2025 (11) TMI 558 - AT - Income Tax

Reopening under s.147/148 invalid where AO relied solely on investigation report; asset held by heirs treated as capital gain

ITAT held the reopening under s.147/148 invalid because the AO issued notice solely on an investigation report without independently examining its ... Validity of reopening of assessment - reasons to believe - independent application of mind or borrowed satisfaction - as alleged sales receipts are in the nature of adventure of trade and comes under the business of the assessee - capital asset was received by the legal heirs after demise of late assessee/father HELD THAT:- The case of the assessee was reopened u/s147/148 of the Act on the basis of the information received from investigation wing, Bellary, and the AO has issued notice u/s148 without verifying the report of the investigation wing Bellary and reopening is only on the basis of investigation report received. AO has relied to issue notice under section 148 of the Act on the basis of report of the DIT (Inv.), Bellary. But he has not independently examined the veracity of the report submitted by the DIT (Inv.). The learned CIT(A) has rightly allowed appeal of the assessee on this ground and in support of our decision we rely on the judgment of Kelvinator India Ltd. [2010 (1) TMI 11 - SUPREME COURT] Thus, we hold that the initiation of proceeding under section 147/148 of the Act is not correct. Further, the finding of the learned CIT(A) regarding issue on merits that capital asset was received by the legal heirs after demise of late M. Eranna has not been converted into the stock by the legal heirs and the assessee has shown capital gain on this income. The disputed amount does not come under the head of business income. Therefore, on this point, the business treated by the assessee is also not correct - Appeal filed by the Revenue is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether reopening assessment under section 147/148 was validly initiated when it was based on an investigation-wing report without independent tangible material or application of mind by the Assessing Officer. 2. Whether the receipts from sale of multiple plots, as per information from investigation records, could be treated as unexplained cash receipts/'on-money' and assessable as business income (adventure in the nature of trade) or whether they constituted capital receipts/long-term capital gains shown in the return. 3. Whether denial of deduction claimed under the relevant capital-gains provision was justified where the assessing authority treated transactions as business income. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of reopening under section 147/148 based solely on investigation report Legal framework: Reopening of an assessment under section 147/148 requires the Assessing Officer to have formed a belief of escapement of income based on tangible material; reasons recorded must demonstrate a live link between material and formation of belief, and mere change of opinion is impermissible. Precedent treatment: The Tribunal applied the established principle that substitution of belief or mere reliance on investigation reports without independent verification and tangible material amounts to improper reopening. Prior higher-court authority has been followed establishing the 'change of opinion' / tangible-material test as a check on reopening powers. Interpretation and reasoning: The AO issued notice based primarily on an investigatory upload indicating sale of 21 plots at a high market rate, without independent verification or contemporaneous tangible material in the AO's possession; purported enquiries were not reflected in the reasons and the reasons were characterized as vague and based on blind reliance on the investigation report. The Tribunal accepted the appellate authority's findings that the AO did not apply independent mind, did not have documentary evidence at the time of recording reasons, and recorded incorrect factual assertions (e.g., alleged nondisclosure of capital gains despite return showing long-term capital gain). The Tribunal found that proper enquiries and a live link between material and belief were absent. Ratio vs. Obiter: Ratio - reopening based solely on an investigation report without independent, tangible material and without application of mind is unsustainable. Obiter - comments on the investigation wing's methodology and evidentiary weight insofar as they are ancillary to the primary defect of non-application of mind. Conclusion: Reopening under section 147/148 was invalid; the subsequent assessment framed on that reopening cannot stand. The Tribunal affirmed the appellate authority's quashing of reopening and assessment on this ground. Issue 2: Characterisation of receipts from sale of plots - business income (adventure in the nature of trade) vs. capital gains Legal framework: Taxability depends on factual characterisation of transactions - whether they amount to transfer of capital asset attracting capital gains provisions or constitute an adventure in the nature of trade resulting in business income. The nature of the asset (whether received as inheritance and continued as capital asset), frequency, intention, and surrounding facts inform the classification. Precedent treatment: The Tribunal accepted the appellate authority's approach of analysing the factual matrix and rejected the assessing officer's conclusion that the transactions were trade, noting that mere investigatory assertions of market price do not displace documentary sale deeds and the return's disclosure of capital gain. Precedent relied upon by the AO treating similar receipts as business income was not held to cure the procedural/ material defects in reopening and was not followed as determinative here in light of the facts. Interpretation and reasoning: The assessee produced multiple sale deeds (although not all 21 initially), and the return disclosed long-term capital gain. The appellate authority found that the assets were inherited by legal heirs on demise and continued to be capital assets, not stock-in-trade. The AO's adoption of a uniform market value per plot and inference of 'on-money' lacked corroboration beyond the investigation report; assessments treating the entire alleged market value as unexplained receipts were therefore inadequately supported. On the merits, the Tribunal concurred with the appellate authority that the disputed amounts were not properly treated as business income and that the assessee had demonstrated capital gains treatment in return and supporting documents for at least part of the transactions. Ratio vs. Obiter: Ratio - where factual material (sale deeds, return showing capital gain, inheritance background) supports capital-asset character and the AO's contrary conclusion rests on unverified investigatory figures, the capital-gains character prevails; treatment as business income cannot be imposed without adequate material. Obiter - observations on the sufficiency of partial production of sale deeds and on how differing plot sizes and stamp duty entries affect valuation. Conclusion: The disputed receipts do not sustainably qualify as business income/adventure in the nature of trade on the record; the finding of the lower authority that the receipts were capital in nature was upheld by the Tribunal. Issue 3: Denial of deduction under capital-gains provision when AO treats receipts as business income Legal framework: Deductions under the specific capital-gains provision are available only if the income is properly characterised as capital gain and relevant conditions and evidence for deduction are satisfied; if income is taxed under business head, those deductions are inapplicable. Precedent treatment: The Tribunal noted that since the AO's primary classification as business income was unsustainable for want of material and improper reopening, the denial of capital-gains deductions premised on that classification could not be sustained. The appellate authority had addressed the absence of evidence to substantiate a claim for relief and the nature of the transaction. Interpretation and reasoning: The AO denied the deduction on the basis that the receipts were business income and that requisite evidence for section-specific relief was lacking. The appellate authority accepted that even if a deduction were claimed, the core question was whether the receipts were capital gains at all. Given the Tribunal's endorsement of capital-asset character, the denial of deduction must be assessed in light of whether relevant conditions for the deduction were proved; however, the appellate authority had noted absence of supporting evidence for the particular exemption claimed and had not allowed it. The Tribunal did not disturb the appellate authority's scrutiny that the specific statutory deduction was unsupported by evidence, while restoring the overall capital-gain assessment posture. Ratio vs. Obiter: Ratio - denial of a capital-gains deduction cannot be sustained where the assessment treating income as business income is itself invalid; nevertheless, entitlement to any particular deduction depends on proof of statutory conditions and remains a point of fact. Obiter - remarks on evidentiary sufficiency to claim deductions. Conclusion: The assessment cannot be upheld insofar as it treated receipts as business income and denied capital-gains treatment solely on that basis. Entitlement to specific capital-gains deductions, however, requires independent proof and was not allowed where unsupported; the Tribunal sustained the appellate authority's approach on the need for evidence while restoring the capital-asset character of the transactions. Cross-references Issues 1 and 2 are interlinked: invalid reopening (Issue 1) vitiates the AO's subsequent characterisation and evidentiary conclusions (Issue 2). Issue 3 flows from Issue 2 - the denial of capital-gains relief depends on the classification established under Issue 2 and on proof of conditions for the statutory deduction.