Income Tax Appellate Tribunal - Mumbai
Jehangir H.C. Jehangir, Mumbai vs Department Of Income Tax on 27 November, 2006
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH 'J, MUMBAI.
Before Shri Shri J. Sudhakar Reddy, Accountant Member and
Shri V.D. Rao, Judicial Member.
I.T.A. No. 1484/Mum/2007
Assessment Year : 2001-02.
Dy. Commissioner of Income Tax, Jehangir H.C. Jehangir,
12(3), Mumbai. Vs. Readymoney Mansion,
43-Veer Nariman Road,
Mumbai-400 023.
PAN : AAJPJ4355N.
Appellant Respondent
Appellant by : Shri L.K. Agarwal.
Respondent by : Shri R.R. Vora.
ORDER
Per J. Sudhakar Reddy, A.M.
This is an appeal filed by the Revenue directed against the order of the CIT(Appeals)-XII, Mumbai dated 27-11-2006 for the assessment year 2001-02 wherein penalty levied u/s 271(1)(c) has been deleted.
2. Facts in brief :
The assessee is an individual who owned a piece of land in Shivaji Nagar, Pune. On the land stands a Bungalow, two servant quarters, a garage and tenanted bungalow. The assessee obtained permission to develop the land. He intended to construct a building on the said plot as a business activity. For that purpose he converted the land in question into stock-in-trade and entered into joint venture agreement with Godrej Properties and Investment Ltd. (in short GPIL) and started 2 construction work. As per the agreement three faces/projects in the name of Sherwood, Eternia B and Eternia C were to be constructed. The activity started some where in the assessment year 1999-2000. The accounts for all the three constructions were kept separately but at the end, a combined profit and loss account and balance sheet have been prepared in respect of all the three constructions at the end of the accounting year. During the previous year the construction of building Eternia B was completed and flats were sold to the purchasers. The assessee filed a return of income on 31st Oct., 2001 declaring a loss of Rs.5,96,756/-. Subsequently during the course of assessment proceedings the assessee filed a revised profit and loss account. The AO completed the assessment at a total income of Rs.3,32,90,170/-. The capital gains to the assessee on the sale capital assets which were subsequently converted into stock in trade, was computed at Rs.1,87,70,701/- and the profit from business on completion of Eternia B Project was computed at Rs.1,24,25,705/-. The AO was of the view that the capital gains on the proportionate land pertaining to the Building Eternia B, which was completed and sold, were to be shown as income during the year. The assessee contended that there was no sale of land as no conveyance of sale deed was executed and only flats and shops were sold. It was further submitted that the whole plot of land was not sub divided between the three buildings which were under construction and no conveyance or sale deed were executed. It was contended that the capital gains or profit of the whole project consisting of three buildings could be ascertained only on completion of the whole project and hence the capital gains pertaining to the proportionate land occupied by Eternia B could not be taxed in this year but they are taxable in the year when construction of the flats in all the three buildings were completed in the subsequent year. This contention was rejected by the AO. On appeal, the first appellate 3 authority as well as the ITAT confirmed the view of the AO. The AO initiated penalty proceedings u/s 271(1)(c) and levied the same by his order dated 27-2-2002.
3. The assessee contended that he was under the bonafide belief that the capital gains in respect of the land was taxable only on completion of the project which consisted of three wings. It was also pointed out that the assessee had taken a legal opinion and based on the legal opinion had adopted a project completion method of accounting. The AO rejected these contentions and held that the assessee has deliberately concealed the particulars of income and levied the penalty u/s 271(1)(c). Aggrieved, the assessee carried the matter in appeal. The first appellate authority deleted the penalty both on the ground that both the return of income as well as the assessed income was a loss and also that the assessee had disclosed all particulars before the AO and it is very much possible that under a bonafide belief the assessee thought that after completion of the projects the income would be subject to capital gains. He noted that as projects Eternia C and Sherwood were still under completion, the assessee had not shown accrual of the capital gains. On the ground that there is a difference of opinion he struck down the penalty levied. Aggrieved, the Revenue is in appeal on the following ground :
" On the facts of the case and in law, the ld. CIT(A) has erred in cancelling the penalty of Rs.37,54,140/- levied u/s 271(1)(c) by holding that the assessee was under bonafide belief that capital gain would be taxable only after completing all the three projects but ignoring the fact that the assessee was always guided by a qualified Chartered Accountant that assessee has not been able to prove bonafide of its explanation before the A.O."
