WP788_01.odt IN HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO.788 OF 2001 M/s. J. S. & M. F. Builders ... Petitioner Vs. A. K. Chauhan and others ... Respondents Mr. Percy Pardiwalla, Senior Advocate a/w. Mr. Balasaheb Yewale and Ms Rupali Vasaikar i/b. Rajesh Shah & Co. for Petitioner. CORAM : UJJAL BHUYAN & MILIND N. JADHAV, JJ. Reserved on : FEBRUARY 27, 2020 Pronounced on : JUNE 12, 2020 JUDGEMENT: 1. By filing this petition under Article 226 of Constitution of India, petitioner has assailed legality and validity of four impugned notices, all dated 25.02.2000, issued under Section 148 of Income Tax Act, 1961 (briefly 'the Act' hereinafter) proposing to re-assess income of petitioner for assessment years 1992-93, 1993-94, 1994-95 and 1995-96 on ground that income chargeable to tax for said assessment years had escaped assessment within meaning of Section 147 of Act. 2. In other words, subject matter of present writ petition relates to challenge to notices proposing to re-open assessments for aforesaid four assessment years. 3. We have heard Mr. Percy Pardiwalla, learned senior counsel along with Mr. Balasaheb Yewale and Ms Rupali Vasaikar, learned counsel for petitioner. However none has appeared for respondents. 4. Case of petitioner is that it is partnership firm constituted by deed of 1/19 ::: Uploaded on - 12/06/2020 ::: Downloaded on - 11/07/2020 11:51:58 ::: WP788_01.odt partnership dated 21.10.1977. Object of petitioner is to carry out business of builders and developers. At time of filing writ petition partnership consisted of eight partners. Petitioner is assessee under Act, Respondent No.1 being jurisdictional Assessing Officer and respondent No.2 being superior higher authority having jurisdiction over respondent No.1. 5. agreement was entered into on 08.11.1977 between Mr. Krishnadas Kalyanji Dasani and petitioner whereby and whereunder Mr. Dasani agreed to sell and petitioner agreed to purchase property situated at Tilak Road, Borivali admeasuring approximately 6,173.20 square metres. property consisted of seven structures and two garages. property was mortgaged and all tenaments were let out. Aggregate consideration for purchase was Rs.3,00,000.00 and further expenditure of Rs.44,087.00 was incurred by way of stamp duty and registration charges. said property was purchased subject to all encumbrances. purchased property was reflected in balance sheets of petitioner drawn up thereafter as fixed asset. 6. For almost decade after purchase, petitioner entered into various agreements with tenants to get property vacated. In this process petitioner incurred further sum of Rs.9,92,427.00. 7. In balance sheet as on 30.09.1987 Borivali property was shown as fixed asset, value of which was disclosed at Rs.13,36,514.00, detailed break up of which has been furnished at page 35 of paper book. 8. With effect from 01.10.1987, petitioner converted portion of property into stock-in-trade and continued to retain that part of property which still remained tenanted as fixed asset. market value of entire Borivali property as on 01.10.1987 was arrived at Rs.69,38,000.00 out of which value of property that was converted into stock-in-trade was determined at 2/19 ::: Uploaded on - 12/06/2020 ::: Downloaded on - 11/07/2020 11:51:58 ::: WP788_01.odt Rs.66,29,365.00. 9. Petitioner thereafter demolished vacant structures and commenced construction of multi-storied structure. 10. In balance sheet as on 31.03.1989, petitioner reflected tenanted property as fixed asset at cost of Rs.2,86,740.00 and stock-in-trade at value of Rs.66,29,365.00. It is stated that revaluation reserve of Rs.55,58,759.00 was also credited. In note accompanying computation of income it was clearly mentioned that conversion of part of Borivali property was made into stock-in-trade and liability to tax under Section 45(2) of Act would arise as and when flats were sold. 11. During previous year relevant to assessment year 1992-93, petitioner had entered into fourteen agreements for sale of fourteen flats, total area of which admeasured 10,960 square feet. 12. For assessment year 1992-93 petitioner filed return of income on 02.11.1992 declaring total income of Rs.17,55,760.00. Petitioner declared income chargeable under head 'profits and gains of business or profession' at Rs.9,37,385.00 and income chargeable under head 'capital gains' at Rs.8,10,993.00. 'capital gains' was arrived at by determining difference between market value of land converted into stock-in-trade as on 01.10.1987 and cost incurred by petitioner which came to figure of Rs.55,87,591.00. Having regard to total built up area of 37,411 square feet, 'capital gains' per square feet was computed at Rs.149.36 on pro-rata basis. Accordingly, having regard to area of 10,960 square feet sold, 'capital gains' was determined at Rs.16,36,986.00. Along with return of income, computation of income as well as audit report in terms of Section 44AB of Act were filed. 