JUDGMENT
Akil Kureshi, J. - The petitioner has challenged a notice dated 8.2.2017 issued by the respondent Assessing Officer to reopen the petitioner's assessment for the assessment year 2012- 2013.
2. Facts are as under. The petitioner, a partnership firm, is engaged in the business of selling, purchasing and developing land. As part of such activity, the assessee purchased a plot of land of a paper mill in liquidation for a consideration of Rs.6.56 crores. This purchase was made through an auction conducted under the order of the High Court. The petitioner incurred further expenditure towards stamp duty, registration charges, administrative costs etc. According to the petitioner, the total cost of acquisition of land in question came to Rs.17,64,61,557/-. The petitioner sold the said plot of land for a consideration of Rs.35,44,70,594/- during the financial year 2011-2012. In the return that the petitioner filed for the assessment year 2012-2013, the petitioner offered sum of Rs.14,49,48,233/- as a long term capital gain.
3. The return of the assessee was taken in scrutiny by the Assessing Officer by issuing notice on 23.9.2013 under section 143(2) of the Income Tax Act, 1961 ("the Act" for short). According to the department, such notice was dispatched through Speed Post on 24.9.2013 and was also served on the assessee before the last date i.e. 30.9.2013.
4. Case of the assessee is that no such notice was served on the assessee at the relevant time. Much later, the Assessing Officer issued a questionnaire to the assessee on 16.3.2015 to explain why the sale consideration should not be taxed as a business income instead of capital gain. In response to the same, the assessee under its letter dated 9.3.2015 contended that no proceedings for assessment can be undertaken since the notice of scrutiny assessment was never served before 30.9.2013. The department thereupon conveyed to the assessee that notice under section 143(2) of the Act was issued on 23.9.2013 and was dispatched through the Speed Post to the assessee on 24.9.2013. The assessee thereafter, responded to the Assessing Officer's desire to tax the income as the business income and not capital gain.
5. The Assessing Officer in a detailed order of assessment dated 30.3.2015 dealt with both the objections of the assessee. Regarding non service of notice under section 143(2) of the Act, the Assessing Officer observed that proper notice was generated and issued on 23.9.2013 and dispatched for service through Speed Post on the last known address of the assessee on 24.9.2013. Regarding the income, he held that the assessee was in the business of purchase and development of the land; the assessee had shown the land as stock in trade and the income earned by the assessee through the sale of land would be a business income.
6. The assessee challenged the order of assessment before the Commissioner (Appeals). The assessee raised the ground of jurisdiction of the Assessing Officer to make the assessment without the service of notice under section 143(2) of the Act. The assessee also questioned the order on merits.
7. The Commissioner (Appeals) by an order dated 8.12.2016 allowed the appeal of the assessee on the ground that there was no proof of service of notice under section 143(2) of the Act. In the opinion of the CIT (Appeals), not mere issuance of notice but service thereof was important. Since there was no evidence of service of notice on the assessee before the due date, the order of assessment was invalid and he quashed the same. In that view of the matter, with respect to assessee's grievance of the Assessing Officer having changed the head of the income, he rendered no decision.
8. Soon after the order of Commissioner (Appeals), the Assessing Officer issued the impugned notice seeking to reopen the assessment of the assessee for the said assessment year 2012-2013. In order to do so, he had recorded the following reasons :
"The assessee has filed its return of income on 29.09.2012 declaring total income of Rs.11,49,48,233/-. The assessment u/s 143(3) was finalised on 30.03.2015 determining the total income at Rs.17,80,09,040/-. The assessee preferred an appeal before the Ld. CIT (A). The Ld. CIT (A), Ahmedabad has passed the order vide No. CIT (A)- 7/87/2015-16 dated 08.12.2016 has deleted the addition on the ground that the notice u/s. 143(2) was not served upon the assessee.
