Court quashes income tax reassessment notice for alleged capital gains on land development agreement.

Case Name:

Darshana Anand Damle vs. Deputy Commissioner of Income Tax, Central Circle 3(4), Mumbai & Ors. (High Court of Bombay)

Key Takeaways:

- The court held that granting a license for development does not amount to a transfer of possession under Section 53A of the Transfer of Property Act, 1882.

- Consequently, Section 2(47)(v) (of Income Tax Act, 1961), which defines "transfer" for capital gains purposes, was not applicable.

- The court relied on the Supreme Court's decision in Seshasayee Steels (P) Ltd. v. Assistant Commissioner of Income Tax VI(2), Chennai.

- The reassessment notice was quashed as the income tax department had already considered the development agreement during the original assessment proceedings.

Issue:

Whether the development agreement entered into by the petitioner amounted to a transfer of land, resulting in capital gains taxable under the Income Tax Act, 1961.

Facts:

- The petitioner filed a return of income for the assessment year 2013-14, declaring a total income of Rs.2,32,81,270/-

- On 15th June 2012, the petitioner, along with co-owners, entered into a development agreement with Sai Ashray Developers for land in Chikhloli, Ambernath.

- The development agreement provided that Sai Ashray would develop the property at its own cost and give the owners 36% of the total constructed saleable area as consideration.

- Sai Ashray paid the owners a refundable interest-free deposit of Rs. 40 crores, of which the petitioner and a co-owner received Rs. 21 crores.

- During the original assessment proceedings, the petitioner submitted the development agreement and explained why it did not amount to a transfer of land under Section 2(47)(v) (of Income Tax Act, 1961), and Section 53A of the Transfer of Property Act, 1882.

- The Assessing Officer accepted the petitioner's explanation and passed the assessment order without making any addition for capital gains.

Arguments:

- The income tax department argued that by entering into the development agreement, the petitioner had transferred the land to Sai Ashray, as defined under Section 2(47) (of Income Tax Act, 1961). The department contended that the petitioner should have offered capital gains on the market value of the constructed saleable area.

- The petitioner argued that the reassessment notice was not permissible after four years from the end of the relevant assessment year, as there was no failure to fully and truly disclose material facts. The petitioner relied on the Supreme Court's decision in Seshasayee Steels (P) Ltd. v. Assistant Commissioner of Income Tax VI(2), Chennai to argue that the development agreement did not amount to a transfer of land.

Key Legal Precedents:

- Aroni Commercials Ltd. v. Deputy Commissioner of Income Tax 2(1), Mumbai & Anr.:

The court held that once a query is raised during the assessment proceedings and the assessee has replied to it, it follows that the query was considered by the Assessing Officer while computing the assessment. It is not necessary for the assessment order to contain a reference or discussion on the issue.

- Seshasayee Steels (P) Ltd. v. Assistant Commissioner of Income Tax VI(2), Chennai:

The Supreme Court held that granting a license to a developer for the purpose of development and selling flats does not amount to "allowing the possession of the land" under Section 53A of the Transfer of Property Act, 1882. Consequently, Section 2(47)(v) (of Income Tax Act, 1961), which defines "transfer" for capital gains purposes, would not apply.

Judgment:

The court quashed the reassessment notice issued under Section 148 (of Income Tax Act, 1961), and the order disposing of the petitioner's objections. The court held that since the issue of whether the development agreement amounted to a transfer of land was considered during the original assessment proceedings, the reassessment notice was based on a mere change of opinion, which is not permissible. The court also relied on its earlier decision in a co-owner's case, which applied the Supreme Court's decision in Seshasayee Steels (P) Ltd. v. Assistant Commissioner of Income Tax VI(2), Chennai to hold that the development agreement did not amount to a transfer of land.

FAQs:

Q1: What was the significance of the court's decision?

A1: The court's decision clarified that granting a license for development does not amount to a transfer of possession under Section 53A of the Transfer of Property Act, 1882, and consequently, Section 2(47)(v) (of Income Tax Act, 1961), which defines "transfer" for capital gains purposes, is not applicable. This has implications for the taxation of development agreements in the real estate sector.

