Income Tax Appellate Tribunal - Mumbai
Rubab M. Kazerani vs Joint Commissioner Of Income Tax on 6 July, 2004
Equivalent citations: (2005)97TTJ(MUM)698
ORDER
S.C. Tiwari, A.M.
1. This appeal has been filed by the assessee against the order under Section 263 of the Act made by the learned CIT, Mumbai City-XIII, Mumbai, on 28th Feb., 2001, in the case of the assessee in relation to assessment order under Section 143(3) made by the AO on 10th Dec., 1998, for asst. Yr. 1996-97.
2. Facts of the case leading to this appeal, briefly, are that the assessee is a spinster lady of more than 60 years of age. She received by way of gift from her late father in September, 1955, a property known as "Hepburn Hall" (hereinafter called "The property"), situated at Convent Road in Bangalore. This property had been purchased by her father in the year 1921. The military authorities requisitioned the property during the war time and the same was derequisitioned in 1992. The assessee was a resident of Bombay. On 8th June, 1995, she executed a memorandum of understanding (MoU) with one Mr. Shahrooq Ali Khan of Bangalore through her general power of attorney holder, Mr. Sameer A. Khan. As per the terms of this MoU, the assessee appointed Mr. Shahrooq Ali Khan (hereinafter mentioned as the "Second party") the sole and exclusive person to identify buyers for the property. The assessee accepted a sum of Rs. 5,50,00,000 from the second party which was described as "security deposit" in the MoU. The second party agreed to identify buyers for the property and to obtain, if necessary, clearance certificate under the provisions of the Urban Land Ceiling Act, 1976. The assessee conferred upon the second party irrevocable right to identify buyers to purchase the property and it was agreed that the second party shall not claim reimbursement of any expenses incurred for the purpose of developing and identifying buyers for the property. It was also agreed that the assessee was entitled to receive the sum of Rs. 5,50,00,000 only and she would have nothing to do with the profit earned or loss incurred by the second party on identifying buyers of the property and receiving the sale consideration. Thereafter, by way of an agreement for sale dt. 1st July, 1998, the property was sold for Rs. 11,87,00,726. The assessee, represented by her attorney, Shri Sameer A. Khan, was referred to in this agreement as the vendor and the second party was referred to as confirming party. The second party thus received Rs. 6,37,00,726, which is substantially more than what the assessee as a real owner of the property received. The assessee and the second party never filed any statement under Section 269UC of IT Act in the prescribed Form No. 37-I before the Appropriate Authority in relation to MoU dt. 8th June, 1995. But, such statement under Section 269UC in Form No. 37-I was duly filed in respect of sale agreement dt. 1st July, 1998, for sale consideration of Rs. 11,87,00,726 and clearance from Appropriate Authority was obtained. Further, while MoU was not subjected to any registration, the agreement for sale dt. 1st July, 1998, was duly registered with the registration authority in the month of April, 1999.
3. The assessee filed return of income on 27th June, 1996, and declared long-term capital gain of Rs. 2,69,00,000 arising out of consideration of Rs. 5,50,00,000. The AO who completed the assessment under Section 143(3) on 10th Dec., 1998, accepted the long-term capital gain declared by the assessee. The assessee while working out the long-term capital gain disclosed fair market value of the property as on 1st April, 1981, at Rs. 1 crore on the basis of report of one Shri H.S. Vasan, a registered valuer. Subsequently, the learned CIT found that the AO had not examined properly the correctness of assessee's claim of long-term capital gain. He, therefore, issued a notice under Section 263 of the Act requesting the assessee to file explanation/clarification as under:
"(i) In the sale agreement dt. 1st July, 1998, drawn up with Indian Society of the Church of Jesus Christ of Later-Day Saints, the sale consideration of Rs. 11,87,00,726 is clearly stated. This sale agreement was duly registered with registration authority in the month of April, 1999. Since the immovable property was conveyed in the financial year 1999-2000, the correct assessment year for charging long-term capital gain would be asst. yr. 2000-01.
(ii) In the MoU dt. 8th May, 1995, amount of Rs. 5.50 crores paid by Shri Shahrukh to the assessee is referred as security deposit. Shri Shahrukh was entrusted with a job of finding out prospective buyer of assessee's property at Bangalore. In the agreement for sale dt. 1st July, 1998, Shri Shahrooq had been referred to as a confirming party and not the seller. The name of the assessee through her attorney is appearing as vendor. As per sale agreement dt. 1st July, 1998, Shri Shahrooq, as confirming party, received Rs. 6,37,00,726 for the services of locating the prospective buyer of Bangalore property. The services rendered by Shri Shahrukh did not merit such payment, which is substantially more than what assessee received as an actual owner of the property.
(iii) The fair market value of Rs. 1 crore as on 1st April, 1981, as per valuation report furnished by the assessee was on the higher side keeping in view appreciation in real estate prices during the financial years 1981-82 to 1994-95. The correctness of value as per valuation report was not verified by the AO properly. The approved valuer has not given any basis for adoption of rate of Rs. 300 per sq. ft. for valuation of the property. The AO did not examine properly the above valuation report with due care."
4. In response to the show-cause notice, the assessee, through her authorised representative, argued that during the course of assessment proceedings all materials necessary for assessment had been produced before the AO. As per the terms of MoU, the assessee was entitled to receive only Rs. 5,50,00,000 which had been paid to her on or before signing the MoU. Therefore, the transfer within the meaning of Section 2(47) of the IT Act had taken place during the financial year 1995-96 relevant to asst. yr. 1996-97. The amount of Rs. 6,37,00,726 received by the second party was not only for the purpose of locating prospective buyer but also for other services and risk undertaken by him. Regarding the determination of fair market value as on 1st April, 1981, at Rs. 1 crore, the assessee contended that the AO had duly considered the valuation report and accepted the same.
5. The learned CIT held that the MoU dt. 8th June, 1995, had been executed for the purpose of identification of prospective buyers of the property. The sum of Rs. 5.50 crores paid to the assessee by the second party was referred to as "Assured Security Deposit" and not sale consideration. If it was full and final payment, there was no reason to mention it as security deposit. If MoU was an instrument for sale, then it should have been referred to as an agreement for sale and not as MoU. The assessment record showed that agreement for sale dt. 1st July, 1998, for Rs. 11,87,00,726 was on record. This agreement for sale was registered with the registering authority in the month of April, 1999. Therefore, the correct assessment year for the transfer of capital asset and taxability of capital gain thereon would be asst. yr. 2000-01 and not asst. yr. 1996-97, as shown by the assessee. The agreement for sale dt, 1st July, 1998, referred to the second party as confirming party and not as owner. It was the assessee through her attorney who was referred to as vendor. The MoU indicated that the second party was appointed for the purpose of locating prospective buyer at Bangalore, as the assessee being a lady residing at Mumbai with no infrastructure at Bangalore required such assistance. In this context huge disproportionate sum of Rs. 6,37,00,726 paid to the second party was definitely not commensurate with the extent of services rendered by him. The extent of services rendered and the reasonableness of payment made to the second party had not been looked into properly by the AO. Further, for the purpose of working out long-term capital gain, the assessee adopted the value of the property as on 1st April, 1981, at Rs. 1 crore. In the valuation report, the registered valuer adopted the value at Rs. 300 per sq. ft. as on 1st April, 1981, but he did not furnish any basis for doing so. The AO did not appear to have examined this aspect at all applying his mind to the points involved. The fair market value at Rs. 1 crore as on 1st April, 1981, was evidently on the higher side, keeping in view the graph of real estate market between the financial years 1981-82 to 1994-95 during which period the real estate prices increased by atleast 20 to 25 times. During the course of assessment proceedings, the AO requested the assessee's Authorised Representative on 21st July, 1997, to file comparable sale instances. On 4th Aug., 1997, just after 14 days, the assessee's Authorised Representative wrote that the assessee could not find comparable sale instances. In the absence of comparable sale instances being furnished by the assessee, the least that the AO could do was to utilise the service of Departmental valuation cell manned by senior and experienced hands in the matter. The AO failed to do so. Besides, if the AO had applied his mind, he could have contacted one of the officers of the Department at Bangalore to find out some comparative sale instances from the Registrar's office. With alertness and proper application of mind, the AO would have collected necessary material to find out correctness of the fair market value of the property. The learned CIT referred to the judgment of Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC) that an incorrect assumption of facts or an incorrect application of law would satisfy the requirement of the order being erroneous. Further, the phrase "prejudicial to the interest of Revenue" was an expression of wide import. The learned CIT also did not accept the argument of the assessee's Authorised Representative that all the material necessary for the assessment and entire details for transfer of the assessee's property at Bangalore having been furnished during the course of assessment proceedings, there was no case for applying the provisions of Section 263. Referring to the judgment of Hon'ble Rajasthan High Court in the case of CIT v. Emery Stone Mfg. Co. (1995) 213 ITR 843 (Raj), the learned CIT held that even in a case where the facts were disclosed by the assessee to the assessing authority, the power under Section 263 could be invoked if the order was otherwise erroneous and prejudicial to the interests of the Revenue. There was non-application of mind by the AO, which was also evident from the perfunctory manner in which the assessment order was made. Major part of the assessment order was reproduction from the enclosure with the assessee's return and the AO discussed the matter in ten perfunctory lines, which are as follows :
"The assessee has filed MoU dt. 8th June, 1995, indicating that the said property has been assigned for a consideration of Rs. 5,50,00,000. The assessee has also filed valuation report dt. 30th May, 1996. The assessee has submitted that an amount of Rs. 7,27,305 has been withdrawn for household expenses and the family of the assessee consists of the assessee himself and her sister, Miss. Pravin Kazerani, and both are spinsters. Subject to above, income of the assessee is computed as under:
Long-term capital gains 26,900,000 Income from other sources 3,496,863 Less Deductions : under Section 80-L 13,000 3,483,863 Total income 30,383,863 Rounded off to 30,383,860"
On this basis, the learned CIT held that the assessment order was grossly erroneous and prejudicial to the interests of the Revenue. He, therefore, passed the following order:
"Hence, the assessment order under Section 143(3) of the Act is hereby cancelled and the AO is being directed to examine the correct taxability of the capital gain after making necessary enquiry regarding the fair market value of the property at Bangalore, subject-matter of the capital gain. He may avail the services of the Department's valuation cell to ascertain fair market value of the property as on 1st April, 1981, for reaching correct conclusion. The AO will pass detailed speaking order after giving reasonable and adequate opportunity to the assessee to be heard."
6. During the course of hearing before us, the learned Counsel for the assessee argued at length that the AO did make considerable enquiry during the course of assessment proceedings before accepting the assessee's return of income and the working of long-term capital gains. The following papers were filed by the assessee before the AO :
"(a) Letter dt. 17th July, 1997, filed along with document of purchase of property. by father dt. 30th March, 1921, marked as Annex. D.
(b) Property document of 30th March, 1921, marked as Annex. E.
(c) The gift deed dt. September, 1955, marked as Annex. F.
(d) Letter dt. 22nd Oct., 1992, from the defense estate office de-requisitioning the premises, marked as Annex. G.
(e) Letter dt. 8th June, 1995, giving possession of the property to the builder, marked as Annex. H.
(f) Letter dt. 8th June, 1995, agreeing to execute irrevocable power of attorney, marked as Annex. I.
(g) Letter dt. 8th June, 1995, handing over all original property documents, marked as Annex. J.
(h) Power of attorney given to Shahrukh Ali Khan dt. 6th July, 1995, marked as Annex. K.
(i) Copy of order obtained under Section 269UL(1) dt. 20th Nov., 1998, marked as Annex. L."
In view of the detailed material brought on assessment record, all the relevant facts were collected by the AO. The AO did look into the question of comparative sale instances as well as the reasons for not filing Form No. 37-I in respect of MoU. By the written letters addressed to him the assessee informed that there were no comparable sale instances. The assessee also informed the AO that Form No. 37-I was not filed because the conveyance was not completed. The fact of subsequent sale by the second party to the Indian Society of the Church of Jesus Christ of Later-Day Saints for the sum of Rs. 11,87,00,726 was duly brought on record. It cannot, therefore, be said that the AO did not make necessary enquiries. The learned Counsel further argued that simultaneous with MoU signed on 8th June, 1995, by the assessee's general power of attorney holder, Mr. Sameer A. Khan, the assessee received the balance amount of Rs. 4,85,00,000 by bankers' cheques. On the same date, all original documents were handed over to the second party and the assessee also handed over possession of the property to the second party. Thus, the transfer within the meaning of Section 2(47) of IT Act, 1961, was completed even though the transfer of property was not complete under general law. In view of the specific provisions of Section 2(47) of the Act, asst. yr. 1996-97 was the correct assessment year for assessment of capital gains received by the assessee. If at all the assessment year was preponed, it resulted only into lesser indexed cost. Hence, such an action could not be prejudicial to the interests of the Revenue. The learned CIT failed to realise that in any case the assessee cannot be assessed for an amount more than the sum of Rs. 5.5 crores because that is what she actually received. The amounts which were received by the second party could not be denied because that money was paid to the second party and not to the assessee. The AO scrutinised each and every detail. Hence, there was application of mind. There was nothing on record to suggest that acceptance of fair market value as on 1st April, 1981, was not justified. On what basis the CIT could say that the price of the property during the intervening period had increased from 20 to 25 times ? While filing the return of income, the assessee got the property valued by a registered valuer. What else could be done by her ? Whatever be the reasons for the assessee having received only Rs. 5.5 crores, there was nothing to show that she had received anything more than Rs. 5.5 crores. The second party was not in any manner related to the assessee and the transaction was at an arm's length. On what basis the learned CIT said that the payment of Rs. 6.37 crores to the second party was excessive. The learned CIT does not spell out as to how the receipt of surplus sale proceeds by the second party was not in accordance with law. The learned Counsel supported his contentions with the judgments in Marghabhai Kishabhai Patel and Co. v. CIT (1977) 108 ITR 54 (Guj) and Godavari Sugar Mills Ltd. v. CIT .