2. In this case, the information received from I & CI, Ahmedabad that the assessee has sold non agriculture land. The assessee has declared the long term capital gain in response to sale of transaction. The details of which are as under :—
| Sr. No. | Particular | Qty | Sale Date/ cost date | Sale value | Cost value | Index-cost index | Index gain | Book gain | |
| 1 | Land | 1 | 30.07.11 28.07.07 | 35447 0594 | 70955 697 | 101089332 785/551 | 2533381262 | 283514897 | |
| 2 | Land | 1 | 2011-12 31.03.09 | 0 | 14000 0 | 188832 785/582 | -188 832 | -140000 | |
| 3 | Land | 1 | 2011-12 31.03.09 | 0 | 97070 0 | 1205695 785/632 | -1205695 | -970700 | |
| 4 | Land | 1 | 2011-12 31.03.11 | 0 | 23597 520 | 28040862 | -28040862 | -25397520 | |
| 5 | Land | 1 | 2011-12 30.06.11 | 0 | 78997 640 | 78997640 785/785 | -78997640 | -78997640 | |
| 35447 0594 | 17646 1557 | 144948233 | 17800 9037 | ||||||
| Total Net Capital Gain Rs.144948233/- |
3. In this regard, it is found that the land under question was purchased by the partnership firm from the liquidator of the company namely; the Associated Pulp & Paper Ltd under the order of Hon'ble Court dated 11.08.2006 and sale document was executed on 24/08/2007. The assessee being partnership firm had purchased this property with intention of developing the said land for the business purpose. The said land was also held as stock in trade as per the return of income for the AY 2011-12. The partnership firm was formed on 20/08/2007 and as per the partnership deed, the main business of the firm was "sale/purchase of land and building, construction, organizer and developer" as mentioned page-2 under clause-3 of the partnership deed. Thus, the profit and gain arising on sale of such property in the hands of the partnership firm is required to be taxed as income from business & professional instead of Long Term Capital Gain as declared by the assessee firm. The benefit of indexation claimed by the assessee is not allowable to the firm. However, the various expenses incurred subsequent to purchase of said land is required to be allowed after verification.
3.1 On verification of the records, the assessee is entitled to claim the following deduction in respect of opening stock and expenses incurred for the purpose of land.
| Stock in Trade as on 01/04/2011 | 9,74,63,917 | |
| Land sale Banakhat Right | 6,75,00,000 | |
| Matipuran Expenses | 1,14,97,640 |
3.2 The total sale consideration of the land is of Rs.35,44,70,594/- and after deducting the above expenses of Rs.17,64,61,557/-, the Net Chargeable Income under the Head of Business & Profession works out to RS.17,80,09,037/-. The tax payable on the above income works out to Rs.5,50,04,793/- as against the tax on capital gain paid by the assessee of RS.2,98,59,336/-. Hence, there would be tax evasion of Rs.2,51,45,457/- (Rs.55004793-29859336). Therefore, the case is also covered under deemed escaped assessment as the income chargeable to tax has also been assessed at too low a rate as per explanation-2 of section 147 of the IT Act, 1961. Issue notice u/s. 148 of the Act."
9. Two things can be immediately seen from the record. The notice of reopening has been issued within a period of four years from the end of relevant assessment year and that the same is founded on the single issue of treatment that the sale proceeds of the land sold by the assessee should receive.
10. In this background, we have heard learned counsel for the parties at length. Learned advocate Shri R.K. Patel for the petitioner raised the following contentions :
11. On the other hand, learned counsel for the Revenue Shri Manish Bhatt opposed the petition contending that the original assessment was set aside by the Commissioner on the grounds of non service of notice. The order of assessment having been invalidated, there remains no assessment in the eye of law. The issues examined by the Assessing Officer in such assessment proceedings cannot take the character of the scrutinised issues. The Commissioner did not set aside the additions made by the Assessing Officer on merits. The principle of merger with its limited applicability under section 147 of the Act, would therefore, not apply. He further contended that the Assessing Officer had formed a bona fide belief that income chargeable to tax had escaped assessment, for which he had tangible material at his command. Notice for reopening of assessment issued within four years from the end of relevant assessment year was therefore valid. Counsel relied on the following decisions :
12. Facts of the case are simple, undisputed but somewhat peculiar. We may summarise such facts. The Assessing Officer wanted to scrutinise the return for the assessment year 2012-2013 for which notice under section 143(2) of the Act was issued on 23.9.2013 and dispatched for service on 24.9.2013. The position which is concluded by virtue of the order of the Appellate Commissioner is such notice was not served on the assessee before 30.9.2013. The assessee raised such contention before the Assessing Officer and also participated in the assessment. The Assessing Officer rejected the ground of non service of notice and taxed the proceeds out of sale of land as the business income. In the appeal, CIT (Appeals) held that the assessment was invalid since it was carried out without notice under section 143(2) of the Act. In that view of the matter, CIT (Appeals) did not examine the assessee's contention regarding the additions made by the Assessing Officer. This order of the CIT (Appeals) has become final. After this order was passed, the Assessing Officer issued the impugned notice for reopening which was done within a period of four years from the end of relevant assessment year.