3/19 ::: Uploaded on - 12/06/2020 ::: Downloaded on - 11/07/2020 11:51:58 ::: WP788_01.odt 12.1. During assessment proceedings, petitioner's representative had filed detailed letter explaining nature of activity that was carried out as well as method of computation of income. 12.2. Respondent No.1 thereafter completed assessment for said assessment year and passed assessment order dated 26.04.1993 under Section 143(3) of Act assessing petitioner at income of Rs.17,85,560.00. 13. Petitioner filed return of income for assessment year 1993-94 on 29.10.1993 declaring total income of Rs.17,00,233.00. Like previous assessment year, income was computed both under head 'profits and gains of business or profession' as well as under head 'capital gains' for twelve flats sold during relevant previous year. return was accompanied by tax audit report as well as profit and loss account and balance sheet. 13.1. In course of assessment proceedings for said assessment year, petitioner furnished all relevant details including nature of activities undertaken, details of flats sold and closing stock. 13.2. Respondent No.1 completed assessment for said assessment year and passed assessment order on 18.10.1994 under Section 143(3) of Act assessing petitioner at income of Rs.17,30,230.00. It is stated that in assessment order Assessing Officer specifically noted that income from 'long term capital gain' was declared in terms of Section 45(2) of Act. 14. Petitioner filed its return of income for assessment year 1994-95 on 31.10.1994. In return, total income was shown at Rs.10,09,674.00. In this connection intimation under Section 143(1)(a) of Act was issued on 30.03.1995. 4/19 ::: Uploaded on - 12/06/2020 ::: Downloaded on - 11/07/2020 11:51:58 ::: WP788_01.odt 15. For assessment year 1995-96, petitioner filed its return of income on 27.10.1995. In return petitioner declared income under both heads i.e. 'income from business' and 'capital gains'. Income of petitioner was computed in similar manner as in earlier years with similar disclosures in tax audit report, profit and loss account and balance sheet furnished along with return. In course of assessment proceedings, petitioners furnished details of flats sold as well as manner of computing profit in terms of Section 45(2) of Act. Be that as it may, petitioner's assessment for assessment year 1995-96 was completed and thereafter assessment order was passed on 15.05.1996 under Section 143(3) of Act determining taxable income at Rs.1,32,930.00. 16. According to petitioner, it received on 08.03.2000 four notices, all dated 25.02.2000, issued under Section 148 of Act for four assessment years i.e. assessment years 1992-93 to 1995-96 proposing to re-assess petitioner for said assessment years. It was mentioned in notices that respondent No.1 had reason to believe that income of petitioner chargeable to tax for said assessment years had escaped assessment within meaning of Section 147 of Act. Therefore notices were issued after obtaining necessary satisfaction of respondent No.2. Respondent No.1 stated that he proposed to re-assess income of petitioner for each of four assessment years and therefore it was called upon to submit returns of income in prescribed format for each of assessment years. 17. Petitioner through its chartered accountant wrote to respondent No.1 on 31.03.2000 requesting latter to furnish reasons for reopening assessment. 18. It may be mentioned that in response to notices dated 25.02.2000 petitioner filed its returns of income for aforesaid four assessment years on 07.04.2000 contending that filing of returns was without prejudice to its 5/19 ::: Uploaded on - 12/06/2020 ::: Downloaded on - 11/07/2020 11:51:58 ::: WP788_01.odt contention that impugned notices were without jurisdiction. In subsequent returns, details of income remained same as in original returns. Additionally chartered accountant once again requested respondent No.1 to furnish copy of reasons recorded for re-opening assessments. 