7. During the course of arguments of the learned Counsel, we pointed out that the provisions of Section 269UC of the IT Act, 1961, clearly mandated that no transfer of any immovable property in a specified area of value exceeding the prescribed amount shall be effected except after agreement for transfer is reduced to writing in the form of prescribed statement and furnished to the Appropriate Authority within the prescribed time. In the instant case, the immovable property was situated in an area to which provisions of Section 269UC applied. The consideration mentioned in the MoU exceeded the minimum amount of exemption prescribed for that area. Hence, if this MoU assigned any rights in the property, it was mandatory for the parties to reduce their agreement in the prescribed statement in Form 37-I and to furnish the same to the Appropriate Authority within the prescribed time-limit. As admittedly this was not done, the MoU was just simply 'non est' or the transfer sought to be effected thereby did not take place. In this view of the matter, could it not be said that the assessment order was erroneous inasmuch as the AO acted upon this MoU ? In his reply, the learned Counsel for the assessee argued that no such argument had been taken in the impugned order under Section 263. For the purpose of deciding upon the validity of an order under Section 263 it was not open to the Tribunal to advance their own reasons in support of the order. For this proposition, the learned Counsel placed reliance on the judgments in CIT v. Jagadhari Electric Supply and Industrial Co. ; CIT v. L.F. D Silva and CIT v. Chandrika Industrial Trust . The learned Counsel vehemently argued that the Tribunal cannot uphold the order under Section 263 on the ground of the failure of the parties to undergo the requirements of provisions of Section 269UC of the Act. The learned Counsel further argued that the impugned order under Section 263 finally related itself only to the question of determination of fair market value as on 1st April, 1981, as was apparent from the operative part of the impugned order under Section 263. The learned CIT grossly erred in directing the AO to look into this issue once again. While framing the assessment order the AO had looked into the question of valuation and accepted the valuation report as filed by the assessee after raising the question of comparable sale instances. In these circumstances, the assessment order could not be called to be erroneous. The learned Counsel referred to the judgments in CIT v. Ratlam Coal Ash Co. (1988) 171 ITR 141 (MP) and CIT v. Gabrial India Ltd. , and argued that the CIT could not go into the judgment of the AO about determination of the fair market value.
8. The learned Departmental Representative strongly relied upon the Hon'ble Supreme Court judgment in Malabar Industrial Co. Ltd. (supra) and argued that if an assessment order was made without ascertaining correct facts, it was bound to be erroneous. In the instant case, the AO merely acted mechanically. MoU dt. 8th June, 1995, was an agreement fraught with duplicity. In one breath, it purported to be an agreement authorising the second party to identify buyers for the property and at the same time in another breath it entitled the second party to realise the value of the property on his own account. If the assessee's sale was completed with signing of the MoU, what prevented the assessee from entering into a straightforward agreement ? A detailed enquiry into the facts of the case was a must in view of the peculiar nature of MoU. The learned Departmental Representative argued that, prima facie, MoU was a device to defeat several provisions of law. The objective was to prevent Appropriate Authority from purchasing the property, which was bound to be because the consideration in the MoU was fixed at Rs. 5.5 crores, whereas the property shortly thereafter was actually sold for Rs. 11.87 crores. As the statement in prescribed Form 37-I was not filed, it continued to be MoU only. In this view of the matter it was essential on the part of the AO to see whether any rights passed on and whether there was any transfer by virtue of MoU. The AO should not have allowed the assessee to take a circuitous route instead of direct sale. It was very significant that this MoU also resulted into evasion of huge amount of stamp duty. As the assessee's transactions were intended to defeat the provisions of law, the case required detailed investigation. How could have the assessee agreed to allow the second party to make abnormal profit of Rs. 6.37 crores ? The AO did not make any investigation at all and simply accepted the assessee's contentions at the face value.
9. The learned Departmental Representative contested the argument of the learned Counsel of the assessee that the impact of impugned order under Section 263 was merely to dispute the question of fair market value as on 1st April, 1981. In the impugned order, the learned CIT had clearly stated that MoU was not an agreement of transfer and that the correct assessment year was asst. yr. 2000-01. The question of correct fair market value as on 1st April, 1981, was only one of the issues. Here also, the assessment order was grossly erroneous. Inspite of the fact that no comparable sale instances were given and no basis for determination of value was given in the report filed by the assessee, the AO quietly accepted it. The report given by the registered valuer, though from a technical person, was very common-place. No objective data was given for arriving at the value. The learned AO clearly erred in accepting such a valuation report without making his own enquiries. The learned CIT, therefore, rightly observed that the least the AO could do was to make a reference to Departmental valuation cell.
10. The learned Counsel for the assessee in his rejoinder stated that power to make reference to Valuation Officer was only under the provisions of Section 55A of the Act. There is no finding in the impugned order that the requirements of the provisions of Section 55A were satisfied. What was the material with the learned CIT that the report of the registered valuer was an under valuation ? As far as avoidance of stamp duty was concerned, that could not be a basis for order under Section 263. In exercise of his functions under Section 263, the learned CIT was not concerned at all with the question of stamp duty. Finally, if the learned CIT had held the view that the correct assessment year was asst. yr. 2000-01 he should have cancelled the assessment order instead of sending the matter back to the AO. The very fact that the assessment order was kept open supports the view that the effect of the order under Section 263 is only related to the question of determination of fair market value as on 1st April, 1981.
11. We have carefully considered the rival submissions. On consideration, we reject the contention of the learned Counsel of the assessee that the effect of the impugned order under Section 263 was restricted to determination of the correct fair market value of the property as on 1st April, 1981. In the first instance, in the operative part of the impugned order, which has been reproduced by us at the end of para 5 of this order, we find that the learned CIT has cancelled the assessment order under Section 143(3) and directed the AO "to examine the correct taxability of the capital gain after making necessary enquiry regarding the fair market value of the property at Bangalore...". We thus find that the mandate given by the learned CIT to the AO is to examine the correct taxability of the capital gain and enquiry to be made regarding the fair market value is only a part of this mandate. Secondly, it is well-settled that a document must be read as a whole and not merely in parts. In this case the learned CIT has controverted MoU dt. 8th June, 1995, and acceptance of the same as basis of the assessment order by the AO both in the show-cause notice issued and in the subsequent part of his order justifying exercise of his powers under Section 263. He has also expressed the view that the correct assessment year was asst. yr. 2000-01, though, finally the CIT has left this issue open and left it to the AO "to examine the correct taxability of the capital gain".
12. The assessee filed return of income of asst. yr. 1996-97 computing long-term capital gain arising to the assessee during the previous year relevant to asst. yr. 1996-97 on the ground that by virtue of execution of MoU with the second party on 8th June, 1995; the receipt of consideration of Rs. 5.5 crores from the second party; the possession of the property handed over to the second party and irrevocable power of attorney in favour of the second party, etc., the assessee transferred all her rights in the property in favour of the second party and the provisions of Section 2(47) came into operation. The AO accepted this claim without demur. The learned CIT found that all was not well with this MoU. The MoU purported to be an agreement for identification by the second party of buyers of the property and the sum of Rs. 5.50 crores paid by the second party to the. assessee was described as "assured security deposit". Neither party filed statement of transfer in prescribed Form 37-I before Appropriate Authority nor the registration of the document was done. In contradistinction, when the agreement for sale of the property was made on 1st July, 1998, it was the assessee who continued to hold the position of the vendor. This document was subjected to the rigours of the provisions of Section 269UC of the Act and it was duly registered. According to the learned CIT, the AO erred in accepting the contention of the assessee that there was a transfer of the property during the previous year relevant to asst. yr. 1996-97. In view of various features of MoU, the conduct of parties of not making statement of transfer in Form 37-I and not having MoU registered and the assessee as the vendor of the property having entered into sale agreement dt. 1st July, 1998, transferring the property for a consideration of Rs. 11.87 crores in favour of the Indian Society of the Church of Jesus Christ of Later-Day Saints, the previous year relevant to asst. yr. 2000-01 was the year in which the transfer took place. On consideration of the matter, we see considerable substance in these findings of the learned CIT. We find the MoU in question to be a nebulous document. By this document, the assessee purported to confer on the second party an irrevocable right of identifying buyers of the property for a consideration to be agreed upon by the second party in his sole discretion, with an irrevocable right in favour of assessee to receive a sum of Rs. 5.5 crores by way of "assured security deposit". This "assured security deposit" was, however, to be an inflexible and final sale consideration of Rs. 5.5 crores, not a penny more and not a penny less. Translated into layman terms, the assessee parted with all her rights in favour of the second party for a fixed consideration of Rs. 5.5 crores. All the talk about identifying buyer or "assured security deposit", etc., appears to be for the purpose of lending certain amount of vagueness about the true intent behind the MoU. At any rate, we find that MoU has been rendered an ineffectual document under the weight of its own contradictions, inasmuch as it is not legalised by following the procedure laid down under Section 269UC(1).
13. The provisions of Section 269UC(1) start with a non obstante clause, "Notwithstanding anything contained in the Transfer of Property Act, 1882 (4 of 1882), or in any other law for the time being in force...". In other words, these provisions override and supersede the provisions of Section 2(47) of the Act. As per these provisions, no transfer, in cases to which they apply, shall be effected except after an agreement for transfer is reduced to writing in the form of a statement (Form 37-I) and such statement is furnished to the Appropriate Authority within the prescribed time. As admittedly these provisions were not complied with, in the eyes of law, no transfer whatsoever has been effected by MoU in question. During the course of hearing before us, the learned Counsel for the assessee argued that no such ground having been taken in the impugned order by the learned CIT, it was not open to us to go into this question. On perusal of the impugned order, we find that the learned CIT has raised this issue. The learned CIT has raised the issue of Form No. 37-I being not submitted to the Appropriate Authority, while the same having been done in respect of agreement for sale dt. 1st July, 1998, in para 3 of the impugned order.
Secondly, though the assessee argued before him that the transfer within the meaning of Section 2(47) of the IT Act took place in the financial year relevant to asst. yr. 1996-97, the learned CIT did not accept this argument, among other things, for the reason also that MoU was not registered. Such registration could not have taken place without the assessee having filed statement of transfer (Form 37-I) under Section 269UC(1) and obtained from Appropriate Authority a no objection certificate as laid down under Section 269UL of the Act. We, therefore, find that the question of not undergoing the procedure laid down under Section 269UC is an integral part of the finding of the learned CIT that asst. yr. 2000-01 and not asst, yr. 1996-97 was the correct year in which the transfer by the assessee was carried out.
14. During the course of hearing before us, the learned Counsel for the assessee argued that there was no material with the CIT to hold that the sum of Rs. 6.37 crores received by the second party was excessive. The learned CIT also did not spell out as to how the receipt of surplus sale proceeds by the second party was not in accordance with law. He also argued that in any case in the hands of the assessee an amount exceeding Rs. 5.5 crores could not be assessed because that was what she actually received. We find that these aspects have been properly raised by the learned CIT in the impugned order. If MoU did not transfer any rights in favour of the second party, the role of the second party remained no more than identifying the buyers of the property. In these circumstances, the very basis on which the sum of Rs. 6.37 crores was received by the second party would appear to be under clouds. The learned CIT has, therefore, rightly directed the AO to examine the correct taxability of the capital gain in the hands of the assessee.
15. During the course of hearing before us, the learned Counsel for the assessee argued that it should be held that the AO who completed the assessment under Section 143(3) on 10th Dec., 1998, conducted proper enquiries in view of the fact that all the relevant material had been furnished to him by the assessee. In our opinion, an order not erroneous and prejudicial to the interests of the Revenue is a question not of merely collection of all the relevant material but of drawing correct inferences therefrom and of application of the correct provisions of law thereupon. If an AO does not draw the inferences which were warranted on the facts and in the circumstances of the case and does not apply the provisions of law which were attracted on the facts and in the circumstances of the case, the order passed by him would no less be erroneous and prejudicial to the interests of the Revenue even if all the relevant material had been gathered and brought on record. In the instant case, the AO failed to examine as to whether or not MoU did bring about transfer of a capital asset so as to give rise to capital gains chargeable to tax for asst. yr. 1996-97. Even if the assessee voluntarily offered capital gains for tax, the obligation of the AO to examine the implications of the assessee herself as vendor of the property entering into an agreement for sale for a much larger amount of Rs. 11.87 crores in the subsequent assessment year, did not come to an end. The AO was also required to go into the question of full value of consideration being disclosed at Rs. 5.50 crores only, whereas the transfer of the property actually did take place from assessee to the Indian Society of the Church of Jesus Christ of Later--Day Saints for the sum of Rs. 11.87 crores. The learned CIT has observed that the AO merely disposed of the matter in ten perfunctory lines, as reproduced at p. 7 of our order. After perusing the same, we find ourselves substantially in agreement with these observations of the learned CIT. As the AO did not carry out the enquiry which was warranted on the facts and in the circumstances of the case, we are left with no manner of doubt that the order passed by him was erroneous insofar as it was prejudicial to the interests of the Revenue. It is settled position now that the CIT may consider an order to be erroneous for the purpose of Section 263 if the order is a stereotyped order which simply accepts what the assessee has stated in his return and fails to make enquiries which are called for in the circumstances of the case. Reference in this behalf may be made to the judgments in Rampyari Devi Saraogi v. CIT , Smt. Tara Devi Aggarwal v. CIT , Gee Vee Enterprises v. Addl. CIT , Swawp Vegetable Products Industries Ltd. v. CIT , Addl. CIT v. Mukur Corporation , Thalibai F. Jain and Ors. v. ITO and Anr. , Malabar Industrial Co. Ltd. (supra) and so on.
