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Facts
The Assessing Officer (AO) initiated reassessment proceedings under section 147 against the assessee for AY 2017-18, believing income had escaped assessment. The assessee had sold an immovable property for Rs. 5,28,97,000/- during FY 2016-17 but did not furnish an ITR for AY 2017-18. The AO treated the entire sale amount as long-term capital gains.
Held
The CIT(A) allowed the assessee's appeal, finding that the property sold was not owned by the assessee firm but by a partner. The tribunal held that while the CIT(A)'s admission of additional evidence without giving the AO an opportunity violated Rule 46A, this did not materially impact the outcome. The tribunal agreed that capital gains could only be computed on assets owned by the firm.
Key Issues
Whether the entire sale proceeds of an auctioned property, where ownership is disputed between the firm and its partner, can be treated as the firm's long-term capital gains. Whether the CIT(A) erred in admitting additional evidence without providing the AO an opportunity.
Sections Cited
147, 144, 250, 144B, 151, 46A, 148, 292B, 292BB
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, LUCKNOW ‘B’BENCH, LUCKNOW
A.Y. 2017-18 Deputy Commissioner of Income vs. M/s Shree Bhawani Mills, Tax, Circle-1, Bareilly Gandhi Ganj, Shahjahanpur, U.P. PAN:AADFS8573M (Appellant) (Respondent) And C.O. No.15/LKW/2023 A.Y. 2017-18 M/s Shree Bhawani Mills, Gandhi vs. Deputy Commissioner of Ganj, Shahjahanpur, U.P. Income Tax, Circle-1, Bareilly PAN:AADFS8573M (Appellant) (Respondent) Assessee by: Sh. P.K. Kapoor, C.A. Revenue by: Sh. Manu Chaurasia, CIT DR Date of hearing: 12.03.2025 Date of pronouncement: 25.04.2025 O R D E R PER NIKHIL CHOUDHARY, A.M.: This is an appeal filed by the Revenue against the order of the ld. CIT(A) passed under section 250 of the Income Tax Act on 7.09.2023 allowing the appeal of the assessee against the order passed by the ld. AO on 30.03.2022 under section 147 r.w.s. 144 of the Income Tax Act, 1961. The grounds of appeal are as under:-
CO No.15/LKW/2024 M/s Shree Bhawani Mills “The ld. CIT has erred in; (i). Law and on facts of the case by giving relief of Rs.5,28,97,000/- by deleting the addition of long term capital gain made by the Faceless Assessing Officer who has made the addition after recording the detailed reasons for doing so in length in the order itself. (ii). Law and on facts of the case by deleting addition of Rs. 5,28,97,000/- after admitting the additional evidences given by the assessee by filing an application u/s 46A of the IT Rules by the assessee without giving the Assessing Officer an opportunity to examine such additional evidences filed during the course of appellate proceeding and therefore, has erred by violating the procedure laid down in Rule no. 46A of IT Rule, 1962. (iii). Law and on facts of the case by ignoring the A.O to examine such additional evidences and Ld. CIT (A) had accepted the additional evidence in the matter, the Ld. CIT(A) who is having co-terminus powers with that of the Assessing Officer should have calculated the taxable income of the assessee according to him or he should have held in his order as to whom this income belongs to but has failed to do so.
2. The appellant craves the leave to add or alter or withdraw any other ground(s) during appellate proceedings”
The assessee has filed a Cross Objection in which it has held that the ld. CIT(A), even while allowing relief to the assessee should also have held that the assessment proceedings were illegal, bad in law and wholly without jurisdiction as they were void ab initio and therefore, not in accordance with the relevant provisions of the Act. The grounds of appeal
preferred by the assessee in the Cross Objection are as under: “1. BECAUSE while allowing the appeal of cross objector assessee, the Id. CIT(A) should also have held that the assessment proceedings commencing from recording of reason to believe and concluding with passing of order dated 30.03.2022 passed by NFAC u/s 147 r.w.s 144B of the Income Tax Act, 1961 were illegal, bad in law and wholly without jurisdiction as the same were not conducted in accordance with relevant provisions of the Act.
