IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE P.S.GOPINATHAN TUESDAY, THE 5TH JULY 2011 / 14TH ASHADHA 1933 ITA.No. 1478 of 2009() ---------------------- AGAINST ORDER DATED 12/12/2007 IN ITA.503/COCH/2006 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/ APPELLANT / REVENUE ------------------------------ THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S) / RESPONDENT / ASSESSEE --------------- NATIONAL TYRES & RUBBER CO.OF INDIA LTD. COCHIN. ADV. SRI.ANIL D. NAIR SRI.J.R.PREM NAVAZ SMT.NIVEDITA A.KAMATH SRI.P.A.ABISH THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 05/07/2011, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA NO.1478/2009 APPENDIX APPELLANT'S EXHIBITS ANNEXURE-A : COPY OF ORDER UNDER SECTION 143(3) READ WITH SECTION 147 DATED 22/03/2002 FOR THE ASSESSMENT YEAR 1995-96. ANNEXURE -B : COPY OF ORDER DATED 11/05/2006 OF THE COMMISSIONER OF INCOME TAX (APPEALS). ANNEXURE-C : CERTIFIED COPY OF ORDER DATED 12/12/2007 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH IN ITA NO.503/COCH/2006. //TRUE COPY// PA TO JUDGE. jg C.R. C.N.RAMACHANDRAN NAIR & P.S.GOPINATHAN, JJ. .................................................................... I.T.A.No.1478 of 2009 .................................................................... Dated this the 5th day of July, 2011. J U D G M E N T Ramachandran Nair, J. The question raised in the appeal filed by the Revenue is whether the Tribunal was justified in sustaining the order of the CIT (Appeals) cancelling the reassessment completed on the respondent assessee for the assessment year 1995-96 as invalid. 2. We have heard learned Senior counsel Shri.P.K.R.Menon appearing for the appellant-Revenue and Shri.Anil D.Nair, learned counsel appearing for the respondent assessee. 3. The facts leading to the controversy are the following:- The assesee, a Limited Company with capital assets in the form of land valued at Rs.1,52,909/- converted the same into ITA No.1478/2009 2 stock-in-trade during the previous year relevant for the assessment year 1992-93. While converting the land into stock-in-trade, it was revalued at Rs.18 lakhs and the profit on revaluation of Rs.16,47,091/- was credited to the general reserve. The land was sold in pieces in the course of the assessment years 1993-94, 1994-95 & 1995-96. Even though profit on sale of the land was returned as business income for assessments, the assessee did not return any income assessable for capital gains under Section 45(2) of the Income Tax Act (hereinafter referred to as the Act for short). Even though the assessments were completed for all the assessment years accepting the returns, based on the objection raised by the audit party, the Assessing Officer reopened the assessment for the year 1995-96 because major portion of the land and building thereon was sold in the previous year relevant for the assessment year 1995-96 for which capital gain was assessable under Section 45(2) of the Act. Re-assessment so completed was questioned in appeal by the assessee before the CIT(Appeals) and the CIT (Appeals) ITA No.1478/2009 3 even though held that the original assessment was completed by the Officer without considering the liability for tax under Section 45(2), following the two decisions of the Gujarat High Court in VXL India Ltd. v. Asst. Commissioner of Income Tax, reported in (1995) 215 ITR 295 and in Garden Silk Mills Pvt.Ltd. v. DC of Income Tax, reported in 237 ITR 668 held that reassessment is as a result of change of opinion of the Assessing Officer and therefore it is not sustainable. On the second appeal filed by the Revenue, the Tribunal sustained the order of the CIT(Appeals) against which the Revenue has come up with this appeal. 4. The short question that arises for our consideration is whether reassessment completed under Section 147 is not tenable as held by the CIT (Appeals) and confirmed by the Tribunal. In order to consider the validity of reassessment we have to necessarily consider the nature of the income that escaped assessment in the regular assessment completed under Section 143(3) of the Act. Section 45(2) which is the sole basis of reassessment under Section 147 is extracted ITA No.1478/2009 4 hereunder for easy reference:- “45(2) Notwithstanding anything contained in sub-section(1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock- in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.” 5. What is clear from the above is that transfer or conversion of capital asset into stock-in-trade will attract tax under capital gains and liability arises in the year in which the stock-in-trade after conversion is sold. In this case, admittedly the assessee converted the fixed assets held in the form of land into stock-in-trade in the assessment year 1992- 93 and since the land which had the book value of only Rs.1,52,909/- was revalued at Rs.18 lakhs and profit of Rs.16,47,091/- was credited in the general reserve, the conversion of land into stock-in-trade which resulted in huge profit to the assessee was assessable to tax under Section 45 ITA No.1478/2009 5 (2) for the previous year relevant for the assessment year in which the land was sold. Admittedly, the land in pieces were sold in the course of three assessment years 1993-94, 1994- 95 and 1995-96. By virtue of the operation of Section 45(2), the Assessing Officer should have charged taxable capital gains under Section 45(2) in respect of the land sold in each of the assessment years. However, assessments for 1993-94 & 1994-95 are not seen reopened probably on account of limitation. When objection was raised by the audit party, the Assessing Officer reopened the assessment for the assessment year 1995-96, the previous year of which main portion of the land with building thereon was sold by the assessee, and brought to tax the capital gain attributable to such land assessable under Section 45(2) of the Act. 6. The sole question for our consideration therefore is whether the omission of the Assessing Officer to make assessment on capital gains in the regular assessment completed under Section 143(3) is a ground justifying revision of assessment under Section 147 of the Act. The learned ITA No.1478/2009 6 senior counsel appearing for the Revenue relied on the decision of the Supreme Court in Asst.Commissioner of Income Tax v Rajesh Jhaveri Stock Brokers Pvt. Ltd., reported in 291 ITR 500, and the decision of this Court in Commissioner of Income Tax v. Popular Vehicles & Services Ltd., reported in (2010) 191 Taxman 333 (Ker.) and contended that reassessment initiated by issuing