PALANISAMY RANI,ERODE vs. PCIT-1, COIMBATORE, COIMBATORE

This appeal instituted by the assessee is against the order of the Principal Commissioner of Income Tax, Coimbatore-1, for the assessment year 2017-18, vide order dated 16.11.2023.

The assessee has raised the following grounds of appeal:

Accordingly, the Ld.PCIT, provided an opportunity by issuing fresh notices to the assessee 13/07/2023 and 07/08/2023. In response to the notices the assessee participated in the proceedings and relevant submissions were made by the assessee and after hearing the assessee, the Ld.PCIT passed an order U/s.263 dated 16/11/2023 finding the following error of AO’s order with a direction to AO to revise the same:

The Ld.Counsel for the assessee assailed the impugned action of revision by the Ld.PCIT, which amounts to review and not amenable to revisionary jurisdiction and prayed for quashing the impugned order of the Ld.PCIT and restore the order of the AO.

The Ld.AR drew our attention to the following observations made by the Ld.PCIT in the order U/s.263: “6. The facts of the instant case, the submissions made and the impugned assessment order and the other details available on record have been duly perused and considered. To reiterate the facts once again, the assessee, during the period relevant to this assessment year had sold immoveable property consisting of land measuring 31,489 square feet with RCC and ACC building (previous used as a cinema theatre belonging to the assessee's father) along with her two family members and had admitted the long term capital gains. The assessee's deceased father and three other members had purchased this property and registered in the name M/s.Ravi Construction company in the year 1968 to 1970 and the assessee inherited the same upon the demise of the father in the year 2001. The sale took place through registered sale documents numbering six and all registered on 7-3-2017. The value of land and building sold by the assessee and two others as culled out from the :-5-: ITA. No:1490/Chny/2023 sale documents are reproduced in para4 above. The break up of the value of the land and building as per the registered sale documents were Rs.5,13,55,000 for land and Rs.1,14,70,848. However, in respect of lands registered in DOC No.3738/2017, 3739/2017, 3741/2017, 3742/2017, the land value adopted by the Stamp Valuing authority was Rs.1,36,86,207 each as against the registered value of Rs.1,14,05,000 against those document numbers. Thus, the AO in the course of scrutiny assessment proceedings, reworked the LTCG by disallowing the indexed cost claimed at Rs.12,96,709 and Rs.3,13,718 and made addition to the capital gains already admitted in the return of income. In addition to the above, the AO had disallowed the claim of deduction u/s 54F of the Act amounting to Rs.45,15,560, but has allowed the claim of deduction u/s 54EC of the Act. As against the capital gain admitted in the return of income amounting to Rs.39,17,794, the AO adopted the sale consideration as per section SOC of the Act amounting to Rs.2,63,04,214 and from there, recomputed the LTCG at Rs.1,65,99,279 and added the same to the income returned. This being the factum matrix of the case, it was noticed from the discussion in the impugned assessment order and the miscellaneous records which included the sale deed copies, the written submissions of the assessee before the AO at the time of scrutiny assessment proceedings, that there existed a building in the form of a cinema theatre and prima facie perusal of the facts indicate that the assessee's share of the building was Rs.41,27,211 (being 35.98% of Rs.1,14,70,848). This was also taxed by the AO at 20% slab as applicable to long term capital assets. The building being a depreciable asset, ought to have been taxed at 30% slab and by not doing so, it is held that the order of