2022 (10) TMI 1169 - AT - Income Tax

Tribunal overturns PCIT's order under Section 263, emphasizing AO's reasonable judgment

Sri V. Rajasekhar Versus The Income Tax Officer, Ward-14 (5), Hyderabad.

The Tribunal set aside the Principal Commissioner of Income Tax's (PCIT) order under Section 263, as it did not meet the criteria of being 'erroneous and ... Revision u/s 263 by CIT - Capital gain on sale of land - conversion of capital asset into stock-in-trade - Reopening of assessment concluded - as per AR adequate enquiries were made by the Assessing Officer during the proceedings u/s. 148 of the Act and, therefore, the Ld.PCIT cannot invoke the explanation-II to section 263 of the Act for the purposes treating the order passed by the AO is erroneous - HELD THAT:- In our opinion, the AO had formed a view whereby the AO has considered the transfer of land as a capital asset and is subjected to profit and gain on the transfer of the capital asset in accordance with the principles for computing the business income of the assessee. However, undoubtedly, the other view of the ld.PCIT whereby he was of the opinion that the land stood transferred within the meaning of section 2(47)(v) of the Income Tax Act on the date of handing over the possession of the land. Both the views are possible in the present set of facts and therefore, the view of the Assessing Officer cannot be said to be erroneous merely on the ground that he had agreed to the contention of conversion of capital asset into stock-in-trade as on 02.05.2007. AO has rightly taken one view by duly considering the fact that the impugned Land was nothing but a stock in trade and can be evidenced from the financial statements of the assessee. Once the view has been taken by the AO after thorough examination any other view taken by the ld.PCIT would form change of Opinion and is not possible U/s 263 of the Act. In our view, the Pr. CIT cannot thrust upon his own thoughts, perceptions, and conclusions on the A.O. (or) direct him to pass on order in such a manner and in such a fashion as he thinks fit by setting aside the already completed assessment. Crux of the issue involved is that the AO has framed assessment u/s 147 and not under section 143(3), as it is purely re-opened for a specific reason and was concluded by accepting the submissions of assessee after duly verifying the records and the material available on record and on complete satisfaction of the Assessing Officer. Assessing Officer had applied his mind and asked the relevant question from the assessee and thereafter had completed the assessment. While, deciding the issue, the Assessing Officer had noticed the decision of R. Gopinath (HUF) Vs. ACIT [2009 (7) TMI 1209 - ITAT CHENNAI] and ACIT Vs. T. Ashok Kumar [2012 (12) TMI 518 - ITAT HYDERABAD]. Thus, the decision of the Assessing Officer was based on one of the possible views, which is supported by the two decisions of the Tribunal. Thus assessment order passed under the proviso of section 143(3) r.w.s 147 of the Act, cannot be said as erroneous. Appeal of the assessee is allowed. Issues Involved:1. Validity of the order under Section 263 of the Income Tax Act, 1961.2. Jurisdiction of the Principal Commissioner of Income Tax (PCIT) under Section 263.3. Examination of the conversion of land into stock-in-trade.4. Adequacy of the Assessing Officer's (AO) inquiry.5. Applicability of capital gains tax on the transaction.6. Procedural fairness and opportunity of being heard.Issue-wise Detailed Analysis:1. Validity of the Order under Section 263 of the Income Tax Act, 1961:The assessee challenged the validity of the order passed by the PCIT under Section 263, arguing that it was 'bad both in law and on facts.' The assessee contended that the order was based on a change of opinion and was void ab initio. The Tribunal examined whether the PCIT's order met the requirements of Section 263, which necessitates that the order must be 'erroneous and prejudicial to the interest of revenue.'2. Jurisdiction of the Principal Commissioner of Income Tax (PCIT) under Section 263:The Tribunal scrutinized whether the PCIT had the jurisdiction to initiate proceedings under Section 263. The PCIT had issued a show cause notice based on the belief that the AO's order was erroneous. The Tribunal noted that the PCIT cannot exercise jurisdiction if the AO had already examined the subject matter adequately. The Tribunal referenced the case of Supersonic Technologies P. Ltd. and other relevant judgments to support this view.3. Examination of the Conversion of Land into Stock-in-Trade:The AO had accepted the assessee's claim that the land was converted into stock-in-trade on 02-05-2007. The PCIT, however, questioned this conversion, arguing that there was no corroborative evidence and that the claim was an afterthought. The Tribunal noted that the AO had considered the assessee's submissions and financial statements, which showed the land as stock-in-trade. The Tribunal concluded that the AO had taken a plausible view supported by evidence.4. Adequacy of the Assessing Officer's (AO) Inquiry:The Tribunal evaluated whether the AO had conducted an adequate inquiry. The AO had issued notices under Sections 142(1) and 143(2), and the assessee had responded with detailed submissions. The Tribunal found that the AO had applied his mind and made inquiries, thus fulfilling the requirement of a proper inquiry. The Tribunal referenced the case of Brahma Centres and other judgments to support the view that the AO's inquiry was adequate.5. Applicability of Capital Gains Tax on the Transaction:The PCIT argued that the land was transferred within the meaning of Section 2(47)(v) when the development agreement was signed, and thus capital gains should be taxed. The assessee contended that the capital gains would be taxable only when the stock-in-trade was sold. The Tribunal noted that both views were possible and that the AO had taken one plausible view. The Tribunal referenced the Supreme Court's judgment in Malabar Industrial Co. Ltd. to support the view that when two views are possible, the AO's view cannot be deemed erroneous.6. Procedural Fairness and Opportunity of Being Heard:The assessee argued that the PCIT did not afford a reasonable opportunity of being heard before setting aside the assessment. The Tribunal emphasized the importance of procedural fairness and noted that the PCIT must provide specific findings and a reasonable opportunity for the assessee to present their case. The Tribunal found that the PCIT had not provided specific findings on the issue and had not given adequate opportunity to the assessee.Conclusion:The Tribunal concluded that the AO had conducted a proper inquiry and taken a plausible view supported by evidence. The PCIT's order under Section 263 was set aside as it did not meet the requirements of being 'erroneous and prejudicial to the interest of revenue.' The appeal of the assessee was allowed, and the Tribunal emphasized that the PCIT cannot substitute his judgment for that of the AO when the AO's view is plausible and supported by evidence.