19. Ultimately vide separate letters dated 17.10.2000 respondent No.1 furnished reasons recorded on basis of which re-assessment proceedings were initiated. reasons recorded for each of assessment years were identical save and except assessment details and figures. Though reasons recorded would be dealt in detail in later part of judgment, suffice it to say that respondent No.1 broadly gave four reasons to justify initiation of re-assessment proceedings. Firstly, petitioner was not justified in assuming that market value of stock adopted as on 01.10.1987 would continue to remain static in subsequent years. In other words, closing stock of land should have been valued at market price as on date of closing of accounts for year concerned. This resulted in under valuation of closing stock and consequent reduction of profit. Secondly, even though petitioner might have entered into agreements to sell certain flats and sold flats, ownership of land continued to remain with petitioner. whole of land under ownership of petitioner constituted its stock-in-trade and it should have been valued at market price as on date of closing of accounts for year concerned. Thus, assessee had suppressed market price of closing stock thereby reducing profit. Thirdly, for purpose of computing 'capital gains' in terms of Section 45(2) of Act, petitioner was not justified in taking cost of entire land; rather, petitioner ought to have taken only fraction of original cost of Rs.3,00,000.00. Thus, there was inflation of cost. Lastly, in terms of Section 45(2), 'capital gains' arising on conversion of land into stock-in- trade ought to have been assessed only in year in which land was sold or otherwise transferred. As land was not conveyed to co-operative society, petitioner was not justified in offering to tax 'capital gains' in terms of Section 6/19 ::: Uploaded on - 12/06/2020 ::: Downloaded on - 11/07/2020 11:51:58 ::: WP788_01.odt 45(2) of Act on basis of flats sold during each of previous years relevant to four assessment years under consideration. 20. Aggrieved by issuance of impugned notices under Section 148 of Act, petitioner has preferred present writ petition seeking reliefs as indicated above. 21. This Court by order dated 31.01.2002 had admitted writ petition for final hearing and passed interim order to effect that assessment should be subject to result of writ petition and that respondents should not raise any demand pursuant to re-assessment during pendency of writ petition. 22. Thereafter respondent No.1 filed affidavit in reply through Shri Pramod Kumar, then Joint Commissioner of Income Tax, Special Range-9, Mumbai. It is stated that his predecessor in office after recording reasons and after obtaining sanction from Commissioner of Income Tax issued notices dated 25.02.2000 under Section 148 of Act for assessment years 1992-93 to 1995-96 thereby re-opening assessments on ground that income of petitioner chargeable to tax had escaped assessment for those assessment years. It is further stated that notices dated 25.02.2000 were served on petitioner on 08.03.2000. In pursuance to notices, petitioner filed returns of income disclosing same income as already declared in original returns. Reasons recorded by Assessing Officer prior to issuance of notices under Section 148 of Act and sanction accorded by Commissioner of Income Tax have been annexed to affidavit. Referring to statutory remedies available, it is contended that no prejudice has been caused to petitioner by issuance of impugned notices. Therefore, writ petition should be dismissed. 23. Referring to Sections 147 and 148 of Act, Mr. Pardiwalla, learned senior counsel for petitioner submits that to assume jurisdiction under Section 147 of 7/19 ::: Uploaded on - 12/06/2020 ::: Downloaded on - 11/07/2020 11:51:58 ::: WP788_01.odt Act, Assessing Officer must have reason to believe that any income chargeable to tax has escaped assessment for assessment year under consideration. Placing reliance on decision of Supreme Court in Income Tax Officer Vs. Lakhmani Mewal Das, 103 ITR 437, he submits that where assessment under Section 143(3) of Act is sought to be re-opened after expiry of four years from end of relevant assessment year, two conditions would have to be satisfied before Assessing Officer acquires jurisdiction to issue notice under Section 148 of Act - firstly, he must have reason to believe that income chargeable to tax has escaped assessment and secondly, he must have reason to believe such income has escaped assessment by reason of failure on part of assessee to make return under Section 139 or not responding to statutory notices under Section 142 or Section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year. Duty of assessee does not extend to beyond making true and full disclosure of primary facts. It is for Assessing Officer to draw correct inference from primary facts. Once inference is drawn which may susbsequently appear to be erroneous, that would amount to mere change of opinion with regard to that inference and would not justify re-opening of assessment. reasons for formation of belief that income had escaped assessment must have rational connection on formation of belief. In other words, there should be live link or close nexus between materials before Assessing Officer and belief formed by him regarding escapement of income from assessment. He submits that above jurisdictional facts are totally absent in present case thereby vitiating impugned notices. In this connection, he has also placed reliance on decision of this Court in Prashant S. Joshi Vs. ITO, 324 ITR 154. 