4. Mr. L.K. Agarwal, learned DR, submitted that the assessee was following project completion method and it had three projects on 4 hand and was maintaining separate accounts for each of the project and when the undisputed fact is that one of the project is completed, the assessee was required to declare both the capital gains as well as the profits of that project, especially when the flats in that projects were sold and that failing to do so accounted to concealment of income as well as furnishing of inaccurate particulars of income. He drew the attention of the Bench to para 12 page 9 of the order of the H-Bench of the Mumbai Tribunal in the quantum proceedings in ITA No.7381/Mum/204 and submitted that the Tribunal has held that the provisions of section 2(47) are attracted in this case which provide for certain transactions to be treated as transfer for the purpose of computation of capital gains. He pointed out that the Tribunal has held that the profit arising on conversion of capital receipt into stock in trade, is assessable to tax in terms of section 45(2) in the year of sale of stock-in- trade. In the year under appeal, the Tribunal has noted that property Eternia B was fully sold and also that the assessee had not excluded any sale deed in respect of the land as well as the building. The Tribunal pointed out that the building is immovable property and the land underneath the Apartment cannot be separate and the criteria that is applicable to the sale of building is to be applied to the sale of land. He argued that the assessee claimed the cost of land as an expense. He further submitted that it is wrong on the part of the assessee to contend that there were three wings for the same building and the fact is that they were three separate projects. He submitted that the land has been sold and it is a different matter that conveyance has not taken place. He relied on the decision of the Hon'ble Supreme Court in the case of K.P. Madhusudan 251 ITR 99 as well as the judgment of the Hon'ble Kerala High Court in the case of CIT vs. Kishore Kumar Shyamji 244ITR 701. He relied on the decision of Union of India and 5 another vs. Dharmendra Textile Processors and another reported in 306 ITR 277.
5. The learned counsel for the assessee, Mr. R.R. Vora, on the other hand, submitted that the admitted fact is that the land cannot be sub divided and three separate wings were being constructed on the same land. While conceding that the legal issue whether penalty can be levied when both the returned income as well as the assessed income is a loss, is against the assessee by the decision of the Hon'ble Supreme Court in the case of Gold Coin, the learned counsel for the assessee submitted that the assessee was under the bonafide belief that he has to offer the income in question to tax only on completion of the project. He submitted that it was a difference of opinion between the assessee and the AO on the year of chargeability to tax of capital gains, on conversion of a capital asset into stock-in-trade and that this cannot be regarded as furnishing of inaccurate particulars of income. He submitted that it is merely timing difference on the issue of chargeability of capital gains and this does not tantamount to furnishing of inaccurate particulars of income. He vehemently contended that the assessee was under a bonafide belief that capital gains was to be offered for taxation on the completion of the project and such a belief was based on a written opinion of a senior Advocate. The learned counsel submitted that it was wrong on the part of the AO to state that the assessee maintained separate books of account for each project and this is evidenced from the order of the Tribunal wherein it is recorded that only when the AO express the view that income was to be assessed on the basis of each building, the assessee prepared separate income and expenditure account on the particular building. He vehemently contended that land, which is a capital asset of the assessee, was converted into stock-in-trade and what was sold was only the 6 structure over the proportionate land underneath Eternia B and the land was never sold. He pointed out that the land would be transferred only to a society and then only the provisions of section 45(2) would come into play. He pointed out that the assessee had sold the land during the financial year 2005-06 and had offered the entire capital gain in the assessment year 2006-07. He pointed out that the AO assessed the capital gains in the year 2006-07 resulting in double taxation. He pointed out that a Senior Advocate in a written opinion had stated that the Revenue cannot place reliance on section 2(47)(v) because the said provision device transfer in the context of a capital asset and whereas section 45(2) comes into play when what is transferred is a stock-in-trade.
6. For the proposition that on a mere difference of opinion, no penalty can be levied, the learned counsel relied on a number of decisions including CIT vs. Garg Engineering Co. 235 ITR 451 (All.).
