Section 153C notice and joint development taxation: Tribunal rejects defective jurisdiction and applies section 45(2) treatment.

In a section 153C search assessment, a return filed in response to the notice had to be followed by a statutory notice under section 143(2); the absence of that notice, together with the impermissible sequence in recording satisfaction and issuing notice, rendered the assessment void ab initio. On the joint development arrangement, the Tribunal treated the land as stock-in-trade and held that taxation could not be tied merely to the occupation certificate in assessment year 2017-18. Section 45(5A) was held inapplicable to a partnership firm, and the transaction was to be dealt with under section 45(2) based on the relevant conversion and sale events. The additions were deleted.

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Issues: (i) Whether the assessment framed under section 153C of the Income-tax Act, 1961 was invalid for want of a mandatory notice under section 143(2) after the assessee filed its return in response to the section 153C notice, and for the sequence in which satisfaction and notice were recorded. (ii) Whether the income arising from the joint development arrangement was taxable in assessment year 2017-18, or whether the transaction was to be regarded as a transfer/conversion arising on the date of the joint development agreement and governed by section 45(2) of the Income-tax Act, 1961 instead of the reasoning adopted by the lower authorities.

Issue (i): Whether the assessment framed under section 153C of the Income-tax Act, 1961 was invalid for want of a mandatory notice under section 143(2) after the assessee filed its return in response to the section 153C notice, and for the sequence in which satisfaction and notice were recorded.

Analysis: The return filed in response to the section 153C notice was treated by the Assessing Officer as part of the assessment proceedings, but no notice under section 143(2) was issued after the return was filed. The assessment record also showed that the notice under section 143(2) had been issued earlier than the recording of satisfaction under section 153C, which was held to be an impermissible sequence for assuming jurisdiction in the manner adopted. The Tribunal held that, on these facts, the assessment could not stand.

Conclusion: The assessment was held to be bad in law and void ab initio on this count.

Issue (ii): Whether the income arising from the joint development arrangement was taxable in assessment year 2017-18, or whether the transaction was to be regarded as a transfer/conversion arising on the date of the joint development agreement and governed by section 45(2) of the Income-tax Act, 1961 instead of the reasoning adopted by the lower authorities.

Analysis: The Tribunal held that the assessee had entered into a registered joint development agreement with a registered power of attorney, and the land had already been treated as stock-in-trade. On the facts, the transaction was not to be assessed on the footing adopted by the lower authorities with reference to the occupation/completion certificate in assessment year 2017-18. Section 45(5A) was held inapplicable because it applies only to the specified class of assessees and could not govern a partnership firm. The proper treatment was under section 45(2), with the capital element and business element to be recognized in accordance with the date of conversion and actual sale of the stock-in-trade, not merely on receipt of the occupation certificate.

Conclusion: The addition made in assessment year 2017-18 was deleted and the issue was decided in favour of the assessee.

Final Conclusion: The impugned assessments were quashed and the additions relating to the joint development transaction were deleted; both appeals succeeded, and the stay petitions became infructuous.

Ratio Decidendi: In a search-related assessment under section 153C, a return filed in response to the notice must be followed by the statutory notice under section 143(2), and a joint development transaction involving conversion of land into stock-in-trade is to be taxed under section 45(2) on the legally relevant transfer and sale events, not merely on the basis of the occupation certificate or section 45(5A).

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