16. During the course of hearing before us, considerable arguments were made in relation to the observations of the learned CIT in the impugned order on the question of fair market value as on 1st April, 1981. As we have seen, the effect of the order of the learned CIT is cancellation of the assessment order under Section 143(3) made by the AO on 10th Dec., 1998, directing the AO to examine the correct taxability of the capital gain and thereafter pass detailed speaking order after giving reasonable and adequate opportunity to the assessee to be heard. At the same time, the learned CIT has directed the AO to make necessary enquiry regarding the fair market value of the property as on 1st April, 1981. The learned Counsel for the assessee has argued before us that the assessee relied .upon the valuation made by registered valuer and there was no material with the learned CIT to come to the conclusion that the value at Rs. 1 crore was an undervaluation. As a matter of fact, it appears that the valuation report filed by the assessee was not found to be satisfactory by the AO himself. He, therefore, by his noting on the order sheet on 21st July, 1997, requested the assessee to file comparable sale instances. However, once the Authorised Representative of the assessee wrote that the assessee could not find comparable sale instances, the AO closed the matter. In this context, the learned CIT has held that in the absence of comparable sale instances being furnished by the assessee, the assessee could have utilised the services of the Departmental valuation cell or sought the assistance of his colleagues at Bangalore to find out comparative sale instances from the Registrar's office. The learned CIT has also noted that the report made by the valuer was merely opinion-based and not on the basis of any objective data. We find the learned CIT to be justified in entertaining these views and directing the AO to go into this question afresh. The report from a valuer is not sacrosanct for the reason only that the valuer has been registered under Direct Taxes Acts to do valuation. Unless the valuation report is well reasoned and well supported, the responsibility to determine correct value continues to be with the AO.
17. In view of the discussion in the foregoing paragraphs, we uphold the impugned order of the learned CIT under Section 263 of the Act and dismiss this appeal filed by the assessee.
G.C. Gupta, J.M.
1. I have perused the proposed order of my learned Brother caretuiiy but could not persuade myself to agree with his conclusions as arrived at by him. The facts as detailed in paras 1 to 10 of the proposed order of my learned Brother may be referred to. However, at the cost of repetition, it is considered necessary to bring to close focus some facts of the case. The assessee is a spinster lady of more than 60 years of age. She received by way of gift from her father in 19th Sept., 1955, a property known as "Hepburn Hall" situated at Convent Road at Bangalore. This property was requisitioned during war time by military authorities and de-requisitioned in the year 1992. The assessee was a resident of Bombay. It is stated that there was nobody to look after the property in a proper manner and to identify buyers for the property at Bangalore, on 8th June, 1995, the assessee executed a MoU with one Mr. Shahrooq Ali Khan of Bangalore through her general power of attorney holder, Mr. Sameer A. Khan.
As per the terms of this Memorandum of Understanding (MoU), the assessee appointed Mr. Shahrooq, the sole and exclusive person, to identify buyers for the property and in return the assessee accepted Rs. 5.5 crores from Mr. Shahrooq. The assessee conferred the irrevocable right to identify the buyer on Shri Shahrooq and it was agreed that the necessary clearance certificate shall be the liability of Shri Shahrooq and he shall not claim any expenses or reimbursement of any expenses incurred for developing and identifying buyers for the property or for obtaining clearance certificate, etc. As per the terms of MoU, the assessee was entitled to receive a sum of Rs. 5.5 crores only and shall have nothing to do with the profit earned or loss incurred by Shri Shahrooq on identifying buyers of the property and receiving the sale consideration. The agreement for sale dt. 1st July, 1998, was executed and the property was sold for Rs. 11.87 crores and the assessee was referred to in this agreement as the 'Vendor' and Shri Shahrooq was referred to as confirming party. Shri Shahrooq thus received an amount of Rs. 6.37 crores in the transaction. The assessee filed the return of income on 27th June, 1996, and declared long-term capital gain of Rs. 2.69 crores arising out of consideration of Rs. 5.5 crores, and the AO accepted the long-term capital gains declared by the assessee as income accrued under Section 143(3) on 10th Dec., 1998. Subsequently, the learned CIT found that the AO had not examined the correctness of the assessee's claim of long-term capital gain. He, therefore, issued a notice under Section 263 of the Act requesting the assessee to file explanation/clarification as under:
"(i) In the sale agreement dt. 1st July, 1998, drawn up with Indian Society of the Church of Jesus Christ of Later-Day Saints, the sale consideration of Rs. 11,87,00,726 is clearly stated. This sale agreement was duly registered with registration authority in the month of April, 1999. Since the immovable property was conveyed in the financial year 1999-2000, the correct assessment for charging long-term capital gain would be asst. yr. 2000-01.
(ii) In the MoU dt. 8th May, 1995, amount of Rs. 5.50 crores paid by Shri Shahrooq to the assessee is referred as security deposit. Shri Shahrooq was entrusted with a job of finding out prospective buyer of assessee's property at Bangalore. In view of the agreement for sale dt. 1st July, 1998, Shri Shahrooq has been referred to as a confirming party and not the seller. The name of the assessee through her attorney is appearing as 'Vendor'. As per sale agreement dt. 1st July, 1998, Shri Shahrooq, as confirming party, received Rs. 6,37,00,726 for the service of locating the prospective buyer of Bangalore property. The services rendered by Shri Shahrooq did not merit such payment, which is substantially more than what assessee received as an actual owner of the property.
(iii) The fair market value of Rs. 1 crore as on 1st April, 1981, as per valuation report furnished by the assessee was on the higher side keeping in view appreciation in real estate prices during the financial years 1981-82 to 1994-95. The correctness of value as per valuation report was not verified by the AO properly. The approved valuer has not given any basis for adoption of rate Rs. 300 per sq. ft. for valuation of property. The AO did not examine properly the above valuation report with due care."
2. The CIT after hearing the assessee in response to his show-cause notice and after examining assessment records, etc., passed the following order:
"Hence, the assessment order under Section 143(3) of the Act is hereby cancelled and the AO is being directed to examine the correct taxability of capital gain after making necessary enquiry regarding the fair market value of the property at Bangalore, subject-matter of capital gain. He may avail the services of the Department's valuation cell to ascertain fair market value of the property as on 1st April, 1981, to reach at correct conclusion. The AO will pass detailed speaking order after giving reasonable and adequate opportunity to the assessee to be heard."
Against this order passed by the CIT under Section 263, the assessee is in appeal before us.
3. In my considered opinion the assessee can be taxed on long-term capital gains arising out of consideration of Rs. 5.5 crores only. Admittedly, the assessee has got Rs. 5.5 crores out of the transaction of sale. It is nobody's case that the assessee has got a penny more than this amount of Rs. 5.5 crores. It is well-settled position of law that the assessee is liable to pay tax on the "real income" only. The assessee has received consideration of Rs. 5.5 crores for the transfer of property and the long-term capital gain of Rs. 2.69 crores arising out of the transaction was declared in the return of income filed on 27th June, 1996. In the case before us, it is a common ground between the parties that the transfer of the property by the assessee is a bona fide transaction where full value of the consideration received by the assessee was correctly disclosed at the figure of Rs. 5.5 crores. Since it is not the case of the Revenue that the assessee has not disclosed the full amount of consideration received by her, the assessee cannot be taxed on a rupee more than the consideration of Rs. 5.5 crores disclosed by her in her return of income. The assessee could be taxed on real income only and since the full consideration of Rs. 5.5 crores was declared by the assessee and the long-term capital gains computed thereon, it cannot be said that the order of the AO is prejudicial to the interest of the Revenue.
4. The three grounds of the CIT to invoke the extraordinary jurisdiction under Section 263 have been reproduced in para No. 1 above. The first reason of the CIT to invoke jurisdiction under Section 263 is that the sale agreement dt. 1st July, 1998, drawn up with Indian Society of the Church of Jesus Christ of Later-Day Saints registered with registration authority in April, 1999, and accordingly, correct assessment year for charging long-term capital gains would be 2000-01. It seems that after hearing the objections of the assessee, the CIT himself has dropped this issue in the final directions issued in order under Section 263 of the Act. In para No. 16 of the CIT's order under Section 263 the directions given to the AO is to examine the correct taxability of the capital gain after making necessary enquiry regarding the fair market value of the property at Bangalore and also to avail the services of the Department's valuation cell to ascertain the fair market value of the property as on 1st April, 1981, for reaching the correct conclusion. Nowhere in the operative part of the order, the CIT has directed to assess the long-term capital gain in the asst. yr. 2000-01. Since the CIT himself has dropped this issue in his final directions, this reason does not survive. Moreover, the assessee has received an amount of Rs. 5.5 crores during the period relevant to asst. yr. 1996-97 and has declared the long-term capital gain to Rs. 2.69 crores and assessed in the asst. yr. 1996-97; it cannot be said that the assessment order is prejudicial to the interests of the Revenue as to why the long-term capital gains was assessed in an earlier asst. yr. 1996-97 and the assessee paying the tax thereon four years prior to the asst. yr. 2000-01. In these facts the first reason to issue notice under Section 263 of the Act regarding the asst. yr. 2000-01 does not survive.
5. The second reason of the CIT for invoking the jurisdiction under Section 263 of the Act is that as per sale agreement dt. 1st July, 1998, Shri Shahrooq, as confirming party received Rs. 6.37 crores for the services of locating the prospective buyer of Bangalore property and that the services rendered by Shri Shahrooq did not. merit such payments, which is substantially more than what the assessee received as an actual owner of the property. In my considered view this reasoning of the CIT in invoking jurisdiction under Section 263 of the Act is without any merit. It is not the case of the Revenue that the MoU dt. 8th May, 1995, or the agreement dt. 1st July, 1998, is a sham transaction. It is nobody's case that the assessee has received a penny more than the amount of Rs. 5.5 crores received by the MoU dt. 8th May, 1995. The assessee can be taxed on the long-term capital gains arising out of this amount of Rs. 5.5 crores received by her. When she cannot be assessed on some unreal income, it is not understandable that how the order of the AO assessing the assessee on long-term capital gains arising out of the amount of Rs. 5.5 crores is prejudicial to the interest of the Revenue. In any case the assessee cannot be assessed on any amount more than what has been assessed in her hands. Even though that the confirming party, Shri Shahrooq, had received substantially heavy amount for his services of locating a prospective buyer of the property, there is no provision of law under which the amount paid to Shri Sharooq is not deductable. Accordingly, it cannot be said that the order of the AO is erroneous, there is no relation of the assessee with Shri Shahrooq whatsoever. Clause 16(1) of the agreement of sale clearly mentions that only Rs. 5.5 crores were given to the vendor on which the long-term capital gain has been assessed in her hands and there is no provision of law to assess her on some amount more than the sale consideration of Rs. 5.5 crores.
6. In Godhra Electricity Co. Ltd v. CIT , Hon'ble Supreme Court held :
"Income-tax is a levy on income. No doubt, the IT Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or it receipts; but the substance of the matter is the income. If the income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about a hypothetical income, which does not materialise."
In view of the above binding decision of the Hon'ble Supreme Court cited supra, I consider that the assessment order assessing the assessee on capital gains calculated on sale consideration of Rs. 5.5 crores received by the vendor for calculating the long-term capital gain is neither erroneous nor prejudicial in the interests of the Revenue and accordingly the second ground of the CIT for issue of notice under Section 263 is rejected.