2. BECAUSE while allowing the appeal of the cross objector - assessee, the Id. CIT(A) should also have held that the assessment proceedings u/s 147 of the Income Tax Act, 1961 were vide ab-initio owing to several infirmities in the reason to believe recorded by the Assessing Officer.
CO No.15/LKW/2024 M/s Shree Bhawani Mills 3. BECAUSE the sanction u/s 151 of the Income Tax Act, 1961 stated to have been granted by the Addl. CIT Range-1, Bareilly is without application of mind and grated purely in a mechanical manner, the Id. CIT(A) should have quashed the assessment order passed u/s 147 r.w.s. 144B as non-est, void ab-initio and bad in law.”
The facts of the case are that the ld. AO observed from the financial transactions placed on the system, that the assessee had sold immovable property valued at Rs.5,28,97,000/- during the financial year 2016-17. On examination of the ITD data base, the ld. AO noticed that the assessee had not furnished an ITR for the assessment year 2017-18. Therefore, the ld. AO concluded that the assessee had not disclosed the above transaction and for this reason income had escaped assessment. After obtaining necessary sanction from the Addl CIT, Range-1 Bareilly, the ld. AO issued notices to the assessee asking for his explanation in the matter. A copy of the response submitted is scanned and placed in the assessment order, but is not legible. Be that as it may, the ld. AO also pointed out that these details were incomplete since they were not accompanied by the profit and loss account, the balance sheet, the statement of fixed assets or the audit report. Therefore, the assessee was asked to submit these details by 26.02.2022. Since the assessee did not submit these details, a notice under section 144 was issued to the assessee. In response, the assessee filed a copy of its final accounts, which the ld. AO states were taken into consideration but were not found to be acceptable. The ld. AO noted that from the sale deed submitted by the assessee, it appeared that the assessee was a loan defaulter and the bank had attached the property and sold it off on auction and the assessee had not properly explained the reasons for the bank selling off the property on auction. However, since the assessee was the actual owner of the property and in the absence of proper details and credible evidences, the entire sale amount of the property i.e. Rs. 5,28,97,000/- was treated as the long term capital gains in the hands of the assessee and taxed accordingly.
CO No.15/LKW/2024 M/s Shree Bhawani Mills 4. Aggrieved with this assessment order, the assessee went in appeal to the National Faceless Appeal Centre. Before the ld. CIT(A), it was submitted that the firm was established long back and was regularly assessed to tax upto the assessment year 2016-17. The returns and the audited final accounts for the assessment year 2016-17 was available on record with the Department. However, since the firm was incurring huge losses, it closed down its business in August, 2016, which was duly informed to ITO-1(4), Shahjahanpur on 6.04.2017. The assessee firm had a secured loan from Punjab National Bank against the security, building, structure and plant and machinery of the firm as well as the land, which was owned by one of its partners, Smt. Shakuntla Devi. As the firm was not in a position to pay back the bank loan, the bank in order to realize their loan, took all the above referred assets, against which the said loan was granted into their possession and auctioned it on 26.04.2016 for Rs.5,28,97,000/-. Thus, this was a distress sale and the auction amount represented not only the value of the building structure and plant and machinery, which belonged to the assessee firm, but also the land that belonged to Smt. Shakuntla Devi. It was submitted that while framing the assessment, the ld. AO had made the following glaring mistakes; i. He had not given any cognizance to the fact that such auction sale amount did not belong solely to the firm. ii. Since the firm was the owner of depreciable assets, hence it was the WDV such assets which were the fair market value and ought to have been deducted from the sale value and the remaining amount in the hands of the firm would be Nil. iii. The brought forward unabsorbed depreciation was on building structure and plant and machinery had been fully ignored even when data with regard to the same was available in the returns and the audited final accounts that were filed online.
CO No.15/LKW/2024 M/s Shree Bhawani Mills iv. Since the land did not belong to the firm, anything derived from it could not be assessed in the hands of the firm and without prejudice to this, the ld. AO had not deducted its index cost also. v. The ld. AO had fully ignored the reply and other documentary evidences which were filed during the course of assessment proceedings and the assessment had been framed without giving any reason to brush aside the evidences.