assessment passed by the AO u/s.143(3) dated 28-12-2019 is made without verification of the actual facts and the order so made, suffers in as much as it is erroneous and prejudicial to the interest of revenue, requiring an intervention to cure the order made erroneous and prejudicial to the interest of revenue. Though in the present proceedings, the assessee had relied upon numerous case laws, it is a fact that there existed a building in the land sold by the assessee and two others and that proper taxation needs to be done by the AO with regard to computation of short term capital gain in respect of buildings and long term capital gain in respect of land. In the impugned assessment order, it is noticed that the AO, after discussion about the various items claimed as deduction in the computation of capital gains, did not give a clear finding as to whether the building was taxed at the appropriate rates or not. From the table mentioned in para.4, it is clear that provisions of section SOC of the Act ought to have been invoked, which the AO had carried out correctly, but the impugned assessment order is :-6-: ITA. No:1490/Chny/2023 silent about the taxability of the building involved (i.e) cinema theatre. Therefore, the impugned assessment order is held as erroneous and in not taxing the building at appropriate rates and clubbing it together with L TCG calculation and taxing at 20% tax rate renders it as prejudicial to the revenue and thus, the undersigned is well within the powers to exercise the provisions of section 263 of the Act and accordingly, all the other objections raised by the assessee are rejected. In this regard, support is drawn from the decision of the Hon'ble Supreme Court in the recently delivered judgment of CIT vs. Paville Projects Pvt Ltd in C.A. 6126 of 2031 dated 6.4.2023, wherein the revisionary powers of the PCIT has been strengthened and the Hon'ble Apex Court had distinguished the decision rendered by the Hon'ble Apex Court itself in Malabar Industrial Co. Ld. Case. The relevant portion of the judgment is reproduced here below for the sake of clarity and convenience:- "7.2 Thus, even as observed in paragraph 9 by this Court in the case of Malabar Industrial Co. Ltd. (supra) that the scheme of the Act is to levy and collect tax in accordance with the provisions of the Civil Appeal No. 6126 of 2021 Page 18 of 20 Act and this task is entrusted to the Revenue. It is further observed that if due to an erroneous order of the Income Tax Officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. However, only in a case where two views are possible and the Assessing Officer has adopted one view, such a decision, which might be plausible and it has resulted in loss of Revenue, such an order is not revisable under Section 263. 7.3 Applying the law laid down by this Court in the case of Malabar Industrial Co. Ltd. (supra) to the facts of the case on hand and even as observed by the Commissioner, the order passed by the Assessing Officer is erroneous as well as prejudicial to the interest of the Revenue. Having gone through the assessment order as well as the order passed by the Commissioner of Income Tax, we are also of the opinion that the assessment order was not only erroneous but prejudicial to the interest of the Revenue also. In the facts and circumstances of the case, it cannot be said that the Commissioner exercised the jurisdiction under Section 263 not vested in it. The erroneous assessment order has Civil Appeal No. 6126 of 2021 Page 19 of 20 resulted into loss of the Revenue in the form of tax. Under the Circumstances and in the facts and circumstances of the case narrated hereinabove, the High Court has committed :-7-: ITA. No:1490/Chny/2023 a very serious error in setting aside the order passed by the Commissioner passed in exercise of powers under Section 263 of the Income Tax Act.

