MUSTAFA KATTHAWALA,KOTA vs. DCIT ACIT, CIRCLE-2, KOTA, KOTA

Rs. 1,71,87,500/-: The Id. AO erred in law as well as on the facts of the case in considering the facts of the present case as a case of introduction of the immovable assets by the appellant partner in the firm M/s Royal Park Developers as its capital contribution and therefore, erred in holding that provision of s.45(3) were applicable and inconsequently erred in, taxing the entire Fair Market Value (FMV) of this subjected asset at Rs. 1,71,87,500/- (12.50% of 13.75 Crores) as Long-Term Capital Gain (in short LTCG). The taxing of the income as LTCG by applying 8.45(3) of the Act, is completely contrary to the provisions of law and the facts available on record and hence additions were made deserves to be completely deleted.

Mustafa Katthawala vs. DCIT/ACIT About point mentioned at (i) the assessee, in support of his argument furnished the Development Agreement entered into with one M/s Tirupati Infraprojects on 20.11.2013 whereby Tirupati Infraprojects is entrusted the responsibility of developing the land in lieu of a share in profit. This point of argument of the assessee invariably contradicts the point raised at no (ii) which is that he has converted his capital asset into stock in trade as per the provisions of section 45(2) of the Act as the plain reading of the section 45(2) would suggest that profit and gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock in trade of a business carried on by him shall be chargeable to income tax as his income of the previous year in which such stock in trade is sold or otherwise transferred by him. It can be seen from the above, that the provisions of section 45(2) are applicable to where the capital asset is treated as stock in trade into the business run by the owner, whereas, in the instant case the capital asset has been given to a developer i.e. Tirupati Infraprojects which is different from the assessee. Hence, provisions of section 45(2) are not applicable as far as assessee's argument that the capital was converted during the A.Y. 2014-15 Mustafa Katthawala vs. DCIT/ACIT and 2015-16 for which case is reopened for scrutiny. Therefore, this argument did not find to be acceptable by the ld. AO. 3.2 With regard to the other argument of the assessee that He has converted his capital asset into stock in trade as per provisions of section 45(2) of the Income tax Act, 1961, on that it was submitted that as discussed in para above that the provisions of section 45(2) are applicable to where the capital asset is treated as stock in trade into the business run by the owner, whereas in the present case assessee is not the owner but the partner in a firm. 3.3 Hence, ld. AO noted that the provisions of section 45(3) are squarely applicable to the partner of who has introduced capital in the form of capital asset or otherwise. Ld. AO further noted that the partnership firm i.e. M/s Royal park Developers came into existence during F.Y. 2014-15 relevant to A.Y. 2015-16 and on perusal of the Balance Sheet of the Royal Park Developers for F.Y. 2014-15, it is seen, that capital has been shown in the form land ownership in the name of partners, hence, it was abundantly clear that the assessee has transferred capital asset to the firm in which he is a partner in the form of capital introduction. Therefore, provisions of section 45(3) are applicable in this case and Mustafa Katthawala vs. DCIT/ACIT assessee is liable to liable to pay tax on long term capital gain of Rs 1.71.87.500 (12.50% of 13,75,00,000/-) as per provision of section 46(3) of the Income Tax Act. 3.4 Further, a show cause notice was issued to the assessee on 10/03/2023 fixing the date of hearing on 17/03/2023. In response to the show cause notice the assessee did not submit any reply. Hence, it was construed that the assessee has no argument to offer and has no objection if the case is decided on merit and on the basis of whatever documentary evidence is in possession of the department. Hence, in view of the above, ld. AO noted that the assessee has not been able to substantiate its claim and the said amount of Rs. 1,71,87,500/- was treated as Long term capital gain u/s 45(3) of the Act added to the total income of the assessee.

