Dcit 12 3 Mumbai v. Sri Jehangir H C Jehangir Mumbai

In The Income Tax Appellate Tribunal Mumbai Bench J Mumbai Before Shri Shri J Sudhakar Reddy Accountant Memb Er And Shri V D Rao Judicial Member I T A No 14 84 Mum 2007 Assessment Year 2001 02 Dy Commissioner Of Income Tax Jehangi R H C Jehangir 12 3 Mumbai Vs Readymoney Mansion 43 Veer Nariman Road Mumbai 400 023 Pan Aajpj 4355 N Appellant Respondent Appellan T By Shri L K Agarwal Respondent By Shri R R Vora O R D E R Per J Sudhakar Reddy A M This Is An Appeal Filed By The Revenue Directed A Gainst The Order Of The Cit Appeals Xii Mumbai Dated 27 11 2 006 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 O F Land In Shivaji Nagar Pune On The Land Stands A Bungalow Two Servant Quarters A Garage And Tenanted Bungalow The Asses See Obtained Permission To Develop The Land He Intended To Cons Truct 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 Gpi L 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 Co Nstructed 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 Const Ruction Of Building Eternia B Was Completed And Flats Were Sold To The Purchasers The Assessee Filed A Return Of Income On 31 St Oct 2001 Declaring A Loss Of Rs 5 96 756 Subsequently During The Course Of As Sessment Proceedings The Assessee Filed A Revised Profit And Loss Accoun T 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 Com Puted At Rs 1 24 25 705 The Ao Was Of The View That The C Apital Gains On The Proportionate Land Pertaining To The Building Etern Ia B Which Was Completed And Sold Were To Be Shown As Income Duri Ng The Year The Assessee Contended That There Was No Sale Of Land A S No Conveyance Of Sale Deed Was Executed And Only Flats And Shops Wer E Sold It Was Further Submitted That The Whole Plot Of Land Was Not Sub D Ivided Between The Three Buildings Which Were Under Construction And N O Conveyance Or Sale Deed Were Executed It Was Contended That The Capit Al Gains Or Profit Of The Whole Project Consisting Of Three Buildings Cou Ld Be Ascertained Only On Completion Of The Whole Project And Hence The Ca Pital Gains Pertaining To The Proportionate Land Occupied By Eternia B Cou Ld Not Be Taxed In This Year But They Are Taxable In The Year When Construc Tion Of The Flats In All The Three Buildings Were Completed In The Subsequen T Year This Contention Was Rejected By The Ao On Appeal The F Irst 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 Lev Ied The Same By His Order Dated 27 2 2002 3 The Assessee Contended That He Was Under The Bo Nafide Belief That The Capital Gains In Respect Of The Land Was T Axable Only On Completion Of The Project Which Consisted Of Three Wings It Was Also Pointed Out That The Assessee Had Taken A Legal Opi Nion And Based On The Legal Opinion Had Adopted A Project Completion Meth Od Of Accounting The Ao Rejected These Contentions And Held That The Assessee Has Deliberately Concealed The Particulars Of Income An D Levied The Penalty U S 271 1 C Aggrieved The Assessee Carried The Matt Er 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 T He Ao And It Is Very Much Possible That Under A Bonafide Belief The Asse Ssee Thought That After Completion Of The Projects The Income Would Be Sub Ject To Capital Gains He Noted That As Projects Eternia C And Sherwood We Re Still Under Completion The Assessee Had Not Shown Accrual Of T He 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 No T Been Able To Prove Bonafide Of Its Explanation Before The A O 4 Mr L K Agarwal Learned Dr Submitted That Th E 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 G Ains 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 B Ench Of The Mumbai Tribunal In The Quantum Proceedings In Ita No 7381 Mum 204 And Submitted That The Tribunal Has Held That The Provi Sions Of Section 2 47 Are Attracted In This Case Which Provide For Certai N Transactions To Be Treated As Transfer For The Purpose Of Computation Of Capital Gains He Pointed Out That The Tribunal Has Held That The Pro Fit Arising On Conversion Of Capital Receipt Into Stock In Trade Is Assessab Le To Tax In Terms Of Section 45 2 In The Year Of Sale Of Stock In Trad E In The Year Under Appeal The Tribunal Has Noted That Property Eterni A B Was Fully Sold And Also That The Assessee Had Not Excluded Any Sale De Ed 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 Apar Tment 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 Ass Essee 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 Tha T Conveyance Has Not Taken Place He Relied On The Decision Of The Honb Le Supreme Court In The Case Of K P Madhusudan 251 Itr 99 As Well As T He Judgment Of The Honble