The Ld.Counsel pointed that the AO had considered and dealt with all the facts of the case during the assessment proceedings and framed the assessment order by treating the asset as long term capital asset and disallowed the cost of acquisition of Rs.12,96,709/- and brought to tax @ 20% on the entire share of sale consideration of Rs.41,27,211/- as ‘long term capital gain’. Therefore, the revisional order of the Ld.PCIT is bad in law and it tantamount to change of opinion and hence prayed for quashing the same on legal ground.

Further, the Ld.Counsel stated that, based on the facts of the present case, on merits also the order of the Ld.PCIT do not stand in the eyes of law as the facts have already been completely verified and convinced with the facts during the :-8-: ITA. No:1490/Chny/2023 assessment proceedings by the AO, before considering the said claim of deduction of cost of acquisition of the asset as Long term capital gain, while framing the Assessment order U/s.143(3) of the Act. In support of the assessee’s claim of asset (which was earlier a depreciable asset) as long term capital asset, the ld. counsel relied on decision of ITAT, Mumbai in the case of Prabodh Investment & Trading Co. Vs. ITO, dated 28/11/2011, wherein the tribunal has dealt the identical issue and termed the asset as capital asset and considered as long term capital asset by holding as under : “7. The next contention of the assessee is the one based on the order of the Cochin Bench of the Tribunal cited supra. In that case the assessee stopped claiming depreciation on the flat from the assessment year 1995-96 onwards on the ground that it was no more used for the purpose of the business. In the books of account the flat was shown as an investment from 01.04.1995. In the sold and the surplus was declared as long term capital gains. The income tax authorities held that the capital gains should be assessed as short term capital gains on the footing that the flat might have been used for business purposes even in the assessment years 1996-97 and 1997-98. On further appeal to the Tribunal, it was held that the flat ceased to be a business asset or depreciable asset on and with effect from 01.04.1995 and its character during the accounting year ended on 31.03.1998 was that of a long term capital asset and, therefore, the capital gains should be computed as long term capital gains. In this order the provisions of section 50A were referred to. This section makes special provision for cost of acquisition in the case of depreciable asset. It says that where the capital asset is one in respect of which depreciation was allowed in any previous year; the provisions of sections 48 and 49 shall apply subject to the modification that the written down value of the asset, as adjusted, :-9-: ITA. No:1490/Chny/2023 shall be taken as the cost of acquisition. Relying on this provision the Tribunal held that but for the difference in the cost of acquisition, a past claim of depreciation does not change the character of the asset as such. This order of the Tribunal supports the assessee's case before us. In the present case also the assessee had stopped claiming depreciation in the income tax return for the assessment years 1992-93 and 1993-94. It had claimed depreciation in respect of the flat only in the assessment years 1990-91 and 1991-92. For the assessment year 1994-95 and all subsequent years the assesses had made a Note in its accounts filed with the returns clarifying that no depreciation was provided in respect of the flat as the same was not used during the year for the purpose of the business. From the assessment year 1994-95 up to the assessment year 2004-05, the flat was classified in the Balance Sheet as a fixed asset and shown at cost less depreciation. These facts are recorded in paragraph 8 of the assessment order. In the assessment years 2000-01 and 2001-02, the flat had been let out and the rental income was shown under the head "Income from house property". It would thus appear that after the assessment year 1993-94 no depreciation was provided even in the books of account and no depreciation had been claimed or allowed in the return or in the assessments. In this factual situation the order of the Cochin Bench of the Tribunal cited supra is applicable, in which it was held that if no depreciation had been claimed or allowed in respect of the asset, even though for an earlier period depreciation was claimed and allowed, from the year in which the depreciation claimed was discontinued, the asset would cease to be a business or depreciable asset and if the asset had been acquired beyond the period of thirty six months from the date of sale, it would be a case of long term capital gains. In our humble understanding, the ratio of the order appears to be that the asset had ceased to be a business asset and had become an investment.

Our view is also fortified by another order of the Mumbai Bench of the Tribunal dated 31.01.2007 in the case of M/s Glaxo Laboratories (I) Ltd. for the assessment years 1989-90 to 1991- 92. Though in this case the controversy was different, the Tribunal has noticed and observed that when certain flats which were earlier used for business purpose ceased to be so used and were let out for rent, the character of the asset had altered or changed and therefore no depreciation would be allowable on those flats. The fact to be noticed in this order is that the assessee had claimed depreciation on the flats for an earlier period and thereafter the flats were let out for rent, but still the assessee claimed depreciation against the rental income. The basis of the claim was that the flats continued to remain in the block of assets. The claim was disallowed by the Tribunal on the ground that since the user of the flats was changed, the character of the assets also underwent a change and- they can no longer be considered as business assets. The principle of this order, though laid down in a different context would support the assessee in the sense that it is :-11-: ITA. No:1490/Chny/2023 possible for a business asset to change its character into that of a fixed asset or investment.

In the present case there is also no dispute that the flat under consideration was purchased by the assessee in the year 1987. It was thus held for a period of more than thirty six months and therefore a long term capital asset. Accordingly, the capital gains is directed to be assessed as long term capital gains after allowing the benefit of cost indexation as claimed by the assessee.”