4. Aggrieved from the order of the assessing officer, assessee preferred an appeal before the ld. CIT(A). A propos to the grounds of the appeal so raised by the assessee, the relevant finding of the ld. CIT(A) is reiterated here in below:-

5. Appellate submissions & findings: 5.1 These notices were issued to the appellant but there was no reply received from the appellant. The aforesaid circumstances show that the appellant is not interested to pursue this appeal. In the absence of any Mustafa Katthawala vs. DCIT/ACIT reply from the appellant, the matter is being decided ex-party based on material on record. Keeping in view the aforesaid factual position, the appeal filed by the appellant is therefore decided on merits. 5.2 As observed by the Apex Court in many cases, the law assists those who are vigilant and not those who sleep over their rights as found in the Maxim 'vigilantibus non-dermientibus jura subvenunt'. Merely because the assessee is not vigilant, it cannot follow that the assessee is bestowed with a right to the delay the proceedings. An assessee cannot sleep over its right ignoring the status of provisions and without giving sufficient and reasonable explanation for the delay. The above findings are fortified by placing reliance on following judicial pronouncements :- 5.3 The Hon'ble ITAT Delhi (ITR No. 2006/Del/2011 dated 19.12.2001) in the case of Whirlpool of India Ltd. Vs. DCIT had dismissed appeal for non-attendance at hearings, inferring that assessee was not interested in prosecuting of appeal. Thereafter, in another decision in the case of Chadha Finlease Ltd. Vs. ACIT (ITA No.3013/Del/2011 date of order 20.12.2011) the Hon'ble ITAT had dismissed the appeal for non- attendance at hearings. 5.4 In this regard, the decision of the Hon'ble High Court of Mumbai in the case of Mis Chemipol Vs Union of India (Central Excise Appeal No.62 of 2009] clearly states that every court, judicial body or authority, inherently possesses the power to dismiss the case in default. For the sake of reference, the relevant extract of the judicial pronouncement rendered by the Hon'ble High Court of Mumbai quoting decision of Hon'ble Supreme Court in the case of Nandramdas Dwarkadas, AIR 1958 MP 260, is reproduced below:

Now the Act does not give any power of dismissal. But it is axiomatic that no court or tribunal is supposed to continue a proceeding before it when the party who has moved it has not appeared nor cared to remain present. The dismissal, therefore, is an inherent power which every tribunal possesses" 5.5 In a decision in the case of CIT v. Gold Leaf Capital Corporation Ltd. On 02.09.2011 (ITA No.798 of 2009), the Hon'ble High Court of Delhi had held that a negligent assessee should not be given too many opportunities just because that quantum of amount involved is high. The necessary course of action is to draw adverse inference, other-wise Mustafa Katthawala vs. DCIT/ACIT it would amount to giving premium to the assessee for his negligence. When the assessee is non-cooperative, it can naturally be safely concluded that the assessee did not want to adduce evidence as it would expose falsity and lack of genuineness. 5.6 The principle that every court that is to decide on a matter of dispute inherently possesses the power to dismiss the case for default, has been upheld by the Hon'ble Supreme Court in case of Dr. P. Nalla Thampy Vs. Shankar (1984 (Supp) SCC 63 and the case of New India Assurance Vs. Srinivasan (2000) 3 SCC 242. All of the above judicial precedents established/ upheld by the Hon'ble Courts apply in the instant case of the applicant.