13. In light of such facts, we need to test the assessee's contentions. Regarding the nature of income having been scrutinised in the original assessment, we cannot accept the stand of the assessee. We may recall, counsel for the assessee had argued that the issues having been examined in the original assessment, the same cannot form the basis for reopening the assessment. Had the scrutiny assessment resulted into an opinion different from the one now propounded by the Assessing Officer in the reasons recorded, this would be a case of change of opinion. However, in the present case, the Assessing Officer proceeded to pass the order of assessment discarding the assessee's objection of non service of notice and in which he held that income generated from the sale of land was a business income. When such order was set aside on the ground of invalidity, having been passed without service of notice, the order does not survive in eye of law. There is thus no original assessment. There is no opinion of the Assessing Officer on record. There is no question of the assessee's return having been scrutinised. There is therefore, no change of opinion.
14. We may test the petitioner's contention regarding merger. Section 147 of the Act, as is well-known, permits the Assessing Officer to assess or reassess the income chargeable to tax which has escaped assessment. The proviso to section 147 of the Act however provides that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment. The essence of this proviso is that the income involving the matters which are the subject matters of appeal, reference or revision, cannot be a subject matter of reopening of the assessment. In other words, on same subject matter, there cannot be parallel consideration by the Assessing Officer in the reopened assessment and by higher officer or authority in appeal, reference or revision. For applicability of this proviso and the principle of merger flowing from such proviso, what is necessary is that there has to be income involving the matter which is the subject matter of any appeal, reference or revision and in such a case, it would not be open for the Assessing Officer to make any assessment or reopening with respect to such income. The stress here is on the income involving the matters which are the subject matter of further proceedings.
15. In the case on hand, the assessee had raised two contentions before the Commissioner (Appeals). First was with respect to the validity of the assessment framed by the Assessing Officer without service of notice and second was with respect to merits of additions made by him in such order of assessment. The Commissioner (Appeals) confined his comments only to first of his contentions and declared that the assessment was invalid since it was framed without service of notice. In that view of the matter, he refused to comment on the assessee's contention on merits of the additions. Essentially, therefore, the order of Commissioner (Appeals) dealt with only one part of the assessee's appeal and refused to enter into the other part. The order of Commissioner, therefore, was confined to the ground of invalidity of assessment per-se and not on the merits of the additions made. The reopening is based on the belief of the Assessing Officer that the sale proceeds should be taxed as the business income and not as capital gain. This subject matter was not a part of the order of the Commissioner (Appeals). The Commissioner (Appeals) having entertained only part of the assessee's appeal, the principle of merger as flowing from the proviso to section 147 of the Act would not apply.
16. In this context, we may refer to the decision of Supreme Court in case of Raja Mechanical Co. (P.) Ltd. (supra). It was a case where the assessee had challenged adjudication order passed by the authority. Such appeal was rejected on the ground that the appeal was filed beyond a period of delay which the appellate authority could not condone. Further appeal of the assessee was rejected by the Tribunal, upon which, the assessee preferred an application for rectification urging the Tribunal to decide the issues on merits and not only on limitation, which was rejected by the Tribunal. The assessee approached the High Court and sought a reference. High Court refused to call for a reference. Supreme Court confirmed the view rejecting the assessee's contention that the order of adjudicating authority having merged with that of the appellate authority, the Tribunal should have examined the issue on merits.
