Commissioner Of Income Tax-I, New Central Revenue Building,Statue Circle, Jaipur (Raj v. Shri Sunil Sankhla, Shiv Bhawan, Near Rajpoot Hostel, Stationroad, Jaipur

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 162 / 2017 Commissioner of Income Tax-I, New Central Revenue Building,Statue Circle, Jaipur (Raj.) ----Appellant Versus Shri Sunil Sankhla, Shiv Bhawan, Near Rajpoot Hostel, StationRoad, Jaipur ----Respondent _____________________________________________________ For Appellant(s) : Mr. Anuroop SinghiFor Respondent(s) : Mr. Sanjay Jhanwar _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERIHON'BLE MR. JUSTICE VIJAY KUMAR VYASjudgment 10/01/2018 1.By way of this appeal, the appellant has challenged thejudgment and order of the Tribunal whereby the Tribunal hasallowed the appeal of the assessee. 2.This court while admitting the appeal on 18.07.2017 framedthe following question of law:- “Whether on the facts and circumstances ofthe case and in law, the Hon’ble ITAT is rightin setting aside the order of Principal CIT-Ipassed u/s 263 of the I.T. Act, holding that thelaw did not permit the Pr.CIT to replace theview of the AO without appreciating the factthat the assessment order was set-aside onthe ground that the AO had passed the orderwithout making inquiries or verification, whichshould have been made?” 3.The brief facts of the case are that the assessee is engagedin the business of real estate i.e. purchase and sale of land. During the assessment proceedings it was found that assessee hassold two properties amounting to Rs. 30,00,000/- and Rs.23,00,000/- on 28/12/2010 total amounting to Rs. 53,00,000/-out of his business stock of Rs. 57,51,720/-. The Assessing Officerduring the assessment proceedings accepted the returned incomeas declared by assessee is and assessed the income of assesseeu/s 143(3) of the Income Tax Act, 1961, at Rs. 27,93,750/-. 4.The property was never shown in stock in trade and it wasnever shown in the capital account. The Assessing Officer passedan order dated 24.03.2014 wherein it has been observed asunder:- “2) Assessee is engaged in the businessof real estate i.e. purchase and sale ofland. Apart from the above assesseehas also shown income from job work.3) During assessment proceedings it isfound that during the year assessee hassold two properties amounting to Rs.30,00,000/- and Rs. 23,00,000/- on28/12/2010 total amounting of Rs.53,00,000/- out of his business of Rs.57,51,720/-.” 5.Taking into consideration, he further contended that the CIT(A) while considering the matter held as under:- “4. I have gone through the writtensubmission of the assessee and availablerecords. It is seen that no closing stockor opening stock, as claimed by theassessee, was appearing in the balancesheet of AY. 2007-08 to 2009-10. Thoughthe AR in the letter dated 28.01.2015has mentioned that the balance sheets ofthese years were attached, however, nosuch attachment was enclosed with thesaid letter. 5. The assessee furnished tradingaccount for the year ended on 5.Taking into consideration, he further contended that the CIT(A) while considering the matter held as under:- “4. I have gone through the writtensubmission of the assessee and availablerecords. It is seen that no closing stockor opening stock, as claimed by theassessee, was appearing in the balancesheet of AY. 2007-08 to 2009-10. Thoughthe AR in the letter dated 28.01.2015has mentioned that the balance sheets ofthese years were attached, however, nosuch attachment was enclosed with thesaid letter. 5. The assessee furnished tradingaccount for the year ended on 31.03.2010, which shows that the assesshas converted the land to stock on DLCrate of rS. 4,42,12,500/- on 01.04.2009and mentioned in the footnotes as shortterm capital gain of Rs. 4,17,23,850/-.However, at the same time in the letterdated 28.01.2015, the assessee hascategorically stated that he hadpurchased 44 bigha and 2 biswa land inthe financial year 2006-07 during thecourse of business. The assessee hasfurther stated that the land waspurchased by him in course of businessactivity and it had been held as stock intrade. These two things are contradictoryin nature. If the claim of the assesseethat the land was purchased during thecourse of business and was held as stocksince its purchases in the year 2006-07,the trading account discussed above isincorrect. If it was purchased during thecourse of business, why assess neededto convert it into stock at DLC rate of Rs.4,42,12,500/- on 01.014.2009 andarrived at STGC of Rs. 4,17,23,850/-.” 