6. I have considered the assessment order, Statement of Facts submitted by the appellant along with Form 35 and the material on record and find that the AO has given complete reasoning in the assessment order for making an addition of Rs. 1,71,87,500/- under the provision of the IT Act 1961 for the Financial Year 2014-15 relevant to Assessment Year 2015-16. As per assessment order, the appellant was one of the six partners, having 12.50% share in the firm namely M/s Royal Park Developers, Kota which was engaged in the business of selling and developing of residential and commercial plots during the relevant year. As per the AO M/s Royal Park Developers, Kota had shown the opening stock of Rs. 13,75,00,000/- alongwith closing stock of Rs. 10,31,89,390/- and during the relevant year the above said firm had also sold immovable property for the sale consideration of Rs.3.43,10,610/-, The immovable property of partners was transferred to the Firm in the FY 2014-15 relevant to AY 2015-16 of Rs. 13,75,00,000/-(25 bigha X 55 lacs). Hence the AO relied that the appellant was liable to pay tax on capital gain of Rs. 1,71,87,500/- (12.50% of 13.75,00,000/-) as per provision of section 45(3) of the Income Tax Act for the year under consideration. As per AO the appellant failed to furnish any cogent reply alongwith supporting documentary evidence during the assessment proceedings. Therefore, the Ld. AO made the addition of Rs. 1,71,87,500/- on the account of undisclosed Long-Term Capital gain u/s 45(3) under the provision of the Act, 1961. 6.1 Even during the appellate proceedings, the appellant failed to furnish any reply/documentary evidences in respect of its appeal filed. However, despite being provided ample opportunities in the appellate Mustafa Katthawala vs. DCIT/ACIT proceedings, the appellant could not file any reply/evidences in respect of grounds of appeal

as well as statements of facts. Therefore, in the absence of any reply/evidence, I have no option but to confirm the addition of Rs. 1,71,87,500/- under the provision of the IT Act, 1961, made by the A.O. in the assessment order as discussed above.

7. As a result, the appeal of the appellant is not allowed.”

5. Feeling dissatisfied with the above finding of the ld. CIT(A) the assessee filed the present appeal before this tribunal on the grounds as reiterated herein above. To support the grounds so raised the ld. AR appearing on behalf of the assessee has placed reliance on the written submission which is extracted herein below:-

Brief General facts: In the present case, the assessee filed his return of income for the Assessment Year (A.Y.) 2015-16 on 30.11.2015, declaring a total income of Rs. 24,18,000/-. During the review of the assessment records the AO observed that a Joint Development Agreement with one Tirupati Infraprojects on 20.11.2013, during the Financial Year (F.Y.) 2014-15 for developing and constructing residential & commercial project on the land owned by assessee along with his brothers. The AO reopened the assessment proceedings u/s 147 of the Act recording the reasons that M/s Royal Park Developers, Kota had reported an opening stock of Rs. 13,75,00,000/- and a closing stock of Rs. 10,31,89,390/-. During the year under consideration i.e A.Y. 2016-17, M/s Royal Park Developers sold land worth Rs. 3,43,10,610/-. The firm comprises six partners, including the assessee, who holds a 12.50% share. The immovable property of the partners was transferred to the firm in F.Y. 2014-15, relevant to A.Y. 2015-16, amounting to Rs. 13,75,00,000/- (25 bighas x Rs. 55 lakhs). The ld. AO alleged that as per the provisions of S. 45(3) of the Income Tax Act (herein after referred “the Act ), the assessee was liable to pay tax on the capital gain of Rs. 1,71,87,500/- (12.50% of Rs. 13,75,00,000/-) for the relevant year stating that:

Mustafa Katthawala vs. DCIT/ACIT 1. S. 45(2) of the Act is not applicable since capital asset is not treated as stock in trade since the asset were not transferred gather given to Tirupati Infraprojects for development project.

3. The ld. AO has further alleged that S. 45(3) of the Act is applicable as the assessee is a partner in the firm M/s Royal park Developers and the capital asset transferred shall be considered as partner’s capital. The assessee contended that S. 45(2) of the Act should have been applied by the AO instead of S. 45(3) of the Act since it is conversion of asset into stick-in-trade. However, the ld. AO rejected this contention The assessee preferred an appeal before the CIT(A), however the CIT(A) passed an ex-parte order without affording a reasonable and adequate opportunity to the assessee. Hence this appeal.

