Court rules AO’s order can’t be called wrong just for lacking details PC wanted included

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Case Name

Commissioner of Income Tax Vs Chandan Magraj Parmar (High Court of Bombay)

Income Tax Appeal No. 1570 of 2017

Date: 16th November 2017

Key Takeaways

• AO’s orders can’t be branded as erroneous simply for lacking details: The court established that if an AO makes necessary inquiries and reaches a conclusion, the order can’t be called wrong just because it doesn’t contain all the details the Principal Commissioner thinks should be there
• Agricultural land exemption clarified: Land situated beyond 8 km from municipal limits doesn’t qualify as a “capital asset” and therefore capital gains tax doesn’t apply
• Section 263 revision powers limited: Principal Commissioners can’t substitute their judgment for that of AOs unless the original order is both erroneous and prejudicial to revenue

Issue

Can the Principal Commissioner revise an AO’s assessment order under Section 263 of the Income Tax Act when the AO made necessary inquiries but didn’t document all details in the written order?

Facts

Chandan Magraj Parmar filed his tax return for Assessment Year 2011-12, showing a total income of Rs. 2,21,280. Here’s the interesting part - he had bought some agricultural land (8 hectares and 36 guntha) on February 17, 2010, for Rs. 54,87,320. Just two months later, on April 15, 2010, he contributed this same land to a partnership firm at a much higher valuation of Rs. 7,32,83,210 - that’s a whopping 1335% increase in value!

Parmar claimed this transaction was exempt from capital gains tax because the land was agricultural land situated more than 8 km from any municipal limits. The AO completed the assessment on February 26, 2014, accepting Parmar’s claim and determining his income at Rs. 7,06,540.

However, the Principal Commissioner wasn’t satisfied. He felt the AO should have investigated this unusual price escalation more thoroughly and issued revision notices under Section 263, ultimately setting aside the AO’s order.

Arguments

Revenue’s Arguments:

The tax department argued that the AO failed to make proper inquiries about the suspicious 1335% price increase within just two months. They claimed the AO simply accepted the transaction as genuine without adequate verification, making the order both erroneous and prejudicial to revenue interests.

Assessee’s Arguments:

Parmar contended that the land was indeed agricultural land situated beyond 8 km from municipal limits, making it exempt from capital gains tax. He provided detailed explanations and documentation to support his position, including notifications showing the area wasn’t a municipal/urban area.

Key Legal Precedents

The court relied heavily on Commissioner of Income-Tax Vs Gabriel India Ltd, which established crucial principles about Section 263 revision powers. The Gabriel India case held that:

• An order can only be revised under Section 263 if it’s both erroneous AND prejudicial to revenue
• “Erroneous” means “involving error; deviating from the law”
• An order can’t be termed erroneous unless it’s not in accordance with law
• The Commissioner can’t substitute their judgment for the AO’s unless the decision is legally erroneous

The court also referenced the definitions from Black’s Law Dictionary for “erroneous,” “erroneous assessment,” and “erroneous judgment” to clarify when an order can be considered legally wrong.

Key sections referenced include:

• Section 2(1A) and Section 2(14) of the Income Tax Act (definition of capital asset)
• Section 143(3) (assessment orders)
• Section 263 (revision by Commissioner)
• Section 260A (appeals to High Court)

Judgement

The High Court dismissed the Revenue’s appeal, siding with Parmar. Here’s their reasoning:

1. Land classification was undisputed: Both parties agreed the land was situated beyond 8 km from municipal limits, so it didn’t qualify as a “capital asset” under Section 2(14)
2. No capital gains liability: Since the land wasn’t a capital asset, no capital gains tax could arise
3. AO made sufficient inquiries: The ITAT found that the AO had raised queries about the capital gains claim, Parmar provided detailed replies on January 31, 2014, and the AO accepted the claim after considering the response
4. Order not erroneous: The court agreed with ITAT that an AO’s order can’t be branded as erroneous just because it lacks details the Principal Commissioner thinks should be included

The court concluded that ITAT hadn’t committed any perversity or applied incorrect legal principles, and dismissed the appeal with no order as to costs.

FAQs

Q1: What makes agricultural land exempt from capital gains tax?

A: Agricultural land in India is exempt from capital gains tax if it’s not situated within 8 km of municipal limits or cantonment boards with populations of at least 10,000 people.

Q2: Can a Principal Commissioner always revise an AO’s order if they disagree with it?

A: No, the Principal Commissioner can only revise under Section 263 if the order is both erroneous (legally wrong) AND prejudicial to revenue. They can’t substitute their judgment just because they would have written a more detailed order.

Q3: What if an AO makes inquiries but doesn’t document everything in the written order?

A: If the AO raised queries and the assessee provided satisfactory responses, the order can’t be called erroneous just because all details weren’t included in the final written order. The fact that proper inquiry was made is what matters.

Q4: Why was the 1335% price increase not considered suspicious enough to deny the exemption?

A: The court focused on whether the land qualified for exemption based on its location, not on the price increase. Since both parties agreed the land was beyond 8 km from municipal limits, it wasn’t a capital asset, making the price increase irrelevant for capital gains purposes.