6.He contended that the Tribunal has committed serious errorin allowing the appeal of the assessee. 7.Counsel for the respondent Mr. Sanjay Jhanwar has taken usto the order of the Tribunal wherein it has been observed asunder:- 2.4 We have heard the parties and perusedthe material available on record. We have alsoconsidered the facts of the case and case lawsrelied on by both the sides. The records showsthat the assessee had purchased the landmeasuring 61,500 Sq. meter. The magnitudewas so much that it cannot be for capitalinvestment. The assessee got the land useconversion from agriculture to residential andpaid the necessary fee to the concernedauthorities. Since the acquisition of the saidland and converting the same into residentialwas shown in the accounts as stock in tradewhich is evident from the financial statementsavailable in the paper book as submittedbefore the AO. Further it is seen that ld. 2.4 We have heard the parties and perusedthe material available on record. We have alsoconsidered the facts of the case and case lawsrelied on by both the sides. The records showsthat the assessee had purchased the landmeasuring 61,500 Sq. meter. The magnitudewas so much that it cannot be for capitalinvestment. The assessee got the land useconversion from agriculture to residential andpaid the necessary fee to the concernedauthorities. Since the acquisition of the saidland and converting the same into residentialwas shown in the accounts as stock in tradewhich is evident from the financial statementsavailable in the paper book as submittedbefore the AO. Further it is seen that ld. Pr.CIT1 has also observed the fact that as on1-4-2009 the land was disclosed as openingstock for F.Y. 2009-10 i.e. relevant to AY 2010-11. The issue before us is for AY 2011-12.Thus in the previous year relevant to theassessment year before us the subject landwas business asset of the assessee. The ld.Pr.CIT-1 has also ignored this fact. This issuehas been examined by the AO and assesseehad made submission during the course ofassessment proceedings. These details areavailable in the paper book. The AO afterexamining these details and after goingthrough these financial statements proceededto complete the assessment by accepting thebusiness profit declared by the assessee. Theassessee has been able to demonstrate thatthe land sold during the assessment year wasthe business asset (stock in trade) in thefinancial statements and duly appearing in thereturn of income filed. The AO accepted thecontentions of the assessee and adopted aview. Now Pr. CIT does not agree with theview adopted by the AO then the law does notpermit him to replace the view. Thus in ourconsidered view the ld. Pr.CIT-1 is not justifiedto set aside the order of the AO. We set asidethe revision order passed by the ld. Pr.CIT-1and direct to restore the assessment orderpassed by the AO dated 24-03-2014. We alsoagree with the alternate argument of the ld.AR of the assessee that the order passed bythe AO should satisfy the twin conditions asprescribed in section 263 that the assessmentorder should not only be the erroneous butalso prejudicial to the interest of revenue. Asper the ld. Pr.CIT-1 the date of conversion ofthe investment in the subject land to the stockin trade was 1.4.2009, as appearing in thereturn of income for AY 2010-11, even thenthis preposition will not make any adverseeffect to the assessed income for the yearbefore us in terms of provisions of section45(2), according to which the fair marketvalue as on the date of transfer has to betaken to compute the deemed capital gains ason the date of such conversion and by takingsuch value the business profit is computed. Inthis regard our attention was drawn by the ld.AR to the argument put forth before the ld.Pr.CIT-1 vide paper book pages 106 & 107wherein it was established that there was noloss to revenue if the provisions of section45(2) are applied and deemed capital gains as on the date of conversion of investment intostock in trade was computed. Further businessprofit is computed in the impugned year whenactual sale takes place by taking the fairmarket value as on the date of suchconversion as cost of acquisition. This view isduly supported by the order of the Hon’bleApex court in the case of CIT v. Max India Ltd.,295 ITR 282 (SC) wherein it has been heldthat ‘every loss of revenue cannot be said tobe prejudicial to the interests of revenue’. Asobserved above in the present case , there hasbeen no loss to the revenue and it cannot besaid that the order passed by the AO wasprejudicial to the interest of revenue. For