Q2: Why did the court quash the reassessment notice?

A2: The court quashed the reassessment notice because the issue of whether the development agreement amounted to a transfer of land was already considered during the original assessment proceedings. The reassessment notice was based on a mere change of opinion, which is not permissible under the Income Tax Act, 1961.

Q3: What was the significance of the Supreme Court's decision in Seshasayee Steels (P) Ltd. v. Assistant Commissioner of Income Tax VI(2), Chennai?

A3: The Supreme Court's decision in Seshasayee Steels (P) Ltd. v. Assistant Commissioner of Income Tax VI(2), Chennai was crucial in determining that granting a license for development does not amount to a transfer of possession under Section 53A of the Transfer of Property Act, 1882. This decision was relied upon by the court in the present case to hold that the development agreement did not result in a transfer of land for capital gains purposes.

Q4: What was the significance of the court's reliance on Aroni Commercials Ltd. v. Deputy Commissioner of Income Tax 2(1), Mumbai & Anr.?

A4: The court relied on Aroni Commercials Ltd. v. Deputy Commissioner of Income Tax 2(1), Mumbai & Anr. to establish that once a query is raised during the assessment proceedings and the assessee has replied to it, it follows that the query was considered by the Assessing Officer while computing the assessment, even if the assessment order does not explicitly discuss the issue.

1. Pleadings are complete. With the consent of the Parties we decided to dispose this Petition at this admission stage. Therefore, Rule, made returnable forthwith.

2. Petitioner is an individual, who filed return of income on 13th January 2014 for Assessment Year 2013-14 declaring total income of Rs.2,32,81,270/-. Petitioner’s case was selected for scrutiny and Petitioner received notice under section 143(2) (of Income Tax Act, 1961) (“the Act”).

3. During Financial Year 2012-13 corresponding to Assessment Year 2013-14, Petitioner along with other co-owners had entered into a Development Agreement on 15th June 2012 with one Sai Ashray Developers ("Sai Ashray") for developing the land situated at Chikhloli, Ambernath. During the assessment proceedings under Section 143(3) (of Income Tax Act, 1961), Petitioner, vide letter dated 17th March 2016, had filed a copy of the Development Agreement before the Assessing Officer (“AO”). The AO asked Petitioner as to why the Development Agreement should not be treated as ‘transfer of the said land’ resulting in capital gains and taxed accordingly. Petitioner filed a reply and in the reply Petitioner explained that by entering into the Development Agreement, Petitioner has not transferred the land to Sai Ashray and specific reference was made to provisions of Section 2(47)(v) (of Income Tax Act, 1961) and Section 53A of the Transfer of Property Act, 1882. Petitioner’s explanation was accepted and the assessment order under Section 143(3) (of Income Tax Act, 1961) came to be passed on 31st March 2016 without making any addition on account of capital gains. Petitioner’s income was, however, determined as Rs.3,32,85,240/- wherein other additions to the total income of Petitioner were made.

4. Petitioner received a notice dated 22nd March 2021 under Section 148 (of Income Tax Act, 1961) stating that Respondent No.1 had reasons to believe that Petitioner’s income chargeable to tax for Assessment Year 2013-14 had escaped assessment within the meaning of Section 147 (of Income Tax Act, 1961). Petitioner also received a notice dated 6th January 2022 under Section 142(1) (of Income Tax Act, 1961). Petitioner was also served the reasons recorded for re-opening the assessment.

5. Petitioner filed detailed objections vide its communication dated 8th February 2022 that came to be disposed by an order dated 14th February 2022. It is this order along with notice issued under Section 148 (of Income Tax Act, 1961) which is impugned in this Petition.

