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Income Tax Appellate Tribunal, MUMBAI BENCH “H”, MUMBAI
Before: SHRI J P BOAZ & SHRI AMIT SHUKLA
�ावोटेल (इं�डया) �ाइवेट �ल�मटेड 1 Travotel (India) Pvt Ltd ITA No.1551/M/2011 आयकर अपीलीय अिधकरण “एच” �यायपीठ मुंबई म�। IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “H”, MUMBAI �ी जे पी बोस, लेखा सद�य एवं �ी अिमत शु�ला, �याियक सद�य के सम� । BEFORE SHRI J P BOAZ, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA No. : 1551/Mum/2011 (Assessment year: 2004-05) �ावोटेल (इं�डया) �ाइवेट �ल�मटेड Vs Income Tax Officer, Ward-2(3)-3, Aayakar Bhavan, M K Road, Travotel (India) Pvt Ltd, Mumbai -400 020 C/o Taj Printing Works 46/A, Cawasji Patel Street, Fort, Mumbai -400 001 �थयी लेखा सं.:PAN: AAACT 1982 D अपीलाथ� (Appellant) ��यथ� (Respondent) Appellant by �ी जे डी �म��ी और �ी के के वेद : S/Shri J D Mistry & K K Ved Respondent by : �ी एन के चाँद Shri N K Chand सुनवाई क� तार�ख /Date of Hearing : 10-12-2015 घोषणा क� तार�ख /Date of Pronouncement : 07-03-2016 आदेश ORDER अिमत शु�ला : �या. स.: PER AMIT SHUKLA, JM: The aforesaid appeal has been filed by the assessee against impugned order dated 14.12.2010, passed by CIT(A)-6, Mumbai, for the quantum of assessment passed under section 143(3) r.w.s 147 for the assessment year 2004-05. In the grounds of appeal, the assessee has raised following issues: (i) Validity of reopening of the assessment under section 148; (ii) Disallowance of expenses debited to the Profit and Loss Account for sums aggregating to Rs.10,01,258/-; (iii) Computation of income under the head ‘Income from Other Sources’; and lastly, (iv) Disallowance under section 14A.
�ावोटेल (इं�डया) �ाइवेट �ल�मटेड 2 Travotel (India) Pvt Ltd ITA No.1551/M/2011
The brief facts qua the issue of validity of reopening of assessment under section 147 are that, the assessee company is engaged in the business of running of a hotel. It has filed its return of income on 1st November, 2004 showing total income of Rs.1,99,930/-. The said return of income was duly processed under section 143(1) vide intimation dated 19.10.2005, which resulted into refund of Rs.58,731/-. Thereafter, the assessee’s case was reopened under section 147 by issuance of notice under section 148, dated 28.11.2007, which was served upon the assessee on 22.11.2007. The “reasons” for reopening the assessment, as communicated to the assessee read as under:-
“The assessee is in the business of running of a hotel. On verification of the records, it is seen that the assessee has disclosed Long Term Capital Gains for the year to the tune of Rs.23,00,000/- for AY 2004-05. The some have been claimed exempt under section 54EC by claiming these proceeds to have been invested in NABARD Bonds.
It is apparent from the records of AY 2004-05 that the assessee has reduced its asset-building-leased to NIL and the assessee has been claiming depreciation on the same. The claim of depreciation is verified from records of AY 2001-02 where the assessee has claimed depreciation of Rs.7,099/- on the hotel building. Hence the provisions of section 50 are applicable on the depreciable asset by virtue of which the asset so ceasing to exist in the block (from AY 2004-05), the capital gain arising from transfer of the same shall be treated as capital gain arising from transfer of short term capital asset. As per the Income Tax Act, 1961, the provisions of section 54EC are applicable only in case of capital gain arising from transfer of a long term capital asset.