notice under Section 148 within four years from the end of the previous year relevant for the assessment year and completed within the statutory period is perfectly justified. Revenue's counsel also pointed out that the assessee has not returned any capital gains for assessment under Section 45(2) and the Assessing Officer had no occasion to consider the assessee's liability under the said section. So much so, there was no consideration of the issue in the regular assessment by the Assessing Officer and therefore the finding of the Commissioner (Appeals) that there is change of opinion by the Officer is thoroughly out of place. The assessee's counsel on the other hand referred to the decisions relied on by the ITA No.1478/2009 7 Tribunal and contended that entire facts were on record while the Assessing Officer completed regular assessment and so much so assessee is not guilty of any suppression of material facts in the returns filed or in the profit and loss account furnished along with the same. Further contention raised by the assessee's counsel is that the Assessing Officer acted merely based on the opinion of the audit party and he had not any reason of his own to believe that income chargeable to tax has escaped assessment. 7. After hearing both sides we are unable to sustain the order of the CIT (Appeals) confirmed by the Tribunal for the simple reason that their assumption that the reassessment is as a result of change of opinion by the Assessing Officer is factually incorrect. In fact, neither the assessee returned any income for assessment under Section 45(2) nor the Assessing Officer had any occasion to consider assessee's liability under Section 45(2) in respect of the deemed income arising from the transfer or conversion of fixed assets into stock-in-trade. In fact, assessee's liability for ITA No.1478/2009 8 payment of tax under Section 45(2) in respect of the transaction of transfer or conversion of fixed asset into stock- in-trade was brought to the notice of the Officer by the audit party. The CIT (Appeals) also has taken into account the opinion of the audit party that assessment should be revised under Section 263 of the Act. In fact the CIT (Appeals) had made a finding that there is escapement of assessable income and the recourse open to the Department was to have the assessment revised under Section 263 by the Commissioner of Income Tax. So much so, escapement of income from assessment is an undisputed fact. The only question is whether the Assessing Officer has the authority to reopen and revise the regular assessment under Section 147 of the Act. Section 147 opens up stating that any assessment can be reopened within the period of limitation if the Assessing Officer has “reason to believe” that any income chargeable to tax has escaped assessment. Even though the grounds for reopening are not exhaustively provided under Explanation (2) to Section 147, among other things it states that assessment ITA No.1478/2009 9 can be reopened in cases where income chargeable to tax has not been assessed or assessment is made at too low a rate or if the income has been made subject to excessive relief under this Act. All these situations go to establish that reassessment can be made under Section 147 if the Assessing Officer himself has committed a mistake or omission in the assessment completed by him. What the statute visualises is reconsideration and revision of regular assessment by the Assessing Officer himself if he finds that for any reason there is escapement of income chargeable to tax in the original assessment. In our view the amended provisions of Section 147 considered by the Honourable Supreme Court in the decision referred above is sufficiently elastic to cover all cases of non-assessment or under assessment of income chargeable to tax and the only condition for reopening or initiating an assessment under Section 147 is reasonable belief of the Assessing Officer on escapement of income chargeable to tax. 8. In this case, admittedly, income chargeable to tax under Section 45(2) of the Act has escaped regular assessment ITA No.1478/2009 10 for the assessment year 1995-96 because neither the assessee filed return of income taxable under the said provision nor the Officer assessed liability under the said section. The audit party only brought to the notice of the Assessing Officer that income chargeable to tax under Section 45(2) has not assessed for the assessment year 1995-96 because in the previous year relevant for the assessment year the assessee had sold major portion of the land and building thereon held by it as converted stock-in-trade, which was originally capital asset transferred or converted into stock-in-trade in the year 1992-93 leading to a good amount of profit to the assessee. Reopening of regular assessment therefore is for the reason that at the time of regular assessment the Assessing Officer was either unaware of the provision of the Act attracting liability for the assessee to pay tax or was unaware of the factual situation that led to liability for the assessee for tax when sale made during the previous year relevant for the assessment year. In our view, it is immaterial whether the escapement is either on account of ignorance of law or ITA No.1478/2009 11 omission on the part of the assessee or the Assessing Officer. So long as income chargeable to tax has escaped assessment and the Assessing Officer has reason to believe so, whether suomotu found by him from records or whether brought to his notice by the audit party or any other agency, the Assessing Officer will be justified in revising the assessment within the period of limitation provided therein. The fact that entire facts were on record and the assessee is not engaged in suppression has relevance only if reassessment is initiated beyond 4 years provided under the Section, which is not the case here. If reassessment was not made within four years, it would have been invalid on this ground raised by assessee's counsel. In view of the above findings, we allow the appeal by reversing the orders of the Tribunal and the first appellate authority and by restoring reassessment completed under Section 147 of the Income Tax Act. Assessee's counsel brought to our notice levy of interest under Section 234 B & C of the Act. We leave it open to the assessee to file an ITA No.1478/2009 12 application for waiver of interest, which the Assessing Officer will consider in accordance with the norms. This Income Tax Appeal is allowed as above. (C.N.RAMACHANDRAN NAIR, JUDGE) (P.S.GOPINATHAN, JUDGE) jg