2025 (10) TMI 48 - HC - Income Tax

Reopening under s.147/148 quashed; withdrawal of s.47A exemption and recomputation must follow s.155(7B) procedure, not as escapement of income

The HC quashed the reopening proceedings under s.147/148, holding that withdrawal of exemption under s.47A and consequent recomputation must proceed under ... Validity of reopening of assessment - petitioner's property as sold for a sale consideration to its wholly owned subsidiary company - eligibility of exemption from payment of capital gains tax in terms of Section 47(iv) - sale of asset as “capital asset” - as submitted that the subsidiary company is selling the undivided share from time to time during various assessment years by treating it as “capital assets”, for which, the capital gain tax was determined and accordingly, the same was paid. Thus, at no point of the time, the subsidiary company had ever shown the land of 4.76 acres as “stock in trade” and sold the property. Consequences of withdrawal of exemption in terms of Section 47A - Proceedings u/s 154 Vs. Section 155(7B) - Validity of initiation of proceedings u/s 147/148 - Escapement will be ascertained based on the information furnished by the assessee in their returns - subsidiary company had ever shown the land of 4.76 acres as “stock in trade” and sold the property. HELD THAT:- Withdrawal of exemption by invoking Section 47A of the Act would arise only in a situation, where the transferee company sold the asset by treating it as “stock in trade”. In this case, in the books of account of the transferee company, the sale of asset was treated as sale of “capital asset”, for which, they had remitted the capital gain tax to the extent of Rs. 106 Crores out of the sale of 46% of the total land. The respondent had also accepted the stand of transferee company and allowed them to pay the capital gain tax. When such being the case, now the respondent cannot take a different stand in the transferor company and initiate proceedings against them by treating the very same sale of asset by the transferee company as “stock in trade” in the books of account of the transferor company. Validity of reopening of assessment - To initiate the proceedings under Section 147 and issue notice u/s 148, AO must have “reasons to believe” that an income chargeable to tax has escaped assessment for any particular assessment year. In the present case, the proposal to sell the land by the transferee company was through the Joint Development Agreement (JDA) which is an incident that occurred subsequent to the filing of ITR for the AY 2014-15. In the event if the JDA enables the transferee company to make the sale of land by treating it as “stock in trade”, then it would ultimately result in withdrawing the exemption in terms of Section 47A of the Act for the AY 2014-15. The consequences of the same would lead to recomputation and amendment of ITR in terms of provisions of Section 155(7B) of the Act. Such recomputation and amendment of ITR of the transferor company cannot be treated as income escaping assessment in terms of the provisions of Section 147/148. Notice u/s 148 can be issued only if there is any escapement of income, due to the mis-statement, mis-declaration, or suppression of fact, etc., while filing the returns for relevant assessment year. It is nobody's case that there was an escapement of income in the ITR filed as on the date of filing the same by the petitioner for the AY 2014-15. As long as the respondent was not in a position to find out any escapement or error or deliberate omission or commission of offence in the returns for relevant assessment year, there is no locus standi for the respondent to initiate proceedings u/s 148 of the Act. In this case, as stated above, admittedly, there was no escapement of income in the ITR filed by the petitioner for the assessment year 2014-2015 and there was no suppression of material fact as well. Exemption u/s 47(iv) - At the time of transfer of assets, the petitioner had claimed the exemption under Section 47(iv) of the Act, which is permissible in law, since the said assets were transferred from the holding company to its subsidiary company. On 28.03.2016, a Joint Development Agreement was entered between the transferee company and its Developer, due to which, the respondent took a stand that the sale of land was made by the transferee company by treating it as “stock in trade”. Even in such case, the income has to be recomputed for the assessment year 2014-15 and the returns has to be amended. The said amendment is only due to the subsequent events and as stated above, the same cannot be construed as escapement of income, so as to invoke Section 147 of the Act. Even in the 1st proviso to Section 147 of the Act, it has been stated that if there was no escapement of income at the time of filing ITR for the relevant assessment year, then no proceedings can be initiated under Section 147 of the Act after the expiry of 4 years period from the end of relevant assessment year. Proceedings in terms of Section 155(7B) - Normally, if the transferee company sold the assets by