K R SATYANARAYANA vs. THE COMMISSIONER OF INCOME TAX

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 21ST DAY OF DECEMBER 2020 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD I.T.A. NO.192 OF 2015 BETWEEN: K.R. SATYANARAYANA NO.1036-20, 4TH MAIN VIDYRANYAPURAM MYSURU. ... APPELLANT (BY SMT. SWATHI SUKUMAR, ADV.,) AND: 1. THE COMMISSIONER OF INCOME TAX

"SHILPASHRE", VIDYARANYA COMPLEX

VISHWESWARANAGAR, MYSURU. 2. THE ADDITIONAL COMMISSIONER OF

INCOME TAX, RANGE 2

"SHILPASHREE", VIDYARANYA COMPLEX

VISHWESWARANAGAR, MYSURU. 3. THE DEPUTY COMMISSIONER OF INCOME-TAX

CIRCLE-2(1), "SHILPASHREE"

VIDYARANYA COMPLEX

VISHWESWARANAGAR, MYSURU. ... RESPONDENTS (BY SRI. E.I. SANMATHI, ADV.) THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 28.11.2014 PASSED IN ITA

2 NO.269/BANG/2014 FOR THE ASSESSMENT YEAR 2009-10, PRAYING TO: (I) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. (II) ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT, BANGALORE IN ITA NO.269/BANG/2014 DATED 28.11.2014 UPHOLDING THE ORDER PASSED BY THE COMMISSIONER OF INCOME TAX U/S 263 DATED 2ND JANUARY, 2014 AND CONSEQUENTLY CONFIRM THE ORDER PASSED BY THE ASSESSING OFFICER DATED 15.12.2011. THIS ITA COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the assessee. The subject matter of the appeal pertains to the Assessment year 2009-10. The appeal is admitted today on the following substantial question of law: Whether the Commissioner committed an error of law in invoking powers under Section 263 of the Income Tax Act, 1961 in the fact situation of the case. 2. Facts leading to filing of this appeal briefly stated are that assessee is an individual and is running

3 two proprietorship concerns viz., Bhagirath Enterprises and Puneeth Associates. The assessee is also a document writer and is engaged in the business of typing and Xerox. The assessee filed the return of income for the Assessment Year 2009-10 declaring a total income of Rs.35,59,600/-. The assessee declared business income from the proprietary concern Bhagirath Enterprises to the extent of Rs.13,83,194/- and also declared income from the house property for a sum of Rs.2,03,986/- and capital gains at Rs.19,06,984/- and declared income from other sources at Rs.1,55,438/-. The case of the assessee was selected for scrutiny and a notice under Section 143(2) of the Act was issued on 30.08.2010. The Assessing Officer by an order dated 15.12.2011 after making enquiries concluded the assessment by bringing to charge the income arising from sale of properties as income from business as it was found that the assessee was engaged in the business of sale and purchase of the properties. The

4 properties dealt with by the assessee were treated as stock in trade and it was held that in income declared by the assessee under the head capital gains is assessable only as business income. The Assessing Officer thereafter issued a notice under Section 154 of the Act on 13.12.2012 proposing to bring to charge the business income as capital gains. However, no further action in the matter was taken . 3. Thereafter a notice under Section 263 of the Act was issued by the Commissioner of Income Tax inter alia on the ground that income assessed as income from business in respect of sale of properties as income from capital gains to disallow interest on loan of purchase of property as deduction from sale consideration, to direct the Assessing Officer to adopt guidance value of sub registrar in respect of one property as deemed sale value and to bring to tax the difference and to allow deduction under Section 80C of the Act for an amount of Rs.1,00,000/-. The assessee filed a detailed reply in

5 which it was pointed out that there is no error in the order passed by the Assessing Officer nor the same is prejudicial to the interest of the revenue. The Commissioner of Income Tax by an order dated 02.01.2014 set aside the order of assessment and directed the Assessing Officer to pass fresh orders after duly verifying the details furnished by the assessee with that of books of accounts / documents filed, after providing reasonable opportunity of hearing to the assessee. The Assessing Officer was directed to look into the claim of the assessee with regard to disallowance under Section 80C of the Act and to adopt the guideline value as per Section 50C of the Act after providing an opportunity of hearing to the assessee. The assessee thereupon filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The tribunal by an order dated 28.11.2014 dismissed the appeal preferred by the assessee. In the aforesaid factual background, the

6 assessee is before us. 4. Learned counsel for the assessee submitted that the finding recorded by the Commissioner of Income Tax that the Assessing Officer had not called for any details from the assessee as to whether he was carrying on real estate business before concluding that income from sale of properties has to be assessed under the head 'profit and gains of business' as well as the finding recorded by the tribunal that the Assessing Officer has failed to conduct an enquiry and the Assessing Officer on a wrong assumption of law, changed the head of income is factually incorrect. It is urged that neither the Commissioner of Income Tax nor the tribunal appreciated the fact that the Assessing Officer had put 36 questions to the assessee by a questionnaire to ascertain the true nature of the assessee's business and question No.16 and 18 of the questionnaire directly pertain to the issue of classification of income. It is also urged that several

