1980 (1) TMI 77 - HC - Income Tax

Court quashes tax notices citing lack of income escape & lease deed omission. Audit report not new info.

The court allowed the writ petitions, quashing the notices issued under sections 147/148 of the Income-tax Act, 1961. It held that the reassessment was ... Capital Gains, Notice For Reassessment Issues Involved:1. Validity of reopening assessments under sections 147/148 of the Income-tax Act, 1961.2. Whether the conditions for invoking reassessment under section 147(b) were satisfied.3. The impact of lease deed terms on the capital gains assessment.4. The role of audit reports in providing 'information' for reassessment.Detailed Analysis:1. Validity of Reopening Assessments under Sections 147/148:The writ petitions challenge the reopening of assessments for the year 1973-74, arguing that all material facts were disclosed during the original assessment and that the reassessment was merely due to a change of opinion by the Income Tax Officer (ITO). The ITO issued notices under section 148 read with section 147 of the Income-tax Act, 1961, proposing to reopen the assessments on the grounds that income chargeable to tax had escaped assessment.2. Conditions for Invoking Reassessment under Section 147(b):The ITO claimed that the reassessment was justified under section 147(b) due to new information received post-assessment. According to the ITO, the Claridges Hotel incurred expenses for additions and renovations, which were deemed to be the property of the lessors. The ITO argued that the value of these additions should be included in the capital gains of the co-owners. The court, however, emphasized that for section 147(b) to apply, there must be new information that was not considered during the original assessment. The court noted that the ITO had not applied his mind to the lease deed terms and their implications during the original assessment.3. Impact of Lease Deed Terms on Capital Gains Assessment:The lease deeds contained clauses stating that any additions or alterations made by the lessee (Claridges Hotel Pvt. Ltd.) would be deemed the property of the lessors. However, a subsequent agreement modified this, stating that the lessors would compensate the lessee for such additions if the lease was terminated. The court found that the ITO did not consider these clauses during the original assessment. The court concluded that no capital gains accrued to the co-owners from these additions because any compensation paid by the lessors would increase the property's cost basis, balancing any capital gains.4. Role of Audit Reports in Providing 'Information' for Reassessment:The court examined whether the audit report could constitute 'information' under section 147(b). The audit report highlighted the lease deed terms, suggesting that the additions made by the lessee should be considered the property of the lessors, leading to capital gains. The court referred to the Supreme Court's decision in Indian and Eastern Newspaper Society v. CIT, which held that an audit report cannot be treated as information for reassessment purposes if it merely interprets the law. The court concluded that the audit report in this case did not provide new information but only suggested a legal interpretation, which is not sufficient to justify reassessment.Conclusion:The court allowed the writ petitions, quashing the notices issued under sections 147/148. The court held that the reassessment proceedings were not justified as no income had escaped assessment, and the proposed reassessment would be an exercise in futility. The court emphasized that the ITO had not considered the lease deed terms during the original assessment and that the audit report did not constitute new information under section 147(b).Separate Judgment by Ranganathan J.:Ranganathan J. agreed with the order to allow the writ petitions but reserved his views on whether there was information justifying action under section 147(b). He noted that the ITO had referred the issue of capital gains to the Valuation Officer, who had considered the lease deeds. Ranganathan J. expressed hesitation in accepting that the ITO had not applied his mind to the lease deed terms during the original assessment. He concluded that the writ petitions should be allowed because no income had escaped assessment, making the reassessment proceedings futile.