Submissions:

Date of Response Due date of Compliance Remark S. No. issuance of date hearing by assessee notice 1. 13.05.2024 20.05.204 7 Days Requested 2. 11.06.2024 18.06.2024 18.08.2024 for 7 Days Adjournment 3. 19.07.2024 25.07.2024 6 Days A bare perusal of the above chart shows that the so-called many opportunities granted by the CIT(A) to the appellant, is illusionary and Mustafa Katthawala vs. DCIT/ACIT shall reveal an interesting fact that the first notice was given in 13.05.2024 then on 11.06.2024, 19.07.2024 providing a short period of 7 days only. Immediately thereafter on 14.08.2024 he passed the ex-parte order. The question is that when the authority sends the notice after such a long gap from filing of appeal, it may be difficult for the recipient to check his e-mail/portal every next day throughout the period of 1 year. Not only the assessee but also the tax consultant who are also practicing in small towns are not sound with the technical knowledge and infrastructure, it is quite basic for them to have lost sight of such communication if any sent by the department. In these circumstances there appears no justified reason at all as to why the ld. CIT(A) was issuing notices for such a short period of 7-10 days only. Also there was no urgency to pass the appellate order hastily. Therefore, there is no hesitation to say that the ld. CIT(A) just to show a disposal on his part, passed the impugned order in complete disregard to principles of natural justice i.e., Audi alteram partem. Hence, to do substantial justice, the appeal kindly be decided in favour of the assessee or alternatively restored to the file of the ld. CIT(A).

