Loading judgment…
Facts
The assessee, engaged in conducting races and providing related services, filed a return for AY 2007-08 showing a loss. The Assessing Officer (AO) reopened the assessment based on interest income and lease rental income, treating them as income from other sources and not allowing set off against business loss. The assessee objected, but the AO proceeded with reassessment.
Held
The Tribunal held that the reopening was without jurisdiction as there was no fresh tangible material and the AO's action was based on a change of opinion regarding issues already considered in the original assessment and appeal. The lease deed was not a sale deed, and Section 50C was misapplied. The claim that racing losses fell under Section 74A was also found to be without basis.
Key Issues
Whether the reassessment proceedings were validly initiated under Section 147 of the Income Tax Act without fresh tangible material, and whether lease income and racing losses were correctly treated by the AO.
Sections Cited
Sec. 143(1), Sec. 143(3), Sec. 148, Sec. 147, Sec. 71, Sec. 74A, Sec. 50C
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: HON’BLESHRI MANU KUMAR GIRIAND HON’BLE SHRI S.R. RAGHUNATHA
सुनवाईक�तारीख/Date of Hearing : 24.07.2024 घोषणाक�तारीख/Date of Pronouncement : 16.10.2024 आदेश /O R D E R PER MANU KUMAR GIRI (Judicial Member)
This appeal by the assessee is arising out of the order of the Commissioner of Income Tax (Appeals)-18, Chennai in Appeal Reference No. NFAC/2006-07/10054072 and DIN No. ITBA/APL/M/250/ 2023-24/1059980952 (1) dated 22.01.2024 for assessment year 2007-2008. The assessment was
Brief facts of the case are that the appellant is in the business of conducting races, Offering venues for betting, providing services to the members and renting out properties. For the AY 2007-08 the Appellant had filed the return of income on 29.10.2007 declaring a loss of Rs.56,73,976/-. After the return was processed u/s.143(1), the case was taken up for scrutiny and assessment order U/s.143(3) was completed on 29.12.2009 by making an addition of difference in lodge and club house expenses of Rs.29,06,359/- and Income from other sources of Rs.1,55,65,851/- towards interest on fixed deposit. The order of the AO was challenged before the ld.CIT(A) and the Ld.CIT(A) passed an order on 28/03/2012 by partly allowing the assessee’s appeal.
Meanwhile, the AO issued a notice u/s.148 dated 20.04.2011 for reopening the assessment. The assessee filed return in pursuant to the above notice. The reason for reopening was furnished vide their letter dated 30.05.2011, which reads as under: "It was seen from the income and expenditure account and the Schedule VIII to the balance sheet that you are in receipt of interest income of Rs. 1,55,65,852/-. However, in the computation of taxable income, mutuality income / loss alone has been separately dealt with and interest income has been made part of the racing operations. Infact the interest income has to be dealt under the head income from other sources and brought to tax apart from that the profit and account shows a lease rent of Rs.3.90 crores which does not seem
The Appellant/Assessee vehemently objected to the reopening and filed Writ Petition before the Hon'ble Madras High Court in WP No.3005 of 2013 which was disposed of on 04.07.2014 by directing the Assessee to submit its arguments before the Assessing Officer. Accordingly, the Assessee submitted its objections for reopening and the same was rejected vide order dated 17.10.2014 and thereafter, the order of reassessment u/s.143(3) r.w.s. 147 of the Act was passed on 24.10.2014 by denying the set off of loss of business from racing activities against the income from other sources and recomputed the taxable income and tax thereon as under: Current year business loss as Rs. 5,88,39,776/- Income from other Sources Rs. 1,55,65,851/- Income from Long term Capital gain Rs.137,92,24,741/- Income from Lease Rentals Rs. 3,90,00,000/- Aggrieved by the reassessment order of the AO, the assessee preferred an appeal before CIT(A) and the CIT(A) was passed an order dated 22.01.2024 and confirmed the order of AO. Now the Appellant/Assessee is on appeal before us questioning the assumption of jurisdiction by AO u/s.147 to reopen the original assessment dated 29.12.2009 as well as the addition made on merits.
Sans unnecessary details, the Appellant conducts races, carries out Club activities for members exempt under mutuality and earns interest income and lease rentals from renting of property. The first reason for reopening is that the Assessee had received interest income of Rs.1,55,65,852/- and this income has been made part of racing operations and included in arriving at the loss of Rs.56,73,976/- returned by the Appellant. In the return of income the Appellant has excluded the income from club activities on account of mutuality and arrived at a loss from the balance of activities at Rs.56,73,976/-. The loss was arrived at taking into account the Racing activities, interest income and the rental income, treating them as business income. The AO has stated that as reason for reopening, the interest income should be assessed as ‘income from other sources’ and taxed separately without setting off against the current year’s business loss of the club.