23.1. Mr. Pardiwalla further submits that petitioner had fully complied with requirement of Section 45(2) of Act and capital gains arising on conversion of land into stock-in-trade was offered and rightly assessed to tax in years in which flats were sold on footing that on sale of flat 8/19 ::: Uploaded on - 12/06/2020 ::: Downloaded on - 11/07/2020 11:51:58 ::: WP788_01.odt there was also proportionate sale of land. This methodology adopted by petitioner is in accordance with law. Adverting to various figures pertaining to market value of stock-in-trade as well as cost of acquisition of property, he submits that respondent No.1 was not justified in taking view that there was inflation in cost and that income had escaped assessment. He also submits that it is not correct to think that any profit arises out of valuation of closing stock. In this connection, he has placed reliance on decision of Supreme Court in Chainrup Sampatram Vs. CIT, 24 ITR 481. He has also referred to decision of this Court in CIT Vs. Piroja C. Patel, 242 ITR 582 to contend that expenditure incurred for having land vacated would certainly amount to cost of improvement which is allowable expenditure. Finally he submits that all reasons given by Assessing Officer for re-opening assessments do not make out any case of re-opening as in given facts, no prudent person can form reasonable belief that income had escaped assessment. He therefore submits that impugned notices may be set aside and writ petition be allowed. 24. Submissions made by learned counsel for petitioner have been duly considered. In absence of any representation on behalf of respondents, affidavit filed on behalf of respondent No.1 along with documents annexed thereto have been duly considered. 25. Section 147 of Act deals with income escaping assessment. As per Section 147, if Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may subject to provisions of Sections 148 to 153 assess or re-assess such income and also such other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in course of re-assesement proceedings. As per first proviso, where assessment under Section 143(3) or under Section 147 has been made for relevant assessment year, no action shall be taken under Section 147 after expiry of four years from end of relevant assessment 9/19 ::: Uploaded on - 12/06/2020 ::: Downloaded on - 11/07/2020 11:51:58 ::: WP788_01.odt year unless any income chargeable to tax has escaped assessment for such assessment year by reason of failure on part of assessee to make return under Section 139 or in response to notice issued under Section 142(1) or Section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year. 26. In Prashant S. Joshi (supra), this Court observed that basic postulate which underlines Section 147 is formation of belief by Assesing Officer that any income chargeable to tax has escaped assessment for any assessment year. In other words, Assessing Officer must have reason to believe that income chargeable to tax for particular assessment year has escaped assessment for relevant assessment year before he procceeds to issue notice under Section 148. reasons which are recorded by Assessing Officer for re-opening assessment are only reasons which can be considered when formation of belief is impugned. Recording of reasons distinguishes objective from subjective exercise of power and is check against arbitrary exercise of power. reasons which are recorded cannot be supplemented subsequently by affidavits. question as to whether there was reason to believe within meaning of Section 147 that income has escaped assessment must be determined with reference to reasons recorded by Assessing Officer. Even in case where only intimation is issued under Section 143(1), touchstone to be applied is as to whether there was reason to believe that income had escaped asessment. 