7. The third reason for the issue of notice under Section 263 by the CIT is that the fair market value at Rs. 1 crore as on 1st April, 1981, as per valuation report furnished by the assessee was on the higher side keeping in view appreciation in real estate prices during the financial years 1981-82 to 1994-95. As per the CIT, the correctness of value as per valuation report was not verified by the AO properly with due care and approved valuer has not given any basis for adoption of rate of Rs. 300 per sq. ft. for valuation of the property. In my considered view this reasoning of the CIT is without any merit. The assessee was advised by her chartered accountant to declare the capital gains arising out of the transaction in the asst. yr. 1996-97. The assessee got the valuation report of the property from approved valuer and valued the property as on 1st April, 1981, at Rs. 1 crore and accordingly filed the return of income alongwith report declaring long-term capital gains at Rs. 2.69 crores. It is not a case where the AO had made no enquiries before completion of the assessment. In this case the assessment proceedings started on 17th June, 1997, with the issuance of notice under Section 143(2) of the Act. Certain details were required and these were filed by the assessee on 21st July, 1997. The AO has applied his mind to the approved valuer's report as is clear from the fact that the AO demanded comparable sale instances from the assessee. The chartered accountant of the assessee informed the AO that no comparable sale instances nearabout 1st April, 1981, are available. On 12th Aug., 1998, some more details were demanded from the assessee. The copy of the MoU and the subsequent agreement copy were filed before the AO, who examined the same and accordingly, it cannot be said that there is no application of mind of the AO. It is not understandable that what else the assessee is expected to do in the matter. She has declared the long-term capital gains on the basis of the valuation report of the approved valuer and the valuation report was filed alongwith return of income. The AO has applied his mind and has accepted the valuation as on 1st April, 1981, as determined by the approved valuer. In CIT v. Ratlam Coal Ash Co. (1988) 171 ITR 141 (MP) case Hon'ble Madhya Pradesh High Court justified the order of the Tribunal in reversing the order of the CIT made under Section 263 and restored that of the ITO. In this case the order of assessment was revised by the CIT under Section 263 on the ground that the ITO had not made proper enquiries. The order of the CIT was set aside and the ITO's order was restored by the Tribunal because it found that the assessee had furnished the requisite information and the ITO had completed the assessment after considering all the facts. In CIT v. Gabrial India Ltd. case High Court held that the decision of the ITO could not be held to be erroneous simply because in his order he did not make an elaborate discussion in that regard. The valuation of a property is always a matter of estimate and merely because the CIT has difference of opinion with that of the AO with regard to the valuation estimate of a property, is not a ground to hold that the order of the AO is erroneous or prejudicial to the interest of the Revenue. Sec. 55A of the Act authorises reference to the Valuation Officer only when the value declared is less than the fair market value. There is no basis with the CIT to hold the value declared by the assessee in accordance with the report of the approved valuer is less than the fair market value. I am not impressed with the arguments of the learned Departmental Representative that by executing MoU the assessee has avoided the payment of stamp duty payable to the Government since in my considered opinion it does not give jurisdiction to the CIT under Section 263 of the Act.
8. Whether the MoU dt. 8th June,. 1995, tantamounts to 'transfer' or not is not of much significance for the reason that the CIT in his order passed under Section 263 has not directed to assess the long-term capital gains in any other assessment year than the asst. yr. 1996-97 in which the long-term capital gains have been declared and assessed by the AO. Moreover, the issue before us is the applicability of Section 263 which can be invoked only on satisfaction of two conditions, i.e., the order to be erroneous and prejudicial to the interest of Revenue. If the order is not prejudicial to the interest of the Revenue the provision of Section 263 cannot be invoked. The tax can be levied on the real income of the assessee and not more, and admittedly, the assessee has received only Rs. 5.5 crores as consideration which has been subjected to assessment, it cannot be said that the order is prejudicial to the interest of the Revenue and the requisite conditions for the applicability of the provision of Section 263 of the Act are satisfied in the case.
9. In my considered opinion, since the assessee has received an inflexible and final sale consideration of Rs. 5.5 crores, and not a penny more, which is declared to the Revenue as sale consideration, the assessment order cannot be said to be erroneous. In the instant case, it is nobody's case that the transaction and 'MoU' entered between the assessee and Shri Shahrooq were not bona fide nor was it the case of the Revenue that it was a sham transaction or that the price paid in respect of all this transaction to the assessee was other than the one set out in the MoU and accordingly, the taxing authorities had no right to substitute any other price in place of the price or value agreed to between the parties to the transaction. This issue is covered in favour of the assessee with the decision of Hon'ble Gujarat High Court in Marghabhai Kishabhai Patel and Co. v. CIT (1977) 108 ITR 54 (Guj) case and Hon'ble Bombay High Court in Godavati Sugar Mills Ltd. v. CIT case. Accordingly, it cannot be said that the assessment is erroneous or prejudicial to the interest of the Revenue. Merely because the procedure of filing Form 37-I before Appropriate Authority was avoided at the time of registration of the agreement to sell, is not decisive of the question of taxability of the transaction in the assessee's hands. There is no provision of law that in every case the AO should refer the question of valuation of property to the Departmental valuation cell. Merely because the approved valuer's report was accepted by the AO, it cannot be said that the assessment order is erroneous and prejudicial to the interest of the Revenue.
10. In view of the aforesaid discussions and in view of the fact that none of the three reasons cited by the CIT for invoking the provisions of Section 263 has any merit and that the assessee has been assessed on her real income as computed on the amount of sale consideration received by her, I hold that the assessment order passed by the AO is neither erroneous nor prejudicial to the interest of the Revenue and accordingly, the impugned order of the CIT passed under Section 263 of the Act is cancelled.
11. In the result, the appeal of the assessee is allowed.
REFERENCE UNDER SECTION 255(4) OF THE IT ACT, 1961 Since there is a difference of opinion vis-a-vis conclusions arrived at in ITA No. 2518/Mum/2001 in the case of Miss Rubab M. Kazerani v. Jt. CIT, Special Range-40, Mumbai, involving asst. yr. 1996-97, we are of the opinion that the following point of difference is required to be referred to the Third Member and for the purpose we direct that the file be put upto the Hon'ble President:
"Whether or not on the facts and in the circumstances of the case, the impugned order under Section 263 made by the learned CIT is justified and sustainable ?"
Significantly, there has been exchange of correspondence between us while preparing this reference under Section 255(4). The same is annexed to this reference as Annexes. A, B, C and D and may be treated as part of this reference.
ANNEXURE 'A' S.C. Tiwari, A.M. Since there is a difference of opinion vis-a-vis conclusions arrived at in ITA No. 2518/Mum/2001 in the case of Miss Rubab M. Kazeiani v. Jt. CIT, Special Range-40, Mumbai, involving asst. yr. 1996-97, we are of the opinion that the following points of difference are required to be referred to the Third Member and for the purpose we direct that the file be put upto the Hon'ble President:
"1. Whether or not in view of peculiar nature of the MoU dt. 8th June, 1995, and the fact that the assessee did not follow the mandatory procedure laid down under Section 269UC(1) of the Act while maintaining before the AO that a transfer under Section 2(47) had taken place on signing of the MoU, the learned CIT was justified in arriving at the conclusion that the AO should have carried out more detailed enquiry and examination in this case than he did ?
2. Whether or not on the facts and in the circumstances of the case, the learned CIT was justified in arriving at the conclusion that the question of division of the final sale consideration as per sale deed dt. 1st July, 1998, amounting to Rs. 11,87,00,726 between the assessee and Shri Shahrooq Ali Khan had required proper enquiry by the AO ?
3. Whether or not in view of the directions given by the learned CIT to the AO, 'to examine the correct taxability of the capital gain' the question of assessment year in which to levy capital gains tax was left to the AO for decision afresh ?
4. Whether or not on the facts and in the circumstances of the case, the learned CIT was justified in arriving at the conclusion that the question of fair market value of the property as on 1st April, 1981, required determination afresh by the AO?
5. Whether or not on the facts and in the circumstances of the case, the impugned order under Section 263 made by the learned CIT is justified and sustainable ?"
ANNEXURE 'B' G.C. Gupta, J.M. Since there is a difference of opinion between the learned AM and the JM with regard to the conclusion arrived at in ITA No. 2518/Mum/2001 for the asst. yr. 1996-97 in the case of MI'SS Rubab M. Kazeiani v. Jt. CIT, Mumbai, I am of the opinion that the question (as drafted by the learned AM) Nos. 1 and 2 are only the grounds of the Revenue in support of its arguments and the question Nos. 3 and 4 are only the directions given by the learned CIT to the AO. In fact, the question No. 5 (as drafted by the learned AM) covers the entire controversy in the appeal and the difference of opinion between the learned AM and the JM. Therefore, it shall be sufficient to refer only the question No. 5 to the Third Member and accordingly, the file be put up before the Honble President for directions in the matter. The question to be referred to the Third Member covering the whole controversy is as under:
"1. Whether or not on the facts and in the circumstances of the case, the impugned order under Section 263 made by the learned CIT is justified and sustainable ?"
ANNEXURE 'C' S.C. Tiwari, A.M.
1. Hon'ble JM may please refer to his reference under Section 255(4) of the IT Act, 1961, and consider the following :
2. Under the provisions of Section 255(4) no questions (as wrongly stated in your reference) are referred to and only the point or points on which Members of a Bench differ In opinion are referred to the President of the Tribunal. Seen in this light, it may please be considered whether or not there is difference of opinion on the points of difference at SI. Nos. 1 to 4 as stated in the reference drafted by me and signed on 1st May, 2002. It would be seen that while as per my order answers to point Nos. 1 to 4 are in the affirmative, the same according to the Hon'ble JM, are in the negative. That being so, there is no option but to refer these points of difference of opinion for further consideration under Section 255(4). If however the Hon'ble JM agrees that answer to any of the four points is in the affirmative he may say so and in that event, it would be possible to exclude such point(s). The Hon'ble JM is, therefore, requested to reconsider his views that points at SI. Nos. 1 to 4 merely state grounds of the Revenue or the directions given by the learned CIT.
3. Hon'ble JM may, therefore, reconsider the draft proposed by me so that the commonly agreed to statement on points on which there is difference of opinion may be forwarded to the Hon'ble President for further action in the matter.
ANNEXURE 'D' G.C. Gupta, J.M. Hon'ble AM may please refer to his note dt. 3rd May, 2002. 2. I have reconsidered the draft proposed by you for reference to the Third Member carefully and with all humility I am still of the considered opinion that it shall be sufficient to refer only question No. 5 (as framed by the learned AM) which, in my opinion, covers the entire controversy in the appeal and accordingly, the file may be put up before the Hon'ble President for direction in the matter.
J.P. Bengra, Vice President
1. Since there was a difference of opinion between the learned AM and the learned JM, the Hon'ble President referred the following question for my opinion under Section 255(4) of the IT Act, 1961 :
"Whether or not on the facts and in the circumstances of the case, the impugned order under Section 263 made by the learned CIT is justified and sustainable ?"
2. Facts of the case leading to this question in appeal, briefly, are that the assessee is a spinster lady of approximately 65 years of age. The property known as "Hepburn Hall" situated at Convent Road, Bangalore, was purchased by her father in the year 1921. She received the said property from her father by way of gift in September, 1955. The military authorities requisitioned the said property during the war period for the purpose of utilization of army. However, the military authorities de-requisitioned the said property in the year 1992. It will be pertinent to mention here that the assessee never resided in the said property and she was a resident of Bombay. On 8th June, 1995, with an intention to sell this property, the assessee executed a MoU (MoU) with one Shri Shahrooq Ali Khan of Bangalore through her general power of attorney holder, Shri Sameer A. Khan. As per the terms of agreement of this MoU, the assessee appointed Shri . Shahrooq Ali Khan (hereinafter mentioned as the second party) the sole and exclusive person to identify buyers for the property as she was not capable of attending to the interested purchasers to the scheduled property. The assessee accepted a sum of Rs. 5,50,00,000 from the second party as total sale consideration. The second party agreed to identify the buyers for the property and to obtain, if necessary, clearance certificate under the provisions of the Urban Land Ceiling Act, 1976. It will be important to note that the first party to the MoU was an Iranian national holding Iranian passport but was residing in India since birth and was resident of India.
3. The assessee conferred upon the second party irrevocable right to identify buyers to purchase the property and it was agreed that the second party shall not claim reimbursement of any expenses incurred for the purpose of developing and identifying buyers for the property. It was also agreed that the assessee was entitled to receive the sum of Rs. 5,50,00,000 only and she would have nothing to do with the profit earned or loss incurred by the second party on identifying buyers of the property and receiving the sale consideration. On 1st July, 1998, an agreement to sell was executed by the assessee's attorney, Shri Sameer A. Khan, for the said property for a total consideration of Rs. 11,87,00,726 and the assessee was referred to in the agreement as a vendor and the second party was referred to as confirming party. In this way the second party received the sum of Rs. 6,37,00,726 in the said transaction of sale. The assessee and the second party did not file any statement under Section 269UC of the IT Act in the prescribed Form No. 37-I before the Appropriate Authority in relation to MoU dt. 8th June, 1995. But, such statement was duly filed in respect of sale agreement dt. 1st July, 1998, for the sale consideration of Rs. 11,87,00,726 and clearance from Appropriate Authority was also obtained. The subsequent agreement to sell was registered whereas the earlier MoU was not.
4. The assessee filed its return of income declaring long-term capital gain of Rs. 2,69,00,000 arising out of sale consideration of Rs. 5,50,00,000. The AO who completed the assessment under Section 143(3) on 10th Dec., 1998, accepted the long-term capital gain declared by the assessee. The assessee while working out the long-term capital gain disclosed fair market value of the property on 1st April, 1981, at Rs. 1 crore on the basis of the report of one Shri H.S. Vasan, a registered valuer. Subsequently, the learned CIT on perusal of the record found that the AO had not examined properly the correctness of assessee's claim of long-term capital gain. Therefore, he issued notice under Section 263 of the Act requesting the assessee to file explanation/clarification on the following points :
"(a) In view of agreement for sale dt. 1st July, 1998, Bangalore property was sold for Rs. 11,87,00,726. In this agreement, the assessee through her attorney, Shri Sameer Ali Khan, has been referred to as the vendor. Shri Shahrukh Ali Khan is referred to as confirming party.
(b) As per the agreement dt. 1st July, 1998, Shri Shahrukh Ali Khan being the confirming party, received Rs. 6,37,00,726 for this services of locating the prospective buyers of Bangalore property. The services of Shri Shahrukh do not appear to merit such payment, which is substantially more than what assessee as real owner of the property actually received.