In the Assessment order u/s.143(3) dated 29.12.2009, interest income has been treated as ‘income from other sources’ and reduced from profits. The very same issue has been subject matter of appeal against the order u/s.143(3) of the Act. The CIT(A) in his order dated 28.03.2012 in Para 8 has held as under:
The additional grounds relates to double addition of interest income of Rs.1,55,65,851/-, During appeal the appellant raised additional grounds which are forwarded to the AO on 28.11.2011 to examine, its admissibility and furnish a report. The AO in the remand report after examining the issue vide letter dated 15.02.2012 submitted that: "On verifying the facts from the balance sheet, statement of computation of income and the assessment order for the AY 2007-08, it is seen that as per the balance sheet, the interest income received has been considered as 'other sources and business loss of Rs.2,32,12,010/- has been arrived in the Profit and Loss Account.
In the computation statement, as per the Income Tax Act, 1961, the assessee has started the computation with the business income of the same amount (Rs.2,32,12,010/-) and after making, adjustments as per the Income Tax Act, 1961 the assessee arrived at a loss of Rs.56,73,976/-. In the assessment order, the assessing officer had started the computation with business loss as arrived at by the assessee in the computation statement (Rs.2,32 12,010/-) and has not disallowed the interest income of Rs. 1,55,65,851/-while considering the same as income from other sources. Therefore, on examining the facts of the case, it is stated that the business loss as computed in the assessment order for the AY 2007-08 is inclusive of interest income." 8.1. Therefore, the AO is directed to exclude Rs.1,55,65,851/- which has been considered twice on account of not excluding while computing business loss as the same was considered as income from other sources. This ground of appeal is allowed.
7. Firstly the ld. Counsel canvassed that the CIT(A) in the appeal against the Assessment order u/s.143(3) dated 29.12.2009 has dealt with the same issue and has held that the net loss was arrived in the return of income filed was after including the interest income. If the interest income is excluded, the net loss will increase to Rs.2,32,12,010/- and if the interest income assessed as ‘income from Other Sources’ is set off against the business loss (under section 71- dealing with set off of loss from one head against income from another head) the net loss will still be the same. Thus, in the original order of Assessment itself the interest income has been treated as income from other sources and the ld. CIT(A) has held that ‘income from other sources’ should be set off against the business loss. If done, the returned loss by the Assessee will be the same. In view of the fact that the interest income has already been treated as ‘income from other sources’ in the Assessment order u/s.143(3) and the CIT(A) has held that if Interest income is to be assessed separately as Income from other sources, then the loss figure will go up by that extent. As per the directions of the ld.CIT(A), if the Interest income assessed separately set off against the increased losses of the Assessee, the net losses will be the same as returned by the Assessee. There is no escapement of income.
8. Secondly, the ld. Counsel argued that the order of Assessment merges with that of the ld.CIT(A) on this issue and AO does not have jurisdiction to reopen an issue which has merged with the order of the First Appellate Authority and in any event there is no escapement of income.
9. The second point in the reason for reopening is that the rental income of Rs.3.90 Crores does not have the character of racing income or mutuality income and hence it has escaped assessment. The Assessee has considered the Racing income, interest income and the lease rental as their business income and has arrived at a net loss of Rs.56,73,976/-. As mentioned, in the case of interest income, the rental income has also been taken into account while arriving at the net loss. As pointed out by the CIT(A) in his order dated 28.03.2012, in the appeal against the order of assessment u/s.143(3) of the Act for the impugned Assessment year, in the case of interest income, if the lease rental of Rs.3.90 Crores is to be assessed as ‘income from other sources’ (as it is lease of land only), the loss figure will correspondingly increase and if the lease rental is set off against such increased loss (in accordance with sec.71), the net loss figure will still be Rs.56,73,976/-. Hence, the ld. Counsel
The Learned Authorised Representative heavily relied on the judgement of the Hon'ble Madras High Court in the case of TANMAC India Ltd reported in 97 CCH 189, wherein the Division bench of the Jurisdictional High Court held that in that case the perusal of the reason for reopening would indicate that the AO proceeded solely on the basis of return of income and the enclosures thereto, being financials to initiate proceedings for reassessment. The aforesaid documents, however was part of the record and the basis on which the assessment was completed. Thus, the AO had evidently applied his mind to financials in completing the Assessment u/s.143(3). Further the order of assessment was under appeal before the Ld.CIT(A) and the facts submitted before the AO has been accepted and the decision of the ld.CIT(A) was based on the accepted records. The Jurisdictional High Court further held at para 11 as under: - "11. The phrase "reason to believe in section 147 relates to such other new or tangible material as may have come to the knowledge of the assessing officer pursuant to the original proceedings for assessment. The Supreme Court in CIT Vs. Kelvinator of India (320 ITR 561) states thus in the context of the 'belief' that should form the basis for a re-assessment; 'We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review, he has the power to reassess. But reassessment has to be based on fulfilment of certain pre- conditions and if the concept of 'change of opinion' is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of 'change of opinion' as an in-built test to check abuse of power by the Assessing Officer.