17. We may now refer to the decisions cited by the learned counsel for the petitioner of this Court in support of his contention regarding merger.
18. This brings us to the last contention of the counsel for the assessee that the Assessing Officer could not have issued notice of reopening to bypass or circumvent the statutory period for issuance of notice under section 143(2) of the Act. The argument was that power of reopening the assessment cannot be exercised to overcome the situation where scrutiny assessment is not possible, for want of service of notice under section 143(2) of the Act within the statutory time period. As is well-known section 143 of the act pertains to assessment. Sub-section (1) of section 143 provides the manner in which the Assessing Officer would process a return filed by the assessee. Sub-section(2) of section 143 provides that where a return has been filed and the Assessing Officer considered it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not underpaid the tax, he shall serve on the assessee a notice requiring him on the specified date to attend his office or to produce or cause to be produced any evidence on which the assessee may rely in support of the return. This notice under Sub-section(2) of section 143 of the Act before a scrutiny assessment can be undertaken and assessee's returned income can be questioned, is held to be mandatory in nature. Proviso to Sub-section(2) of section 143 lays down the time limit within which such a notice can be issued.
19. On the other hand, section 147 of the Act pertains to income escaping assessment. Under the said provision, if the Assessing Officer has the reason to believe that any income chargeable to tax has escaped assessment, he may assess or reassess such an income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the assessment proceedings. Exercise of jurisdiction under section 147 of the Act for reopening of the assessment therefore requires a formation of belief on part of the Assessing Officer that income chargeable to tax has escaped assessment. Such belief should be formed bona fide and on the basis of tangible material on record. If these requirements are satisfied, it would be open for the Assessing Officer to assess or reassess the income of an assessee after issuing the notice under section 148 of the Act.
20. Nothing contained in the language of section 147 would permit us to hold that even if all the parameters to enable the Assessing Officer to assess or reassess the income by reopening the assessment are present, same may not be permitted in cases where the original assessment framed by the Assessing Officer has failed on any technical ground, such as in the present case i.e. want of service of notice under section 143(2) of the Act. Once the original assessment is declared as invalid as having been completed without the service of notice on the assessee within the statutory period, there would be thereafter no assessment in the eye of law. The situation therefore, be akin to where return of the assessee has been accepted without a scrutiny. Reopening of the assessment, if the Assessing Officer has the reason to believe that income chargeable to tax has escaped assessment, would be entirely permissible under section 147 of the Act. Merely on the ground that the reasons recorded by the Assessing Officer proceeded on the same basis on which the Assessing Officer initially desired to make additions but which failed on account of setting aside the order of assessment, would not preclude the Assessing Officer from carrying out the exercise of reopening of the assessment. In the present case, facts are peculiar. It is not as if the Assessing Officer after noticing certain discrepancies in the return of the assessee, slept over his right to undertake the scrutiny assessment. The scrutiny assessment was initiated by issuance of notice under section 143(2) of the Act on 23.9.2013. It was also dispatched for service to the assessee on 24.9.2013 by Speed Post on the last known address. The Commissioner (Appeals) however, held that there was no proof of service of notice and since section 143(2) requires service of notice, the assessment was framed without complying with the mandatory requirements.
21. We may refer to some of the decisions on the point. In case of A G Group Corpn. (supra), the Court noticed that at one point the Revenue had reopened the assessment of the assessee. However, such assessment failed on the ground that the reasons were not recorded by the Assessing Officer for issuing such a notice. On the same ground, the Revenue issued fresh notice of reopening which was challenged before the High Court. The High Court held that when the earlier order stood annulled on the ground of lack of fulfillment of the basic requirement under section 147 of the Act, there was no bar against reopening the assessment once again on the same grounds after following due procedure in accordance with law.