27. Earlier, Supreme Court in Lakhmani Meval Das (supra) when contours of Section 147 was different though essence of section was same explained expression 'reason to believe'. grounds or reasons which lead to formation of belief that income chargeable to tax has escaped assessment must have material bearing on question of escapement of income from assessment. Once there exists reasonable grounds for Income Tax Officer to form such 10/19 ::: Uploaded on - 12/06/2020 ::: Downloaded on - 11/07/2020 11:51:58 ::: WP788_01.odt belief, that would be sufficient to clothe him with jurisdiction. Sufficiency of grounds, however, is not justiciable. expression 'reason to believe' does not mean purely subjective satisfaction on part of Income Tax Officer. reason must be held in good faith and cannot be mere pretence. It is open to court to examine whether reasons for formation of belief have rational connection with or relevant bearing on formation of belief and are not extraneous or irrelevant. Elaborating further, Supreme Court held that rational connection postulates that there must be direct nexus or live link between material coming to notice of Income Tax Officer and formation of his belief that there has been escapement of income from assessment in that particular year. Sounding note of caution, Supreme Court observed that powers of Income Tax Officer to re-open assessment though wide, are not plenary; words of statute are 'reason to believe' and not 'reason to suspect'. 28. Having noticed above, we may now advert to reasons given by Assessing Officer for re-assessment. We take up reasons given for assessment year 1992-93 as reasons given for other assessment years are identical. 28.1. Firstly, Assessing Officer after recording sequence of events from acquiring property vide deed of conveyance dated 23.04.1980 noted that assessee had converted part of property into stock-in-trade on 01.10.1987 with view to construct flats. On date of conversion into stock-in-trade value thereof was determined at Rs.66,29,365.00. Upto assessment year 1991-92 there was no construction. After building was constructed, constructed flats were sold to various customers. On sale of flats, assessee reduced proportionate market value of land as on 31.03.1989, in same ratio as area of flat sold bore to total constructed area. However, assessee valued closing stock at market price prevailing as on 01.10.1987. According to Assessing Officer closing stock should have been valued at market price on close of each accounting 11/19 ::: Uploaded on - 12/06/2020 ::: Downloaded on - 11/07/2020 11:51:58 ::: WP788_01.odt year. This resulted into under-valuation of closing stock and consequent reduction of profit. 28.2. Secondly, land as asset is separate and distinct from building. Building was shown as work in progress in profit and loss account prepared by asessee and filed with return. Even after construction of building and sale of flat, stock i.e., land was still under ownership of assessee. Ownership of land was not transferred. As land continued under ownership of assessee, its value could not be reduced on plea that flat was sold. whole of land under ownership of assessee constituted its stock-in-trade and it should have been valued at market price as on date of closing of accounts for year under consideration. Therefore, Assessing Officer alleged that assessee had suppressed market price of closing stock, thus reducing profit. 28.3. Third ground given was regarding computation of 'capital gains' furnished with return of income. Assessing Officer noted that total capital gains as on 01.10.1987 was arrived at by deducting cost of land as on 01.10.1987 i.e., Rs.10,41,774.00 from fair market value of land i.e., Rs.66,29,365.00 which came to Rs.55,87,591.00. According to Assessing Officer, assessee made deduction of cost incurred for entire land whereas only fraction of said land was converted into stock-in-trade where construction was made. Assessing Offier worked out that cost of converted piece of land was only Rs.13,260.00. This figure he arrived at by deducting Rs.2,86,740.00 which was value of tenanted property from cost of property i.e. Rs.3,00,000.00. Thus, he alleged that there was inflation of cost by Rs.10,28,514.00 (Rs.10,41,774.00 - Rs.13,260.00). 