In view of the above discussion since the above-said transfer does not fall within the meaning of transfer of a long term capital asset, it is clear that the benefit u/s 54EC are incorrectly claimed by the assessee and hence I have reasons to believe that for the
�ावोटेल (इं�डया) �ाइवेट �ल�मटेड 3 Travotel (India) Pvt Ltd ITA No.1551/M/2011 AY 2004-05 the income has escaped assessment to the tune of Rs.23,00,000/- which is further subject to revision after submission of details of the sale proceeds and withdrawal of Indexation, if any claimed, being the quantum of proceeds wrongly claimed as long term capital gain on which provisions of section 54EC have been claimed and hence this is a fit case for issuing notice under section 148 of the Income Tax Act, 1961. Issue Notice u/s 148 Sd/- (XXX) (ITO 2(3)(3), Mumbai” In response to such notice, the assessee filed its detailed objections before the AO, challenging the validity of reopening of the assessment on the basis of above “reasons recorded”. It was categorically submitted that, so far as the claim of exemption under section 54EC on account of capital gain arising from transfer of the hotel building, which was a depreciable asset, is allowable in law in view of the decision of Hon’ble jurisdictional High Court in the case of CIT vs. Ace Builders (Pvt.) Ltd, reported in [2006] 281 ITR 210 and, therefore, exemption under section 54EC cannot be denied to the assessee as the fiction created in section 50 cannot be extended to section 54EC as held by the Hon’ble High Court. Further, reliance was also placed on the decision of Hon’ble Bombay High Court in the case of German Remedies Ltd vs DCIT, reported in [2006] 285 ITR 86, wherein, on similar circumstances, the reopening was held to be bad in law. However, the Ld. AO rejected the assessee’s objection and passed the assessment order not only denying exemption under section 54EC but also making various disallowances/additions and finally income was computed at an income of Rs.38,69,010/-.
The Ld. CIT(A) too rejected the assessee’s contention with regard to the validity of the reopening of assessment under section 147. However, on the merits of the issue relating to the claim of exemption under section 54EC, which was the subject matter of
�ावोटेल (इं�डया) �ाइवेट �ल�मटेड 4 Travotel (India) Pvt Ltd ITA No.1551/M/2011 reopening, was deleted by him following the decision of Hon’ble jurisdictional High Court in the case of CIT vs Ace Builders P. Ltd. (supra). Thus, the very basis for which the assessment was reopened stood deleted by the CIT(A).
Before us the Ld. Senior Counsel, Shri J.D. Mistry, submitted that, firstly, in light of the decision of ld. CIT(A), whereby he has allowed the exemption u/s 54EC, against which the revenue has not filed any appeal, the very basis and the reasons for reopening the assessment does not hold ground. Accordingly, in view of the decision of Hon’ble Bombay High Court in case of Jet Airways, reported in [2011] 331 ITR 236, wherein it has been held that, once the very ground for entertaining the ‘reason to believe’ for income escaping assessment stands negated or is no longer the subject matter of addition, then other additions also cannot be made and the very formation of reason to believe will not hold ground. The Hon’ble Bombay High Court has specifically taken note of the provisions of Explanation 3 to section 147 inserted by Finance Act, 2009 with retrospective effect from 01.04.1989. He strongly referred and relied upon Paras 11, 13, 14, 15 & 16 of the said judgment. His second line of argument is that, at the time of recording the ‘reasons’ itself, there was a law laid down by the Hon’ble jurisdictional High Court that in case of a capital gains arising out of depreciable asset in view of deeming provision of section 50, exemption under section 54E (which is applicable for section 54EC also) cannot be denied. The section 54E/54EC does not make any distinction of capital asset qua depreciable asset and non-depreciable asset and benefit cannot be denied by importing the fiction of section 50 to section 54EC and, therefore, Ld. AO in wake of such binding judicial precedence could not have entertained “reasons to believe” that any income chargeable to tax has escaped assessment. Before the AO, the assessee at the very first instance has brought to his notice about the decision of Hon’ble Bombay High Court; however, Ld. AO
�ावोटेल (इं�डया) �ाइवेट �ल�मटेड 5 Travotel (India) Pvt Ltd ITA No.1551/M/2011 completely disregarded the decision of Hon’ble Jurisdictional High Court and proceeded to complete the assessment u/s 143(3) rws 148. The assessment cannot be reopened u/s 148 simply on AO’s whims and his understanding of law by ignoring the binding decision of the Jurisdictional High Court. Thus, such a reopening is bad in law and once that is so, then entire “reasons” and initiation of proceedings under section 147 has to be quashed. The other additions in that case will be outside the purview of impugned assessment proceedings in view of the decision of Hon’ble Jurisdictional High Court in the case of Jet Airways (supra).
On the other hand, Ld. DR strongly relying upon the order of the CIT(A) submitted that, firstly, at the time of recording the “reasons”, the AO has to give prima facie ground for entertaining the ‘reason to believe’ and secondly, here in this case, the assessment was completed under section 143(1) and, therefore, AO could have very well assumed jurisdiction for reopening the assessment and thereby framing assessment under section 143(3) r.w.s. 147.
