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2015 Supreme(Kar) 441
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
VINEET SARAN & S. SUJATHA, JJ.
N. Govindaraju - Appellant
Vs.
Income Tax Officer & Ors. - Respondents
Income Tax Appeal 504 / 2013
Decided On : 1.7.2015
Advocate Appeared:
Sri A. Shankar, Adv. for Sri V.S. Yogesh Kumar, Adv.
Sri E. Sanmathi Indrakumar, Adv.
If a notice under Section 148 is valid, the Assessing Officer can assess any income escaping assessment under Section 147, regardless of whether the original reasons for reopening survive. Fair Market Value determination must consider registered valuation reports rather than just nearby sale deeds.
Headnote:(A) Income Tax Act, 1961 - Sections 147, 148, 45(2), 48, and 55(2)(b) and Explanation 3 to Section 147 - Reopening of assessment - Escaped income - Validity of assessing "any other income" when original reasons for reopening do not survive - If the notice under Section 148 is valid, the Assessing Officer has the power to assess any other income chargeable to tax which has escaped assessment and comes to notice during the course of proceedings, even if the original reasons for reopening do not survive - The two parts of Section 147 relating to "such income" and "any other income" are to be read independently - Explanation 3 is clarificatory and empowers the Assessing Officer to assess any issue that escaped assessment notwithstanding its absence in the reasons recorded under Section 148(2).
(B) Income Tax Act, 1961 - Section 55(2)(b) - Fair Market Value (FMV) - Determination of FMV as on 1.4.1981 - Guidelines for determining FMV - FMV is defined as the price that the capital asset would ordinarily fetch on sale in the open market - Authorities cannot ignore a registered valuer's report and rely solely on guideline values or sale deeds of nearby properties without proper consideration.
(C) Income Tax Act, 1961 - Deduction of expenditure - Brokerage charges - Expenses paid through banking channels and supported by receipts - Disallowance of 50% of brokerage without assigning reasons is not justified when there are sufficient grounds for higher brokerage payments due to property litigation or occupancy by unauthorized persons.
Facts of the case:
An individual's assessment for the year 2004-05 was reopened under Section 147 on the grounds that the assessee had failed to consider provisions of Section 45(2) and claimed excessive indexation. During reassessment, the Assessing Officer adopted a lower fair market value for the property as on 1.4.1981 and disallowed 50% of the brokerage expenses claimed. The assessee challenged the validity of the reopening on the ground that the original reasons did not survive and the final assessment was based on different issues.
Findings of Court:
The court found that once a notice under Section 148 is validly issued, the Assessing Officer is empowered to tax the entire income that has escaped assessment, regardless of whether additions are made on the original grounds. On merits, the court found that the Assessing Officer erred in ignoring the registered valuer's report for determining FMV and in disallowing brokerage expenses paid via banking channels without sufficient justification.
Issues: (1) Whether the levy of tax on a different issue is permissible when the reason recorded for reopening the assessment under Section 147 does not survive; (2) Whether the determination of fair market value as on 1.4.1981 was perverse; (3) Whether the disallowance of brokerage expenditure paid through banking channels was justified.
Ratio Decidendi: The phrase "and also" in Section 147, read with Explanation 3, indicates that the power to assess "any other income" is independent of whether the specific income mentioned in the notice was actually taxable. Once the jurisdictional notice is validly issued, the Assessing Officer is empowered to tax all income escaping assessment. Furthermore, Fair Market Value must be determined based on open market values, and registered valuation reports cannot be ignored without reason.
Result: the answer to the first two questions is in favour of the Revenue and against the assessee. The third and fourth questions are answered in favour of the assessee and against the Revenue. The matter is remanded back to the Assessing Officer for re-determining the taxable income of the assessee, in accordance with law and in light of the observations made and directions given hereinabove.
JUDGMENT
The primary question that requires determination in this appeal is that when the reason recorded for reopening the assessment under section 147 of the Income Tax Act (for short ‘Act’) itself does not survive, can tax be levied by the Assessing Officer for a totally different reason or issue, which was not the subject matter of reopening the assessment. In other words, if reasons for reopening are (a) and (b) and during fresh assessment proceedings under section 147 of the Act, income is found to have escaped from assessment for some other reason say, (c) and (d), then, if reasons (a) and (b) do not survive and no addition can be made for such reasons, can additions be made on the basis of reasons or grounds (c) and (d). Besides the aforesaid issue, on facts/merits also certain questions have been raised which would require consideration of this Court.
Brief facts of this case are that the appellant, who is assessed as an individual, has income from house property, transport business, capital gains and other sources. For the assessment year 2004-05, he filed his Income Tax return on 16.12.2004 declaring an income of Rs.4,82,330/- and agriculture income of Rs.1,62,470/-. Such return was first processed under section 143(1) of the Act and accepted on 2.3.2005. Thereafter, notice under Section 148 was issued on 17.1.2006 stating that the assessee had converted agricultural land into nonagricultural purposes, formed sites and sold the same during the relevant period, and while arriving at the capital gains, the assessee had considered the indexation up to the financial year 2003-04 whereas the provision of section 45(2) envisages, if such capital assets were invested in stock-in-trade, the income is chargeable to tax as business income in the year in which the stock is sold. It was also stated that the assessee had claimed indexation till the assessment year 2003-04 and arrived at the capital gains without considering the provisions of section 45(2) and the assessee has thus understated the income and claimed excessive indexation. Thus, it was stated that the Assessing Officer had reason to believe that income chargeable to tax had escaped assessment for the year 2004-05.
The assessment was reopened for the purpose of assessing the income from the sale of property under section 45(2) of the Act and denying the benefit of indexation. The reassessment was completed on total income of Rs.29,90,672/-, which was for reasons other than the one recorded in the notice.
During the relevant period, the assessee had sold a plot of land measuring 12,430 sq. ft. for a consideration of Rs.74,58,000/-. The property devolved upon the assessee in a family partition in the year 1972. Assessee treated it as a case of sale of long term capital asset, for which a fair market value was adopted at Rs.225/-per sq.ft. and offered the capital gains for taxation after availing the benefit of indexation.
After reopening of the case, the Assessing Officer adopted fair market value at Rs.84/-per sq.ft. and computed the capital gains, and also disallowed 50% of expenses on transfer claimed by the assessee. Besides this, certain other disallowances were also made by the Assessing Officer.
Challenging the same, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), who granted certain relief, but confirmed the reopening of assessment under section 147 of the Act; the assessment of fair market value at Rs.84/-per sq.ft.; and also the disallowance of 50% of transfer expenses claimed by the assessee.
Being aggrieved by the said order, an appeal was filed before the Income Tax Appellate Tribunal (ITAT), claiming the reopening of assessment under section 147 of the Act to be bad in law on the ground, that besides the fact that Assessing Officer had formed his opinion purely on suspicion and surmises on the same facts amounting to change of opinion, the assessment was also for different reasons than which were recorded by the Assessing Officer i