The assessee also filed an application under Rule 46A of the Income Tax Rules for submission of additional evidence and alongwith the same, submitted a copy of the Khatauni (Land Revenue Record) and a certificate issued by the Nayab Tehsildar of Shahjahnpur, in support of its contention, that the land in question belonged to its partner Smt. Shakuntla Devi, and not to the appellant firm. Thereafter, it filed another submission where it questioned the validity of the notice under section 148 on the grounds that the notice had not been signed by any authority. It was further submitted that the fact of the entire auction sale amount being on account of the value of land, which belonged to the partner Smt. Shakuntla Devi, value of building structure and plant and machinery and which was supported by the balance-sheet and audit report of the assessee firm, the ld. AO had not given any cognizance to these facts. Without prejudice to this ground, the assessee also contended that the ld. AO had erred in not deducting any cost / index cost out of the auction sale proceeds and in assuming the entire proceeds as capital gains. The ld. AO had not deducted WDV of building, plant and machinery out of the sale proceeds. He had also erred in not taking into consideration the brought forward unabsorbed depreciation on these two assets, though the entire details were available on record with Department in the returns and audit reports which were filed online. It was submitted that the WDV of the building structure and plant and machinery were the fair market value of the assets owned by the firm and the firm had nothing to do with the land which did not belong to the firm, but rather belonged to the partner. In CO No.15/LKW/2024 M/s Shree Bhawani Mills conclusion, it was submitted that the assessee had only been given 23 hours to furnish its objections to the draft assessment order and therefore, the order of the ld. AO that was passed subsequently were completely against the principles of natural justice. In consideration of the submissions made by the assessee, the ld. CIT(A) pointed out that the land that was auctioned by Punjab National Bank belonged to Smt. Shakuntla Devi, who was one of the partner of the firm. The auction amount of Rs.5,28,97,000/- represented the value of the building structure, the plant and machinery – which belonged to the firm and the land which belonged to Smt. Shakuntla Devi. However, the ld. AO had treated this sum, as long term capital gains and completed the assessments. He held that the ld. AO had failed to appreciate the facts given in the written submission and since there was merit in the appellant’s contention, he allowed all the grounds raised
by the assessee.
6. Aggrieved with this order of the ld. CIT(A), the Revenue is before us in appeal. Shri. Manu Chaurasia, ld. CIT DR, (hereinafter referred to as the ‘ld. CIT DR’) representing the Revenue, pointed out that the order of the ld. CIT(A) was violative of Rule 46A of the Income Tax Rules because the additional evidence had been admitted without giving an opportunity to the ld. AO. Hence, this order deserve to be set aside and the ld. AO should be given an opportunity to analyze this new piece of evidence which the assessee had furnished before the ld. CIT(A) and on the basis of which the ld. CIT(A) had ruled in favour of the assessee.
7. On the other hand, Sh. P.K. Kapoor, C.A. (hereinafter referred to as the ‘ld. AR’) pointed out that even without the Dakhil Khariz which was presented before the ld. CIT(A) and the certificate of the Nayab Tehsildar of Shahjahanpur which showed that the land stood in the name of Smt. Shakuntla Devi and that it had been transferred to Punjab National Bank, there was sufficient material on record to show that the land in question belonged to Smt. Shakuntla Devi, the partner and therefore, the assessee firm could not be charged long term capital gains on a property that did CO No.15/LKW/2024 M/s Shree Bhawani Mills not belong to it. He drew reference to the fact that the sale deed had been presented before the ld. AO and formed a part of his records. Ld. AR pointed out that the entire assessment was bad in law because it had been opened on the basis of a mistake in Form 26AS which showed the assessee to be in receipt of money and the ld. AO had acted mechanically on the basis of this entry in Form 26AS. Even though, the evidences were there on record, the ld. AO had not bothered to consider that; i. The title over the property did not vest with the firm. ii. The land was not part of the capital account of Smt. Shakuntla Devi. iii. The land was not a part of the fixed assets of the firm. Therefore, while the land may have been pledged against the loan taken by the firm, since the firm did not own the land, it could not be charged long term capital gains on any asset which did not belong to it. The ld. AR also drew reference to his cross objection pointing out that the ld. CIT(A) while allowing the appeal of the assessee should also have held the assessment to be bad in law as the case had been reopened on the basis of erroneous facts and the approval had been given mechanically without bothering to understand the correct facts of the case. Therefore, the assessment order was even otherwise liable to be quashed.