thisproposition reliance is also placed on thefollowing decisions of the jurisdictional highcourt: on the date of conversion of investment intostock in trade was computed. Further businessprofit is computed in the impugned year whenactual sale takes place by taking the fairmarket value as on the date of suchconversion as cost of acquisition. This view isduly supported by the order of the Hon’bleApex court in the case of CIT v. Max India Ltd.,295 ITR 282 (SC) wherein it has been heldthat ‘every loss of revenue cannot be said tobe prejudicial to the interests of revenue’. Asobserved above in the present case , there hasbeen no loss to the revenue and it cannot besaid that the order passed by the AO wasprejudicial to the interest of revenue. For thisproposition reliance is also placed on thefollowing decisions of the jurisdictional highcourt: 1. CIT Vs. M/s Chambal Fertilizers &Chemicals Ltd. (Raj HC) (2014) 51TW 1572. CIT Vs. M/s Deepak Real EstateDevelopers P. Ltd. (Raj HC) (2014) 51TW 186 With the above observations, we are setting asidethe revision order passed by the ld. Pr.CIT-1,Jaipur and restore the assessment order passedu/s 143(3) of the Act by AO dated 24-03-2014.Accordingly the appeal of the assessee is allowed. 8.He relied upon the decision of Karnataka High Court in Commissioner of Income Tax vs. Gokuldas Exports,[2011] 333 ITR 214, (KARHC) : wherein it has been heldas under:- 28. Further the Delhi High Court in the matterof CIT v. Shri Ram Honda Power Equip :[2007] 289 ITR 475 has taken a contra viewafter elaborately discussing the judgments ofvarious High Courts and the Supreme Court onthe point In the aforesaid case it has beenheld as under (headnote): The idea of section 80HHC is to ensure thatthe exporter gets the benefit of the profitsderived from export and not to depress the profit further. Therefore, it can only be the netinterest which can be included in the profits. Ifnetting were not to be permitted the resultwould be that the profits of the exporter wouldbe depressed by an item that is expenditureincurred on earning interest, which does notform part of the profit at all. This could nothave been the intention of the Legislature. Explanation (baa) is relatable only to clause(a) of section 80HHC(3) and not to clause (b)thereof. These operate in distinct areas and nointer-mixing is contemplated. Hence the word'interest' in clause (baa) to the Explanation insection 80HHC is indicative of 'net interest',i.e., gross interest less the expenditureincurred by the assessee in earning suchinterest. To summarise the conclusions : (i) Incomputing what the profits derived fromexports for the purposes of section 80HHC(1)read with section 80HHC(3) are, the nexustest has to be applied to exclude that whichdoes not partake of profits that can be said tohave been derived from the business ofexports. (ii) In the specific context of clause(baa) of the Explanation to section 80HHC,while determining the 'profits of the business',the Assessing Officer has to undertake a two-step exercise in the following sequence. Hehas to first 'compute' the profits of thebusiness under the head 'Profits and gains ofbusiness or profession.' In other words, he willhave to compute business profits, in terms ofthe Act, by applying the provisions of sections28 to 44 thereof. (iii) In arriving at the profitsof the business by the above method, theAssessing Officer will exclude all such incomeswhich partake of the character of 'income fromother sources' which in any event are treatedunder sections 56and 57 of the Act and aretherefore not to be reckoned for the purposesof section 80HHC. (iv) Where surplus fundsare parked with the bank and interest isearned thereon it can only be categorised asincome from other sources. This receipt merits separate treatment under section 56 of the Actwhich is outside the ring of profits and gainsfrom business and profession. It goes entirelyout of the reckoning for the purposes ofsection 80HHC. (v) Interest earned on fixeddeposits for the purposes of availing of creditfacilities from the bank, does not have animmediate nexus with the export business andtherefore has to necessarily be treated asincome from other sources and not businessincome. (vi) Once business income has beendetermined by applying accounting standardsas well as the provisions contained in the Act,the assessee would be permitted, in terms ofsection 37of the Act, to claim as deduction,expenditure laid out for the purposes ofearning such business income. (vii) In thesecond stage, the Assessing Officer will deductfrom the