28.4. last ground given by Assessing Officer was regarding offering of long term capital gain by assessee. Assessing Officer noted that for purpose 12/19 ::: Uploaded on - 12/06/2020 ::: Downloaded on - 11/07/2020 11:51:58 ::: WP788_01.odt of computation of long term capital gain, assessee estimated fair market value of land converted to stock as on 01.10.1987 at Rs.66,29,365.00 which was reduced by cost incurred as on 01.10.1987 i.e., Rs.10,74,774.00 (sic). However, Assessing Officer also noted that method of computation of cost was not clear in view of fact that whole of land with tenanted structures was purchased for Rs.3,00,000.00. Assessing Officer further noted methodology adopted by assessee for computation of long term capital gain. According to him, Assessee had worked out difference between fair market value of land converted to stock and cost and thereafter divided it by total permissible built-up area. quotient was identified by assessee as capital gains per square feet. Assessee thereafter multiplied built-up area of individual flats sold with such quotient and claimed it to be 'capital gains' for year under consideration. By adopting such computation assessee was claiming sale of land in different years in same ratio as area of flat sold bore to total permissible FSI area. But this calculation was not accepted by Assessing Officer primarily on ground that land as stock was different from flats. Selling of flats did not amount to selling of proportionate quantity of land. Under Section 45(2) of Act, 'capital gains' for land should be considered in year when land was sold or otherwise transferred by assessee. Though flats were sold, ownership of land continued to remain with assessee. 'Capital gains' would be chargeable to tax only in year when land was sold or transferred to co-operative society formed by flat purchasers and not in year when individual flats were sold. 29. Regarding ground Nos.1 and 2, contention of petitioner is that respondent No.1 proceeded on erroneous presumption that stock-in-trade had to be valued at present market value. There is merit in contention of assessee if we analyse decision of Supreme Court in Chainrup Sampatram (supra). In that case, Supreme Court held that it would be wrong to assume that valuation of closing stock at market rate has for its object 13/19 ::: Uploaded on - 12/06/2020 ::: Downloaded on - 11/07/2020 11:51:58 ::: WP788_01.odt bringing into charge any appreciation in value of such stock. true purpose of crediting value of unsold stock is to balance cost of those goods entered on other side of account so that cancelling out of entries relating to same stock from both sides of account would leave only transactions on which there had been actual sales in course of year showing profit or loss actually realised on year's trading. While anticipated loss is taken into account, anticipated profit in shape of appreciated value of closing stock is not brought into account as no prudent trader would care to show increased profit before its actual realisation. This is theory underlying rule that closing stock has to be valued at cost or market price whichever is lower and it is now generally accepted as established rule of commercial practice and accountancy. In such circumstances, taking view that profits for income tax purposes are to be computed in conformity with ordinary principles of commercial accounting unless such principles have been superseded or modified by legislative enactments, Supreme Court held that it would be misconception to think that any profit arises out of valuation of closing stock. 30. In so far third ground is concerned i.e., computation of 'capital gains', stand of assessee is that it had rightly deducted cost incurred in acquiring property from fair market value of land converted into stock-in-trade. cost incurred included not only sale price of land i.e., Rs.3,00,000.00 but also expenditure incurred by way of stamp duty and registration charges amounting to Rs.44,087.00. That apart, assessee had incurred further sum of Rs.9,92,427.00 in getting entire property vacated. Contention of Assessing Officer that there was inflation of cost is not correct. 30.1. At this stage we may refer to some of legal provisions having bearing on this ground as well as on fourth ground. 30.2. Section 45 deals with 'capital gains'. As per sub-section (1), any profits or 14/19 ::: Uploaded on - 12/06/2020 ::: Downloaded on - 11/07/2020 11:51:58 ::: WP788_01.odt gains arising from transfer of capital asset affected in previous year shall, save as otherwise provided in Sections 54 to 54H, be chargeable to income tax under head 'capital gains' and shall be deemed to be income of assessee for previous year in which transfer took place. Thus, any profits or gains arising from transfer of capital asset shall be deemed to be income of assessee for previous year in which transfer took place and shall be chargeable to income tax under head 'capital gains'. two key expressions in this provision are 'transfer' and 'capital asset' but before we deliberate upon these two expressions, it would be useful to refer to sub-section (2) of Section 45 and Section 48. 