TaxTMI 
TaxTMI 
2020 (6) TMI 325
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed senior counsel along with Mr. Balasaheb Yewale and Ms Rupali Vasaikar, learned counsel for the petitioner. However none has appeared for the respondents. 4. Case of the petitioner is that it is a partnership firm constituted by a deed of partnership dated 21.10.1977. Object of the petitioner is to carry out the business of builders and developers. At the time of filing the writ petition the partnership consisted of eight partners. Petitioner is an assessee under the Act, Respondent No.1 being the jurisdictional Assessing Officer and respondent No.2 being the superior higher authority having jurisdiction over respondent No.1. 5. An agreement was entered into on 08.11.1977 between Mr. Krishnadas Kalyanji Dasani and the petitioner whereby and whereunder Mr. Dasani agreed to sell and the petitioner agreed to purchase a property situated at Tilak Road, Borivali admeasuring approximately 6,173.20 square metres. The property consisted of seven structures and two garages. The property was mortgaged and all the tenaments were let out. Aggregate consideration for the purchase was Rs. 3,00,000.00 and a further expenditure of Rs. 44,087.00 was incurred by way of stamp duty and registr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e to a figure of Rs. 55,87,591.00. Having regard to the total built up area of 37,411 square feet, the 'capital gains' per square feet was computed at Rs. 149.36 on a pro-rata basis. Accordingly, having regard to the area of 10,960 square feet sold, the 'capital gains' was determined at Rs. 16,36,986.00. Along with the return of income, a computation of income as well as an audit report in terms of Section 44AB of the Act were filed. 12.1. During the assessment proceedings, petitioner's representative had filed a detailed letter explaining the nature of the activity that was carried out as well as the method of computation of income. 12.2. Respondent No.1 thereafter completed the assessment for the said assessment year and passed assessment order dated 26.04.1993 under Section 143(3) of the Act assessing the petitioner at the income of Rs. 17,85,560.00. 13. Petitioner filed return of income for the assessment year 1993-94 on 29.10.1993 declaring total income of Rs. 17,00,233.00. Like the previous assessment year, income was computed both under the head 'profits and gains of business or profession' as well as under the head 'capital gains' for twelve flats sold during the r....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... stated that he proposed to re-assess the income of the petitioner for each of the four assessment years and therefore it was called upon to submit returns of income in the prescribed format for each of the assessment years. 17. Petitioner through its chartered accountant wrote to respondent No.1 on 31.03.2000 requesting the latter to furnish the reasons for reopening the assessment. 18. It may be mentioned that in response to the notices dated 25.02.2000 petitioner filed its returns of income for the aforesaid four assessment years on 07.04.2000 contending that filing of the returns was without prejudice to its contention that the impugned notices were without jurisdiction. In the subsequent returns, the details of income remained the same as in the original returns. Additionally the chartered accountant once again requested respondent No.1 to furnish a copy of the reasons recorded for re-opening the assessments. 19. Ultimately vide separate letters dated 17.10.2000 respondent No.1 furnished the reasons recorded on the basis of which re-assessment proceedings were initiated. The reasons recorded for each of the assessment years were identical save and except the assessmen....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Thereafter respondent No.1 filed affidavit in reply through Shri Pramod Kumar, the then Joint Commissioner of Income Tax, Special Range-9, Mumbai. It is stated that his predecessor in office after recording reasons and after obtaining sanction from the Commissioner of Income Tax issued notices dated 25.02.2000 under Section 148 of the Act for the assessment years 1992-93 to 1995-96 thereby re-opening the assessments on the ground that income of the petitioner chargeable to tax had escaped assessment for those assessment years. It is further stated that the notices dated 25.02.2000 were served on the petitioner on 08.03.2000. In pursuance to the notices, petitioner filed returns of income disclosing the same income as already declared in the original returns. Reasons recorded by the Assessing Officer prior to issuance of the notices under Section 148 of the Act and sanction accorded by the Commissioner of Income Tax have been annexed to the affidavit. Referring to the statutory remedies available, it is contended that no prejudice has been caused to the petitioner by issuance of the impugned notices. Therefore, the writ petition should be dismissed. 23. Referring to Sections 147....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oting that on the sale of the flat there was also a proportionate sale of the land. This methodology adopted by the petitioner is in accordance with law. Adverting to the various figures pertaining to the market value of the stock-in-trade as well as the cost of acquisition of the property, he submits that respondent No.1 was not justified in taking the view that there was inflation in the cost and that income had escaped assessment. He also submits that it is not correct to think that any profit arises out of valuation of the closing stock. In this connection, he has placed reliance on a decision of the Supreme Court in Chainrup Sampatram Vs. CIT, 24 ITR 481. He has also referred to a decision of this Court in CIT Vs. Piroja C. Patel, 242 ITR 582 to contend that the expenditure incurred for having the land vacated would certainly amount to cost of improvement which is an allowable expenditure. Finally he submits that all the reasons given by the Assessing Officer for re-opening assessments do not make out any case of re-opening as in the given facts, no prudent person can form a reasonable belief that income had escaped assessment. He therefore submits that the impugned notices ma....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... determined with reference to the reasons recorded by the Assessing Officer. Even in a case where only an intimation is issued under Section 143(1), the touchstone to be applied is as to whether there was reason to believe that income had escaped asessment. 27. Earlier, Supreme Court in Lakhmani Meval Das (supra) when the contours of Section 147 was different though the essence of the section was the same explained the expression 'reason to believe'. The grounds or reasons which lead to the formation of belief that income chargeable to tax has escaped assessment must have a material bearing on the question of escapement of income from assessment. Once there exists reasonable grounds for the Income Tax Officer to form such belief, that would be sufficient to clothe him with jurisdiction. Sufficiency of the grounds, however, is not justiciable. The expression 'reason to believe' does not mean a purely subjective satisfaction on the part of the Income Tax Officer. The reason must be held in good faith and cannot be a mere pretence. It is open to a court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the format....