(c) While in view of MoU dt. 8th May, 1995, for assignment of the property for Rs. 5.5 crores, no Form No. 37-I was filed to the Appropriate Authority under IT Act, in respect of sale agreement dt. 1st July, 1998, showing sale consideration of Rs. 11,87,00,726, a Form No. 37-I was filed and clearance from appropriate was obtained.
(d) The agreement for sale dt. 1st July, 1998, is duly registered with the registration authority in the month of April, 1999.
(e) The assessee, while working out the long-term capital gain on the basis of MoU dt. 8th May, 1995, has taken fair market value of the property as on 1st April, 1981, at Rs. 1 crore as per Shri H.S. Vasan, an approved valuer's report. In the valuation report, no basis for adoption of rate of Rs. 300 per sq. ft. for the valuation of the property has been given. AO did not examine the valuation report with due care and with proper application of mind.
(f) While working out deduction under Section 48(1) of the Act, the fair market value of the property as on 1st April, 1981 is shown at Rs. 1 crore. The cost of acquisition as per IT Act is 281 and indexed cost of acquisition is taken by the assessee at Rs. 2.81 crores. Here, as looking into the fact that between financial years 1981-82 and 1994-95, the real estate prices increased atleast by 20 to 25 times, the value adopted by the assessee as on 1st April, 1981, for the purpose of computation of long-term capital gains was not only substantially on the higher side, but its correctness was also not verified by the AO properly."
In response to the show-cause notice, the assessee through her Authorised Representative, replied vide a detailed letter dt. 23rd May, 2000. She submitted that the order passed by the AO for the asst. yr. 1996-9.7 was neither erroneous nor prejudicial to the interest of the Revenue. Therefore, for the reasons given in the said letter it was prayed that the proceedings initiated under Section 263 be dropped. In the said reply the assessee had mentioned that during the course of assessment proceedings from 17th June, 1997 to 10th Dec., 1998, before the AO, all materials necessary for assessment were produced and all the queries raised by the AO during this period were also replied in detail. As per the terms of MoU the assessee was entitled to receive only Rs. 5,50,00,000 from Shri Shahrooq Ali Khan which had been received by her on or before signing the MoU. Therefore, the transfer within the meaning of Section 2(47) of the IT Act had taken place during the financial year 1995-96 relevant to asst. yr. 1996-97. The amount of Rs. 6,37,00,726 received by the second party was not only for the purpose of locating prospective buyer, but also for other services and risk undertaken by him. The assessee was not liable for any duty nor was she required to obtain any kind of clearance under ULC or IT Act, which was the sole responsibility of the second party. The terms and conditions also depict that the power given to the second party to identify buyers and such right was irrevocable as the second party will be incurring expenses for the purpose of developing and identifying buyers for the property. Therefore, it was the absolute liability of Shri Shahrooq Ali Khan to incur such expenditure for which he received the amount of Rs. 6,37,00,726. As regards the fair market value determined on 1st April, 1981, by the registered valuer at Rs. 1 crore, the assessee contended that the AO had duly considered the valuation report and had accepted the same. In this connection, Board Circular No. 495, dt. 22nd Sept., 1987, was also furnished to the AO. In the application Form No. 37-I to the Appropriate Authority the assessee has mentioned that out of the entire sale consideration, Rs. 5,50,00,000 was receivable by the assessee and additional Rs. 6,37,00,726 was receivable by the builder. The AO after applying his mind and after seeking clarification has accepted the claim of the assessee.
5. However, the CIT was not convinced with the reply of the assessee. Therefore, he cancelled the assessment passed under Section 143(3) and directed the AO to examine the correct taxability of the capital gain after making necessary inquiries regarding the fair market value of the property at Bangalore, subject-matter of the capital gain, by passing the impugned order. He further observed that the AO may avail services of the Department's valuation cell to ascertain fair market value of the property as on 1st April, 1981, for reaching the correct conclusion. The details of his finding given at paras 6 to 16 of his order are as under :
"6. I have carefully considered the learned Counsel's submission. On the examination of facts and assessment records, it is evident that MoU dt. 8th May, 1995, executed by the assessee with Shri Shahrukh for the consideration of Rs. 5,50,00,000 was only for the limited purpose of identification of prospective buyer at Bangalore. In the MoU, amount of Rs. 5.50 crores paid to the assessee by Shri Shahrukh was referred to as assured security deposit and not sale consideration. If it was full and final payment, there was no reason to mention it as security deposit. If MoU is an instrument for sale, then it should have been referred to as an agreement for sale and not as MoU.
7. The assessment records show that agreement for sale dt. 1st July, 1998, for Rs. 11,87,00,726 is on record. However, this is also a fact that this agreement for sale dt. 1st July, 1998, was registered with the registering authority in the month of April, 1999. Since the agreement for sale was registered in April, 1999, the correct assessment year for the purpose of transfer of capital asset and taxability of capital gain thereon would be asst. yr. 2000-01 and not asst. yr. 1996-97.
8. The agreement dt. 1st July, 1998, for sale of the property refers to Shri Shahrukh as the confirming party and not its owner. Therefore, the learned Counsel's assertion that by virtue of MoU, Shri Shahrukh became property owner does not stand to reason. In the agreement for sale, the assessee and her attorney are referred to as vendor The plain reading of MoU clearly indicates that Shri Shahrukh was appointed only for the purpose of locating prospective buyer at Bangalore as assessee being a lady residing at Mumbai with no infrastructures at Bangalore could do so. In this context, huge and disproportionate sum of Rs. 6,37,00,726 paid to Shri Shahrukh is definitely not commensurate with the extent of services rendered by him. The quantum of amount received by him is much more than what assessee received as a owner of the property. The extent of services rendered and the reasonableness of payment made to Shri Shahrukh has not been looked into properly by the AO.
9. The assessee while working out the long-term capital gain, has adopted value of the property as on 1st April, 1981, at Rs. 1 crore and indexed cost of acquisition is taken at Rs. 2.81 crores accordingly. The value as on 1st April, 1981, is as per approved valuer's report. The valuation report furnished by the approved valuer adopted value at Rs. 300 per sq. ft. as on 1st April, 1981. He has, however, not furnished basis for doing so. His estimate has no logic or basis. Unfortunately, the AO does not appear to have examined this aspect at all applying his mind to the points involved.
10. The fair market value of Rs. 1 crore as on 1st April, 1981, is evidently on the higher side. Keeping in view the graph of real estate market between the financial years 1981-82 and 1994-95, it is well known that the real estate prices increased during the period atleast by 20 to 25 times. If one takes into account the fact that the property was ultimately sold for Rs. 11,87,00,726 in the financial year 1998-99, there is definitely a case that valuation report is grossly inflated. Here, it has to be kept in view that in the last five years, there had been phenomenal rise in the price of the real estate in Bangalore in view of its becoming the most vibrant centre of software technology in the country earning for itself coveted distinction of being called the Silicon Valley of India. Hence, the final sale price of the property at Rs. 11,87,00,726 and receipt of the amount of Rs. 5,50,00,000 by the assessee as per MoU should not blinker the vision to ascertain its fair market price as on 1st April, 1981, which would have been atleast 20 to 25 times less than what it has fetched on the final sale. From the order sheet of the asst. yr. 1996-97, it is ascertained that the AO required the assessee's counsel, Shri Contractor, on 21st July, 1997, to file comparable sale instances. On 4th Aug., 1997, just after 14 days he writes that the assessee could not find comparable instances. Here, the natural corollary is that in case of the assessee's inability to furnish comparable sales instances on the above date, the least that the AO could do was to utilize the service of Department valuation cell manned by senior and experienced hands in the matter. The AO has failed to do so.
11. Besides this, if he had applied his mind, he could have contacted one of the officers of the Department at Bangalore to find out some comparative sales instances from the Registrar's office there at the relevant time to ascertain the reasonableness of the price of the property shown by the assessee at Rs. 1,00,00,000 on the given date. The assessee's counsel did not file it even if he had it because it was not in the assessee's interest. With alertness and proper application of mind the AO would have collected necessary material to find out the correctness of the fair market value of the property for proper taxation of capital gains in the case. Here, a reference may be made to the judgment of Hon'ble Supreme Court on the applicability of the provisions of Section 263 of the Act in the case of Malabar Industrial Co. Ltd v. CIT (2000) 243 ITR 83 (SC), specially the finding at p. 87 thereof which reads as under :
'There can be no doubt that the provisions cannot be invoked to correct any every type of mistake or error committed by the AO, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind.'
12. Their Lordships of the Hon'ble Supreme Court have further examined in the above judgment the phrase 'prejudicial to the interest of Revenue' as under:
'The phrase 'prejudicial to the interest of the Revenue1 is not an expression of art and is not defined in the Act. Understood in its ordinary meaning, it is of wide import and is not confined to loss of tax. The High Court of Calcutta in Dawjee Dadabhoy and Co. v. S.P. Jain (1957) 31 ITR 872 (Cal), the High Court of Karnataka in CIT v. T. Narayana Pai , the High Court of Bombay in CIT v. Gabrial India Ltd. and the High Court of Gujarat in CIT v. Smt. Minalben S. Pankh (1995) 215 ITR 81 (Guj) treated loss of tax as a prejudicial to the interests of the Revenue.'
13. In view of the above finding and observation of Hon'ble Supreme Court, acceptance of the considerably inflated fair market value of the property at Bangalore (subject-matter of capital gain) at Rs. 1 crore on 1st April, 1981, has caused substantial loss of revenue. Hence, the assessment order for asst. yr. 1996-97 is considered to be grossly erroneous and prejudicial to the interest of Revenue and deserves cancellation.
14. The other important point in learned Counsel's argument is that during assessment proceedings all the material necessary for the assessment and entire details for transfer of the assessee's property at Bangalore had been furnished meaning thereby that in view of this there was no case for applying the provisions of Section 263 of the IT Act to the present case. It has to be kept in view that disclosure of full facts does not confer immunity from revisional jurisdiction of the CIT under Section 263 of the IT Act. Here, a reference may be made to the judgment of Hon'ble Rajasthan High Court in the case of CIT v. Emery Stone Mfg. Co. (1995) 213 ITR 843, 850 (Raj) where Their Lordships of Hon'ble Rajasthan High Court held that even in a case where the facts were disclosed by the assessee to the assessing authority, the power under s, 263 can be invoked. In the case of CIT v. Emery Stone Mfg. Co. (supra), the CIT was held justified in setting aside the assessment order with the direction to work out actual cost of the asset after applying the provisions of Expln. 3 to Section 43(1) of the IT Act. In view of the facts and circumstances of the case already discussed in detail, in my considered opinion, it is a fit case for invoking the provisions of Section 263 of the IT Act as the assessment order under revision is grossly erroneous and prejudicial to the interest of the Revenue. The correctness of valuation report filed by the assessee has obviously not been examined by the AO.
15. Non-application of mind by the AO is evident from the order sheet and the assessment order itself as already mentioned in the explanation. As already indicated in the first para of this order, the 51 line assessment order contains 25 lines reproduced from the enclosure with the assessee's return. The assessment order as a matter of fact consists of hardly ten perfunctory lines which are reproduced as under for the sake of convenience :
'The assessee has filed MoU dt. 8th June, 1995, indicating that the said property has been assigned for a consideration of Rs. 5,50,00,000. The assessee has also filed valuation report dt. 30th May, 1996. The assessee has submitted that an amount of Rs. 7,27,305 has been withdrawn for household expenses and the family of the assessee consists of the assessee herself and her sister, Miss. Parvin Kazerani, and both are spinsters. Subject to above income of the assessee is computed as under:
Long-term capital gains 26,900,000 Income from other sources 3,496,863 Less deductions; under Section 80-L 13,000 3,483,863 Total Income 30,383,863 Rounded off to 30,383,860
Issue requisite document. Credit for prepaid taxes be given after due verification. Charge interest as per provision of the Act.'
16. From the above, it is evident that in view of the judgment of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (supra) and judgment of Hon'ble Rajasthan High Court in the case of CIT v. Emery Stone Mfg. Co. (supra), this is a fit case for applying the revisionary provisions of Section 263 of the Act as the assessment order for the asst. yr. 1996-97 in the case of the petitioner is grossly erroneous and prejudicial to the interests of the Revenue. Hence, the assessment order under Section 143(3) of the Act is hereby cancelled and the AO is being directed to examine the correct taxability of the capital gain after making necessary enquiry regarding the fair market value of the property at Bangalore, subject-matter of the capital gain. He may avail the services of the Department's valuation cell to ascertain fair market value of the property as on 1st April, 1981, for reaching (at) correct conclusion. The AO will pass detailed speaking order after giving reasonable and adequate opportunity to the assessee to be heard."