Hence, after 1st April, 1989, the Assessing Officer has power to reopen, provided there is 'tangible material' to come to the conclusion that there is escapement of income from assessment. Reasons must have a link with the formation of the belief."
This is merely a ‘change of opinion’ by the AO on the same set of facts and documents on the basis of a mere relook of the same and are not sustainable. Further the issue on which the AO sought to reopen was already subject matter of appeal and decided by the CIT(A) vide order dated 28.03.2012. Hence, the order of Assessment merged with the order of CIT(A) on issues of treating interest income as ‘income from other sources’ and setting of loss against income from other sources has been decided by the CIT(A). Hence, the AO loses assumption of jurisdiction to reopen on issues decided by the ld.CIT(A).
In this view of the matter the ld.AR summarised that the reopening is without jurisdiction and there was no escapement of income, which was sought to be reassessed as per the reasons for reopening and therefore the reopening as invalid and the order of reassessment should be set aside. Further, in the course of reassessment proceedings, the AO had picked up two more issues. (1) the losses incurred by the Assessee is loss to which sec.74A applies and hence cannot be set off against other income and; (2) the long term lease deed dated 05.12.2006 is in fact a sale deed and assessed capital gains on the basis of deemed consideration at the guide line value. The Ld.AR further stated that it was held in the following decisions that the reasons mentioned in the reopening notice has to be read as it is. No additions and/or inferences are permissible. No amendment or substitution to the reasons originally intimated is permissible to substantiate the reopening.
Hindustan lever Ltd v R.B.Wadekar, 268 ITR 339 (Bom) 2. Peninsula Land Ltd 439 ITR 582 (Bom) 3. Donaldson India Filter Systems P. Ltd–ITA-86/2014 dt.19.01.2015 (Del.)
As the reasons for reopening first disclosed is without jurisdiction on the threshold itself, these further points considered in the course of the reassessment proceedings does not require consideration. In any event, as regards the first point, it is not clear as to why the ‘losses from racing’ which is considered as business loss cannot be set off against income from other sources. Presumably, the AO felt that the loss from the racing activity fell under sec.74A of the Act, which deals with loss arising from owning and maintaining race horses. It is not the case of the revenue, and there is no finding or discussion on this subject, that the Assessee owns race Horses and the loss has arisen from owning and maintaining race horses. Loss from any other head can be set off against income from business or other sources under section 71 of the Act. Further the CIT(A) in his order against the assessment u/s.143(3) had clearly stated that the losses shown by the Assessee is business losses and income from other sources can be set off against Assessee's business losses. Thus conclusion of AO/CIT(A) in the course of reassessment that the losses of the Assessee fall u/s.74A of the Act is without any basis and runs contrary to the directions of the CIT(A) in the first round and hence cannot be sustained.