We have heard the rival contentions and perused the relevant material on record qua the issue of validity of reopening. Here in this case, the “reasons” have been recorded for reopening the assessment on 21.11.2007 denying the claim of exemption under section 54EC on the ground that, capital gain arising from the transfer of hotel building which was a depreciable asset has to be treated as short-term-capital asset as per the deeming provision of section 50, whereby tax is levied as a short-term-capital-gain and in view of such a deeming provisions the exemption under section 54EC will not be available to the assessee, because, it envisages exemptions on long term capital gain only. Thus, the exemption to the tune of Rs.23 lakhs claimed by the assessee has been sought to be denied. At the time of recording the “reasons”,
�ावोटेल (इं�डया) �ाइवेट �ल�मटेड 6 Travotel (India) Pvt Ltd ITA No.1551/M/2011 there was already a decision of Hon’ble jurisdictional High Court in the case of CIT vs. Ace Builders (Pvt.) Ltd. (supra), specifically deciding this issue in favour of the assessee by holding that, the legal fiction created in section 50 for deeming a capital gain as short-term-capital-gain does not mean that asset itself is a short- term-capital-asset and thereby convert a long-term-capital-asset into short-term capital-asset. The deduction of the exemption under section 54E does not make distinction between depreciable asset and non-depreciable asset and, therefore, exemption would be available in such cases also. The exemption under section 54E cannot be denied by fiction created under section 50. The relevant observation of the Hon’ble High Court after discussing the relevant provisions of the Act are as under:-
“25. In our opinion, the assessee cannot be denied exemption under section 54E, because, firstly, there is nothing in section 50 to suggest that the fiction created in section 50 is not only restricted to sections 48 and 49 but also applies to other provisions. On the contrary, section 50 makes it explicitly clear that the deemed fiction created in sub-sections (1) and (2) of section 50 is restricted only to the mode of computation of capital gains contained in sections 48 and 49. Secondly, it is well established in law that a fiction created by the legislature has to be confined to the purpose for which it is created. In this connection, we may refer to the decision of the Apex Court in the case of State Bank of India v. D. Hanumantha Rao 1998 (6) SCC 183. In that case, the service rules framed by the bank provided for granting extention of service to those appointed prior to 19-7-1969. The respondent therein, who had joined the bank on 1-7-1972 claimed extension of service because he was deemed to be appointed in the bank with effect from 26-10-1965 for the purpose of seniority, pay and pension on account of his past service in the army as short service commissioned officer. In that context, the Apex Court has held that the legal fiction created for the limited purpose of seniority, pay and pension cannot be extended for other purposes. Applying the ratio of the said judgment, we are of the opinion, that the fiction created
�ावोटेल (इं�डया) �ाइवेट �ल�मटेड 7 Travotel (India) Pvt Ltd ITA No.1551/M/2011 under section 50 is confined to the computation of capital gains only and cannot be extended beyond that. Thirdly, section 54E does not make any distinction between depreciable asset and non- depreciable asset and, therefore, the exemption available to the depreciable asset under section 54E cannot be denied by referring to the fiction created under section 50. Section 54E specifically provides that where capital gain arising on transfer of a long-term capital asset is invested or deposited (whole or any part of the net consideration) in the specified assets, the assessee shall not be charged to capital gains. Therefore, the exemption under section 54E of the Income Tax Act cannot be denied to the assessee on account of the fiction created in section 50.
It is true that section 50 is enacted with the object of denying multiple benefits to the owners of depreciable assets. However, that restriction is limited to the computation of capital gains and not to the exemption provisions. In other words, where the long-term capital asset has availed depreciation, then the capital gain has to be computed in the manner prescribed under section 50and the capital gains tax will be charged as if such capital gain has arisen out of a short-term capital asset but if such capital gain is invested in the manner prescribed in section 54E, then the capital gain shall not be charged under section 45 of the Income Tax Act. To put it simply, the benefit of section 54E will be available to the assessee irrespective of the fact that the computation of capital gains is done either under sections 48 and 49 or under section 50. The contention of the revenue that by amendment to section 50, the long-term capital asset has been converted into a short-term capital asset is also without any merit. As stated hereinabove, the legal fiction created by the statute is to deem the capital gain as short-term capital gain and not to deem the asset as short-term capital asset. Therefore, it cannot be said that section 50 converts long-term capital asset into a short-term capital asset.