30.3. Sub-section (2) of Section 45 starts with non-obstante clause. It says that notwithstanding anything contained in sub-section (1), profits or gains arising from transfer by way of conversion by owner of capital asset into or its treatment by him as stock-in-trade of business carried on by him shall be chargeable to income tax as his income of previous year in which such stock- in-trade is sold or is otherwise transferred by him and for purposes of Section 48 fair market value of asset on date of such conversion or treatment shall be deemed to be full value of consideration received or accruing as result of transfer of capital asset. Therefore, sub-section (2) which had overriding effect over sub-section (1) says that profits or gains arising from transfer of capital asset by way of conversion by owner into stock-in-trade of business carried on by owner shall be chargeable to income tax as his income of previous year in which such stock-in-trade is sold or is otherwise transferred by him; further, for purposes of Section 48, fair market value of asset on date of such conversion or treatment shall be deemed to be full value of consideration as result of transfer of capital asset. 30.4. This brings us to Section 48 of Act which deals with mode of computation of capital gains. main provision of Section 48 says that 15/19 ::: Uploaded on - 12/06/2020 ::: Downloaded on - 11/07/2020 11:51:58 ::: WP788_01.odt income chargeable under head 'capital gains' shall be computed by deducting from full value of consideration received or accrued as result of transfer of capital asset following amounts i.e.,- (1) expenditure incurred wholly and exclusively in connection with such transfer; (2) cost of acquisition of asset and cost of any improvement thereto. 30.5. Thus, for computing income under head 'capital gains', full value of consideration received as result of transfer of capital asset shall be deducted by expenditure incurred in connection with such transfer, cost of acquisition of asset and cost incurred in improvement of asset. expression 'the full value of consideration' would mean fair market value of asset on date of such conversion. meaning of expressions 'cost of improvement' and 'cost of acquisition' are explained in Sections 55(1) and 55(2) of Act respectively. 30.6. expression 'capital asset' occuring in sub-section (1) of Section 45 is defined in sub-section (14) of Section 2. 'Capital asset' means property of any kind held by assessee whether or not connected with his business or profession as well as any securities held by foreign institutional investor but does not include any stock-in-trade, consumable stores or raw materials, personal effects, etc. 30.7. Again, word 'transfer' occuring in sub-section (1) of Section 45 has been defined in Section 2(47) of Act. As per this definition, 'transfer' in relation to capital asset includes sale, exchange or relinquishment of asset or extinguishment of any rights therein or compulsory acquisition of asset or in case of conversion of asset by owner into stock-in-trade of business carried on by him, such conversion or any transaction involving allowing of possession of any immovable property to be taken or retained in part performance 16/19 ::: Uploaded on - 12/06/2020 ::: Downloaded on - 11/07/2020 11:51:58 ::: WP788_01.odt of contract or any transaction whether by way of becoming member of or acquiring shares in co-operative society etc. which has effect of transferring or enabling enjoyment of any immovable property. 30.8. In case of Miss Piroja C. Patel (supra), question before this Court was whether Tribunal was justified in holding that amount in question being compensation paid by assessee to hutment dwellers for vacating land was allowable expenditure within meaning of Section 48 read with Section 55 of Act. This Court held that on eviction of hutment dwellers from land in question, value of land increases and therefore, expenditure incurred for having land vacated would certainly amount to cost of improvement. 30.9. Thus in so far third ground is concerned, we do not find any rationale in view taken by Assessing Officer. cost incurred on stamp duty etc. together with cost incurred in carrying out eviction of hutment dwellers would certainly add to value of asset and thus amount to cost of improvement which is allowable deduction from full value of consideration received as result of transfer of capital asset for computing income under head 'capital gains'. 