Income Tax Appellate Tribunal - Mumbai
Jhulelal Land Development Corpn. vs Deputy Commissioner Of Income-Tax on 13 September, 1995
Equivalent citations: [1996]56ITD345(MUM)
ORDER
K.C. Singhal, Judicial Member
1. This appeal by the assessee is against the order of the CIT under Section 263. A short and interesting issue that arises in this appeal relates to the assumption of jurisdiction by the CIT.
2. The brief facts giving rise to this appeal are these. Assessee is a partnership firm which acquired development rights in a plot of land at Dahisar, Bombay, in the year 1979 for a consideration of Rs. 17,34,000. However, from 1979 to 1988, the assessee could not exploit this right of development except construction of a boundary wall. In the year 1988, the assessee decided to dispose of the said right and ultimately sold the same on 16-7-1988 to M/s. Vardhman Developers for a consideration of Rs. Two crores. Out of this amount, assessee received only Rs. 1.95 crores during this year. It invested Rs. 1,93,75,000 in IDBI bonds on 26-7-1988 for claiming exemption under Section 54E. Return for the assessment year 1989-90 was filed declaring an income of Rs. 3,14,840. In the return assessee declared a capital gain at Rs. 1,81,19,585 and simultaneously claimed exemption for the same amount under Section 54E on the basis of investment made by it in IDBI bonds. Hence, income under the head 'capital gain' was nil. However, the Assessing Officer after scrutinising the return and considering all the relevant facts, determined the capital gain at Rs. 2,18,125 and the total income was assessed at Rs. 5,32,970.
3. The CIT on the basis of the report received from the Dy. CIT, Range-13, Bombay, dated 23-8-1991 issued notice under Section 263 dated 30-9-1991 to the assessee which was duly served upon it. The notice contended the following ground for assuming the jurisdiction: "the profit on the sale of the land during the year was wrongly treated as income from capital gain and deduction under Section 48(2) and Section 54 was allowed instead of taxing the income under the head business."
However, nobody appeared on behalf of the assessee on the appointed date. The CIT, therefore, passed the order under Section 263 on 31 -10-1991 in the following terms :
It has been held by the Delhi High Court at 99 ITR 375 that failure to make enquiries would render an assessment erroneous and prejudicial to the interest of revenue. Similarly in 147 ITR 710 it has been held that non application of mind would also render an order erroneous and prejudicial to the interest of revenue. In the present case it is clear from the records that the Assessing Officer has neither made enquiries nor applied his mind. In the circumstances I am satisfied that the order passed on 22-3-1991 was erroneous and prejudicial to the interest of revenue. I will accordingly set aside the assessment direct the Assessing Officer to reframe the same according to law after giving the assessee a fair opportunity of being heard.
This order of the CIT has been challenged by the assessee in this appeal.
4. The learned counsel for the assessee Mr. Trivedi has vehemently argued before us that the order of the CIT under Section 263 is without jurisdiction inasmuch as the order of the Assessing Officer could not be said to be erroneous on the ground stated by the CIT in his order. According to him all the necessary and primary facts were before the Assessing Officer and he had assessed the assessee under the head 'capital gains' after scrutinising all the facts. The CIT in his order has not mentioned any fact in respect of which the Assessing Officer failed to apply his mind. He has also not indicated in his order in what respect the enquiry was required. He further stated that even after setting aside the order, the Assessing Officer had not made any enquiry and has merely substituted the opinion of the CIT and assessed the assessee under the head 'business income'. According to him, the CIT has not pointed out any error in his order and, therefore, the order of the Assessing Officer could not be said to be erroneous. The power under Section 263 could not be exercised for substituting his opinion. In his support, he strongly relied upon the judgment of the Bombay High Court in the case of CIT v. Gabriel India Ltd. [1993] 203 ITR 108 and the judgment of the Madras High Court in the case of Venkatakrishna Rice Co. v. CIT [1987] 163 ITR 129 and the judgment of Punjab & Haryana High Court in the case of CIT v. Kanda Rice Mills [ 1989] 178 ITR 446. Besides this, he also relied upon the various decisions of the Tribunal reported as Indian Aluminium Co. Ltd. v. CIT [1994] 50 TTJ (Cal.) 281, Mittal Cotton Factory v. ITO [1983] 15 TTJ (Chd.) 64, Mewar Chemical Products Ltd. v. Asstt. CIT [1994] 50 TTJ (Jap.) 80, and Bajaj Auto Employees' Welfare Fund v. ITO [1987] 27 TTJ (All.) 64, Nirfabrics Ltd. v. Dy. CIT[ 1994] 50 ITD 336 (Bom.), Dilshad Trading Co. (P.) Ltd. v. ITO [1994] 49 ITD 348 (Bom.) and 41 ITD 539. His further submission was that before passing any order under Section 263, the CIT must show errors either factually or legally and further must show that on account of such errors the order of the Assessing Officer is prejudicial to the interest of the revenue. According to him no order can be passed in the name of enquiry unless it points out in what respect Assessing Officer had failed to make an enquiry. He further submitted that the High Court judgments relied upon by the CIT are distinguishable.