6.1 For the proposition that mere timing difference on chargeability of capital gains do not tantamount to furnishing of inaccurate particulars of income, the learned counsel placed reliance on the decision of the Hon'ble Bombay High court in the case of CIT vs. Nagri Mills Co. Ltd. 33 ITR 681 and the decision of the Hon'ble Gujarat High Court in the case of CIT vs. Manilal Tarakchand 254 ITR 630 (Guj.).
6.2 For the proposition that no penalty is leviable when the assessee was under the bonafide belief on the advice of the Senior Advocate, he relied on the following case laws :
i) Condord of India Insurance Co. Ltd. vs. Nirmala Devi 118 ITR 507 (S.C.).
ii) T. Ashok Pai 292 ITR 11
7
6.3 On the impact of the decision in the case of Dharmendra
Textiles Processors (supra) he relied on the decision of the Lucknow Bench of the Tribunal in the case of Star International P. Ltd. vs. ACIT (2008) 23 SOT 88 and the decision of the Hon'ble Supreme Court in the case of Union of India vs. Rajastan Spinning and Weaving Mills Ltd. 23 DTR 158. He further relied on the following decisions :
i) M/s Sidhartha Enterprises, Ludhiana (2009-TIOL-349-HC--
P&H-IT)
ii) CIT vs. Haryana Warehousing 314 ITR 215.
iii) Kanbay Software India Private Limited vs. DCIT 22 DTR 481
(AT).
iv) ACIT vs. VIP Industries (2009) 30 SOT 254.
He distinguished the case laws relied upon by the Revenue.
7. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and a perusal of the papers on record and the orders of the authorities below as well as the case laws cited, we hold as follows :
8. Factually the land in question was the capital asset of the assessee and this capital asset was converted into stock in trade. Such conversion is governed by section 45(2) which reads as follows :
" Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock- in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock- in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset." (Emphasis ours).8
9. The issue whether the sale of stock-in-trade, which is not a capital asset, is governed by section 2(47) or not is a debatable legal issue. Sub section (2) of section 47 deals with transfer in relation to a capital asset and does not deal with transfer in relation to stock-in-trade. This is the opinion expressed in writing by a Senior Advocate Mr. Sohrab E. Dastur on a query from the assessee. The Senior Advocate opined that the Revenue cannot place reliance on section 2(47)(v) because the said provisions defines transfer in the context of a capital asset, whereas section 45(2) comes into play when what is transferred is stock-in-trade. Thus he opined that capital gains still arise only when registered deed is executed. The Tribunal in the quantum proceedings at para 12 had opined that the same criteria that is to be applied to the building, is to be applied to the land underneath and section 2(47)(iv)(v)(vi) are applicable even to section 45(2). From the above it is clear that there is a cleavage of opinion on this issue. When the assessee follows the opinion of a Senior Advocate on the interpretation of law and offers to tax, capital gains in the year of transfer of the land by way of a conveyance deed in favour of the society, it cannot be said that the assessee was not under the bonafide belief that capital gains in question does not arise in the impugned assessment year. We note that the AO had taxed the assessee on the very same capital gain in two different assessment years i.e. the impugned assessment year 2001-02 as well as the assessment year 2006-07 which clearly amounts to double taxation.
10. When the two views are possible and there is a difference in opinion on interpretation of a statute, in our humble opinion, no penalty can be levied. In the case of Garg Engineering Co, (supra) the Hon'ble Allahabad High Court held that "Where a case set up by the assessee in a 9 given case is found plausible and there could legitimately be two opinions about it, the fact that the Tribunal has accepted one version in preference to the other, does not make out a case for penalty, nor could the guilt of concealment of income be said to have been established."
10.1 Similar view is taken by the Hon'ble Calcutta High court in the case of CIT vs. Jagabandhu Kumar Ruplal Sen Poddar 133 ITR 156 (Cal.) The Hon'ble Gujarat High Court in the case of CIT vs. Manilal Tarakchand 254 ITR 360 was considered the imposition of a penalty when the dispute between the assessee and the Department was, as to in which year the compensation received by the assessee was taxable. The Hon'ble High Court held that penalty u/s 271(1)(c) cannot be levied in such circumstances.