For all the aforesaid reasons, we concur with the decision of the Gauhati High Court in the case of CIT v. Assam Petroleum Industries (supra) and hold that the Tribunal was justified in allowing the benefit of exemption under section 54E of the Income
�ावोटेल (इं�डया) �ाइवेट �ल�मटेड 8 Travotel (India) Pvt Ltd ITA No.1551/M/2011 Tax Act to the assessee in respect of the capital gains arising on the transfer of a capital asset on which depreciation has been allowed”.
Thus, in the wake of such a binding precedence of the Hon’ble Jurisdictional High Court, the AO could not have entertained the ‘reasons to believe’ on the same issue holding that any income chargeable to tax has escaped assessment. This decision of Hon’ble jurisdictional High Court is dated 07.03.2005 and held the field at the time of recording the “reasons”, therefore, such a decision should have been followed by the AO. In any case, once the assessee brought to the notice of the ld.AO about the said decision of Hon’ble jurisdictional High Court, then he should have immediately dropped the proceedings u/s 148. Thus, on such ‘reasons recorded’, we are of the opinion that such a reopening of assessment which is contrary to the binding precedence of the Hon’ble Jurisdictional High Court is invalid in law and cannot be sustained, hence, same is quashed.
Now coming to the various other additions made by the AO, it is apparent from the records that nowhere in the “reasons recorded”, the AO has recorded his ‘reasons to believe’ on such issues/additions and, therefore, in view of the decision of Hon’ble Bombay High Court in the case of CIT vs Jet Airways (supra) the AO cannot rope in any other additions, especially when the main ground for reopening itself has been declared invalid/bad in law (or is not made in the assessment or stands deleted finally). Thus, without recording the reasons on these issues, no addition can be made in such circumstances. The relevant observation of Hon’ble High Court after analyzing Explanation 3 to section 147 brought by the Finance Act, 2009 with retrospective effect from 01.04.1989 and also the relevant provision of section 147 reads as under:-
Explanation 3 lifts the embargo, which was inserted by judicial interpretation, on the making of an assessment or reassessment on grounds other than those on the basis of which a notice was issued
�ावोटेल (इं�डया) �ाइवेट �ल�मटेड 9 Travotel (India) Pvt Ltd ITA No.1551/M/2011 under section 148 setting out the reasons for the belief that income had escaped assessment. Those judicial decisions had held that when the assessment was sought to be reopened on the ground that income had escaped assessment on a certain issue, the Assessing Officer could not make an assessment or reassessment on another issue which came to his notice during the proceedings. This interpretation will no longer hold the field after the insertion of Explanation 3 by the Finance Act (No. 2) of 2009. However, Explanation 3 does not and cannot override the necessity of fulfilling the conditions set out in the substantive part of section 147. An Explanation to a statutory provision is intended to explain its contents and cannot be construed to override it or render the substance and core nugatory. Section 147 has this effect that the Assessing Officer has to assess or reassess the income ("such income") which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which, comes to his notice during the course of the proceedings. However, if after issuing a notice under section 148, he accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independently to assess some other income. If the intends to do so, a fresh notice under section 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee”.
Thus on the legal ground itself, the impugned reassessment proceeding u/s 148 right from the stage of initiation to the stage of conclusion is bad in law and accordingly, same is quashed. Thus, the grounds of appeal of the assessee stands allowed.
�ावोटेल (इं�डया) �ाइवेट �ल�मटेड 10 Travotel (India) Pvt Ltd ITA No.1551/M/2011 9. In the result, appeal of the assessee stands allowed. Order pronounced in the open court on 7th March, 2016.
Sd/- Sd/- (जे पी बोस) (अिमत शु�ला) लेखा सद�य �याईक सद�य (J P BOAZ) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 7th March, 2016 ��त/Copy to:- 1) अपीलाथ� /The Appellant. 2) ��यथ� /The Respondent. 3) The CIT(A) -6, Mumbai. 4) The Commissioner of Income Tax- 2/concerned___, Mumbai. 5) िवभागीय �ितिनिध “एच”, आयकर अपीलीय अिधकरण, मुंबई/ The D.R. “H” Bench, Mumbai. 6) गाड� फाईल \ Copy to Guard File. आदेशानुसार/By Order / / True Copy / /
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, मुंबई Dy./Asstt. Registrar I.T.A.T., Mumbai *च�हान व.िन.स *Chavan, Sr.PS