5. On the other hand, the learned Sr. Departmental Representative Mr. Tilakchand strongly opposed the argument of Mr. Trivedi and supported the order of the CIT. He submitted that the order of revision should not be considered in isolation but should be considered along with the report of the Dy. CIT on the basis of which the CIT has assumed jurisdiction under Section 263. The copy of the report appears at page-35 of the departmental paper book. He took us through the report which points out the facts on the basis of which profits earned by assessee on the sale of development rights should have been assessed as business income. He drew our attention to the following facts of the case which have not been considered by the Assessing Officer :
(i) The assessee firm was constituted with the object of carrying on the business of developing the land by parcelling out into small plots constructing flats, blocks or bungalows thereon and sale or otherwise deal in them.
(ii) The development right purchased by the assessee was its stock-in-trade from this very inception and it was never a capital asset. There is no material to the effect that it was ever converted into capital asset.
(iii). The assessee had always been assessed under the head business and the losses determined by the Assessing Officer were apportioned between the partners. The partners had set off such losses against their individual income.
(iv) The concept of constituting the firm itself is business. He was at pains to submit that the Assessing Officer had not applied his mind to these facts. According to him, had he applied his mind to these facts, then he would not have assessed the assessee under the head 'capital gains'. Therefore, according to him the order of the Assessing Officer was erroneous and prejudicial to the interest of the revenue. In support of his contention he relied upon the judgment of the Madras High Court in the case of Indian Textiles v. CIT [1986] 157 ITR 112, Rajasthan High Court in the case of CIT v. Emery Stone Mfg. Co. [1995] 213 ITR 843 and the judgment of the Supreme Court in the case of Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84. Besides this, he also relied on various Tribunal decisions reported as Binoy K. Varma v. ITO [1995] 51 TTJ (Ahd.) 331, Asstt. CIT v. Laxmi Vishnu Silk Mills [1994] 51 ITD 207 (Ahd.), Hyundai Heavy Industries Co. Ltd. v. ITO [1995] 52 TTJ (Delhi) 42 and Fifth ITO v. R.M.B. Aradhya [1994] 49 ITD 14 (Bang.).
6. In reply, Mr. Trivedi submitted that the scope of this appeal is very limited and the merits of the transaction are not to be decided in this case. The only question before the Tribunal is whether the CIT was justified in setting aside the order on the ground that necessary enquiries had not been made by the Assessing Officer. He again submitted that powers of revision cannot be invoked merely for substituting an opinion of the CIT. For this purpose, he again drew our attention to the judgment of the Bombay High Court in the case of Gabriel India Ltd.'s (supra). He further submitted that even the fact that Assessing Officer has reframed the assessment by substituting the view of the CIT without bringing any fresh facts itself show that no enquiry was required in this case. Even on merits, he submitted that the assessee was never a dealer in purchase and sale of development rights in land and, therefore, it was never a stock-in-trade of the assessee. He referred to the various statements of account to show that the assessee had never shown this asset as a stock-in-trade. His submission was that development right was only a capital asset in the hands of the assessee which could not be exploited by it. Hence, the Assessing Officer was right in assessing profit under the head 'capital gain'. He also drew our attention to the decision of the Bombay High Court in the case of CIT v. Laxmi Surgical Pvt. Ltd. [1993] 202 ITR 601 in support of his contention. He, therefore, concluded his argument by submitting that all the facts were before the Assessing Officer at the time of the original assessment and no enquiry was required in the present case. Therefore, powers under Section 263 could not be exercised by the CIT merely for substituting his own view.