We have duly considered the facts and circumstances of the case. It does appear from the order or the ld. CIT(A), that before acting upon the additional evidences presented before him i.e. the copy of the Khatauni and a certificate dated 29.09.2016, the ld. CIT(A) did not offer an opportunity to the ld. AO to consider these evidences in remand proceedings. Therefore, his actions appear to be in violation of the Rule 46A. However, in our opinion, this will not materially impact the fate of the case because these evidences were only supporting evidences with regard to facts that had already been placed before the ld. AO in the form of the sale deed. That sale deed showed that the land in question, which formed part of the auctioned assets, 7 CO No.15/LKW/2024 M/s Shree Bhawani Mills belonged to Smt. Shakuntla Devi, the partner of the firm and not to the firm. In view of the same, the firm could not be charged long term capital gain on alienation of an asset which did not belong to it. The only gains attributable to the firm could be on account of building structure and plant and machinery which were owned by the firm and depicted in its schedule of fixed assets. For the same, the ld. AO was required to arrive at the figures of amounts realized on sale of building structure and plant and machinery and compute the profits on the sale of the same after deducting the written down value as it stood in the books of the assessee. No other amount could be taxed in the hands of the assessee as capital gains, for assets which did not belong to it. In the circumstances, we are inclined to agree with the ultimate decision of the ld. CIT(A) in granting relief to the assessee. Therefore, the appeal of the Revenue on the actual grant of relief i.e. ground no. 1 is dismissed. However, appeals on ground nos. 2 and 3 with regard to the entertaining of additional evidences in violation of Rule 46A of the Income Tax Rules are upheld. Thus, the appeal of the Revenue in is partly allowed.
With regard to the Cross Objection filed by the assessee, it is observed that the information that was available with the ld. AO, coupled with the fact that the assessee had not filed a return of income earlier gave rise to a valid, “reason to believe” that the income had escaped assessment. The ld. AR has pointed out that there was a mistake in the Form 26AS. Be that as it may, the reason to believe of the ld. AO at that stage is a prima facie belief, which is based upon the information which is before him at that stage. This reason to believe could subsequently be altered in the course of assessment depending upon the facts placed before the ld. AO. The fact that the ld. AO may later come to a conclusion that the grounds on which the proceeding was initiated, were not valid, would not vitiate the initiation of the proceeding because the initiation has to be viewed in the context of the material that was available at that time and whether the same could lead to a reasonable inference, CO No.15/LKW/2024 M/s Shree Bhawani Mills that income had escaped assessment. In considering the material available before the ld. AO and subsequently before the Addl CIT, Range-1, Bareilly, and considering that at that point of time, the amendments to the act that provided for seeking the explanation of the assessee before issuance of notice under section 148, had not yet come into play, we see no infirmity in the initiation of the assessment proceedings or the approval given to the said assessment proceedings by the Addl CIT, Range-1, Bareilly. In the circumstances, in our view, it cannot be said that the assessment proceedings were void ab initio or that the approvals were given mechanically. We also observe that the assessee has appeared before the ld. AO in response to the notice issued by him. Therefore, in view of the provisions of secton 292B and 292BB, the notice cannot be said to be invalid or the proceedings vitiated on account of service of an incomplete notice. We, therefore, also cannot conclude that the assessment proceedings were illegal, bad in law or without jurisdiction. Therefore, even while we have held that the addition was not sustainable in the hands of the assessee, the grounds raised
in the Cross Objection are not found to be maintainable and accordingly, all three grounds are dismissed as such. The Cross Objection is accordingly dismissed.