We heard both the parties and have gone through the facts and circumstances of the case and perused the materials and orders of the authorities below. Since, the assessee has challenged the jurisdiction of Ld.PCIT U/s.263 of the Act, let us take the guidance of judicial precedence laid down by the Hon'ble Apex Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC) wherein their Lordship have held that :-12-: ITA. No:1490/Chny/2023 twin conditions should be satisfied before jurisdiction u/s 263 of the Act is exercised by the Ld.CIT. The twin conditions which need to be satisfied are that (i) the order of the Assessing Officer must be erroneous and (ii) as a consequence of passing an erroneous order, prejudice is caused to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous i.e. (i) if the Assessing Officer's order was passed on assumption of incorrect facts; or assumption of incorrect law; (ii) Assessing Officer's order is in violation of the principles of natural justice; (iii) if the AO's order is passed without application of mind; or (iv) if the AO has not investigated the issue before him. In the circumstances enumerated above only, the order passed by the Assessing Officer can be termed as erroneous for the purpose of S.263 of the Act. Coming next to the second limb, the AO's erroneous order can be revised by the Ld. CIT only when it is shown that the said order is prejudicial to the interest of Revenue. When this aspect is examined one has to understand what is prejudicial to the interest of the revenue. The Hon'ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. "prejudicial to the interest of the revenue'' has to be read in conjunction with an "erroneous" order passed by the :-13-: ITA. No:1490/Chny/2023 Assessing Officer. The Hon’ble Supreme Court, held that for invoking powers conferred by S.263; the CIT should not only show that the AO's order is erroneous as a result of any of the situations enumerated above but CIT must also further show that as a result of an erroneous order, some loss is caused to the interest of the revenue. Their Lordship in the said judgment held that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. It was further observed that when the Assessing Officer adopts one of the course permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the Ld. CIT does not agree, it cannot be treated as an order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law.

Keeping the aforesaid legal principles in mind when we apply the same to the facts of the present case, we note that the sole issue that has been raked up by the Ld.PCIT in the present case is whether the capital asset sold by the assessee is a long term or short term for the purpose of computation of Capital gain and tax thereon. The Assessing officer had framed

The AO had verified and convinced that, the building was a long term capital asset in the hands of the assessee during the A Y 2017-18 and the cost of acquisition was denied since, the building value has been completely depreciated and the Written down value of the Asset in the hands of the previous owner was NIL. This action of the AO, interfered by the Ld.PCIT exercising his jurisdiction U/s.263, which according to the ld. AR is wholly without jurisdiction and the issue that has been raked by the Ld. PCIT is treating the capital asset as Short term capital asset. According to the Ld.PCIT the capital gain on account of the said sale transaction in relation to sale of building to be treated as short term capital asset sold and the corresponding gain to be taxed @ 30%. However, we do not agree with the assertion laid by the Ld.PCIT and the AO during the assessment proceedings has considered the impugned building as long term capital asset and concluded the :-16-: ITA. No:1490/Chny/2023 assessment. This action of the AO was the plausible action because the building was inherited by the assessee was a long- term capital asset, even though the same was a depreciable asset in the hands of the original owner. This view of the AO is in consonance of the decision in the case of Prabodh Investment & Trading Co. Vs. ITO (Supra), which is identical to the facts of the case in considering the erstwhile depreciable asset as long term capital asset for the computation of capital gain in the hands of the assessee. In such a scenario, the AO’s action cannot be termed as erroneous and prejudicial to the interest of revenue.

The assertion of the ld.PCIT that, the AO while scrutinizing the assessment has failed to verify the issue stated (supra) is contrary to the facts revealed from the records and found to be incorrect assertion of the Ld.PCIT. From perusal of the Paper Book filed before us and the assessment order it reveals that the AO has properly conducted enquiry on the issue of capital gain as long term in nature and the assessee had furnished all the relevant material during the assessment proceedings and which have been duly considered and verified by AO before concluding the assessment by accepting the asset

In the light of the aforesaid facts, we are of the view that the assessee succeeds and the Ld. PCIT erred in invoking his jurisdiction of revisional powers u/s.263 of the Act. Therefore, the impugned order passed by the ld.PCIT dated 16.11.2023 is hereby quashed and the appeal of the assessee is allowed.