2018 (9) TMI 2164 - AT - Income Tax

Assessments under Section 153A Quashed; Land and Share Sales Treated as Capital Gains, Not Business Income

Shri Dineshbhai P. Sorathia Om Kirti Construction P. Ltd. Versus ACIT, Cent. Cir. 1, Rajkot

Shri Dineshbhai P. Sorathia Om Kirti Construction P. Ltd. Versus ACIT, Cent. Cir. 1, Rajkot - TMI 1. ISSUES PRESENTED and CONSIDERED 1. Whether additional grounds of appeal can be admitted post adjudication to challenge the validity of assessment orders passed under section 153A without reference to incriminating material found during search. 2. Whether assessments for assessment years 2007-08, 2008-09, and 2009-10, where no assessment proceedings were pending on the date of search and the time limit for issuance of notice under section 143(2) had expired, are valid under section 153A in absence of incriminating material relating to those years. 3. Whether the profit earned from sale of land by the assessee is to be treated as business income or capital gains. 4. Whether the profit from sale of shares should be treated as business income or long-term capital gains. 5. Whether addition on account of unexplained credit to capital account can be deleted by giving telescoping effect against undisclosed income declared during search. 6. Whether disallowance of interest on loan taken by the assessee is justified on the ground that borrowed funds were used for non-business purposes. 7. Whether addition on account of jewellery investment, based on a bill found during search but belonging to a third party, is sustainable in the hands of the assessee. 2. ISSUE-WISE DETAILED ANALYSIS 1. Admission of Additional Grounds Challenging Validity of Assessments under Section 153A - Legal Framework and Precedents: The assessee relied on Supreme Court decisions establishing that legal issues affecting taxability can be raised at any stage. Subsequent High Court decisions (including jurisdictional High Court) have clarified the scope and jurisdiction of AO under section 153A. - Court's Reasoning: The Court observed that the issue of jurisdiction under section 153A is a pure question of law. Since the relevant legal pronouncements came after the CIT(A) orders, the Tribunal was obliged to take cognizance of these developments and admit the additional grounds. - Conclusion: Additional grounds challenging the validity of assessment orders passed under section 153A without reference to incriminating material were admitted and decided on merits. 2. Validity of Assessments for AYs 2007-08, 2008-09, and 2009-10 under Section 153A in Absence of Incriminating Material - Legal Framework and Precedents: Section 153A mandates issuance of notice and assessment for six assessment years preceding the year of search. Assessments or reassessments pending on the date of search abate and fresh assessments are to be made on the basis of incriminating material found during search or other relevant material. The Delhi High Court in CIT v. Kabul Chawla clarified that completed assessments cannot be reopened under section 153A unless incriminating material relating to those years is found during search. - Court's Reasoning: The Tribunal noted that for AYs 2007-08 to 2009-10, assessments were completed (returns accepted under section 143(1)) and time limit for issuance of notice under section 143(2) had expired on the date of search. The Department failed to produce any incriminating material relating to these years. The seized documents pertained only to AY 2010-11 or to a different entity. - Application of Law to Facts: In absence of incriminating material for these years, assessments framed under section 153A were held to be void ab initio. - Conclusion: Assessment orders for AYs 2007-08, 2008-09, and 2009-10 were quashed for want of jurisdiction under section 153A. 3. Nature of Income from Sale of Land: Business Income or Capital Gains - Legal Framework and Precedents: The distinction between business income and capital gains depends on intention at the time of acquisition, treatment in books of accounts, frequency and volume of transactions, and other relevant factors. The Gujarat High Court in CIT v. Rewashanker A. Kothari and the ITAT Lucknow Bench in Sarnath Infrastructure (P) Ltd. laid down tests including intention of purchase, treatment in accounts, frequency, scale, and manner of dealing. - Court's Reasoning: The AO and CIT(A) treated the income as business income based on continuous and substantial transactions, subdivision of plots, borrowing for purchases, and disclosure of unaccounted income during search. However, the assessee maintained separate portfolios for investment and trading, with land held as investment shown separately in balance sheet and gains credited to capital account. The holding period for most land was more than three years. - Treatment of Competing Arguments: The Tribunal found that the Revenue's reliance on frequency and borrowing was not supported by cogent evidence. The assessee's consistent treatment of certain land as investment and separate accounting was a significant factor. The frequency and volume of transactions in the investment portfolio were not sufficient to infer trading intention. - Conclusion: The Tribunal reversed the Revenue's finding and directed that income from sale of land held as investment be treated as capital gains, not business income. 4. Nature of Income from Sale of Shares: Business Income or Long-Term Capital Gains - Legal Framework and Precedents: Similar principles apply as in land transactions. The intention at acquisition, frequency, holding period, and accounting treatment are relevant to distinguish trading from investment. - Court's Reasoning: The AO and CIT(A) treated all share transactions as business income due to frequent purchases and sales. The assessee claimed separate portfolios for trading and investment, with profits from investment credited to capital account. The Revenue did not examine holding periods or distinguish intra-day from delivery transactions. - Treatment of Competing Arguments: The Tribunal found the Revenue's approach to be sweeping and without detailed analysis. Absence of specific findings on holding period or nature of transactions undermined the Revenue's case. - Conclusion: The Tribunal directed the AO to treat gains from sale of shares as long-term capital gains, reversing the Revenue's order. 5. Addition on Account of Unexplained Credit to Capital Account and Telescoping Effect - Facts: An amount credited to the capital account was treated as unexplained credit and added to income. The assessee contended that the amount was covered by the disclosure of Rs. 1.62 crores made during search. - Court's Reasoning: To avoid double taxation, the AO was directed to give benefit of telescoping effect for the addition against the disclosed income during search. - Conclusion: Addition of Rs. 1,29,949/- was deleted. 6. Disallowance of Interest on Loan Taken by Assessee - Legal Framework and Precedents: Interest on borrowed funds used for business purposes is allowable deduction. Disallowance arises if funds are used for non-business purposes. The Bombay High Court in CIT v. Reliance Utilities and Powers Ltd. held that sufficient interest-free funds to cover advances negate disallowance. - Court's Reasoning: The assessee had capital exceeding Rs. 4.82 crores, sufficient to meet interest-free advances. No evidence suggested diversion of capital to non-business purposes. - Conclusion: Disallowance of interest and processing charges was not warranted; grounds were allowed. 7. Addition on Account of Jewellery Investment Based on Bill Found During Search - Facts: A jewellery purchase bill in the name of a third party was found during search at the assessee's premises. No jewellery was found or seized. The AO presumed the jewellery belonged to the assessee and made addition. - Court's Reasoning: Mere possession of a bill in the premises without corroborative evidence does not justify presumption of ownership. The assessee denied ownership and explained the bill belonged to a third party. No further evidence was produced by Revenue. - Treatment of Competing Arguments: The assessee also submitted that the disclosed income during search could cover this addition if sustained. - Conclusion: Addition was deleted as unsustainable in absence of corroborative evidence.