6. Aggrieved, the appeal was filed by the assessee before the Tribunal. This matter was heard by the 'D' Bench, which constituted Shri S.C. Tiwari, AM and Shri G.C. Gupta, JM. After noting the arguments from both the sides, the AM concluded that the direction given by the learned CIT to the AO was to examine correct taxability of the capital gain and after making necessary inquiries regarding the fair market value of the property at Bangalore, is only a part of his mandate. However, the CIT has controverted the MoU dt. 8th June, 1995, and acceptance of the same as basis of the assessment order by the AO, both in the show-cause notice issued and in the subsequent part of his order, justifying exercise of his powers under Section 263. He further expressed the view that the correct assessment year was 2000-01. He pointed out that MoU purported to be agreement for identification by the second party of buyers of the property and the sum of Rs. 5.50 crores paid by the second party to the assessee was described as "assured security deposit". So, it was not a sale consideration. Neither party filed a statement of transfer in prescribed Form No. 37-I before the -Appropriate Authority nor has the registration of the documents been done. In contradiction, when the agreement of sale of the property was made on 1st July, 1998, the said formalities were complied with. The document was subjected to the rigours of the provisions of Section 269UC of the Act and it was duly registered. He was of the view that the assessee purported to confer on the second party an irrevocable right of identifying buyers of the property for a consideration to be agreed upon by the second party in his sole discretion, with an irrevocable right in favour of assessee to receive a sum of Rs. 5.5 crores by way of assured security deposit. In this way, the assessee parted with all her rights for a fixed consideration of Rs. 5,50,00,000. All the talk about identifying buyer or "assured security deposit", etc. appears to be for the purpose of lending certain amount of vagueness about the true intent behind the MoU. As such, the MoU has been rendered an ineffectual document under the weight of its own contradictions, inasmuch as it is not legalized by following the procedure laid down under Section 269UC(1). The learned AM was of the view that since these provisions were not complied with no transfer had been effected by the MoU. He concluded that the question of not undergoing the procedure laid down under Section 269UC is an integral part of the finding of the learned CIT that asst. yr. 2000-01 and not asst. yr. 1996-97 was the correct year in which the transfer by the assessee was carried out. He has also observed that if MoU did not transfer any rights in favour of the second party, the role of the second party remained no more than identifying the buyers of the property. The very basis on which the sum of Rs. 6.37 crores was received by the second party would appear to be under clouds. Therefore, the CIT had rightly directed the AO to examine the correct taxability of the capital gain in the hands of the assessee. As regards the point that all relevant material had been furnished by the assessee to the AO, the learned AM was of the view that the order not erroneous and prejudicial to the interests of the Revenue is a question not of merely collection of all the relevant material but of drawing correct provisions of law thereupon. If an AO does not draw inferences which were warranted on the given facts and circumstances of the case and does not apply the provisions of law which were attracted on the facts and circumstances of the case, the order passed by him would no less be erroneous and prejudicial to the interests of the Revenue even if all the relevant material had been gathered and brought on record. In the instant case, the AO failed to examine as to whether or not MoU did bring about transfer of a capital asset so as to give rise to capital gains chargeable to tax for asst. yr. 1996-97. Even if the assessee voluntarily offered capital gains for tax, the obligation of the AO to examine the implications of the assessee herself as vendor of the property entering into an agreement for sale for a much larger amount of Rs. 11.87 crores in the subsequent assessment year did not come to an end. The AO was also required to go into the question of full value of consideration being disclosed at Rs. 5.50 crores, whereas the transfer of the property actually did take place from assessee to the Indian Society of the Church of Jesus Christ of Later-Day Saints for the sum of Rs. 11.87 crores. The learned AM agreed with the observation of the CIT that the AO has merely disposed of the matter in ten perfunctory lines. As the AO did not carry out the enquiry which was warranted on the facts and in the circumstances of the case, he agreed with the findings of the CIT that the order was erroneous insofar as it was prejudicial to the interests of the Revenue. So, he upheld the assumption of jurisdiction under Section 263. He further held that the valuation report filed by the assessee was not found satisfactory by the AO himself. He, therefore, by his noting on the order sheet on 21st July, 1997, requested the assessee to file comparable sale instances and closed the matter. Therefore, the CIT has rightly opined that the AO could have availed the services of the valuation cell to find out comparative sale instances as on 1st April, 1981. Thus, the AM upheld the impugned order passed under Section 263 of the Act.
7. The learned JM did not agree with the opinion of the learned AM on the basis that the assessee has received Rs. 5,50,00,000 under the MoU out of the transaction of sale and it is no one's case that the assessee has got a penny more than this amount. Therefore, as per the settled legal position of the law the assessee is liable to tax on the real income only, i.e., Rs. 5,50,00,000 for transfer of property and long-term capital gain of Rs. 2.69 crores arising out of the transaction which was rightly declared in the return of income filed on 27th June, 1996. Since it is not the case of the Revenue that the assessee has not disclosed full amount of consideration received by her, the transaction was bona fide transaction where full value of the consideration received by the assessee was correctly disclosed at Rs. 5,50,00,000. The assessee cannot be taxed on a rupee more than what has been declared by her.
8. The learned JM noted that the first reason of the CIT to invoke the jurisdiction under Section 263 is that the sale agreement dt. 1st July, 1998, drawn up with Indian Society of the Church of Jesus Christ of Later-Day Saints registered with the Registrar was in April, 1999, and, therefore, the correct assessment year for charging the long-term capital gain fall in asst. yr. 2000-01. He opined that the CIT himself has dropped this issue in the final directions issued in the impugned order. Therefore, this issue does not survive. On the other hand, the assessee on actual receipt of Rs. 5,50,00,000 declared long-term capital gain of Rs. 2.69 crores in asst. yr. 1996-97. Therefore, it cannot be said that the assessment order is prejudicial to the interest of the Revenue and why the long-term capital gains should not be assessed in the asst. yr. 1996-97. On these facts the first reason for taxability in asst. yr. 2000-01 does not survive. With regard to the second reason of the CIT for invoking the jurisdiction under Section 263, the learned JM was of the view that the reason of the CIT in invoking jurisdiction is without any merit. It is not the case of the Revenue that MoU dt. 8th May, 1995, or the agreement dt. 1st July, 1998, is a sham transaction. It is nobody's case that the assessee has received a penny more than the amount of Rs. 5,50,00,000. Therefore, the assessee can be taxed on long-term capital gain on this amount actually received by her. She cannot be assessed on unreal income. Hence, it is not understood as to how the order of the AO taxing the assessee on the long-term capital gain returned by her has become prejudicial to the interest of the Revenue. In any case the assessee cannot be taxed on any amount more than what has been received by her. Even though the second party had received substantially higher amount for his services of locating the prospective buyer and other formalities, etc., there is no provision of law under which the amount paid to the second party is not deductible. So, he was of the view that the order of the AO is not erroneous as there was no relation of the assessee with the second party. It was further pointed out that Clause 16(1) of the agreement clearly mentions that only Rs. 5.5 crores were given to the assessee on which long-term capital gain has been assessed in the hands of the assessee and there is no provision of law to assess the assessee on some amount which she has not received. The learned JM further placed reliance on the decision of the Hon'ble Supreme Court in the case of Godhra Electricity Co. Ltd. v. CIT and held that the order of the AO is neither erroneous nor prejudicial to the interest of the Revenue and accordingly rejected the second ground of the CIT for exercising jurisdiction under Section 263. The third reason for exercising jurisdiction under Section 263 is that the fair market value of Rs. 1 crore as on 1st April, 1981 is excessive. The learned JM held that the reasoning of the CIT was without any merit. The assessee was advised by her chartered accountant to declare the capital gain arising out of the transaction in the asst. yr. 1996-97. The assessee got the valuation report of the property from approved valuer, who valued the property as on 1st April, 1981, at Rs. 1 crore and accordingly filed the return of income along with valuation report declaring long-term capital gain of Rs. 2.69 crores. It is not the case where the AO had made no inquiries before the completion of the assessment. He pointed out that the proceedings started on 17th June, 1997, and concluded on 10th Dec., 1998. The AO has applied his mind to the valuer's report which is clear from the fact that the AO demanded comparable sale instances from the assessee. To this requisition the chartered accountant of the assessee informed the AO that no comparable instances were available. On 12th Aug., 1998, some more details were demanded from the assessee, which were subsequently filed by the assessee. Hence, it cannot be said that there was no application of mind by the AO. Reliance was placed on the decision of Hon'ble Madhya Pradesh High Court in the case of CIT v. Ratiam Coal Ash Co. (1988) 171 ITR 141 (MP). The learned JM opined that the valuation of the property is always a matter of estimate and in case the CIT has difference of opinion with that of the AO with regard to the valuation of the property, it cannot be a ground to hold that the order of the AO is erroneous or prejudicial to the interest of the Revenue. He further observed that Section 55A of the Act authorizes reference to the Valuation Officer only when the value declared is less than the fair market value. Hence, there is no basis for exercising jurisdiction under Section 263 of the Act. He further mentioned that MoU dt. 8th June, 1995 tantamount to transfer or not, is not of much significance for the reason that the CIT in his order under Section 263 has not directed to assess the long-term capital gains in any other assessment year than the asst. yr. 1996-97 in which the long-term capital gains have been declared and assessed by the AO. He concluded that the assessee had received an inflexible and final sale consideration of Rs. 5.5 crores, and not a penny more, which was declared to the Revenue as sale consideration. Therefore, the assessment order cannot be said to be erroneous. He further held that in the instant case, it is no one's case that the transaction and MoU entered between the assessee and the second party were not bona fide nor it was the case of the Revenue that it was a sham transaction or that the price paid in respect of all the transaction to the assessee was other than the one set out in the MoU and accordingly the taxing authorities had no right to substitute any other price in place of the price or value agreed to between the parties to the transaction. In this regard he placed reliance on the decisions of Hon'ble Gujarat High Court in the case of Marghabhai Kishabhai Patel and Co. v. CIT (1977) 108 ITR 54 (Guj) and Hon'ble Bombay High Court in the case of Godavari Sugar Mills Ltd. v. CIT . He opined that merely because the procedure of filing Form 37-1 before Appropriate Authority was avoided at the time of registration of the agreement to sell, is not decisive of the question of taxability of the transaction in the assessee's hands. Merely because the approved valuer's report was accepted by the AO, it cannot be said that the order of the AO was erroneous or prejudicial to the .interest of the Revenue. He accordingly cancelled the order passed by the CIT under Section 263 of the Act.
9. The learned Counsel for the assessee, Shri Pardiwala, pointed out that the facts in this case were not in dispute. The assessee at the time of executing the MoU was approximately 65 years of age and later on she died. The property in question was purchased by her father and it was gifted to her. On 18th June, 1995, the assessee entered into a MoU with Shahrooq Ali khan, a builder, who was not at all related to her. It is also not in dispute that the assessee was residing in Bombay and the property in question was situated in Bangalore. As the assessee was in an advanced stage and there was no one to look after the property she wanted to dispose of the property. With this intention she entered into a MoU with Shri Shahrooq Ali Khan who paid Rs. 5.5 crores to her as sale consideration of the property and the possession was handed over to him on the same date. She also executed an irrevocable power of attorney in favour of Shri Sameer A. Khan on 6th July, 1995. In the background of these facts, the assessee filed return of income offering Rs. 2.69 crores as capital gain arising out the above transaction. After the return was filed the assessment proceedings continued from 17th June, 1997 to 10th Dec., 1998. The AO raised several queries to which the assessee gave all the information in her possession. It is submitted that in support of her claim she also submitted the valuation report from a registered valuer. But, a comparable sale instance in the same area could not be filed as it was not available with the assessee. After going through the valuation report and other aspects of the matter, the AO accepted the claim of the assessee. As per the assessee counsel the AO could refer the case to the DVO where in his opinion the estimate by the registered valuer was less than its market value. But, in the present case as per the CIT the fair market value adopted by the AO based on the approved valuer's report is excess. Under these circumstances the initiation of proceedings under Section 263 is without any jurisdiction. So far as the other issue of taxability of capital gain in asst. yr. 1996-97 or 2000-01 is concerned there is no direction in the CIT's order. The learned AM himself has raised this issue by inferring from paragraph No. 7 that the CIT has also questioned the year of taxability. But, this direction is not given in the order of the CIT. Therefore, the issue of year of taxability is not in dispute. The learned Counsel for the assessee further invited our attention to Section 55A(a) which reads as under :
"To ascertain the fair market value of a capital asset the AO may refer the valuation of capital asset to a Valuation Officer--
(a) in a case where the value of the asset as claimed by the assessee is in accordance with the estimate made by a registered valuer, if the AO is of the opinion that the value so claimed is less than its fair market value."
It is submitted that reference to the Valuation Officer to ascertain the fair market value of a capital asset can be made if in the opinion of the AO the valuation of the assets claimed by the assessee in accordance with the estimate made by the registered valuer is less than its fair market value. Clause (b) does not apply because the assessee has filed the registered valuer's report. Clause (b) is a case where no such report is filed. As such, the AO could not have referred the case to the DVO. The learned Counsel pointed out that could the order of the AO be said to be erroneous only because he did not make reference to the DVO where the Act itself does not give power to the AO to refer a case, where, as per the CIT, the fair market value estimated by the registered valuer is in excess. In the present case, the assessee has submitted registered valuer's report to the AO who has accepted the fair market value of the property after inquiring for a period of more than one and half year. Hence, can it be said that the assessment order is erroneous merely because in the ipsy dixy opinion of the CIT the fair market value of the property as on 1st April, 1981, should be lower than what has been shown by the assessee, without giving any comparable instance as per the study or material which had come to his knowledge. It was thus submitted that the said order of the AO cannot be held to be erroneous. In this connection reliance was placed on the decision of CIT v. Amalgamations Ltd. , CIT v. Trustees, Anupam Charitable Trust (1987) 167 ITR 129 (Raj) and Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC) case. It was also brought to my notice by the learned Counsel that the year of 1995 was a year of terrorism and clouds of Kargil war were building up. In these circumstances the assessee thought it proper to sell of the property to the builder.