profits of the business computedunder the head 'Profits and gains of businessor profession' the following sums in order toarrive at the 'profits of the business' for thepurposes of section 80HHC(3): (a) 90 percent., of any sum referred to in clauses (iiia),(iiib) and (iiic) of section 28, i.e., exportincentives; (b) 90 per cent., of any receipts byway of brokerage, commission, interest, rent,charges or any other receipt of a similarnature included in such profits; and (c) profitsof any branch, office, warehouse or any otherestablishment of the assessee situate outsideIndia. (viii) The word 'interest' in clause (baa)of the Explanation connotes 'net interest' andnot 'gross interest'. Therefore, in deductingsuch interest, the Assessing Officer will takeinto account the net interest, i.e., grossinterest as reduced by expenditure incurredfor earning such interest. (ix) Where, as aresult of the computation of profits and gainsof business and profession, the AssessingOfficer treats the interest receipt as businessincome, then deduction should be permissible,in terms of Explanation (baa) of the netinterest i.e., the gross interest less theexpenditure incurred for the purposes ofearning such interest. The nexus betweenobtaining the loan and paying interest thereon (laying out the expenditure by way of interest)for the purpose of earning the interest on thefixed deposit, to draw an analogy from section37, will require to be shown by the assesseefor application of the netting principle. 39. Similarly in the matter of Hero Exports,the Supreme Court was essentially dealingwith section 80HHC(3)(b) and Explanation (e).It did not have the occasion to consider clause(baa) of the Explanation appended to section80HHC. Thus the aforesaid two judgments ofthe Supreme Court do not render help to theRevenue, to arrive at a conclusion in its favour. 40. The relevant part of the order of the SupremeCourt in the matter of Hero Exports : [2007] 295ITR 454 is reproduced hereinbelow, which makes itclear that it was not dealing specifically with clause(baa)appendedtotheExplanation:“We make it clear that we are not readingExplanation (baa) into section 80HHC(3)(b). Whatwe say is as a guidance value/factor, 10 per cent.,of the total other income of Rs. 1,60,000 would befair estimate. This guidance value is not flowingfrom clause (baa) but from the scheme of section80HHC read with the Memorandum to the FinanceAct of 1991. Take a reverse case, if allocation ofexpenses is to be done on actual basis, it wouldnot only be very difficult but in some cases actualapportionment may not be in the interest even oftheDepartment.In conclusion, we may state that under section80HHC(3)(b) one has to balance the 'principle ofattribution' with the concept of 'allocation'. Theconcept of allocation is meant to reduce theincentive. However, when 'allocation' has to bebalanced with the 'principle of attribution', theobject is to reduce the incentive and not toeliminateit. 41. In the light of the foregoing discussion, we areof the considered opinion that the sheet anchor tothe facts of this case is the Delhi High Courtjudgment in the matter of Shri Ram Honda PowerEquip (supra). We say so as that was the case,wherein the direct question posed in this appealwas under consideration and has been answeredas such. The reasoning and interpretationemployed therein also appears to be reasonableand plausible.” 9.He also relied upon the decision of Punjab and HaryanaHigh Court inCommissioner of Income Tax vs. NaharExports Ltd. [2008] 173 Taxman 3 ( PHHC) wherein, it has been held as under:- “9. We find no merit in the contentions raised bythe learned Counsel for the appellant. Firstly, it isnot in dispute that when the order of theCommissioner was passed there were two viewson the word "profits" in that section and differentviews existed on the day when the Commissionerpassed the above order. Moreover, the mechanicsof the section have become so complicated overthe years that two views were inherently possible.Therefore, the subsequent amendment in 2005even though retrospective, will not attract theprovisions of Section 263 of the Act, particularlywhen as stated above we have to take intoaccount the position of law as it stood on the datewhen the Commissioner passed the order dated18-2-1998, in purported exercise of powers underSection 263 of the Act. 11. In the case of Malabar Industrial Co. Ltd. v.CIT : (2000) 243 ITR 83, the Hon'ble Apex Courthas taken the view that the phrase "prejudicial tothe interests of the revenue" under Section 263 ofthe Act has to be read in conjunction with theexpression "erroneous" order passed by theassessing officer. Every loss of revenue as aconsequence of an order of the assessing officercannot be treated as prejudicial to the interests ofthe revenue. For example, when an Income TaxOfficer adopted one of the courses permissible inlaw and it has resulted in loss of revenue; orwhere two views are possible or the Income TaxOfficer has taken one view with which theCommissioner does not agree, it cannot be treatedas an erroneous order prejudicial to the interestsof the revenue. 