TaxTMI 
TaxTMI 
2006 (2) TMI 201
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....9;Capital gains' was examined by the Assessing Officer during the course of reassessment proceedings. On this issue, the Assessing Officer has recorded the following findings in the assessment order for the assessment year 1997-98: "It is explained that the assessee had 20 undivided share in a plot of land with structure thereon along with the four other corners with equal shares to co-owners sold their 20 per cent share to M/s. United Builders. During the previous year relevant to assessment year 1997-98, the assessee converted her share in the plot of land and structure standing thereon into stock-in-trade and development and concession (sic) of building started jointly with M/s. United Builders as per the agreement entered into by them. It was agreed by the assessee and the other co-owners that they would contribute towards the cost of construction of the building in the ratio of their interest in the property i.e., 20 per cent each. The balance 40 per cent would be borne by M/s. United Builders. It is further explained that the development agreement entered into M/s United Builders the assessee was entitled to Flat Nos. 302, 801, 1101 and 1102 of 882 sq. ft. each and on....
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....n trade at Rs. 1,61,21,100. From this, indexed cost of Rs. 46,36,000 has been reduced. The net capital gain computed is Rs. 1,14,85,100. As the assessee has retained flats measuring 1764 sq.ft., the value of them amounting to Rs. 1,12,89,600 has been claimed as benefit under section 54 of the Act and the balance amount of Rs. 1,95,500 has been offered as long-term capital gain. The first error in the computation is the claim under section 54 of the Income-tax Act. You have paid towards the cost of flat only. However, you have calculated the land price also in it. The land was already owned by you and no investment has been made in the land. The land component in this calculation will be Rs. 76,73,400 (1,764 X 4,350). In other words, the Assessing Officer has granted excess benefit under section 54 of the Act amounting to Rs. 76,73,400. The cost of construction has been taken at Rs. 2,260 sq. ft. based on a letter from a C.A. This is abnormal cost. Even as on the date of the cost of construction of a building ranges between 400 to 800 per sq. ft. depending on the quality of construction. The Assessing Officer has erred in accepting it without applying her mind and referring to v....
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.... section 263, the ld. counsel submitted that the first ground indicated in the aforesaid notice is that deduction under section 54 of the Act was not correctly worked out and the component of land price was also added to the cost, which is not permissible. It is submitted that complete details regarding deduction available under section 54 were filed before the Assessing Officer and proper explanation was also submitted in response to the show-cause notice issued by the CIT. It was explained to the CIT that the entire transaction has to be considered from the development activity angle. The assessee converted her 20 per cent share into stock-in-trade. The assessee would have sold her 20 per cent share and thereafter could have purchased the flat for her use and in that case, the cost of the flat would have included cost of construction as well as the cost of land. For the purpose of section 54, cost of flat is always inclusive of cost of land. The second objection raised by the CIT was with regard to the cost of construction. The ld. counsel submitted that this issue was properly explained and it was pointed out that the entire cost of construction was incurred by M/s. United Build....
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....arted business of development of real estate and construction and has undertaken a project to construct a building on the said plot of land. The assessee has claimed deduction under section 54 of the Act as she has undertaken to construct new house within a period of three years from the date of transfer of original house property known as 'Baug Roohi'. Out of the total constructed area of 3706 sq.ft., she has retained 1764 sq.ft. for self-occupation and thereby complied with the conditions of section 54. A detailed working of capital gains arising as a result of conversion of land into stock-in-trade is enclosed herewith. As per the provisions of section 54, capital gains arising on conversion of an asset into stock-in-trade is taxable in the year when the stock-in-trade is sold. Accordingly, assessee has offered for taxation capital gains in the year which flats (stock-in-trade) were sold. During the year assessee offered proportionate share of estimated total profit on the area sold during the year worked out as under: Sale price 6,800 per sq. ft. Less: cost of land 4,350 per sq. ft. Less: estimated cost of construction 2,050 per sq. ft. 400 Total ....