10. It was further argued that there was no dispute about the taxability of this amount in the year 1996-97. However, suppose it is accepted that the year of taxability is asst. yr. 2000-01, still there is no loss to the Revenue because the index point for asst. yr. 1996-97 was 281 points whereas it was 329 points in asst. yr. 2000-01. If the assessment year is taken to be 2000-01, the capital gain will go down. Therefore, there cannot be any prejudice to the interest of the Revenue. In this connection reliance was placed on the Chaturbhuj Dwarkadas Kapadia v. CIT . Reference was also made to Section 2(47) of the IT Act stating that the transfer of property has taken place as per sub-Clause (v) of the said section when the assessee received the consideration and handed over the possession to the builder Shahrooq Ali Khan. It was further argued that it was no one's case that the assessee had received even a penny more than Rs. 5,50,00,000. Therefore, she cannot be taxed on the total sale consideration of Rs. 11.87 crores unless there is material or information on record to show that the assessee had received anything more than what is shown in the MoU. She cannot be charged for capital gains on any other amount than what she had received.
11. The learned Counsel brought to my notice Sub-section (1) of Section 48 which says that while computing the capital gain the expenditure incurred in connection with such transfer as a result of transfer of capital asset will be deducted. In the present case it is clear from the agreement and MoU that she had given all the powers to Shri Shahrooq Ali Khan including those of obtaining the necessary clearance certificates and incur all expenses in relation to this property. Therefore, what Shri Shahrooq Ali Khan received was the expenditure which is deductible under Section 48(1). Shri Shahrooq Ali Khan was the agent till the registration had taken place of the said property and all the expenses incurred was deductible. The opinion of the learned AM that it is excessive and unreasonable is not correct. In this connection the learned Counsel placed reliance on the decisions in the case of Gabrial India Ltd. (supra) and CIT v. Kanda Rice Mills .
12. On the other hand, the learned Departmental Representative basically relied on the points mentioned by the learned AM in his order. Besides this, he has submitted that the MoU is in the nature of assured security deposit in which the basic duty of Shahrooq Ali Khan was to find out a buyer and obtain necessary clearance certificates for transfer. Therefore, the amount of Rs. 5.5 crores received by the assessee was in the nature of advance and that is why the assessee did not get the document, MoU, registered nor paid the stamp duty. The assessee was the sole proprietor of the property till the date of registration which is clear from the document of registration at page No. 18. In fact, that total consideration of the property was Rs. 11.87 crores on which the capital gain should have been taxed. The assessee failed to give any comparable instance, therefore, her claim that the property was transferred for a consideration of Rs. 5.5 crores is not correct. Reading out from the order of the AO, it was pointed out that the AO passed the order within fourteen days and did not give detailed reasons for accepting the capital gains returned by the assessee. It was further contended that the assessment order is cryptic. Therefore, when the AO accepted the claim of the assessee without detailed inquiry in the matter, the CIT can assume jurisdiction under Section 263 as the order of the AO is erroneous inasmuch as prejudicial to the interest of the Revenue. In this connection my attention was invited to the word 'erroneous' and its meaning given at p. 8201 in Vol. 5 of Chaturvedi and Pithisaria's book on Income-tax Law. The word 'erroneous' in Black's Law Dictionary means 'involving error; deviating from 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 AO 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'. Reliance was also placed on the decision of Malabar Industrial Co. Ltd's case (supra), Rampyari Devi Saraogi v. CIT case and the decision of Hon'ble Delhi High Court in the case of Gee Vee Enterprises v. Addl. CIT . It was further submitted that when the AO failed to conduct inquiries the CIT can exercise jurisdiction under Section 263. The learned Departmental Representative further submitted that the AO could issue commission to DVO under Section 131(1)(d) if he could not do under Section 55A. However, it is submitted that the case of the assessee could be covered under Sub-clause (ii) of Clause (b) of Section 55A which the CIT has rightly adopted to estimate the fair market value of the property. The learned Departmental Representative tried to distinguish the case laws referred to by the assessee's counsel.
13. The learned Departmental Representative further submitted that Section 269UC of the IT Act is a non obstante clause which says "notwithstanding anything contained in the Transfer of Property Act, 1882, or in any other law for time being in force..." Therefore, for this purpose, Section 2(47)(v) and other provisions of law do not apply. It is further submitted that for the purpose of claiming deduction under Section 48(1), the assessee should give evidence to prove that it had incurred expenditure wholly and exclusively for the purpose of transfer of that property. But, in this case the assessee could not give such evidence. Therefore, the assessee cannot claim Rs. 6.37 crores as expenditure. It is further pointed out that the assessee did not get MoU registered nor paid the stamp duty because the MoU was not treated as transfer of property. It was simply an assured security deposit. It is also submitted that the Circular No. 495 mentioned by the learned Counsel is also not applicable to the facts of the present case. The learned Departmental Representative further placed his reliance on the decisions of Rampyari Devi Saraogi (supra), Smt. Tara Devi Aggarwal v. CIT , Emery Stone Mfg. Co. (supra) and CIT v. Shree Manjunathesware Packing Products and Camphor Works (1998) 231 ITR 53 (SC). Lastly, it was submitted that the AO has not conducted detailed inquiry nor passed a detailed order. Therefore, the CIT was right in assuming jurisdiction under Section 263 of the Act. On the other hand, learned Counsel distinguished the facts of the case in the decisions referred to by the learned Departmental Representative in the case of Amalgamations Ltd. (supra) and Emery Stone Mfg. Co. (supra), and contended that the learned AM had gone wrong in observing that the CIT has rightly assumed jurisdiction under Section 263. He supported the view of the learned JM.
14. I have considered the rival submissions and have gone through the material available on record. On the basis of the question referred, I have to examine whether the CIT was justified in invoking the jurisdiction under Section 263 and his order can be sustained.
15. In this case it is not in dispute that the assessee was a spinster lady of approximately 65 years of age, living at Mumbai, whereas the property in question is situated at Bangalore. She had received the property by way of gift from her father in September, 1955. Since the assessee was a spinster, there were no kith and kin to look after the property in question. Further, this property was requisitioned during the war time by military authorities for the purpose of use by army. However, the military authorities de-requisitioned the same in the year 1992. It is the case of the assessee that under these circumstances there was no one to look after the property in a proper manner and, therefore, with an intention to dispose of the property entered into a MoU on 8th June, 1995, with Shri Shahrooq Ali Khan through her general power of attorney holder, Shri Sameer A. Khan. If we go through the MoU given at pp. 3 to 7 of the paper book we find the following clauses :
"2. The first party has informed the second party that the total sale consideration accepted and received by the first party is Rs. 5,50,00,000 (rupees five crores and fifty lakhs only) and that neither party shall dispute the area of the said schedule property.
3. The second party agrees to identify buyers for the schedule property or any part thereof and has agreed to pay assured security deposit of 5,50,00,000 (rupees five crores and fifty lakhs only), to the first party."
On reading these clauses along with other clauses of the MoU, it is clear that the lady had entered into an agreement with Shri Shahrooq Ali Khan to dispose of the said property for a total consideration of Rs. 5.5 crores. Thus, from the terms of MoU it is clear that the lady signed the MoU through her general power of attorney holder for Rs. 5.5 crores. The possession of the property was handed over to the builder, Shri Shahrooq Ali Khan and original documents were also given to him on that day with an understanding that he will obtain all necessary clearance certificate under the provision of Urban Land (Ceiling and Regulation) Act, 1976, and certificate under Section 269UC of the IT Act, 1961. Therefore, it is clear that the MoU entered into between the parties was not for the purpose of simply identifying the prospective buyer or the consideration received by the assessee was only a security deposit. On reading the contents it will be clear that it was a transaction by which the assessee transferred the property in question in the manner prescribed in Sub-Clauses, (v) and (vi) introduced in Section 2(47) of the IT Act w.e.f. April, 1988. The events which had taken place constitute transfer which includes any transaction which allows possession to be taken/retained in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882, and any transaction entered into in any manner which has the effect of transferring or enabling the enjoyment of any immovable property. Similarly, using the nomenclature, MoU will not change its character of sale agreement. Therefore, capital gains would be taxable in the year in which such transactions are entered into, even if the transfer of the immovable property is not effective or complete for want of registration under the general law. Under Section 2(47)(v) any transaction involving allowing of possession to be taken over or retained in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act would come within the ambit of Section 2(47)(v). In order to attract Section 53A there should be an agreement for consideration; it should be in writing; it should be signed by the transferor; it should pertain to transfer of immovable property; the transferee should have taken possession of the property and the transferee should be ready and willing to perform his part of contract. On consideration of the above, the Hon'ble Bombay High Court has held in its decision in the case of Chaturbhuj Dwarkadas Kapadia v. CIT , that even arrangements confirming privileges of ownership without transfer of title could fall under Section 2(47)(v). Therefore, capital gains would be taxable in the year in which such transactions are entered into, even if the transfer of the immovable property is not effectively complete under the general law. Therefore, the conclusion of the AM that it is merely documents to identify buyer and an assured security deposit is not correct in the eye of law.
16. Since I have held that the MoU between the assessee and Shri Shahrooq Ali Khan was transfer of property in question within the meaning of Section 2(47) of the IT Act, the question arises whether in the given facts and circumstances of the present case, the CIT has rightly exercised his jurisdiction under Section 263 of the IT Act. The CIT has given three reasons for invoking his jurisdiction under Section 263. The first reason is that the sale agreement dt. 1st July, 1998, drawn up with the Indian Society of the Church of Jesus Christ of Later-Day Saints was registered with the registration authorities in April, 1999, and, therefore, the taxability of charging of the long-term capital gain would be the year 2000-01. The learned AM has also concurred with his view. However, if we go through the direction of the CIT we find that the CIT while setting aside the order of the AO has not given such direction in his order. To presume the integral part of the finding of the CIT, as opined by the learned AM, is wrong on the fact of it and I cannot justify the reasoning that he has given such a direction regarding the determination of the year of taxability of capital gains after making necessary inquiry with regard to the fair market value of the property, because nowhere in the operative part of the CIT's order, he has directed to assess the long-term capital gains in asst. yr. 2000-01. On facts, taxability of capital gains at the hands of the assessee does not fall in asst. yr. 2000-01.
17. The second reason of the CIT for invoking the jurisdiction under Section 263 is that as per the sale agreement dt. 1st July, 1998, Shri Shahrooq Ali Khan received a sum of Rs. 6.37 crores which is more than what the assessee has agreed to receive. The amount was received by Shri Shahrooq Ali Khan for identifying the prospective buyers and obtaining necessary clearance certificates. The CIT was of the view that the services rendered by Shri Shahrooq Ali Khan did not merit such payment, which is substantially more than what the assessee received. We have to examine this aspect of the matter in the background that the assessee is a spinster lady of approximately 65 years of age. The said property situated at Bangalore was received by her as gift from her father, which at one point of time, was requisitioned by the military and later de-requisitioned the same. There was no one to look after the property in a proper manner, therefore, under these circumstances, she decided to dispose of the property and she received Rs. 5.5 crores as total sale consideration vide MoU, dt. 8th June, 1995. There is no case by the Department that the assessee had received anything more than Rs. 5.5 crores. There is no material on record to show that either the MoU, dt. 8th June, 1995, or the agreement dt. 1st July, 1998, is a sham transaction. Under these circumstances, unless I hold that these are sham transactions and that the assesses had received more than what is purported to have been received by way of MoU, it cannot be said that the builder who received consideration more than the assessee after about three years for locating buyers and fulfilling necessary conditions to transfer is a justifiable reason for invoking the jurisdiction under Section 263. I cannot forget that the assessee shall be assessed on the real income and not on the unreal income or the presumptive income. Here, I would like to mention that day in and day out there are instances where one party sells property at throwaway prices due to his difficulties/necessities whereas the purchasing party gets a better price on further sale. This not only happens in a transaction of an individual but also in a transaction where Government under its disinvestment schemes have sold companies at a much lower price whereas purchaser or bidder sold at higher price in subsequent transaction. Just because the third party has earned more profit will it be justified to invoke jurisdiction under Section 263 in the eye of law ? It is not justified in the eye of law. In the present case at the cost of repetition, I shall mention here that the Department has not brought any material on record to show that the assessee had received more payment underhand than what is mentioned in the MoU.
18. The third reason for exercising the jurisdiction under Section 263 by the CIT is that the fair market value of the property, as shown by the assessee as on 1st April, 1981, based on an approved valuer's report at Rs. 1 crore, is on the higher side keeping in view the appreciation in real estate prices. As per the CIT, the correctness of value as per valuation report was not verified by the AO properly. He was of the opinion that the approved valuer has not given any basis for adoption of rate of Rs. 300 per sq. ft. for valuation of the property. So far as this reason is concerned the IT Act gives power to the AO to refer the question of valuation of property under Section 55A only which reads as under :
"To ascertain the fair market value of a capital asset the AO may refer the valuation of capital asset to a Valuation Officer--
(a) in a case where the value of the asset as claimed by the assessee is in accordance with the estimate made by a registered valuer, if the AO is of the opinion that the value so claimed is less than its fair market value
(b) in any other case, if the AO is of opinion--
(i) that the fair market value of the asset exceeds the value of the asset as claimed by the assessee by more than such percentage of the value of the asset as so claimed or by more than such amount as may be prescribed in this behalf; or
(ii) that having regard to the nature of the asset and other relevant circumstances, it is necessary so to do."