22. In case of Inductotherm (India) (P.) Ltd. (supra), the Court was examining the validity of notice for reopening the assessment in a case where the original assessment was not framed after scrutiny but the return of the assessee was accepted under section 143(1) of the Act. One of the contentions raised was that notice for reopening cannot be issued in such a case where return was accepted without scrutiny and the time limit for issuing notice for scrutiny had lapsed. This contention was rejected. The Court held that even for reopening the assessment which was not framed after scrutiny, the basic requirement of section 147 that the Assessing Officer has the reason to believe that income chargeable to tax has escaped assessment would apply, but further observed that :
23. In case of CIT v. Kiranbhai Jamnadas Sheth (HUF) [2013] 39 taxmann.com 116/[2014] 221 Taxman 19 (Mag.) (Guj.) , this issue directly came up for consideration. Relying on the judgment in case of Inductotherm (India) (P.) Ltd. (supra), the view of the Tribunal that notice under section 148 could not have been issued without previously having issued notice under section 143(2) of the Act within the time available for framing the original assessment was reversed.
24. In case of CIT v. Vishal Gupta [2012] 22 taxmann.com 82/210 Taxman 65 (Mag.) (Delhi) , issue very similar to case on hand came up for consideration. It was a case where the assessment for the assessment years 1995-1996 and 1996-1997 were quashed by the Tribunal on the ground that statutory notice under section 143(2) of the Act was not served on the assessee within the stipulated period. The Assessing Officer thereafter recorded his reasons and issued notice for reopening of the assessment. The orders of such assessment were set aside by the Tribunal on the ground that the original assessment was set aside; for want of service of notice under section 143(2) of the Act, reopening could not have been done. Reversing the decision of the Tribunal, the Delhi High Court observed as under :
'11. The facts elucidated above clearly show that the tribunal has quashed/set aside the original proceedings on the technical ground that statutory notice under Section 143(2) was not served on the respondent-assessee within the stipulated period of 12 months from the month in which return was filed.
12. The Assessing Officer thereafter had recorded fresh reasons and issued notice under Section 147/148 of the Act. The reasons to believe now recorded have to stand on their own legs and are separate from the reasons to believe, which were recorded earlier before initiation of the re-assessment proceedings, which abated. The said reasons to believe and issue of notice under Section 147/148 of the Act cannot be faulted and rejected on the ground that in the earlier/original assessment or re- assessment proceedings, notice under Section 143(2) was not served on the assessee within the statutory time/period. This was a valid ground to quash the first/original assessment/re-assessment order, but it cannot be a ground to quash the re-assessment proceedings, which have been initiated afresh after recording reasons to believe. In R. Kakkar Glass and Crockery House v. Commissioner of Income-tax, [2002] 254 ITR 273 (P&H) , it has been held:
"10. . ……… When a notice is quashed on some technical ground, it would be in order to issue a fresh notice under Section 148 provided all other legal requirements of law have been complied with. For instance, if a notice under Section 148 is quashed on the ground that no reasons had been recorded, a second notice shall be in order after recording the reasons. Similarly, if a notice is quashed on the ground that it has been issued without the requisite sanction of the higher authority, fresh notice can be issued after obtaining the necessary sanction. Such instances can be multiplied. However, if a notice under Section 148 is quashed after examination of the material relied on by the Assessing Officer and after recording a finding that on the basis of such material the additional income cannot be said to have escaped assessment, then it shall not be permissible for the Assessing Officer to issue a fresh notice on the basis of the same material in respect of the same item of income. However, in case some fresh material comes into the possession of the Assessing Officer subsequently suggesting escapement of income under the same head or some other head, we see no fetters on his power to issue a fresh notice under Section 148. Needless to emphasise that all such subsequent notices have to conform to the parameters prescribed under the law including the provision regarding limitation.'
