2024 (8) TMI 1081 - HC - Income Tax

Reopening notice under Section 147 quashed for capital gains assessment involving Portuguese Civil Code property rights

Bombay HC quashed reopening notice u/s 147 for capital gains assessment. Petitioner argued 50% property share under Portuguese Civil Code applicable to ... Reopening of assessment u/s 147 - Capital gain on sale of land - Apportionment of income between spouses governed by Portuguese Civil Code - as argued petitioner only had a 50% share in the properties since the original petitioner and her late husband were governed by the Portuguese Civil Code applicable to the residents of Goa - HELD THAT:- The husband of the original petitioner had already passed away in the year 1986 and hence there was no question of the original petitioner being governed by Section 5A of the IT Act which is applicable only to the division of incomes between the spouses who are governed by the Portuguese Civil Code. Section 5A does not deal with the division of assets. Hence, the question of stating that the original petitioner was governed by the provisions of Section 5A of the IT Act does not arise. In our view, therefore, the original petitioner could not be governed by the provisions of Section 5A of the IT Act. We find that the substantive rights of the original petitioner were governed by the provisions of the Portuguese Civil Code. The fact that the original petitioner is governed by the Portuguese Civil Code has been duly brought before the respondents. In our opinion, mere non-mention of the same in the return of income would not give rise to a situation where the tax on the sale of property beyond the share of the original petitioner could be taxed in her hands. The respondents do not appear to have disputed that the original petitioner was indeed governed by the provisions of the Portuguese Civil Code and this was already on record of the Revenue (Exhibit E/97). Moreover, the petitioner's husband had passed away way back in the year 1986 and the share of her husband had devolved from the date of his demise equally on his children. This position was also known to the Revenue when their return of income was filed. Reason cited by the Revenue for rejecting the explanation is, “Copy of the Sale Deed was not available at the time of recording of reasons”- We find that even such reasoning is fallacious and not tenable in law. The information from the office of the Sub-Registrar's for any registration is duly transmitted to the respondents. The execution of such Sale Deed was already on record. In such a case if the respondents fail to take note of the document which was available for transmission to the respondents from the Sub-Registrar's office, in our view, the assumption of jurisdiction will have to be regarded as erroneous. In any case, we find that at the time of passing of the order dated 16.07.2021, the Sale Deeds (which were available) ought to have been taken into consideration. Reopening notice quashed - Decided in favour of assessee. 1. The principal legal questions considered by the Court were:(a) Whether the notice issued under Section 148 of the Income Tax Act, 1961 (IT Act) for reopening the assessment was valid and lawful, having regard to the jurisdictional prerequisites and the material on record.(b) Whether the petitioner had failed to disclose income chargeable to tax, thereby justifying the reopening of the assessment under Section 148.(c) Whether the Revenue's comparison of total sale consideration with the petitioner's declared share was legally and factually correct.(d) The applicability of Section 5A of the IT Act concerning apportionment of income between spouses governed by the Portuguese Civil Code, and its relevance to the petitioner's case.(e) Whether the Revenue was justified in rejecting the petitioner's objections to the reopening notice and the subsequent assessment proceedings.2. Issue-wise detailed analysis:(a) Validity of the Section 148 notice and jurisdictional requirements:The relevant legal framework is Section 148 of the IT Act, which permits reopening of an assessment if the Assessing Officer (AO) has 'reason to believe' that income chargeable to tax has escaped assessment. The Court relied on precedents such as Nivi Trading Ltd. and Ankita A. Choksey, which establish that the AO's belief must be based on relevant and material reasons, not arbitrary or irrational. The Court emphasized that the reasons recorded at the time of issuing the notice are crucial and cannot be supplemented or improved upon subsequently, as per the principle laid down in Smt Nirupa Udhav Pawar.The Court examined the recorded reasons for reopening, which alleged that the petitioner had failed to disclose Rs.64,43,000/- of sale consideration in her Return of Income (ROI). However, the Court found that the Revenue had erroneously compared the total sale consideration for one property (Rs.3,59,50,000/-) with the petitioner's declared share in three properties (Rs.2,95,07,000/-), ignoring that the petitioner's ownership was only 50% under the Portuguese Civil Code. This fundamental factual error undermined the reason to believe that income had escaped assessment.(b) Disclosure of income and correctness of facts:The petitioner had declared her 50% share of sale consideration in the ROI, consistent with her ownership rights governed by the Portuguese Civil Code. The Revenue failed to consider the registered sale deeds evidencing the petitioner's 50% ownership and the corresponding sale consideration offered in the ROI. The Court noted that the Revenue's failure to take into account available documents or to correctly interpret the ownership share constituted a patent error in the recorded reasons.The Court also observed that the Revenue did not dispute the petitioner's ownership share and that the information regarding the petitioner's share was available on record, including from the Sub-Registrar's office. The failure to consider such material vitiated the jurisdiction to reopen the assessment.(c) Applicability of Section 5A of the IT Act:Section 5A provides for apportionment of income between spouses governed by the Portuguese Civil Code's community of property system. The petitioner's late husband had died in 1986, long before the assessment year in question. The Court held that Section 5A applies only to spouses jointly governed by the community of property system and does not deal with division of assets after the death of a spouse. Therefore, the petitioner could not be governed by Section 5A in the relevant assessment year. The Revenue's reliance on the petitioner's non-mention of Section 5A in the ROI was held to be legally untenable.(d) Rejection of objections and procedural fairness:The petitioner filed objections to the reopening notice, highlighting the factual inaccuracies and asserting that no income had escaped assessment. The Revenue rejected these objections on the ground that the petitioner had not furnished the sale deeds supporting her claim of 50% ownership. The Court found this reasoning flawed because the sale deeds were available in the public domain and their existence was known to the Revenue. The failure to consider these documents at the time of rejecting objections was a jurisdictional error.The Court emphasized that the validity of reopening must be judged on the reasons recorded at the time of issuing the notice and the order on objections. The Revenue's failure to address the petitioner's factual assertions in the objections order further weakened the basis for reopening.3. Significant holdings:The Court held that the notice dated 28.05.2019 issued under Section 148 and the order dated 16.07.2021 rejecting objections were vitiated by jurisdictional errors and were liable to be quashed. The Court observed:'The belief entertained by the Income Tax Officer must not be arbitrary or irrational. It must be reasonable or in other words it must be based on reasons which are relevant and material.''The reasons recorded by the assessing officer cannot be supplemented by filing an affidavit or making any oral submission, otherwise, the reasons which were lacking in the material particulars would get supplemented, by the time the matter reaches the Court, on the strength of the affidavit or oral submissions.''The original petitioner only had 50% share in the Properties since the original petitioner and her late husband were governed by the Portuguese Civil Code applicable to residents of Goa.''Section 5A does not deal with the division of assets. Hence, the question of stating that the original petitioner was governed by the provisions of Section 5A of the IT Act does not arise.''The information from the office of the Sub-Registrar's for any registration is duly transmitted to the respondents. The execution of such Sale Deed was already on record. In such a case if the respondents fail to take note of the document which was available for transmission to the respondents from the Sub-Registrar's office, in our view, the assumption of jurisdiction will have to be regarded as erroneous.'Accordingly, the Court quashed the reopening notice and the order rejecting objections, concluding that the Revenue had no valid reason to believe that income chargeable to tax had escaped assessment. The reopening proceedings were therefore held to be without jurisdiction and invalid.