7. Rival contentions of the parties as well as material placed before us have been considered carefully. At the outset it may be pertinent to mention that the scope of this appeal is very limited i.e., whether on the facts of the case, the CIT was justified in invoking the revisionary jurisdiction under Section 263 of the Act. It is well established by now that before invoking such jurisdiction, two conditions must be fulfilled viz. (i) that-the order of the Assessing Officer is erroneous and (ii) such order should be prejudicial to the interest of the revenue. So, the CIT must have some material before him in order to hold the order of the Assessing Officer is erroneous. He also must show such material in his order since he is a quasi judicial authority and his order is subject to scrutiny by the lower authorities or the courts. The order of the Assessing Officer he held to be erroneous merely on whims and fancy of the CIT. The word "erroneous" has not been defined in the Act. However, it has been subject to the judicial consideration in various cases. In our opinion, an order can be said to be erroneous when;
(a) it is full of errors either factually or legally;
(b) it is not in accordance with law;
(c) when the conclusion drawn by the Assessing Officer could not have been reached on the facts of the case ; and
(d) the Assessing Officer was required to enquire about and ascertain the facts but has failed to do so.
If the CIT comes to the conclusion that the order of the Assessing Officer is erroneous on the facts available on record, then he may give a correct finding of fact or law and revised the order. Where, however, such finding cannot be given for want of facts in respect of which Assessing Officer should have made enquiries, then in such cases the CIT may set aside the order and direct the Assessing Officer to make enquiries for ascertaining the facts and then decide the matter in accordance with law. But the CIT, in our opinion, cannot substitute his own opinion where the view taken by the Assessing Officer is also a possible view. He cannot also set aside the order of the Assessing Officer in the guise of an enquiry where all the facts are already on record. The CIT cannot be allowed to set aside the order of Assessing Officer for making roving and fishing enquiries. The CIT certainly has powers to set aside an assessment and direct the Assessing Officer to make an enquiry only in those cases where the Assessing Officer had failed to ascertain the facts and in such case the CIT must indicate in his order in what respect the enquiry has to be made. The view which we have taken is fortified by the judgment of the Bombay High Court in the case of Gabriel India Ltd. (supra).
8. Now let us examine the impugned order in the light of the above discussion. In the present case the CIT held the order of Assessing Officer as erroneous inasmuch as the assessee has been assessed in respect of profit on the sale of land under the head 'capital gain' instead of 'business' and the basis of such conclusion was that he neither made enquiries nor applied his mind. Hence, he set aside the order of assessment and directed the Assessing Officer to reframe the assessment in accordance with law. We have gone though the order of the CIT carefully. He has not shown how the profit earned by the assessee was assessable under the head 'business'. He has not even indicated about the facts to which Assessing Officer had not applied his mind. He has also not stated in what respect the Assessing Officer was required to make enquiries. Even the report of the Dy. CIT on the basis of which he assumed the jurisdiction under Section 263 does not indicate that any enquiry was required to be made. On the contrary, the report says that profits should have been assessed as business income. In fact, we find that even after passing of the order by the CIT under Section 263 no enquiries were made by the Assessing Officer. He had also not found any fresh facts. Perusal of the fresh assessment order shows that he has merely substituted the opinion of the CIT after discussing the legal aspect. We have also gone through the entire facts stated by the learned Sr. Departmental Representative. We find that except purchase of development right in land in the year 1979, no other activity has been carried on by the assessee upto the assessment year 1989-90. In fact, all the facts narrated by the learned Sr. Departmental Representative were already before the Assessing Officer framing the original assessment order and no enquiries were required to be made. If the CIT was of the opinion that the Assessing Officer had not applied his mind, then in such case he should have given a finding as to the legal inference from the facts. Even in such cases if the view taken by the Assessing Officer is also a possible view, the order cannot be said to be erroneous. Whether in a given set of facts, the profits on the sale of development right are assessable under the head 'capital gain' or 'business' is highly a debatable issue. Even the issue whether the development right held by the assessee was a capital asset or stock-in-trade is also debatable one. The trading in purchase and sale of development right in land and exploitation of such right are two different matters which need judicial consideration. Reference may be made to the judgment of the Hon'ble Bombay High Court in the case reported in Laxmi Surgical (P.) Ltd. (supra) wherein their Lordships had held that the development right in land was a capital asset. In the present case we are not to decide the issue on merits. We have merely highlighted the points to emphasis that the view taken by the Assessing Officer can also be a possible view and cannot be held erroneous merely because the CIT holds a different view. Hence, we are of the view that the CIT wrongly invoked the jurisdiction under Section 263 inasmuch as no enquiries were required and in fact no enquiries were made and no fresh material was brought on record in fresh assessment proceedings. Even he himself was not sure whether the profit on the sale of development right in the land could be assessed as business income inasmuch as he himself had not come to a definite finding. The revisionary jurisdiction, therefore, cannot be allowed to be exercised either for substituting his opinion or for making fishing and roving enquiry.