25. Similar issue came once again before the Delhi High Court in case of Biotech International Ltd. v. Asstt. CIT [2010] 230 CTR 533 . It was a case where the assessee company filed return of income for the assessment year 2001-2002. The Assessing Officer passed the order of assessment under section 143(3) of the Act. Such order was challenged on the ground that notice under section 143(2) of the Act was not served on the company within the statutory time- frame. CIT (Appeals) having rejected such a contention, the assessee approached the Tribunal. The Tribunal upheld the contention and quashed the order of assessment. After this, the Assessing Officer issued notice under section 147 of the Act to reopen the assessment. Such notice was challenged before the High Court on the ground that the Assessing Officer could not have issued notice once the original assessment was set aside. The High Court held that once the assessment was held to be nullity, it would imply that there was no assessment in the eye of law. The High Court referred to the decision of Supreme Court in case of Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316 (SC) and made following observations :
"8. From the facts which are narrated above, it would become apparent that first and foremost issue which needs determination with regard to an assessment order made under section 143(3) of the Act, as pointed out above. This assessment was rendered invalid and was set aside on the ground that the foundation for initiation of proceedings namely, issuance of the notice under section 143(2) of the Act was vitiated by law. The question that arises is as to whether such an assessment under section 143(3) of the Act would only be irregular/illegal or it would be nullity in the eyes of law."
26. We may now refer to the decisions cited by counsel for the petitioner on this part:
This issue directly does not arise in the present case. In any case, we are not in agreement with the view expressed in the judgment. In our view, such a proposition would be opposed to the decision of Supreme Court in case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra) as reiterated in later judgment in case of Dy. CIT .v Zuari Estate Development & Investment Co. Ltd. [2015] 373 ITR 661/63 taxmann.com 177/[2016] 236 Taxman 1 (SC) . It would also be opposed to the logic adopted by the Court in case of Inductotherm (India) (P.) Ltd. (supra). This decision of Delhi High Court in case of Orient Craft Ltd. (supra) came up for consideration before this Court in case of Olwin Tiles (India) (P.) Ltd. v. Deputy Commissioner Of Income-Tax [2016] 382 ITR 291/237 Taxman 342/66 taxmann.com 8 . It was opined as under :
"9. In case of Orient Craft Ltd. (supra), heavily relied upon by Shri Shah, the Division Bench of Delhi High Court, in the context of reopening of an assessment, which was originally accepted under Section 143(1) of the Act, reiterated that the requirement of 'reason to believe' would apply even in such case and that such requirement cannot be different in case of 143(1) and 143(3) assessment. On this aspect, we have no disagreement at all. In fact, this was substantially what was held in judgment of this Court in Inductotherm (India) P. Ltd. (supra). However, in later portion of the judgment in para-18, which is reproduced hereinabove, the Court went further and observed that there was no whisper in the reasons recorded, of any tangible material which came to the possession of the assessing officer subsequent to the issue of the intimation. The Court was, therefore, of the opinion that it reflects an arbitrary exercise of the power conferred under section 147 of the Act. Heavy reliance was placed on the decision of the Supreme Court in case of CIT v. Kelvinator of India Ltd., reported in 320 ITR, page No.561. We are unable to persuade ourselves to take such a strong line. The decision of the Supreme Court in case of Kelvinator of India Ltd. (supra) was rendered in the background of a case of reopening of an assessment which was previously framed after scrutiny. The observations of the Supreme Court of requirement of reason to believe even after amendment in Section 147 of the Act therefore, must be seen in background of such facts. We are afraid, the Supreme Court never meant to convey that to reopen an assessment, which was accepted under Section 143(1) of the Act, there must be some tangible material, which is alien to the record."
Delhi High Court itself in case of Indu Lata Rangwala v. Deputy Commissioner Of Income Tax [2016] 384 ITR 337/[2017] 80 taxmann.com 102 had explained the judgment in case of Orient Craft Ltd. (supra). Referring to the decisions of Supreme Court in case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra) and Zuari Estate Development & Investment Co. Ltd's case (supra), and taking note of judgment of this Court in case of Olwin Tiles India (P.) Ltd. (supra), the Court summarized the legal position as under :
"35.5 As explained by the Supreme Court in Rajesh Jhaveri Stock Brokers P. Ltd. (supra) and reiterated by it in Zuari Estate Development and Investment Co. Ltd. (supra) an intimation under section 143(1)(a) cannot be treated to be an order of assessment. There being no assessment under section 143(1)(a), the question of change of opinion does not arise.
35.9 the decisions of this Court and other courts to the extent inconsistent with the above decisions of the Supreme Court cannot be said to reflect the correct legal position."
27. In the result, petition is dismissed.
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