12. In view of the above settled proposition of lawand following the law laid down by the Hon'bleApex Court in CIT v. Max India Ltd.'s case (supra)and the Malabar Industrial Company Ltd.'s case (supra), we find that no questions of law survivefor determination of this Court. Thus, there beingno merit in the appeals of the revenue, the sameare hereby dismissed.” 10.He further relied upon the decision of Supreme Court of India inCommissioner of Income Tax vs. Max India Ltd. [2007]295 ITR 282 (01.11.2007 – SC), wherein it has been held as under:- 1. In our view at the relevant time two viewswere possible on the word "profits" in theproviso to Section 80HHC(3). It is true thatvide the 2005 amendment the law has beenclarified with retrospective effect by insertionof the word "loss" in the new proviso. Weexpress no opinion on the scope of the saidamendment of 2005. Suffice it to state that inthis particular case when the order of theCommissioner was passed under Section 263of the Income Tax Act, 1961, two views on thesaid word "profits" existed. In our view thematter is squarely covered by the judgment ofthis Court in the case of Malabar Industrial Co.Ltd. v. CIT reported in : (2000) 243 ITR 83;as also by the judgment of the Calcutta HighCourt in the case of Russell Properties P. Ltd.v. A. Chowdhury, Addl. CIT :[1977]109ITR229(Cal) . 2. At this stage we may clarify that underparagraph 10 of the judgment in the case ofMalabar Industrial Co. Ltd. v. CIT : (2000)243 ITR 83 this Court has taken the view thatthe phrase "prejudicial to the interests of therevenue " under Section 263 has to be read inconjunction with the expression "erroneous"order passed by the assessing officer. Everyloss of revenue as a consequence of an orderof the assessing officer cannot be treated asprejudicial to the interests of the revenue. Forexample, when an Income Tax Officer adoptedone of the courses permissible in law and ithas resulted in loss of revenue ; or where twoviews are possible and the Income Tax Officerhas taken one view with which the Commissioner does not agree, it cannot betreated as an erroneous order prejudicial tothe interests of the revenue , unless the viewtaken by the Income Tax Officer isunsustainable in law. According to the learnedAdditionalSolicitorGeneral,onaninterpretation of the provision of Section80HHC(3) as it then stood the view taken bythe assessing officer was unsustainable in lawand therefore the Commissioner was right ininvoking Section 263 of the Income Tax Act. Inthis connection, he has further submitted thatin fact the 2005 amendment which isclarificatory and retrospective in nature itselfindicates that the view taken by the assessingofficer at the relevant time was unsustainablein law. We find no merit in the saidcontentions. Firstly, it is not in dispute thatwhen the order of the Commissioner waspassed there were two views on the word"profits" in that section. The problem withSection 80HHC is that it has been amendedeleven times. Different views existed on theday when the Commissioner passed the aboveorder. Moreover, the mechanics of the sectionhave become so complicated over the yearsthat two views were inherently possible.Therefore, subsequent amendment in 2005even though retrospective will not attract theprovision of Section 263 particularly when asstated above we have to take into account theposition of law as it stood on the date whenthe Commissioner passed the order datedMarch 5,1997, in purported exercise of hispowers under Section 263 of the Income TaxAct.” 11. We have heard learned counsel for the parties. 12. In our considered opinion, it is well settled legal propositionthat while considering Section 263, twin conditions are to befulfilled which in the present case has not been fulfilled. 13. Hence, we are in complete agreement with the view taken bythe Tribunal. 14.The issue is answered in favour of the assessee and against the department. 15. The appeal stands dismissed. (VIJAY KUMAR VYAS) J. B. M. Gandhi/Gourav/85 (K.S. JHAVERI)J.