them by treating it as “stock in trade” within the period of 8 years, then, the said information should have passed on to the Assessing Officer of the transferor company by the Assessing Officer of transferee company. In this case, the information was provided by the transferee company to its AO as early as on 28.03.2016 itself. In such case, the respondent, who is the Assessing Officer for both transferor and transferee company, was supposed to have initiated the proceedings u/s 155(7B) of the Act. Without doing so, the respondent herein had accepted the returns filed by the transferee company for the relevant assessment year, whereby they had treated the sale of asset as “capital asset”. When such being the case, certainly, the respondent cannot have any locus standi to initiate proceeding against the petitioner/transferor company by treating the very same transaction as “stock in trade”. Even if the respondent's contention is accepted, they are supposed to have invoked proceedings in terms of Section 155(7B) within a period of 4 years from the end of previous relevant year, in which the conversion was made. In this case, according to the respondent, the conversion was made on 28.03.2016 and hence, they are supposed to have initiated proceedings on or before 31.03.2020. Subsequently, due to COVID pandemic, the said time limit was extended till 30.06.2021 by virtue of the Taxation and Other Laws (Relaxation and Amendments of Certain Provisions) Act, 2020. In spite of the said extension, no action was taken by the respondent to invoke the provisions of Section 155(7B) of the Act. Thus, the proceeding is also barred by limitation. The recomputation and amendment in ITR in terms of provisions of Section 155(7B) for the relevant assessment year, due to the subsequent events would not be a ground for reopening of the assessment in terms of the provisions of Section 147/148 of the Act. In this case, the Assessee and the Assessing Officer are well aware of the fact that as on the date of filing the returns, the ITR was filed by the petitioner with due compliance in all the aspects and there is no dispute on the aspect of correctness of the ITR for the relevant AY 2014-15. However, due to the subsequent events, the exemption granted under Section 47(iv) of the Act was said to have withdrawn in terms of Section 47A of the Act by the respondent. Such withdrawal of exemption would not be considered as escapement of income to invoke Section 147/148 of the Act, but it would pave way for recomputation and amendment of ITR of the relevant assessment year, in terms of the provisions of Section 155(7B) of the Act. Treating the transfer of asset as “capital asset” in books of the transferee company and having accepted the capital gain tax paid by them to an extent of Rs. 106 Crores, now, they have no locus standi to take a different stand against the petitioner/transferor company and treat the very same transaction of asset as “stock in trade” in the transferor company. Taking a contrary view and treating the very same transaction as “Capital Asset” for the buyer/transferee company and as “stock in trade” for the seller/transferor company is impermissible in law. No prohibition to initiate independent proceedings against the transferor company for violation of the conditions, under which the exemption was granted in terms of Section 47(iv) of the Act, while transferring the asset from the transferor company to the transferee company, provided if the assets are sold as “stock in trade” by the transferee company, in which case, if any stand is taken or any proceedings are initiated in the transferee company by treating the sale of asset as “stock in trade”, then the respondent can take action in the transferor company to withdraw the exemption in terms of Section 47A of the Act by treating the sale of asset as “stock in trade”. However, in this case, the respondent took different stand in the transferor company as the sale of asset by the transferee company was “stock in trade”, while the stand taken in the transferee company was that sale effected by it was as “capital assets”, which is impermissible in law. The “recomputation and amendment of ITR” in terms of Section 155(7B) of the Act cannot be equated with the “rectification of records” in terms of Section 154 of the Act. The scope of recomputation and amendment of ITR made in terms of Section 155(7B) of the Act is due to non-compliance of the terms and conditions of exemption, which was already granted. On the other hand, if there is any error apparent at the time of filing the ITR, for which, the assessment was also completed, certainly the said error can be rectified by invoking Section 154 of the Act. In this case, no such error apparent on the date of filing the ITR, so as to apply the provisions of Section 154 of the Act. However, the recomputation and amendment is required to be made due to the subsequent events. Therefore, the proceedings for “rectification” under Section 154 of the Act is entirely different from the proceedings for “recomputation and amendment” under Section 155(7B) of the