Kerala High Court In The Case Of Cit Vs Ki Shore Kumar Shyamji 244 Itr 701 He Relied On The Decision Of Un Ion Of India And 5 Another Vs Dharmendra Textile Processors And Anoth Er 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 Tha T The Land Cannot Be Sub Divided And Three Separate Wings Were Being Constr Ucted On The Same Land While Conceding That The Legal Issue Whether Penalty Can Be Levied When Both The Returned Income As Well As The Assess Ed Income Is A Loss Is Against The Assessee By The Decision Of The Honble Supreme Court In The Case Of Gold Coin The Learned Counsel For The Ass Essee 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 An D The Ao On The Year Of Chargeability To Tax Of Capital Gains On Conver Sion Of A Capital Asset Into Stock In Trade And That This Cannot Be Regarde D 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 O Pinion Of A Senior Advocate The Learned Counsel Submitted That It Was Wrong On The Part Of The Ao To State That The Assessee Maintained Separa Te Books Of Account For Each Project And This Is Evidenced From The Order O F The Tribunal Wherein It Is Recorded That Only When The Ao Express The V Iew That Income Was To Be Assessed On The Basis Of Each Building The Asse Ssee Prepared Separate Income And Expenditure Account On The Particular Bu Ilding 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 Et Ernia 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 4 5 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 C Apital 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 Taxat Ion He Pointed Out That A Senior Advocate In A Written Opinion Had Stated T Hat The Revenue Cannot Place Reliance On Section 2 47 V Because The Said Provision Device Transfer In The Context Of A Capital Asset And Wher Eas Section 45 2 Comes Into Play When What Is Transferred Is A Stock In Tr Ade 6 For The Proposition That On A Mere Difference Of Opinion No Penalty Can Be Levied The Learned Counsel Relied O N A Number Of Decisions Including Cit Vs Garg Engineering Co 235 Itr 451 All 6 1 For The Proposition That Mere Timing Differenc E On Chargeability Of Capital Gains Do Not Tantamount To Furnishing Of Inaccurate Particulars Of Income The Learned Couns El Placed Reliance On The Decision Of The Honble Bombay High Court In Th E Case Of Cit Vs Nagri Mills Co Ltd 33 Itr 681 And The Decision Of The Honble Gujarat High Court In The Case Of Cit Vs Manilal Tarakchan D 254 Itr 630 Guj 6 2 For The Proposition That No Penalty Is Leviab Le When The Assessee Was Under The Bonafide Belief On The Advic E Of The Senior Advocate He Relied On The Following Case Laws I Condord Of India Insurance Co Ltd Vs Nirmala Dev I 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 D Harmendra Textiles Processors Supra He Relied On The Decisi On Of The Lucknow Bench Of The Tribunal In The Case Of Star Internati Onal P Ltd Vs Acit 2008 23 Sot 88 And The Decision Of The Honble Su Preme Court In The Case Of Union Of India Vs Rajastan Spinning And We Aving Mills Ltd 23 Dtr 158 He Further Relied On The Following Decisio Ns 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 D Tr 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 Considera Tion Of The Facts And Circumstances Of The Case And A Perusal O F 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 O F 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 C Hargeable To Income Tax As His Income Of The Previous Year In Wh Ich Such Stock In Trade Is Sold Or Otherwise Transferred By Him An D For The Purposes Of Section 48 The Fair Market Value Of Th E Asset On The Date Of Such Conversion Or Treatment Shall Be Deeme D 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 W Hich 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 Tra Nsfer In Relation To A Capital Asset And Does Not Deal With Transfer In Re Lation To Stock In Trade This Is The Opinion Expressed In Writing By A Senio R Advocate Mr Sohrab E Dastur On A Query From The Assessee The Senior Advocate Opined That The Revenue Cannot Place Reliance On Se Ction 2 47 V Because The Said Provisions Defines Transfer In The Context Of A Capital Asset Whereas Section 45 2 Comes Into Play When W Hat Is Transferred Is Stock In Trade Thus He Opined That Capital Gains S Till Arise Only When Registered Deed Is Executed The Tribunal In The Qu Antum Proceedings At Para 12 Had Opined That The Same Criteria That Is T O Be Applied To The Building Is To Be Applied To The Land Underneath A Nd 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 I Ssue When The Assessee Follows The Opinion Of A Senior Advocate On The Int Erpretation Of Law And Offers To Tax Capital Gains In