2. CIT(A)/NFAC did not act as per Law: The CIT(A) has not decided the appeal on merits which is contradictory to the mandate of Section 250(6). The same is reproduced here under for your ready reference: “(6) The order of the Commissioner (Appeals) disposing of the appeal shall be in writing and shall state the points for determination, the decision thereon and the reason for the decision.” A bare perusal of above provision makes it clear that the CIT(A) is bound to dispose of the appeal before him on merits. Merely because the assessee didn’t turn up, he cannot dismiss the appeal in Limine. The law contained u/s 250(6) & 251 do not at all contemplates the CIT(A) passing an appellate order in this manner. There are judicial guidelines to support this contention. 2.2. Supporting Case Laws: 2.2.1. Corporate International Financial Services V ITO held as: “Further, it is well-settled that powers of Ld. CIT(A) are coterminus with powers of the Assessing Officer. Useful reference may be made to order of Apex Court decision in CIT vs. Kanpur Coal Syndicate 53 ITR 225 (SC) in which it was held that the first appellate authority, the Ld. CIT(A) in the case before us, has plenary powers in disposing off an appeal; that the scope of her power is co-terminus with that of the ITO, that she Mustafa Katthawala vs. DCIT/ACIT can do what the ITO can do and also direct him to do what he failed to do. In this context, useful reference may also be made to Hon’ble Apex Court's decisions in the cases of CIT vs. Rai Bahadur Hardutroy Motilal Chamaria 66 ITR 443 (SC) and CIT vs. B.N. Bhattachargee 118 ITR 461 (SC) for the proposition that an assessee having once filed an appeal, cannot withdraw it and even if the assessee refuses to appear at the hearing, the first appellate authority can proceed with the enquiry and if he finds that there has been an underassessment, he can enhance the assessment. Just as, once the assessment proceedings are set in motion, it is not open to the Assessing Officer to not complete the Assessment Proceedings by allowing the Assessee to withdraw Return of Income; it is similarly, not open for Ld. CIT(A) to not pass order on merits by dismissing the appeal in limine, whether on account of non- prosecution of appeal by the Assessee or due to the Assessee seeking to withdraw the appeal or if the assessee does not press the appeal. When the Commissioner (Appeals) dismisses the appeal of assessee in limine for non-prosecution of appeal by the assessee; in effect, indirectly it leads to same results as withdrawal of appeal by assessee. When the assessee is not permitted to withdraw the appeal filed before the first appellate authority, the first appellate authority is duty bound to not allow a situation to arise, through dismissal of appeal in limine for non- prosecution of appeal before the first appellate authority; in which, in effect, indirectly the same results are obtained as arise from withdrawal of appeal by the assessee. What cannot be permitted in law to be done directly, cannot be permitted to be done indirectly either, as is well settled. In view of the foregoing discussion; it is amply clear that Ld. CIT(A) was in error in dismissing the appeal in limine for non-prosecution of appeal by the assessee. We draw support from order of Hon'ble Bombay High Court in the case of CIT vs. Premkumar Arjundas Luthra (HUF) [2016] 240 taxman 133 for the proposition that Ld. CIT(A) is required to apply her mind to all issues which arise from impugned order before her whether or not same had been raised by appellant before her; and further, that CIT(A) is obliged to dispose of the appeal on merits. ---------------xxx----------------xxx--------------xxx----------------xxx---------------- xxx--------------- In view of the foregoing, we hold that the Ld. CIT(A) erred in dismissing the appeal of the Assessee in limine for non-prosecution of appeal by assessee. We set aside the impugned order of the Ld. CIT(A) and we direct the Ld. CIT(A) to pass denovo order as per law, in accordance with Sections 250 and 251 of I.T. Act.” 2.2.2 CIT vs. Premkumar Arjundas Luthra (HUF) [2016] 240 taxmen 133 it was held that: “8…………It is very clear once an appeal is preferred before the CIT(A), then in disposing of the appeal, he is obliged to make such further Mustafa Katthawala vs. DCIT/ACIT inquiry that he thinks fit or direct the Assessing Officer to make further inquiry and report the result of the same to him as found in Section 250(4) of the Act. Further Section 250(6) of the Act obliges the CIT(A) to dispose of an appeal in writing after stating the points for determination and then render a decision on each of the points which arise for consideration with reasons in support. Section 251(l)(a) and (b) of the Act provide that while disposing of appeal the CIT(A) would have the power to confirm, reduce, enhance or annul an assessment and/or penalty. Besides Explanation to sub-section (2) of Section 251 of the Act also makes it dear that while considering the appeal, the CTT(A) would be entitled to consider and decide any issue arising in the proceedings before him in appeal filed for its consideration, even if the issue is not raised by the appellant in its appeal before the CIT(A). Thus once an assessee files an appeal under Section 246A of the Act, it is not open to him as of right to withdraw or not press the appeal. In fact, the CIT(A) is obliged to dispose of the appeal on merits. In fact, with effect from 1st June, 2001 the power of the CIT(A) to set aside the order of the Assessing Officer and restore it to the Assessing Officer for passing a fresh order stands withdrawn. Therefore, it would be noticed that the powers of the CTT(A) is co-terminus with that of the Assessing Officer i.e. he can do all