2006 (3) TMI 549 - AT - Income Tax

Tribunal Invalidates Re-assessment, Rules in Favor of Assessee on Capital Gains Tax

The Tribunal held that the re-assessment was invalid as no addition was made on the issue for which it was re-opened, rendering the entire re-assessment ... Capital gains, Income escaping assessment, Issues Involved:1. Validity of re-opening of assessment under section 147 of the Income-tax Act.2. Taxability of sale consideration of building shops and its impact on the block of assets.Issue-wise Detailed Analysis:1. Validity of Re-opening of Assessment under Section 147 of the Income-tax Act:The primary grievance of the assessee was the validity of the re-opening of the assessment. The assessee argued that the Assessing Officer (AO) assumed jurisdiction for re-opening the assessment on the premise that rental income should be taxed under 'Income from house property' instead of 'Income from business'. However, while completing the assessment, the AO assessed the rental income as business income, which was the same as declared by the assessee. The assessee contended that since no addition was made on the issue for which the assessment was re-opened, the re-opening was invalid.The Commissioner of Income-tax (Appeals) upheld the re-opening, stating that once an assessment is re-opened, the AO is free to examine all issues, not just the reason for which the assessment was re-opened. The Tribunal, however, disagreed, citing the Punjab and Haryana High Court's decision in CIT v. Atlas Cycle Industries, which held that re-assessment proceedings could not continue if the grounds for re-opening were found to be incorrect. The Tribunal also referenced similar judgments from the Gujarat High Court in Sagar Enterprises v. Asstt. CIT and the Patna High Court in Chunnilal Surajmal v. CIT, which supported the view that re-assessment is invalid if the initial grounds for re-opening are not substantiated.In conclusion, the Tribunal held that since no addition was made on the issue for which the assessment was re-opened, the re-assessment was not valid in the eyes of law. The foundation of the notice for re-opening being incorrect, the entire re-assessment proceedings were deemed invalid.2. Taxability of Sale Consideration of Building Shops and Its Impact on the Block of Assets:The second issue involved the taxability of the sale consideration received from the sale of shops and whether it should reduce the Written Down Value (WDV) of the block of assets termed as building. The assessee argued that the shops were part of the block of assets and depreciation was claimed for the first time during the relevant year. Thus, the sale consideration should reduce the WDV of the block of assets.The Commissioner of Income-tax (Appeals) held that since the shops were current assets added to the block during the year and no depreciation was allowed on these shops, the profit from their sale should be taxed under 'Capital gain'. The Tribunal examined Section 50 of the Income-tax Act, which applies to assets forming part of a block of assets on which depreciation has been allowed. The Tribunal clarified that depreciation is allowed on the block of assets as a whole, not on individual assets within the block. Since the building (block of assets) had depreciation allowed, any asset (shop) sold from this block should be treated under Section 50.The Tribunal concluded that Section 50 was applicable, and the sale consideration should reduce the WDV of the block of assets. Consequently, the assessee was not liable for capital gains tax on the sale of the shops.In summary, the appeal was allowed in favor of the assessee, declaring the re-assessment invalid and confirming that the sale consideration of shops should reduce the WDV of the block of assets, thus not attracting capital gains tax.