while, in fact, this amount represented the difference between the consideration and the deemed value of consideration and the actual amount of income that would be deemed to have escaped assessment could only be the capital gains on that amount. Therefore, it is clear that the AO was neither clear about the facts of the case nor the amount of income that had escaped assessment and therefore his reason to believe was founded on incomplete appreciation of the facts and law. Furthermore, these incorrect facts would also have influenced the mind of the approving authority, rendering the said approval incorrect. Accordingly, since the foundational facts of the reason to believe were not correctly appreciated, the entire reason to believe is vitiated and cannot be the basis for a valid notice u/s 148 of the Income Tax Act. Such a mistake, which goes to very root of the assumption of jurisdiction cannot be cured by taking the shelter of section 292B of the Act. Accordingly, we hold that the very initiation of the proceedings being flawed, the subsequent order is void ab initio and liable to be quashed as such. Accordingly, grounds no. 1 to 3 of the assessee’s appeal are allowed. Vikas Jain A.Y. 2015-16

In view of the fact that the proceedings have been found to be void ab initio and quashed accordingly, the remaining grounds of appeal