The Year Of Transfe R Of The Land By Way Of A Conveyance Deed In Favour Of The Society It Canno T Be Said That The Assessee Was Not Under The Bonafide Belief That Cap Ital 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 T O Double Taxation 10 When The Two Views Are Possible And There Is A Difference In Opinion On Interpretation Of A Statute In Our Humb Le Opinion No Penalty Can Be Levied In The Case Of Garg Engineering Co Supra The Honble Allahabad High Court Held That Where A Case Set Up By The Assessee In A 9 Given Case Is Found Plausible And There Could Legit Imately Be Two Opinions About It The Fact That The Tribunal Has Accepted O Ne 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 Establis Hed 10 1 Similar View Is Taken By The Honble Calcutt A High Court In The Case Of Cit Vs Jagabandhu Kumar Ruplal Sen Pod Dar 133 Itr 156 Cal The Honble Gujarat High Court In The Case O F Cit Vs Manilal Tarakchand 254 Itr 360 Was Considered The Impositio N Of A Penalty When The Dispute Between The Assessee And The Depar Tment Was As To In Which Year The Compensation Received By The Assesse E Was Taxable The Honble High Court Held That Penalty U S 271 1 C Cannot Be Levied In Such Circumstances 10 2 The Honble Supreme Court In The Case Of T A Shok Pai Supra Held As Follows It Is Therefore Trite That If An Explanation Gi Ven By The Assessee With Regard To The Mistake Committed By Him Has Bee N 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 Fa Ilure To Discharge His Burden In Terms Of Explanation Appended To Sect Ion 271 1 C Of The Income Tax Act Would Not Arise 11 Applying These Propositions To The Facts Of Th E Case The Assessee Has Given A Bonafide Explanation And Thi S 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 P Rocessors Supra Relied Upon By The Revenue The Only Propos Ition 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 Bee N Over Turned By This Decision In Fact The Honble Supreme Court In A La Ter 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 Th At The Decision In The Case Of Dhamendra Textile Processors Must Be Unders Tood To Mean That Though Application Of Section 11 Ac Would Depend Upo N The Existence Or Otherwise Of The Conditions Expressly Stated In The Section Once The Section Is Applicable In A Case The Authority Woul D Have No Discretion In Quantifying The Amount And Penalty Must Be Imposed Equally To The Duty Determined Under Sub Section 2 Of Section 11 Ac A T Para 19 And 20 Of The Reported Decision The Court Observed As Follow S From The Aforesaid Discussion It Is Clear That Pen Alty Under S 11 Ac As The Word Suggests Is Punishment For An Act Of Deliberate Deception By The Assessee With The Inten T To Evade Duty By Adopting Any Of The Means Mentioned In The Section At This Stage We Need To Examine The Recent Decisi On Of This Court In Dharamendra Textile Supra In Almost Eve Ry 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 I N That Manner At Para 22 The Honble Court Observed As Follows There Is Another Very Strong Reason For Holding Th At Dharamendra Textile Supra Could Not Have Interpre Ted S 11 Ac In The Manner As Suggested Because In That Case Tha T Was Not Even The Stand Of The Revenue 11 Further At Para 23 The Honble Court Observed As Follows The Decision In Dharamendra Textile Supra Must Therefore Be Understood To Mean That Though The Application Of S 11 Ac Would Depend Upon The Existence Or Otherwise Of The Condi Tions Expressly Stated In The Section Once The Section Is Applicab Le In A Case The Concerned Authority Would Have No Discretion In Qua Ntifying The Amount And Penalty Must Be Imposed Equal To The Dut Y Determined Under Sub S 2 Of S 11 A That Is What Dharamendr A Textile Supra Decides 13 The Honble 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 M Istake The Court Also Considered The Judgment In The Case Of Dharam Endra Textiles At Para 5 The Honble Court Stated That The Judgment Of Honble Supreme Court In The Case Of Dhamendra Textiles Supra Can Not 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 Whe N The Assessee Has Offered An Explanation Which Was Not Found False An D When The Assessees Explanation Was Bonafide And When All The Facts Rel Ating To The Same Have Been Disclosed Then No Penalty U S 271 1 C Was C Alled For 15 Applying All Thee Propositions To The Facts Of This Case We Agree With The Findings Of The First Appellate Auth Ority 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 Di Smissed Order Pronounced On This 25 Th Day Of January 2010 Sd Sd V D Rao J Sudhakar Reddy Judicial Member Accountant Member Mumbai Dated 25 Th 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