Secondly, in the order of reassessment, the Assessing Officer has treated the lease agreement as a deemed sale and has applied provisions of Section 50C and determined the deemed capital gains at Rs.137.92 crores after assessing lease rental from letting out of the same property at Rs.3.9 crores as income from other sources. The CIT(A) in Para 6.6.4 of his order describes the chronology of the events and traces as to how there were disagreements between the Assessee and the Lessee on account of which there were two more MOUs and supplementary Lease deeds in 2011 and 2013. The original Lease deed dated 20.12.2006 and subsequent supplementary Lease deeds were registered by the Stamp Authorities only as Lease deeds and not as a sale deed. There was no transfer of full ownership nor was there consideration for sale. The deed provided for return of property after certain years. It is only a lease deed and Section 50C does not apply to a Lease deed. The Lessee referred the matter to Arbitration. Before the Arbitral Tribunal, the parties entered into a Memo of compromise on the basis of the very same land was transferred by a registered conveyance deed dated 13.04.2018 in favour of the Lessee. The Assessee has offered capital gains on AY 2019-20. The Ld.CIT(A) has recognised this fact in Para 6.9.9 of his order. There cannot be two sales of the same property between the same parties. It is the sale deed executed on 13.04.2018 which is the proper sale of the property and not under the lease deed 20.12.2006. Under the circumstances it is not clear on what basis the AO and CIT(A) concluded that the sale was completed under the lease deed dated 20.12.2006. The terms of the lease deed clearly stipulated return of property on the termination of the lease. Hence, factually as well as legally, the Lease deed dated 20.12.2006 cannot be considered as a sale deed. The reliance placed by the revenue on the decision of the Apex Court in the case of R.K.Palshikar (HUF) v Commissioner of Income Tax (172 ITR 311) is misplaced and is distinguishable on facts. Thus, the ld.AR prayed that for all the reasons stated above in the order of reassessment dated 24.10.2014 for the Assessment Year 2007-08 requires to be set aside on the ground that reopening is without jurisdiction.
Per contra, the ld.DR relied on the orders of the Lower authorities.
We have heard the rival contentions, perused the materials available on record and gone through the orders of the authorities. It is admitted fact that the assessee is running race club and having income from business and other sources, filed its return of income by claiming a current loss of Rs.56,73,976/- for the impugned Assessment year. Which was selected for scrutiny and completed the assessment order u/s.143(3) and the same was partly allowed by the ld.CIT(A). The very same issue has been raised in the notice issued by the AO u/s.148 for reopening the original assessment and passed an order U/s.143(3) r.w.s 147 of the Act. On appeal, the ld.CIT(A) was pleased to confirm the same. The reasons for reopening was questioned by the assessee stating that the very same issues have already been subject matter of original assessment and have been drawn from the existing materials of the assessment records hence the reopening of assessment is bad in law, however the AO was not convinced and continued to proceed with the reassessment. The ‘reason to believe’ was judicially interpreted to mean an ‘independent belief’ of the Assessing Officer, not based on ‘borrowed satisfaction’ or ‘opinion of another authority’. Further, such reason to believe was to be based on ‘new tangible material’ and not on ‘material already available on record’. The Hon’ble Supreme Court in Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC) held that even if the conclusion drawn by the Assessing Officer from the facts disclosed by the assessee during the course of original assessment is erroneous, the Assessing Officer cannot reopen the assessment to change that erroneous conclusion once reached at. Further, in CIT v. Kelvinator of India Ltd. [2010] 187 Taxman 312 (SC): 320 ITR 561 SC, the Hon’ble Supreme Court held that mere change of opinion cannot per se be a reason to reopen the concluded assessment. The Court highlighted the conceptual difference between power to review and power to reassess and that review cannot be done in the garb of reopening the assessment. The concept of ‘change of opinion’ must be treated as an in-built test to check abuse of power by the Assessing Officer. The CBDT in Circular No. 549 dated 31 October 1989 provided that it was to allay the fears that the Assessing Officer shall reopen past assessments on mere change of opinion that the expression ‘has reason to believe’ was reintroduced in place of the words ‘for reasons to be recorded by him in writing, is of the opinion’ (by the Amending Act, 1989) in the then existing Section 147 of the Act. The Circular itself indicates that Legislature has never been the intention to permit the Assessing Officer to reopen an assessment on the basis of ‘change of opinion’. Therefore, in the cases where an original assessment had taken place and the Assessing Officer had formed a particular view based on the available material, the Assessing Officer could not have validly reopened an assessment. In the present case, the AO has reopened the original assessment with no fresh tangible material but based on the material available in the assessment records which was also taken upto the CIT(A). Therefore, the action of the AO/CIT(A) cannot be countenanced. The arguments of the assessee challenging the reasons recorded by the AO for reopening of the original assessment is justified based on reliance of the decisions of the various Hon’ble courts (Supra). Thus, the legal grounds raised
by the assessee are allowed. Consequently, we quash the order of reassessment and impugned order of Ld.CIT(A). The grounds of appeal raised by the assessee in respect of merits are not adjudicated, as these grounds become academic since the appeal is decided on the basis of legal issue.
15. In the result the appeal of the assessee stands allowed. Order pronounced in the open court on 16th day of October, 2024 at Chennai.