7 notices were issued and detailed hearings were conducted and the details sought for by the Assessing Officer were supplied by the assessee. It is also contended that the Assessing Officer has mentioned the details of all the properties with dates of purchase and sale and it is evident that the properties were brought and sold within a maximum period of 20 months, which is indicative of the fact that the assessee was engaged in real estate business. It is also argued that the assessee's treatment of income cannot dictate the decision of the Assessing Officer and once the material on record is considered, the power under Section 263 of the Act cannot be invoked merely because a different view can be taken. It is also argued that assessee had conducted the enquiries as required by Explanation 2(a) of Section 263 of the Act. In support of aforesaid submissions, reliance has been placed on decisions in 'CALCUTTA DISCOUNT CO. VS. ITO', (1961) 41 ITR 191 (SC), 'CIT VS. J.L. MORRISON (INDIA) LTD.',

8 (2014) 366 ITR 593 (CAL), 'CIT VS. SUNSCAM AUTO LTD.', (2011) 332 ITR 167 (DEL), 'CIT VS. ARVIND JEWELLERS', (2003) 259 ITR 502 (GUJ), 'CIT VS. DEVELOPMENT CREDIT BANK', (2010) 323 ITR 206 and 'CIT VS. MARKETING AND ADVERTISING CO.', (2012) 341 ITR 180. 5. On the other hand, learned counsel for the revenue submitted that the assessee neither in the return of income nor in financial statements disclosed that he is carrying on the real estate business and therefore, the conclusion arrived at by the Assessing Officer that the properties held by the assesseea are in the nature of stock in trade is prima facie incorrect. It is further submitted that the Assessing Officer has to classify the income under different heads of income specified in Section 14 of the Act and also provisions of Section 28 and Section 45 before concluding the head of income under which the income has to be computed. It is further submitted that from the material on record, it

9 cannot be inferred that the assessee was in the business of sale and purchase of the property, and therefore , the order of the Assessing Officer is erroneous and is prejudicial to the interest of the revenue and the condition precedent for invoking the powers under Section 263 of the Act are satisfied in the fact situation of the case. 6. We have considered the submissions made by learned counsel for the parties and have perused the record. Before proceeding further, it is apposite to take note of the relevant extract of Section 263 of the Act, which reads as under: 263. Revision of orders prejudicial to revenue (1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he, may, after giving the assessee an opportunity of being heard

10 and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. 7. Thus, from close scrutiny of Section 263 it is evident that twin conditions are required to be satisfied for exercise of revisional jurisdiction under Section 263 of the Act firstly, the order of the Assessing Officer is erroneous and secondly, that it is prejudicial to the interest of the revenue on account of error in the order of assessment. 8. The aforesaid provision was considered by the Supreme Court in ‘MALABAR INDUSTRIAL COMPANY VS. CIT’, 243 ITR 83 and it was held that the phrase ‘prejudicial to the interests of the revenue’ has to be read in conjunction with an erroneous order passed by the Assessing Officer and every loss of

11 revenue as a consequence of the order of the Assessing Officer cannot be treated as prejudicial to the interest of revenue. It was further held that where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, the order passed by the Assessing Officer cannot be treated as erroneous order prejudicial to the interest of the revenue. The principles laid down in the aforesaid decision were reiterated by the Supreme Court in ‘CIT VS. MAX INDIA LTD.,’ 295 ITR 282 (SC) and recently in ‘ULTRATECH CEMENT LTD. AND ORS. VS. STATE OF RAJASTHAN AND ORS.’, CIVIL APPEAL NO.2773/2020 DECIDED ON 17.07.2020. 9. In the backdrop of aforesaid well settled legal position, we may advert to the facts of the case. From perusal of the order passed by the Commissioner of income Tax, it is evident that he has invoked powers under Section 263 of the Act, on the ground that the Assessing Officer has not satisfied itself that the

12 assessee was engaged in the business of purchase and sale of plots and Assessing Officer has not brought any material on record to show that investment in the property was made for the purposes of trading. However, it is pertinent to mention here that the Commissioner of Income Tax as well as the tribunal has failed to appreciate that the Assessing Officer had put 36 questions to the assessee to ascertain the nature of business of the assessee and from perusal of questions Nos.16 and 18, it is evident that the aforesaid questions specifically pertain to issue of classification of income. It is pertinent to note that several notices were issued to the assessee and detailed hearings were conducted and the Assessing Officer in its order has mentioned the details of all the properties with dates of purchase and sale and from perusal of the same, it is evident that the properties were brought and sold within a maximum period of 20 months, from which it is evident that the assessee was engaged in real estate business. The

13 Assessing Officer has conducted sufficient enquiry as required under Explanation 2(a) to Section 263 of the Act and there was material available on record to arrive at a conclusion, which was recorded by the Assessing Officer. It is trite law that merely because a different view can be taken, the powers under Section 263 of the Act cannot be invoked. In view of preceding analysis, the substantial question of law framed by this court is answered in favour of the assessee and against the revenue. In the result, the orders passed by the Commissioner of Income Tax and the tribunal dated 02.01.2014 and 28.11.2014 are hereby quashed. In the result, the appeal is allowed. Sd/- JUDGE Sd/- JUDGE ss