Q5: What’s the key takeaway for tax practitioners?

A: AOs need to make proper inquiries, but they don’t need to write elaborate orders documenting every detail. As long as the legal requirements are met and proper inquiry is conducted, the order won’t be considered erroneous under Section 263.

1. This is an Appeal filed under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') impugning an order dated 30/11/2015 passed by the Income Tax Appellate Tribunal (hereinafter referred to as 'ITAT'). The Appellant has proposed the following questions of law :-

"(i) Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal erred in holding that the order of Pr.CIT dated 28.3.2016 passed u/s. 263 is not erroneous as well as prejudicial to the interest of revenue ?

(ii) Whether on the facts and in the circumstances of the case and in law, the order passed by the Hon'ble Tribunal is perverse and not supported by the order passed by the AO u/s. 143(3) with regard to the inquiry made by the AO in respect of the capital gain ?

(iii) Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal failed to consider the principle of the preponderance of probability surrounding circumstances, as enumerated by the Apex Court in Durga Prasad More 82 ITD 520 and Sumati Dayal (SC). The Hon'ble Tribunal failed to take into account the provision of Explanation - 2 to section 263 of the Act."

2. As regards Question No.(i), Mr. Suresh Kumar states that there is a typographical error inasmuch as it should be the order of the Assessing Officer dated 26/02/2014 instead of "the order of Pr. CIT dated 28/03/2016 passed under Section 263 of the Act".

3. Respondent had filed return of income on 29/07/2011 for AY 2011-12 declaring total income of Rs.2,21,280/-. The assessment was completed on 26/02/2014 under Section 143(3) of the Act determining the income of Assessee at Rs.7,06,540/-. The assessment order was revised by the Principal Commissioner under Section 263 of the Act holding that in the return of income, Respondent has shown Long Term Capital Gain (LTCG) of Rs.6,77,95,890/- in respect of sale of agricultural land which was claimed as exempted. Respondent had purchased pieces of land admeasuring 8 Hectares and 36 Guntha on 17/02/2010 for a consideration of Rs.54,87,320/-. On 15/04/2010, Respondent joined a firm M/s. Synergy Developers as partner and the said land was given as Respondent's share of capital in the said partnership firm on agreed value of Rs.7,32,83,210/-. According to Principal Commissioner, during the course of assessment, the Assessing Officer (AO) did not raise any query nor make any inquiry regarding circumstances in which the seller of land, within 2 months, sold the land for a price 1335% higher than the purchase price. According to Principal Commissioner, the AO simply accepted the transaction as genuine on the basis of papers filed in the course of assessment and therefore, failure on the part of AO to examine

the unusual transaction from the point of view of genuineness, rendered the order erroneous and prejudicial to the interest of Revenue. Based on this opinion that the Principal Commissioner had formed, a show-cause notice dated 15/03/2015 was issued calling upon Respondent to show cause as to why the order dated 26/02/2014 should not revised and gain shown as exempt LTCG be taxed as unexplained cash credit under Section 68 of the Act. Respondent contested the revision proceedings and gave detailed explanation for the reason Respondent could fetch such unusual price escalation in the value of the land. The Principal Commissioner once again issued notice dated 20/11/2015 under Section 263 of the Act.

In this notice, the Principal Commissioner mentioned that the exemption

is allowable to Respondent only if land is situated beyond 8 kms from

local limits of any Municipality or any Cantonment Board referred in the

proviso to Section 2(1A) and Section 2(14) of the Act. The notice further

mentioned that the AO neither raised any specific query nor discussed the

matter in the assessment order and thus, the assessment order was

erroneous as well as prejudicial to the interest of Revenue. Respondent

filed reply to the show-cause notice and gave detained explanation.

Respondent also filed various notifications to show that the place where

the land was situated was not a notified Municipal area / urban area etc.

Respondent's explanation was not accepted by the Principal Commissioner

who concluded that AO has not made any inquiry nor any such evidence

produced by Respondent was considered in the course of assessment and

passed an order setting aside the assessment order dated 26/02/2014

passed by AO.

4. Aggrieved by this order of Principal Commissioner, Respondent preferred an Appeal before the ITAT and ITAT, by its order dated 30/11/2016 impugned in this Appeal, accepted the contentions of Respondent and quashed the order passed by Principal Commissioner.

5. Both Mr. Suresh Kumar and Mr. Agrawal, in unison, stated that the fact that the land was situated beyond 8 kms from local limits of any Municipality or any Cantonment Board referred in the proviso to Section 2(1A) and Section 2(14) of the Act is not disputed. The definition of 'Capital Asset' under Section 2(14) of the Act that was prevalent during

the AY 2011-12 read as under :

"(14) ["capital asset means---

(a) property of any kind held by an assessee, whether or not connected with his business or profession; but does not include---

[(iii) agricultural land in India, not being land situate---

(a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand; or

(b) in any area within such distance, not being more than eight kilometers, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government ma, having regard to the extent of, and scope for, urbanization of that area and other relevant considerations specifying in this behalf by notification in the Official Gazette."