X X X X Extracts X X X X
X X X X Extracts X X X X
....it should have been valued at the market price as on the date of closing of the accounts for the year under consideration. Therefore, the Assessing Officer alleged that the assessee had suppressed the market price of the closing stock, thus reducing the profit. 28.3. Third ground given was regarding computation of 'capital gains' furnished with the return of income. Assessing Officer noted that the total capital gains as on 01.10.1987 was arrived at by deducting the cost of the land as on 01.10.1987 i.e., Rs. 10,41,774.00 from the fair market value of the land i.e., Rs. 66,29,365.00 which came to Rs. 55,87,591.00. According to the Assessing Officer, assessee made deduction of the cost incurred for the entire land whereas only a fraction of the said land was converted into stock-in-trade where construction was made. Assessing Offier worked out that cost of the converted piece of land was only Rs. 13,260.00. This figure he arrived at by deducting Rs. 2,86,740.00 which was the value of the tenanted property from the cost of the property i.e. Rs. 3,00,000.00. Thus, he alleged that there was inflation of cost by Rs. 10,28,514.00 (Rs. 10,41,774.00 - Rs. 13,260.00). 28.4. The last g....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... at market rate has for its object the bringing into charge any appreciation in the value of such stock. The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there had been actual sales in the course of the year showing the profit or loss actually realised on the year's trading. While anticipated loss is taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into the account as no prudent trader would care to show increased profit before its actual realisation. This is the theory underlying the rule that the closing stock has to be valued at cost or market price whichever is lower and it is now generally accepted as an established rule of commercial practice and accountancy. In such circumstances, taking the view that profits for income tax purposes are to be computed in conformity with the ordinary principles of commercial accounting unless such principles have been superseded or modified by legislative ena....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as a result of the transfer of the capital asset. Therefore, sub-section (2) which had overriding effect over sub-section (1) says that the profits or gains arising from the transfer of a capital asset by way of conversion by the owner into stock-in-trade of the business carried on by the owner shall be chargeable to income tax as his income of the previous year in which such stock-in-trade is sold or is otherwise transferred by him; further, for the purposes of Section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration as a result of the transfer of the capital asset. 30.4. This brings us to Section 48 of the Act which deals with mode of computation of capital gains. The main provision of Section 48 says that the income chargeable under the head 'capital gains' shall be computed by deducting from the full value of the consideration received or accrued as a result of transfer of the capital asset the following amounts i.e.,- (1) expenditure incurred wholly and exclusively in connection with such transfer; (2) the cost of acquisition of the asset and the cost of any improve....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Thus in so far the third ground is concerned, we do not find any rationale in the view taken by the Assessing Officer. The cost incurred on stamp duty etc. together with the cost incurred in carrying out eviction of the hutment dwellers would certainly add to the value of the asset and thus amount to cost of improvement which is an allowable deduction from the full value of consideration received as a result of the transfer of the capital asset for computing the income under the head 'capital gains'. 31. In so far the fourth ground is concerned, the Assessing Officer has taken the view that long term capital gains arising out of sale or transfer of land would be assessed to tax only in the year in which the land is sold or otherwise transferred by the assessee. Opining that land as a stock is a different item of asset than flats, Assessing Officer held that ownership of land continued to remain with the assessee notwithstanding sale of flat. Therefore, he was of the view that 'capital gains' would be chargeable to tax only in the year when the land is sold or otherwise transferred to the co-operative society formed by owners of the flats and not in the year when individual flats....