that Assessing Officer could do. Therefore, just as it is not open to the Assessing Officer to not complete the assessment by allowing the assessee to withdraw its return of income, it is not open to the assessee in appeal to withdraw and/or the CTT(A) to dismiss the appeal on account of non-prosecution of the appeal by the assessee. This is amply dear from the Section 251(l)(a) and (b) and Explanation to Section 251(2) of the Act which requires the CIT(A) to apply his mind to all the issues which arise from the impugned order before him whether or not the same has been raised by the appellant before him. Accordingly, the law does not empower the CIT(A) to dismiss the appeal for non-prosecution as is evident from the provisions of the Act." 2.2.3 The decision of Shri Onkar Mal in followed in Shri Ram Borewell & Construction company V ACIT (DPB 7-10) it was held as: “As per provisions of Section 250(6) of the Act, the ld. CIT(A) is required to pass a speaking order in writing giving reasons for reaching to the conclusion. However, the order passed by the ld. CIT(A) are not in terms of Section 250(6) of the Act. Therefore, in the substantial interest of justice, we set aside the ex parte order of the ld. CIT(A) and restore the matter back to the file of the ld. CIT(A) for deciding the issue afresh on merits. The assessee is also directed to appear before the ld. CIT(A) within two months from the date of receipt of this order. In case of any failure on the Mustafa Katthawala vs. DCIT/ACIT part of the assessee, the ld. CIT(A) is at liberty to pass order after considering the material placed on record.” 3.1The impugned assessment is not a best judgment assessment as contemplated by law: It is submitted that the AO also did not meet with the requirements of making a “best judgment assessment”. It is submitted that while making an assessment u/s 144 the AO does not have blind and arbitrary powers to make the assessment, the way he wants. On the contrary, the law enjoins upon him a more onerous duty in such a circumstance in as much as he has to act in the capacity of quasi-judicial authority, who is supposed to take a best judgment, while making a fairest possible assessment of the income of an assessee. 3.2 Fair estimation required- Judicial Guideline: For a better appreciation, a reference may kindly be made to the commentary by the ld. Authors Chaturvedi Pethisaria Vol. 3 Edition V at page 4932, reproduced hereunder verbatim:- “Best Judgment assessment – how to be made? – In making a best judgment assessment the Assessing Officer must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must be able to take into consideration local knowledge and repute in regard to the assessee’s circumstances, and his own knowledge of previous returns by and assessments of the assessee and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guess-work in the matter, it must be honest guess-work [CIT Vs. Laxmi Narain Badridas , (1937) 5 ITR 170, 180 (PC), reversing (1934) 2 ITR 246 (Nag); CIT Vs. S. Sen, (1949) 17 ITR 355 (Orissa); Singh Engineering Works Vs. CIT , (1953) 24 ITR 93 (All); M.A. Rauf Vs. CIT, (1958) 33 ITR 843 (Pat); Mohanlal Mahribal Vs. CIT, (1982) 133 ITR 683 (MP) ; Ganga Prasad Sharma Vs. CIT, (1981) 132 ITR 87 (MP) & (1981) 127 ITR 27 (MO); Balchand Udairam Vs. State of Sikkim, (1989) 180 ITR 530, 553 (Sikkim); K.T. Thomas Vs. Ag ITO, (1990) 184 ITR 561, 565 (Ker.)]. In making a best judgment assessment the Assessing Officer does not possess absolutely arbitrary authority to assessee at any figure he likes and that although he is not bound by strict judicial principles he should be guided by rules of justice, equity and good conscience [Abdul Qayum & Co., Vs. CIT, (1933) 1 ITR 375, 378 (Oudh)]. A best judgment assessment is not by way penalty for non-compliance [Jot Ram Sher Singh Vs. CIT, (1934) 2 ITR 129 (All) and it cannot be made capriciously in utter disregard to the material on record [Gunda 3.3 A decision is in the case of CIT v/s Gotan Lime Khaniz Udyog (2002) 256 ITR 243 (Raj): However, your honor shall find that the lower authorities in the present case have not conformed to these settled principles by the courts, while making the impugned assessment u/s 144. Hence, the impugned order kindly be quashed or alternatively be set-aside to the AO to be made afresh or alternatively to the ld. CIT(A). Hence, to do substantial justice, keeping all the facts and circumstances and considering the same sympathetically the impugned order therefore deserves to be quashed. Alternatively, it is therefore humbly prayed that the matter may kindly be set aside and restored to the file of the ld. CIT(A) or AO for consideration and decision afresh and oblige.”

6. During hearing of the present appeal, ld. AR of the assessee vehemently argued that the time given to the assessee was very much less and effectively the assessee was deprived of sufficient opportunity by the ld. CIT(A). Referring to the chart on page 2 of the assessment order he submitted that the assessee submitted replies to ld. AO but he could not provide sufficient time. So he prayed the matter be remanded to the file of ld. AO.

7. Per contra, ld. DR objected to the prayer of the assessee and submitted that even the assessee did not represent case before the ld. CIT(A) in spite of sufficient opportunity were provided. Ld. DR referring to page 2 of the assessment order stated that the Mustafa Katthawala vs. DCIT/ACIT assessee was given show cause notice and the assessee did not file any reply and therefore, the assessee is not co-operative. Ld. CIT(A) considered all the aspects of the matter at para 6 of the order and therefore, he prayed that the appeal is required to be dismissed.

Order pronounced in the open Court on 20/01/2025.