There has been an amendment to the definition with effect from 01/04/2014 with which we are not concerned for the present.

Therefore, 'Capital Asset' means property of any kind held by

an Assessee, whether or not connected with his business or profession but

does not include agricultural land in India not being land situated in any

area within such distance, not being more than 8 kms, from the local

limits of any Municipality or Cantonment Board referred to in Item (a) as

the Central Government may, having regard the extent of, and scope for,

urbanization of that area and other relevant considerations specifying in

this behalf by notification in the Official Gazette.

6. Hence, in view of the admitted position, certainly, the land

which is the subject-matter of this proceeding, would not fall within the

definition of 'Capital Assets'.

7. When it is not disputed that the land concerned would not

fall under the definition of capital asset, the question of any capital gains arising also will not arise. Moreover, we also find that the ITAT has come to a factual finding that the AO has raised queries with regard to the

claim of capital gain on transfer of land, Respondent vide its reply dated

31/01/2014 furnished the details in respect of distance of agricultural

land from municipal limits, record of population as per last census and

the AO after considering the reply of Respondent, accepted the claim of

Respondent. The ITAT has given a finding that the claim of capital gain

was accepted by AO after necessary inquiry and the order under Section

143(3) of the Act was passed. It is true that the AO has not passed any

written detailed order while accepting the explanation of capital gains of

Respondent but the fact is AO had raised queries and Respondent has

given detailed reply means the AO has passed this order after making

necessary inquiries. We agree with the view of the ITAT that the order of

the AO cannot be branded as erroneous merely because the order does

not contain the details which Principal Commissioner feels should have

been included. The Principal Commissioner cannot decide how elaborate

an order of the AO should be. Where the AO, during the scrutiny

assessment proceedings, has raised a query which was answered by the

Assessee to the satisfaction of the AO but the same was not reflected in

the AO by him, the Commissioner cannot conclude that no proper inquiry

with respect to the issue was made by the AO and enable him to assume

jurisdiction under Section 263 of the Act. We are supported in this view

by the Judgment of this Court in Commissioner of Income-Tax Vs. Gabriel

India Ltd.

where the Court has held as under :-

"The power of suo motu revision under sub-section (1)

is in the nature of supervisory jurisdiction and the same can

be exercised only if the circumstances specified therein

exist. Two circumstances must exist to enable the

Commissioner to exercise power of revision under this sub-

section, viz., (i) the order is erroneous; (ii) by virtue of the

order being erroneous prejudice has been caused to the

interests of the Revenue. It has, therefore, to be considered

firstly as to when an order can be said to be erroneous. We

find that the expressions "erroneous", "erroneous

assessment" and "erroneous judgment" have been defined in

Black's Law Dictionary. According to the definition,

"erroneous" means "involving error; deviating from the law".

"Erroneous assessment" refers to an assessment that deviates

from the law and is, therefore, invalid, and is a defect that is

jurisdictional in its nature, and does not refer to the

judgment of the Assessing Officer in fixing the amount of

valuation of the property. Similarly, "erroneous judgment"

means "one rendered according to course and practice of

court, but contrary to law, upon mistaken view of law; or

upon erroneous application of legal principles.

From the aforesaid definitions it is clear that an order

cannot be termed as erroneous unless it is not in accordance

with law. If an Income Tax Officer acting in accordance with

law makes a certain assessment, the same cannot be

branded as erroneous by the Commissioner simply because,

according to him, the order should have been written more

elaborately. This section does not visualise a case of

substitution of the judgment of the Commissioner for that of

the Income Tax Officer, who passed the order unless the

decision is held to be erroneous. Cases may be visualised

where the Income Tax Officer while making an assessment

examines the accounts, makes enquiries, applies his mind to

the facts and circumstances of the case and determines the

income either by accepting the accounts or by making some

estimate himself. The Commissioner, on perusal of the

records, may be of the opinion that the estimate made by

the officer concerned was on the lower side and left to the

Commissioner he would have estimated the income at a

figure higher than the one determined by the Income Tax

Officer. That would not vest the Commissioner with power

to re-examine the accounts and determine the income

himself at a higher figure. It is because the Income Tax

Officer has exercised the quasi-judicial power vested in him

in accordance with law and arrived at 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 will not be

enough to vest the Commissioner with the power of suo

motu revision because the first requirement, viz., that the

order is erroneous, is absent. Similarly, if an order is

erroneous but not prejudicial to the interests of the

Revenue, then also 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

also must be fulfilled. There must be some prima facie

material on record to show that tax which was lawfully

exigible 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."

Many other High Courts have taken the same view and those Judgments

have been referred to in the impugned order.

8. In our view, the ITAT has not committed any perversity or

applied incorrect principles to the given facts and when the facts and

circumstances are properly analysed and correct test is applied to decide

the issue at hand, then, we do not think that questions as pressed raise

any substantial questions of law.

9. The Appeal is devoid of merit and is dismissed with no order

as to costs.

(AMIT B. BORKAR, J.) (K. R. SHRIRAM, J.)