9. The view which we have taken is fully supported by the ratio laid down by the Hon'ble Bombay High Court in the case of Gabriel India Ltd. case (supra). The following observations were made by their Lordships at page 160:
It is well-settled that when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on record to satisfy it in that regard. If the action of the authority is challenged before the court it would be open to the courts to examine whether the relevant objective factors were available from the records called for and examined by such authority. Our aforesaid conclusion gets full support from a decision of Sabyasachi Mukharji J. (as his Lordship then was) in Russell Properties Pvt. Ltd. v. A. Chowdhury, Addl CIT [1977] 109 ITR 229 (Cal). In our opinion, any other view in the matter will amount to giving unbridled and arbitrary power to the revising authority to intitate proceedings for revision in every case and start re-examination and fresh enquiries in matters which have already been concluded under the law.
Besides this, at page 115 their Lordships held that this section did not visualise a case of substitution of the judgments of the Commissioner for that of the ITO who passed the order, unless the decision is held to be erroneous. At the same page the following observations were also made:
There must be some prima facie material on record to show that tax which was lawfully eligible 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.
Similarly, the Punbjab & Haryana High Court in the case of Kanda Rice Mills's (supra), has held as under:
Held, that a reading of the entire order of the Commissioner clearly showed that he did not furnish his opinion or consider the cited cases or the argument raised and merely observed that these were the points which deserved consideration and after setting aside the order of the Income-tax Officer, issued a direction for making assessment afresh, which was not permissible under the provisions contained in Section 263 of the Act. The Commissioner had to come to a firm decision that the order of the Income-tax Officer was erroneous and was prejudicial to the interests of the Revenue. Since, no decision about the erroneous nature of one order was firmly taken, the Tribunal was right in vacating the order of the Commissioner under Section 263.
10. It is pertinent to mention that the case laws relied upon by the learned Sr. Departmental Representative are distinguishable. In the case of Rampyari Devi Saraogi (supra), the action of CIT under Section 263 was upheld by the Supreme Court on the ground that the Assessing Officer had passed a short stereotyped order without making any enquiry in respect to the genuineness of the initial capital introduced by the assessee and the gifts received by her at the time of her marriage. In that case, the return had been filed for the first time. In view of these facts, it was the duty of the ITO to make an enquiry to ascertain the genuiness of the initial capital as well as the gifts received by her. Since the ITO had failed to make the enquiry, the order of the Assessing Officer was held to be erroneous. But in the present case the CIT has not pointed out anything in respect of what enquiry was required to be made. Hence this judgment of the Supreme Court cannot be applied to the facts of the present case. The judgment of the Rajasthan High Court in the case of Emery Stone Mfg. Co. (supra) also does not help the case of the revenue. In that case the Assessing Officer has framed the assessment without applying his mind to the applicability of the provisions of Explanation 3 to Section 43 (1). This case is also distinguishable since in the present case it is not the case of the revenue that Assessing Officer had failed to apply his mind to any of the relevant provisions of the IT Act.
The learned Sr. Departmental Representative also relied heavily on the decision of the Tribunal Ahmedabad Bench in the case reported as Binoy K. Varma s case (supra). In our view that case is distinguishable because the CIT has clearly stated in his order that the assessee was requarly and actively dealing in real estate activities. It is on this account the CIT held that the order of the Assessing Officer was erroneous inasmuch as the income was assessable as business income. We also find that the CIT had given a clear finding in this regard and the ITO was directed to tax the profit as profit from the venture in the nature of trade. In the present case no such rinding has been given by the CIT and, therefore, this decision also does not help the revenue. Another decision of the Tribunal relied upon by the learned Sr. Departmental Representative is that of Ahmedabad Bench in the case of Laxmivishnu Silk Mills (supra). In that case the Assessing Officer had allowed the amount in question under a wrong section without making proper enquiries. This, in our opinion, is distinguishable on the facts of the case as the facts in the present case are entirely different.
11. In view of the above discussion, we are of the opinion that the CIT in the present case has wrongly invoked the jurisdiction under Section 263 inasmuch as all the necessary and primary facts were before the Assessing Officer and no enquiry was required and, in fact, no enquiry was made in the subsequent proceedings. The CIT has also not given any finding as he himself was not sure whether the profit on the sale of the development right was assessable as business income or not. The revisionary jurisdiction cannot be allowed for substituting his opinion. The controversy in the present case is fully covered by the judgment of the Hon'ble Bombay High Court in the case of Gabriel India Ltd. (supra). Therefore, we cancel the order of the CIT under Section 263.
12. In the result, appeal of the assessee is allowed.