It is an admitted position that in the present case the assessee returned the capital gain based on the valuation report of the approved valuer. Therefore, from the provision it is clear that Clause (a) of Section 55A would be attracted. Clause (b) comes into play where the assessee has not furnished any valuation report in support of his/her claim. To say that the AO has power to make a reference to the DVO under Section 131 would be wrong in itself. The learned Departmental Representative had argued that Section 131 also gives power to the AO to make reference to the DVO. However, if we go through the powers given under Section 131 we find that it specifically gives power to the AO, Dy. CIT(A), Jt. CIT, CIT(A) and Chief CIT or CIT regarding discovery and inspection, production of evidence and issue of commissions. It does not talk about making a reference to the Valuation Officer for valuation of property. Therefore, the only section which is relevant for making reference to DVO in IT Act is Section 55A only. The Clause (a) of Section 55A gives power to the AO for making reference of the valuation of a capital asset to the Valuation Officer where the valuation of the asset claimed by the assessee in accordance with the estimate made by the registered valuer is less than its fair market value. It does not talk about excess fair market value. In the present case what I find is that the CIT has mentioned that the fair market value disclosed by the assessee at Rs. 1 crore as on 1st April, 1981, as per the valuation report furnished by the assessee was on the higher side. The CIT or the AO assumes power under the Clause (a) of Section 55A only when in his opinion the fair market value disclosed by the assessee is less. Therefore, neither the AO nor the CIT can assume power to give such a direction where the value of the property disclosed by the assessee based on the approved valuer's report is on a higher side, i.e., Rs. 1 crore in this case. As such, invoking jurisdiction under Section 263 on the above basis is illegal. In this case I find that the CIT invoked jurisdiction under Section 263 by mentioning that the assessment order under revision is grossly erroneous and prejudicial to the interest of the Revenue because the correctness of the valuation report filed by the assessee has not been examined by the AO and hence there is no application of mind by the AO, and his order is not a fully discussed order. In this connection, I would like to mention here that the AO started the assessment proceedings w.e.f. 17th June, 1997, and completed the same on 10th Dec., 1998, after about one and a half year. Several dates were given and several queries were raised by the AO through the chartered accountant of the assessee. It is clear that the chartered accountant filed the details called for by the AO. The AO had called for comparable sale instances in the vicinity of the property situated at Bangalore. It is an admitted position that the assessee could not produce comparable sale instances. Therefore, from the beginning to the end, thorough inquiries were made by the AO before accepting the capital gain returned by the assessee. The assessment order reads as under :
"The assessee filed return of income for the asst. yr. 1996-97 on 27th June, 1996, declaring total income at Rs. 3,03,83,860. The return was processed under Section 143(1)(a) on 21st Sept., 1998, at the same income without making any prima facie adjustments.
In response to notice under Section 143(3), Mr. M.H. Contractor, C.A., attended the assessment proceedings from time to time and filed necessary details.
The assessee derives income from capital gains, income from other sources.
During the previous year corresponding to the asst. yr. 1996-97, the assessee has sold property at Convent Road, Bangalore. The assessee has filed alongwith the return of income letter dt. 19th June, 1996, which is reproduced below :
'I am filing herewith my return of income for the aforesaid assessment year. It may be noted that my total income has exceeded the maximum amount not chargeable to tax on account of long-term capital gains arising on sale of my property at Convent Road, Bangalore.
The said property was gifted to me by my late father in the year 1955. During the time of the war the said property was acquired for occupation as tenant by Garrison Engineer, a division of Indian army. They had acquired the whole property, therefore, the return of income was filed on the basis of rental income. I am enclosing the assessment order for the income year 1968-69 from which it will be seen that the said Bangalore property was duly disclosed. The income from said property amounted to Rs. 3,400. The said rental income was received from Garrison Engineers (Military) who were the tenants in the said premises.
I am also enclosing my bank analysis with BMC bank. Null Bazar branch and Mohamedalli Road branch from 1st April, 1993. From the said bank analysis it will be seen that the deposits are the sale consideration received of the said Bangalore property and interest from the saving account.
I am enclosing herewith the statement of capital gains in respect of sale of said Bangalore property.
The MoU of the said Bangalore property together with the valuation report in respect of the same are enclosed herewith.' The assessee has filed MoU dt. 8th June, 1995, indicating that the said property has been assigned for a consideration of Rs. 5,50,00,000. The assessee has also filed valuation report dt. 30th May, 1996. The assessee has submitted that an amount of Rs. 7,27,305 has been withdrawn for household expenses and the family of the assessee consists of the assessee herself and her sister Miss. Pravin Kazerani, and both are spinsters.
Subject to above income of the assessee is computed as under :
Long-term capital gains 26,900,000 Income from other sources 3,496,863 Less : Deduction under Section 80L 13,000 3,484,863 Total income-tax 30,383,863 Rounded off to 30,383,860
Issue requisite document. Credit for prepaid taxes be given after due verification. Charge interest as per provision of the Act."
One should not forget that the agreement with the builder, Shri Shahrooq Ali Khan was entered in June, 1995, whereas the property in question was. sold to the Indian Society of the Church of Jesus Christ of Later-Day Saints in December, 1998. There is a time lag of more than three years. So, there is every possibility of appreciation of price of property due to time lag to the benefit of the builder. Since the deal struck with the assessee in 1995 for lump sum consideration of Rs. 5.5 crores as distressed sale, due to her inability it cannot be said that the assessee has received anything more in asst. yr. 1996-97 than what is mentioned in the MoU. Therefore, when the assessee had received only Rs. 5.5 crores by way of agreement dt. 8th June, 1995, with the builder, she was justified in offering the same for tax purposes.
19. I have already discussed that the AO had conducted enquiries with regard to the taxability of the capital gains from the assessee and these proceedings lasted for about one and half year (17th June, 1997 to 10th Dec., 1998); details such as comparable sale instances were called from the same vicinity/locality where the property is situated and after going through the valuation report submitted by the assessee, the AO computed the taxable capital gains. The question arises that in such circumstances whether the order of the AO can be said to be erroneous and prejudicial to the interest of the Revenue.
20. The Hon'ble Bombay High Court in the case of Gabtial India Ltd. (supra), has laid down the principles for exercising jurisdiction under Section 263 as follows :
"Two circumstances must exist to enable the CIT to exercise the power of revision under this sub-section, viz., (i) the order should be erroneous and (ii) by virtue of the order being erroneous prejudice must have been caused to the interest of the Revenue. An order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law makes certain assessment, the same cannot be branded as erroneous by the CIT simply because, according to him, the order should have been written more elaborately. This section does not visualize a case of substitution of the judgment of the CIT for that of the ITO, who passed the order, unless the decision is held to be erroneous. Cases may be visualized where the ITO while making as assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by a accepting the accounts or by making some estimates himself. The CIT, on perusal of records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the CIT, he would have estimated the income at a higher figure than the one determined by the ITO. That would not vest the CIT with power to re-examine the accounts and determine the income himself at a higher figure. This is because the ITO has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the CIT the order in question is prejudicial to the interests of the Revenue. But, that by itself would (not) be enough to vest the CIT with the power of suo motu revision because the first requirement, namely, that the order is erroneous, is absent. Similarly, if an order is erroneous but not prejudicial to the interests of the Revenue, then 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 must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully eligible has not been imposed. 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 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."
It was further held :
"This decision of the ITO could not be held to be 'erroneous' simply because in his order he did not make an elaborate discussion in that regard. Moreover, in the instant case, the CIT himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the ITO to re-examine the matter. That was not permissible."
I would like to mention here that the learned Departmental Representative had made it a point that the AO had not made elaborate discussion in that regard which, according to the above decision, could not be held to be erroneous especially when the AO has made thorough inquiries. In the present case I find that the CIT, without bringing any specific sale instance or material, has observed that the value of the property at Bangalore had appreciated more in the year 1995, i.e., when the MoU was entered into between the assessee and the builder. In the absence of any material the observation of the CIT is merely based on surmises, conjectures and guess-work. In the case of Trustees, Anupam Charitable Trust (supra), the Hon'ble High Court has observed that "The error envisaged by Section 263 was not one which depended on possibility or guess-work, but it should be actually an error either of fact or of law."
21. In the case of Malabar Industrial Co. Ltd. (supra), the Hon'ble Supreme Court has laid down the principles for exercising the jurisdiction under Section 263 as under:
"A bare reading of Section 263 of the IT Act, 1961, makes it clear that the prerequisite for the exercise of jurisdiction by the CIT suo motu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the Revenue. The CIT has to be satisfied of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent--if the order of the ITO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue--recourse cannot be had to Section 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the AO; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase is not defined in the Act. Understood in its ordinary meaning, it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the ITO, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The phrase 'prejudicial to the interests of the Revenue has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law."
Applying the principle laid down by the Hon'ble Supreme Court to the facts of the present case, I am of the opinion that the CIT was not justified in invoking the jurisdiction under Section 263. The learned Departmental Representative relied on the decision of Madhya Pradesh High Court in the case of Ratiam Coal Ash Co. (supra), wherein it was laid down that if the ITO made the assessment in undue hurry, accepting what the assessee stated in the return without making any enquiries, in the circumstances of the case, the CIT would be justified in holding the order of the ITO to be erroneous. However, I find that the facts and circumstances mentioned in that case are distinguishable from the facts and circumstances mentioned in the present case. In the present case it was found that the assessee had furnished all requisite information to the AO and the AO after making due enquiries had completed the assessment in a period more than one and half year. Therefore, it cannot be said that the AO has made assessment in due hurry or only by relying what had been stated by the assessee in his return.
22. So far as the case laws cited by the Departmental Representative are concerned, I find the same distinguishable on facts. In the case of Gee Vee Enterprises (supra), the facts are that some of the directors and shareholders formed with some others a registered firm, the petitioner. An agreement was entered into between the company and the petitioner for erecting a multi-storyed building on the plot after taking advances from the licensees to whom the flats were to be let and the agreement was to come to an end after the building was constructed. The ITO granted registration to petitioner-firm under Sections 184 and 185 of the IT Act, 1961, and for the very first year of asst. yr. 1971-72, made assessments accordingly. The CIT found that the AO had not made sufficient enquiries before granting registration to the petitioner. Under these circumstances the Hon'ble Delhi High Court held that the CIT was justified in invoking jurisdiction under Section 263 because the AO had not made further enquiries to the facts, when the circumstances stated in the return, made such enquiries prudent. So, the order of the AO was held to be erroneous. The present case is distinguishable because the AO has made enquiries and then accepted the claim of the assessee. Similarly, the case of Smt. Tara Devi Aggarwal (supra) is distinguishable to the facts of the present case. In that case the assessee wanted to be assessed on a figure in order to assist someone else who would have been assessed to a larger amount and the assessment was held to be erroneous and prejudicial to the interest of the Revenue. In the case of Emery Stone Mfg. Co. (supra), the Hon'ble Rajasthan High Court has observed as follows :
"The IAC not having applied his mind at all and having allowed the depreciation at the enhanced value without considering Expln. 3, the order was prejudicial to the interests of the Revenue."
The facts of this case are also distinguishable from the facts of the present case. So are the facts in the case of Kanda Rice Mills (supra) and Godavari Sugar Mills Ltd. (supra).'
23. In view of the above discussion, I am of the opinion that the principle laid down by the Hon'ble Supreme Court in the case law cited by the learned Counsel that jurisdiction under Section 263 can be invoked where the order of the AO is erroneous. In the present case I find that there is no material on record to show that the assessee has received anything more than Rs. 5.5 crores. Therefore, the assessment order cannot be held to be erroneous. There is also another aspect of the matter. The IT Department in the case of the assessee when reopened the assessment under Section 143(3) r/w Section 147 by order dt. 24th Feb., 2004, has mentioned that Shri Shahrooq Ali Khan in the return filed before the ITO, Bangalore, has shown capital gain from sale of his property taking cost at Rs. 5.5 crores and sale consideration of Rs. 11.87 crores. Therefore, it is clear that the rest of the amount has also been offered for taxation by Shri Shahrooq Ali Khan. Under these circumstances, the assessment order cannot be held to be prejudicial to the interest of the Revenue.
24. In view of the foregoing discussions, I am of the opinion that the order of the AO is neither erroneous nor prejudicial to the interest of the Revenue. Therefore, the CIT is not justified in assuming jurisdiction under Section 263 of the IT Act, His order is not sustainable in the eye of law. I, therefore, agree with the view taken by the learned JM where he has cancelled the order passed under Section 263.
25. The matter will now go before the regular Bench for disposing of appeal in accordance with the majority opinion.
Pramod Kumar, A.M.
1. When this appeal originally came up for hearing before the Bench, there was a difference of opinion between the Members who constituted the Division Bench. To resolve the controversy, Hon'ble President, in exercise of his powers under Section 255(4) of the IT Act, referred the following question for the opinion of a Third Member :
"Whether or not on the facts and in the circumstances of the case, the impugned order under Section 263 made by the learned CIT is justified and sustainable ?"
2. Shri J.P. Bengra, Hon'ble Vice President (M), appointed as Third Member in this case, concurred with the view taken by the learned JM and held that the learned CIT was not justified in assuming jurisdiction under Section 263 of the Act. The learned Third Member was thus of the view that the impugned order passed under Section 263 of the Act is not sustainable in the eye of law.
3. Following the majority view in the matter, we hold that the impugned order under Section 263 passed by the learned CIT is not sustainable in law. It is accordingly cancelled. The appellant, therefore, succeeds in her appeal.
4. In the result and in accordance with the majority view, the appeal is allowed.