6. It is Petitioner’s case that since the notice under Section 148 (of Income Tax Act, 1961) has been issued after the expiry of four years from the end of the relevant assessment year, as provided in Section 147 (of Income Tax Act, 1961), re-opening of the assessment was not permissible unless there was failure on the part of Petitioner to fully and truly disclose material facts required for assessment. Mr. Jain submitted that the reasons to believe does not indicate that there was any failure on the part of Petitioner to truly and fully disclose material facts.

7. Mr. Suresh Kumar submitted that Petitioner has filed original return of income treating the land in question as ‘stock in trade’ in the books of accounts and hence, not a ‘capital asset’ within the meaning of Section 2(47) (of Income Tax Act, 1961). But the screenshot of the schedule of fixed assets held by Petitioner as seen in the balance sheet as on 31st March 2012 required for Assessment Year 2012-13, the land in question was treated as a ‘capital asset’ and, therefore, Petitioner had misrepresented the facts by treating the land as ‘stock in trade’ in her books of accounts instead of treating it as a ‘capital asset’ within the meaning of Section 2(47) (of Income Tax Act, 1961).

8. The entire basis as we could gather from the reason for reopening which prompted the AO to conclude that there was reason to believe escapement of income is that Petitioner along with two other co-owners had granted development rights in respect of land at Chikhloli, Ambernath to Sai Ashray. As per the Development Agreement, Sai Ashray shall develop the property at its own cost and shall give directly to owners 36% of the total constructed saleable area as total consideration for grant of development rights. As per the Development Agreement, Sai Ashray paid Rs.40 Crores to land owners as refundable interest free deposit out of which Rs.21 Crore has been paid to Petitioner and her co-owner one Ashish Anand Damale. From those facts, according to AO, it is clear that Petitioner has transferred, as defined under Section 2(47) (of Income Tax Act, 1961), land to Sai Ashray during Financial Year 2012-13. According to AO, the market value of the constructed saleable area was Rs.9.5994 Crores and Petitioner has only shown consideration of Rs.3 Crores in the Development Agreement. Therefore, Petitioner should have offered capital gain during the Assessment Year 2013-14.

9. At the outset, we have to note that during the assessment proceedings a query had been raised by the AO and Petitioner had submitted copy of agreement relating to joint development at Chikhloli vide its Chartered Account’s letter dated 17th March 2016. By a further undated letter, Petitioner, after referring to the ongoing scrutiny assessment proceedings and referring to the query that was raised during the assessment proceedings as to why the Development Agreement entered into by Petitioner with Sai Ashray should not be treated as ‘transfer of land’ and taxed accordingly, explained in detail as to why there was no ‘transfer of land’. Subsequently, the assessment order 31st March 2016 has been passed in which there is even a reference to the Joint Development Agreement between Petitioner and Sai Ashray of land at Chikhloli village. Therefore, it is clear that the issue as to whether there was a transfer of land or otherwise was the subject of consideration before the AO during the assessment proceedings. As seen in Aroni Commercials Ltd. v Deputy Commissioner of Income Tax 2(1), Mumbai & Anr.1 once a query is raised during the assessment proceedings and the assessee has replied to it, it follows that the query raised was the subject of consideration of the AO while computing the assessment. It is not necessary that an assessment order should contain reference and/or discussion to disclose its satisfaction in respect of the query raised. Paragraph 14 of Aroni Commercial (supra) reads as under:

