14. Reopening of assessment – No reason to believe that the income chargeable to tax has escaped assessment – reopening notice was bad in law. Section 148

CIT vs. Devkumar Haresh
Vaidya. [ Income tax Appeal no 750 of 2014, dt : 05/12/2016 (Bombay High
Court)].

[Devkumar Haresh Vaidya
(IT) vs. ACIT . [ITA No. 7325/MUM/2012; Bench : J ; AY 2007-08 dt: d 31/07/2013
; Mum. ITAT ]

The Assessee filed its ROI
for  AY 2007-08 declaring a total income
of Rs. 24.69 lakh. The same was accepted u/s. 143(1) of the Act. Thereafter,
the AO received information from the Deputy Director of Income Tax
(Investigation), Surat that property situated at New Delhi (said property) was
sold on 23^rd August, 2006 for a total consideration of Rs.148.93
crore by the 12 family members, including the assessee and the assessees’s
share in the said amount was Rs.6.21 crore. Consequently, a notice u/s. 148 of
the Act was issued seeking to reopen the assessment for AY: 2007-08. The reason
for reopening the assessment was that said property had been sold to one
Mineral Management Services (I) Ltd. Thus, the sale was assessable to tax in
the A.Y. 2007-08 as it was so assessed in the hands of Mineral Management
Services (I) Ltd. in that year.

The assessee challenged
the notice pointing out that he had offered to tax the entire consideration of
Rs.6.21 crore (Rs. 4 crore in his hands and Rs.2.21 crore as a part of his late
father’s income was offered to tax) in the earlier A.Y. 2006-07. Moreover, he
had also claimed the benefit of section 54EC of the Act in A.Y. 2006-07. This
was accepted by the AO in scrutiny proceedings u/s. 143(3) of the Act. It was
pointed out that the said property was a family property in which his mother
(Devhuti Vaidya) had undivided and indeterminate rights/share in the said
property. Therefore, though the assessee and his family members did not have
possession of the said property, they had filed caveat objecting the
grant of probate to the Will of the assessee’s maternal grand father Mr.
Anantrai Pattani in favour of his maternal uncle Mr. Kumar Pattani. In the
above view, as a part of the settlement arrived at between the assessee and his
family members with his uncle Mr. Kumar Pattani, an Agreement for Sale dated 25^th
October, 2005 by which the assessee sold his rights in the said property to one
M/s. Duce Property and Services Pvt. Ltd. and withdrew his objections to grant
of probate to Mr. Kumar Pattani. All this in consideration of  Rs.12 crore (as a
family) and Rs.4 crore as a part thereof being for the transfer of his interest
/ right in the immovable property was also received in A.Y. 2006-07.

All the above facts were
examined by the AO while passing the assessment order for the A.Y. 2006-07 and
held that the assessee had sold his rights/share in the immovable property and
sought benefit of the investment made of the sales proceeds u/s. 54EC of the
Act. It was also pointed out that as is evident from the reasons for reopening
the assessment that the amendment made in section 54EC of the Act effective
from A.Y. 2007-08 which would restrict the benefit of that provision to Rs.50
lakh had triggered the reopening notice.

This was evident from the
following observations recorded in the reasons, which reads as under :“ In
view of above amendment, if the assessee would have shown the capital gain
correctly in the A.Y. 2007-08, then she would not have been eligible for
deduction of more than Rs.50 lakhs even if she would have complied with the
time limit provision of the section 54EC.”

However, the AO by order
passed u/s. 143(3) r/w section 147 of the Act, did not accept the assessee’s
objections. Consequently, the AO brought to tax an amount of Rs.6.21 crore on
the above account. (Rs.4 crore being the assessee’s share and Rs.2.21 crore
being his share in his late father Mr. Haresh Vaidya’s interest, who had
expired in the meantime.).

On appeal, the CIT(A) also
dismissed the assessee’s appeal.

On further appeal, the
Tribunal held that the AO could not have any reason to believe that income
chargeable to tax has escaped assessment. In particular, it held that the
assessee had offered capital gains to tax in the AY 2006-07 and the same was
accepted after examination / consideration while passing an order u/s. 143(3)
of the Act. Thus, the AO having already assessed the income arising on sale of
rights in the said property as evidenced by the Agreement for Sale dated 25^th
August, 2005 and letter dated 17^th October, 2005 evidencing the
family arrangement coupled with having received the consideration in the
Assessment Year 2005-06 which was also offered to tax in that year could not
have had any reason to believe that income chargeable to tax has escaped
assessment. The impugned order also records the fact that there were disputes
amongst the legal heirs of late Mr. Anantrai Pattani including pending probate
proceedings before the High Court. The dispute between the assessee and his
uncle Mr. Kumar Pattani stood settled on the basis of offer made by the uncle
in his letter dated 17^th October, 2005 to the assessee and his
family members to give up their rights in respect of the said property
(including not contesting the probate petition) on his uncle paying a sum of
Rs.12 crore in the aggregate. 

Further, the fact that the
communication received from the Deputy Director of Income Tax (Investigation),
Surat which was the material for issuing the impugned notice, also seems to
indicate that the entire exercise was only for denying the benefit of section
54EC of the Act in view of the amendment thereto with effect from AY 2007-08.
The Tribunal held that reopening notice was bad in law.

The Hon. High Court held
that once the assessee has offered the capital gains to tax on the basis of the
Agreement for Sale dated 25^th October, 2005 read with the letter
dated 17^th October, 2005 and the receipt of consideration for sale
of his interest in said property and accepted on due examination u/s. 143(3) of
the Act, the AO could not have had any reason to believe that income chargeable
to tax has escaped assessment. In fact, this is a case of change of opinion,
inasmuch as for the A.Y. 2006-07, the AO in scrutiny proceedings accepted that
the transaction qua the respondent is taxable in A.Y. 2006-07 and now
seeks to tax it in A.Y. 2007-08.