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....ceived Amount receivable 802 1/3rd share 3-3-1997 Sheriton Properties Ltd. 12,12,667 10,91,400 1,21,267 801 3-3-1997 -do- 59,97,600 53,97,840 5,99,760 302 Assessment year 1999-2000 -do- 62,50,000 62,50,000 NIL 134,60,267 127,39,240 7,21,027 The copies of agreement with Sheriton Properties are already furnished and copy of agreement for flat No. 302 will be filed separately. (vi) The land was jointly owned by five co-owners equally viz. Rashid Oomerbhoy, Afzal Oomerbhoy, Imtiaz Oomerbhoy, Salim S. Oomerbhoy and Khatiza S. Oomerbhoy (assessee) having 20 per cent rights each. Two of the co-owners i.e., Rashid S. Oomerbhoy and Afzal S. Oomerbhoy sold their 20 per cent share to United Builders @ Rs. 4,350 per sq.ft. after obtaining approval from appropriate authority. This being the market rate, has been adopted by the assessee for computing capital gains. In addition to the above, we are also enclosing herewith valuation report from registered valuer M/s. Parlekar and Dallas who has valued the Fair Market Value of land and building at Rs. 76 lakhs as on 1-4-1981 and this also mentions that fact of rate of Rs. 4,350 per sq. ft. (vii) S....
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....ated 24-3-2004 in the case of Atlanta Agencies [IT Appeal No. 671 (Mum.) of 2003] (vi) ITAT, Mumbai 'H' Bench order dated 31-3-2005 in the case of Bipin P. Shah v. ITO [IT Appeal No. 5992 (Mum.) of 2003] (vii) ITAT, Mumbai 'H' Bench order dated 31-3-2004 in the case of Ambalal B. Patel [IT Appeal No. 5993 (Mum.) of 2003] (viii) ITAT, Mumbai 'A' Bench order dated 27-4-2004 in the case of Ausia Properties Development Ltd. [IT Appeal No. 3653 (Mum.) of 2003]. 10. The ld. DR strongly relied on the order passed by the ld. CIT under section 263. He contended that various relevant and important issues have not been examined by the Assessing Officer at all. His main focus was on the issue as to whether the income by way of capital gain should be brought to the charge of tax in the assessment year 1997-98 or partly in this year and partly in some other assessment year. The Assessing Officer did not record any finding on various important issues and he-concluded that the entire income was to be brought to the charge of tax in the assessment year 1997-98. The ld. DR invited our attention to the Supreme Court decision in the case of Malabar Industrial Co. Ltd. an....
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.... but is hot prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue - recourse cannot be had to section 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interests of the Revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the ITO, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The phrase 'prejudicial to the interests of the Revenue' has to be read in conj....
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....l power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the Revenue. But that by itself would not be enough to vest the Commissioner with the power to suo motu revision because the first requirement, namely, that the order is erroneous, is absent. Similarly if an order is erroneous but not prejudicial to the interests of the Revenue, then the power of suo motu revision cannot be exercised. Any and every erroneous order cannot be the subject-matter of revision because the second requirement must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully eligible has not been imposed or that by the application of the relevant statute, on an incorrect or incomplete interpretation, a lesser tax than what was just has been imposed. When exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have ....
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....law and arrives at a conclusion, such conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. (viii) The CIT, before exercising his jurisdiction under section 263, must have material on record to arrive at a satisfaction. (ix) If the Assessing Officer has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the Assessing Officer allows the claim on being satisfied with the explanation of the assessee, the decision of the Assessing Officer cannot be held to be erroneous simply because in his order he does not make an elaborate discussion in that regard." 14. A reference to the Mumbai, ITAT decision in the case of Girdharilal B. Rohra may also be fruitful and the ratio of this case is as under: "It is now well-settled position of law that in order to assume jurisdiction under section 263, the CIT must satisfy himself prima facie that the order of the Assessing Officer is erroneous and prejudicial to the interests of revenue. Such satisfaction must be based on the material on record. The assumption of jurisdicti....
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....er. The CIT cannot invoke section 263 for upsetting a concluded assessment framed by the Assessing Officer merely because he feels that a particular line of investigation which would have been effective and useful for the Revenue has not been adopted by the Assessing Officer. The conditions enacted under the provisions of section 263 are obviously intended to avoid element of pure subjectivity or arbitrariness on the part of the CIT in taking resort to revisional powers under section 263." 16. The various other cases relied upon by the ld. counsel for the assessee only reiterate the basic principles which have been stated by us above. 17. The facts of the present case may now be examined in the light of the legal position as indicated above. During the course of re assessment proceedings, the Assessing Officer raised several relevant queries regarding computation of income under the head 'Capital gains' and in response to such queries, the assessee filed detailed replies/explanation supported by documents like valuation reports, copy of development agreement etc. In the order passed by him, the Assessing Officer has referred to these relevant facts and also referred to th....