“14. We find that during the assessment proceedings the petitioner had by a letter dated 9 July 2010 pointed out that they were engaged in the business of financing trading and investement in shares and securities. Further, by a letter dated 8 September 2010 during the course of assessment proceedings on a specific query made by the Assessing Officer, the petitioner has disclosed in detail as to why its profit on sale of investments should not be taxed as business profits but charged to tax under the head capital gain. In support of its contention the petitioner had also relied upon CBDT Circular No.4/2007 dated 15 June 2007. (The reasons for reopening furnished by the Assessing Officer also places reliance upon CBDT Circular dated 15 June 2007). It would therefore, be noticed that the very ground on which the notice dated 28 March 2013 seeks to reopen the assessment for assessment year 2008-09 was considered by the Assessing Officer while originally passing assessment order dated 12 October 2010. This by itself demonstrates the fact that notice dated 28 March 2013 under Section 148 (of Income Tax Act, 1961) seeking to reopen assessment for A.Y.2008-09 is based on mere change of opinion. However, according to Mr. Chhotaray, learned Counsel for the revenue the aforesaid issue now raised has not been considered earlier as the same is not referred to in the assessment order dated 12 October 2010 passed for A.Y.2008-09. We are of the view that once a query is raised during the assessment proceedings and the assessee has replied to it, it follows that the query raised was a subject of consideration of the Assessing Officer while completing the assessment. It is not necessary that an assessment order should contain reference and/or discussion to disclose its satisfaction in respect of the query raised. If an Assessing Officer has to record the consideration bestowed by him on all issues raised by him during the assessment proceedings even where he is satisfied then it would be impossible for the Assessing Officer to complete all the assessments which are required to be scrutinized by him under Section 143(3) (of Income Tax Act, 1961). Moreover, one must not forget that the manner in which an assessment order is to be drafted is the sole domain of the Assessing Officer and it is not open to an assessee to insist that the assessment order must record all the questions raised and the satisfaction in respect thereof of the Assessing Officer. The only requirement is that the Assessing Officer ought to have considered the objection now raised in the grounds for issuing notice under Section 148 (of Income Tax Act, 1961), during the original assessment proceedings. There can be no doubt in the present facts as evidenced by a letter dated 8 September 2012 the very issue of taxability of sale of shares under the head capital gain or the head profits and gains from business was a subject matter of consideration by the Assessing Officer during the original assessment proceedings leading to an order dated 12 October 2010. It would therefore, follow that the reopening of the assessment by impugned notice dated 28 March 2013 is merely on the basis of change of opinion of the Assessing Officer from that held earlier during the course of assessment proceeding leading to the order dated 12 October 2010. This change of opinion does not constitute justification and/or reasons to believe that income chargeable to tax has escaped assessment”

10. This would also indicate that there was no failure to disclose any material fact. On that ground alone the notice dated 22nd March 2021 issued under Section 148 (of Income Tax Act, 1961) has to be quashed and set side. So also the impugned order dated 14th February 2022 disposing Petitioner’s objections. Moreover, the other co-owner’s case was also proposed to be reopened. The other co-owner Late Bharat Jayantilal Patel (since deceased) through legal heir Smt. Minal Bharat Patel had filed Writ Petition No.1612 of 2022 which came to be disposed on 10th February 2023. In that case, we could say identical reasons for reopening of the assessment was recorded. The Court after considering the submissions made and relying upon the judgment of the Apex Court in the case of Seshasayee Steels (P) Ltd. V Assistant Commissioner of Income Tax VI(2), Chennai2 held that the assessee had only granted a licence to Developer who entered into assessee’s land for the purpose of development and that did not amount to ‘allowing the possession of the land’ as contemplated under Section 53A of the Transfer of Property Act, 1882 and therefore Section 2(47)(v) (of Income Tax Act, 1961) would not apply. The Court held that granting of a licence for the purpose of development of the flats and selling the same could not be said to be granting possession. The findings of the Court in Writ Petition No. 1612 of 2022 will squarely apply to the facts of this case as well.

11. Accordingly, we make the rule absolute in terms of prayer clause (a) which reads as under:

“(a) that this Hon’ble Court may be pleased to issue a Writ of Certiorari or a Writ in the nature of Certiorari or any other appropriate Writ, Order or direction, calling for the records of the Petitioner’s case and after going to the legality and propriety thereof, to quash and set aside the notice u/s 148 (of Income Tax Act, 1961) dated 22.03.2021 (“Exhibit D”) and the Order dated 14.02.2022 (“Exhibit I”) disposing of Petitioner’s objections to the issue of impugned notice.”

12. Petition disposed.

(DR. N. K. GOKHALE, J.) (K. R. SHRIRAM, J.)