10.2 The Hon'ble Supreme Court in the case of T. Ashok Pai (supra) held as follows :
" It is, therefore, trite that if an explanation given by the assessee with regard to the mistake committed by him has been treated to be bona fide and it has been found as of fact that he had acted on the basis of wrong legal advice, the question of his failure to discharge his burden in terms of explanation appended to Section 271(1)(c) of the Income Tax Act would not arise."
11. Applying these propositions to the facts of the case, the assessee has given a bonafide explanation, and this explanation has not been held to be false by the Revenue and under such circumstances, no penalty can be levied u/s 271(1)(c).
12. Coming to the decision of Dhamendra Textiles Processors (supra) relied upon by the Revenue, the only proposition laid down therein as per our humble opinion, is that levy of penalty under Income 10 Tax Act is a civil liability. The proposition that levy of penalty is not automatic and that it is discretionary, has not been over turned by this decision. In fact the Hon'ble Supreme Court in a later decision in the case of Union of India vs. Rajastan Spinning and Weaving Mills, Civil Appeal No. 2527 of 2009, 23 DTR (SC) 158 clearly stated that the decision in the case of Dhamendra Textile Processors must be understood to mean that though application of section 11AC would depend upon the existence or otherwise of the conditions expressly stated in the section, once the section is applicable in a case, the authority would have no discretion in quantifying the amount and penalty must be imposed equally to the duty determined under sub-section (2) of section 11AC. At para 19 and 20 of the reported decision, the Court observed as follows :
"From the aforesaid discussion it is clear that penalty under s. 11AC, as the word suggests, is punishment for an act of deliberate deception by the assessee with the intent to evade duty by adopting any of the means mentioned in the section.
At this stage, we need to examine the recent decision of this Court in Dharamendra Textile (supra). In almost every case relating to penalty, the decision is referred to on behalf of the Revenue s if it laid down that in every case of non-payment or short-payment of duty the penalty clause would automatically get attracted and the authority had no discretion in the matter. One of us (Aftab Alam, J.) was a party to the decision in Dharamendra Textile (supra) and we see no reason to understand or read that decision in that manner. "
At para 22 the Hon'ble Court observed as follows :
"There is another very strong reason for holding that Dharamendra Textile (supra) could not have interpreted s. 11AC in the manner as suggested because in that case that was not even the stand of the Revenue. "11
Further, at para 23, the Hon'ble Court observed as follows :
" The decision in Dharamendra Textile (supra) must, therefore, be understood to mean that though the application of s. 11AC would depend upon the existence or otherwise of the conditions expressly stated in the section, once the section is applicable in a case the concerned authority would have no discretion in quantifying the amount and penalty must be imposed equal to the duty determined under sub-s. (2) of s. 11A. that is what Dharamendra Textile (supra) decides."
13. The Hon'ble Punjab & Haryana High Court in the case of M/s Sidhartha Enterprises held that penalty is must only when there is some element of deliberate default and not a mere mistake. The Court also considered the judgment in the case of Dharamendra Textiles. At para 5, the Hon'ble Court stated that the judgment of Hon'ble Supreme Court in the case of Dhamendra Textiles (supra) cannot be read as laying down that in every case where particulars of income are inaccurate, penalty must follow and that the concept of penalty has not undergone a change by virtue of the said judgment.
14. The Mumbai A-Bench of the Tribunal in the case of ACIT vs. VIP Industries 122 TTJ (Mum.) 289 held that when the assessee has offered an explanation which was not found false and when the assessee's explanation was bonafide and when all the facts relating to the same have been disclosed, then no penalty u/s 271(1)(c) was called for.
15. Applying all thee propositions to the facts of this case, we agree with the findings of the first appellate authority as well as the 12 arguments of Mr. R.R. Vora and uphold the deletion of penalty levied u/s 271(1)(c).
16. In the result, the appeal of the Revenue is dismissed.
Order pronounced on this 25th day of January, 2010.
Sd/- Sd/-
(V.D. Rao) (J. Sudhakar Reddy)
Judicial Member. Accountant Member.
Mumbai,
Dated : 25th January, 2010.
Wakode
Copy forwarded to :
1. Appellant.
2. Respondent
3. C.I.T.
4. CIT(A)
5. DR, J-Bench
(True copy)
By Order
Asstt.Registrar,
ITAT, Mumbai Benches