Act. Conclusion:- This Court is inclined to quash the impugned proceedings against the petitioner. While quashing the impugned proceedings, this Court once again reiterate that the revenue loss to the department would incur due to the initiation of present proceedings by the respondent against the petitioner. In the event if the sale of asset is treated as “stock in trade”, then the respondent can recover only a sum of Rs. 45 Crores. On the other hand, by virtue of sale of capital asset to the extent of 46%, the transferee company had so far remitted a sum of Rs. 106 Crore. If the same yardstick is applied for the remaining assets, a sum of Rs. 226 will be paid towards the capital gain tax. Thus, as stated above, the wrongful initiation of proceedings by the respondent would pave way for loss to the Department to the extent of 181 Crores. Even if the property was treated as “stock in trade”, the only recourse available for the respondent is to withdraw the exemption in terms of Section 47A and invoked Section 155(7B) to recompute the income and amend the returns filed by the petitioner and recover only a sum of Rs. 45 Crores. In this case, admittedly, no proceeding was initiated. As stated above, having accepted the stand of transferee company as sale of asset as “capital asset” and allowed them to pay the capital gain tax, now the respondent cannot take a different stand in the transferor company and treat the said sale as “stock in trade” as the same contradicts his stand from the stand taken in the transferee company, which is impermissible. ISSUES PRESENTED AND CONSIDERED 1. Whether proceedings under Section 147/148 of the Income Tax Act can be validly initiated to reopen an assessment where exemption under Section 47(iv) was initially claimed and later events may require withdrawal of that exemption under Section 47A and recomputation under Section 155(7B). 2. Whether withdrawal of exemption under Section 47A and consequent recomputation/amendment under Section 155(7B) constitute 'income escaping assessment' within the meaning of Section 147, permitting issuance of notice under Section 148. 3. Whether the Assessing Officer may lawfully invoke Section 147/148 when the Assessing Officer had earlier accepted the transferee's returns treating subsequent sales as capital gains and collected tax on that basis. 4. Whether limitation or procedural mandates (including duty of the AO of transferee to inform AO of transferor) preclude initiation of Section 147/148 proceedings in the facts where Section 155(7B) should have been invoked within statutory time-limits. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Validity of invoking Section 147/148 where Section 47(iv) exemption was originally claimed and later events may trigger Section 47A/155(7B) Legal framework: Section 47(iv) exempts transfer of capital asset from a company to its subsidiary from chargeability under Section 45; Section 47A withdraws that exemption if the transferee converts or treats the asset as stock-in-trade within prescribed periods; Section 155(7B) permits recomputation and amendment of the transferor's returns where Section 47A applies. Section 147/148 allow reopening where the AO has reason to believe income chargeable to tax has escaped assessment. Precedent treatment: The Court considered the Division Bench precedent recognizing overlap between rectification (Section 154) and escapement (Section 147) and that the AO must choose the appropriate provision, but emphasized statutory distinctions introduced by Section 155(7B). Interpretation and reasoning: The Court held that withdrawal of exemption under Section 47A followed by recomputation under Section 155(7B) arises from subsequent events (conversion/treatment as stock-in-trade) and is not equivalent to escapement of income at the time the original return was filed. Reopening under Section 147 requires a reason to believe that income had escaped assessment because of misstatement, suppression or omission at the time of filing; mere subsequent ineligibility of exemption does not satisfy that threshold. Ratio vs. Obiter: Ratio - Reopening under Section 147/148 is not permissible where the only basis is a subsequent event triggering Section 47A/155(7B); such consequences require recomputation under Section 155(7B) and are distinct from escapement under Section 147. Obiter - observations on policy and revenue consequences. Conclusion: Proceedings under Section 147/148 initiated instead of invoking Section 47A/155(7B) were impermissible in the circumstances and liable to be quashed. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Whether Section 47A/155(7B) consequences constitute 'income escaping assessment' under Section 147 Legal framework: Section 147 applies where AO has reason to believe income chargeable to tax has escaped assessment; Section 155(7B) specifically contemplates recomputation where an exemption earlier availed is later deemed withdrawn under Section 47A. Precedent treatment: The Court acknowledged authority that rectification and escapement provisions may overlap and AO must choose appropriately, but distinguished those cases on facts where error apparent or escapement existed at the time of filing. Interpretation and reasoning: The Court reasoned that recomputation under Section 155(7B) follows from subsequent non-compliance with exemption conditions and is not an identification of escape at the time of filing. Hence Section 147 cannot be invoked merely because a later event would have affected tax liability had it occurred earlier; the statutory design requires use of Section 155(7B). Ratio vs. Obiter: Ratio - Deeming under Section 47A and recomputation under Section 155(7B) do not amount to escapement for Section 147 purposes when returns were correctly filed and accepted at the relevant time. Obiter - commentary on conceptual difference between rectification and recomputation. Conclusion: The Court concluded Section 47A/155(7B) consequences are not grounds for reopening under Section 147 when no escapement existed at time of filing. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Legitimacy of AO taking a contrary stand against transferor when AO accepted transferee's characterization and tax payment Legal framework: AO's actions are governed by statutory provisions described above; consistency in positions taken in respect of interlinked transactions is necessary for fair adjudication. Precedent treatment: No binding precedent compelled inconsistent treatment; Court relied on principle that a tax authority cannot, without proper basis, adopt contradictory stands in respect of economically identical transactions between related entities. Interpretation and reasoning: Where the same Assessing Officer for transferee and transferor accepted transferee's returns treating sales as capital gains and collected tax, the AO cannot later contend in a parallel proceeding against the transferor that the transferee treated sales as stock-in-trade (a contrary characterisation) without initiating appropriate proceedings under Section 155(7B) against the transferor or proceedings against the transferee. Such inconsistent postures indicate non-application of mind and lack locus standi to reopen under Section 147. Ratio vs. Obiter: Ratio - The AO lacks locus to adopt inconsistent positions as to the nature of the transferee's subsequent sales when he previously accepted those sales as capital gains and collected tax; inconsistent recharacterisation cannot justify reopening under Section 147. Obiter - policy remarks on fairness and revenue preservation. Conclusion: The AO's initiation of Section 147/148 proceedings against the transferor while accepting the transferee's capital-gains treatment was impermissible and warranted quashing. ISSUE-WISE DETAILED ANALYSIS - Issue 4: Limitation, duty to inform and procedural obligations of AO of transferee vs transferor Legal framework: Section 155(7B) prescribes a time limit (four years from end of relevant year in which conversion occurred) for recomputation/amendment; statutory and administrative duties require AO of transferee to inform AO of transferor when transferee's acts trigger Section 47A consequences. Precedent treatment: The Court referred to legislative scheme and pandemic-related extension of limitation (Taxation and Other Laws Relaxation Act, 2020) but found no action was taken within extended time limits. Interpretation and reasoning: The conversion event (JDA dated 28.03.2016) triggered the clock for Section 155(7B) recomputation; the AO should have invoked Section 155(7B) by 31.03.2020 (extended to 30.06.2021). Failure to do so meant the correct statutory remedy became time-barred. Further, when the same AO had knowledge (or the knowledge was available) from the transferee, it was his duty to act under Section 155(7B) rather than later reopen under Section 147; a claim of ignorance by the AO was unacceptable in those circumstances. Ratio vs. Obiter: Ratio - Where the AO fails to invoke Section 155(7B) within the statutory period despite having or being in a position to receive necessary information, subsequent reliance on Section 147/148 is improper; failure to communicate and act renders the reopening procedurally defective. Obiter - remarks on duties of assessment officers to prevent revenue loss. Conclusion: Proceedings were barred by limitation for Section 155(7B) and the AO failed in the duty to act or inform; consequently, initiation of Section 147/148 was improper. OVERALL CONCLUSION The Court concluded that (a) withdrawal of exemption under Section 47A and recomputation under Section 155(7B) are the appropriate statutory remedies for subsequent conversion/treatment as stock-in-trade and do not constitute escapement under Section 147; (b) the Assessing Officer could not validly reopen the transferor's assessment under Section 147/148 where no escapement existed at the time of filing and where the transferee's returns were accepted as capital gains; (c) the respondent's failure to invoke Section 155(7B) within the prescribed period and the AO's inconsistent stance justified quashing the impugned notice and assessment. The impugned proceedings under Section 147/148 were therefore quashed.