31. In so far fourth ground is concerned, Assessing Officer has taken view that long term capital gains arising out of sale or transfer of land would be assessed to tax only in year in which land is sold or otherwise transferred by assessee. Opining that land as stock is different item of asset than flats, Assessing Officer held that ownership of land continued to remain with assessee notwithstanding sale of flat. Therefore, he was of view that 'capital gains' would be chargeable to tax only in year when land is sold or otherwise transferred to co-operative society formed by owners of flats and not in year when individual flats are sold. 17/19 ::: Uploaded on - 12/06/2020 ::: Downloaded on - 11/07/2020 11:51:58 ::: WP788_01.odt 31.1. Assessee has responded to this as can be seen from grounds urged in writ petition by contending that if what Assessing Officer says is correct then there could not be any escapement of income chargeable to tax for assessment years under consideration; rather excess income has been offered to tax. According to Assessing Officer, assessee had erred in offering to tax 'capital gains' in year when individual flats were sold whereas such 'capital gains' could be assessed to tax only when land is trasferred to co-operative society formed by flat purchasers. If assessee had offered to tax as 'capital gains' in assessment years under consideration which should have been offered to tax in subsequent years, it is beyond comprehension as to how belief can be formed that income chargeable to tax for assessment year under consideration had escaped assessment. That apart, flat purchasers by purchasing flats had certainly acquired right or interest in proportionate share of land but its realisation is deferred till formation of co-operative society by owners of flats and eventual transfer of entire property to co-operative society. In Prashant S. Joshi (supra), this Court while examining challenge to notices issued under Section 148 of Act was considering reasons for issuing such notices. Petitioner in that case was partner in particular firm who subsequently retired from partnership. On his retirement, he received certain amount during relevant assessment year in full and final settlement of his dues. In return of income while assessee disclosed receipt of said amount, he however did not offer same to tax on ground that it was capital receipt. In appellate proceeding arising out of assessment of partnership firm, first appellate authority allowed claim of partnership firm that payment of said amount to retiring partners should be treated as revenue expenditure. Since assessee had claimed this to be exempt from income tax by treating it as capital receipt, Assessing Officer stated that there was reason to believe that such receipt had escaped assessment within meaning of Section 147 of Act. It was in that context that this Court referred to judgment of Supreme Court in Additional CIT Vs. Mohanbhai 18/19 ::: Uploaded on - 12/06/2020 ::: Downloaded on - 11/07/2020 11:51:58 ::: WP788_01.odt Pamabhai, 165 ITR 166 wherein Supreme Court relied upon its earlier judgments in Sunil Siddharthbhai Vs. CIT, 156 ITR 509 and Addanki Narayanappa Vs. Bhaskara Krishnappa, AIR 1966 SC 1300. Supreme Court held that what is envisaged on retirement of partner is merely his right to realise his interest and to receive its value. What is realised is interest which partner enjoys in assets during subsistence of partnership by virtue of his status as partner and in terms of partnership agreement. Therefore, what partner gets upon dissolution of partnership or upon retirement from partnership is realisation of pre-existing right or interest. Supreme Court held that there was nothing strange in law that right or interest should exist in praesenti but its realisation or exercise should be postponed. Applying above principle, it can certainly be said that upon purchase of flat, purchaser certainly acquires right or interest in proportionate share of land but its realisation is deferred till formation of co-operative society by flat owners and transfer of entire property to co-operative society. 32. Thus on overall consideration of entire matter, it is quite evident that there was no basis or justification for respondent No.1 to form belief that any income of assesee chargeable to tax for assessment years under consideration had escaped assessment within meaning of Section 147 of Act. reasons rendered could not have led to formation of any belief that income had escaped assessment within meaning of aforesaid provision. Therefore, in facts and circumstances of case, impugned notices issued under Section 148 of Act cannot be sustained. Accordingly, impugned notices dated 25.02.2000 are hereby set aside and quashed. 33. Writ petition is allowed by making Rule absolute. However, there shall be no order as to costs. (MILIND N. JADHAV, J.) (UJJAL BHUYAN, J.) 19/19 Minal Parab ::: Uploaded on - 12/06/2020 ::: Downloaded on - 11/07/2020 11:51:58 ::: J. S. & M. F. Builders v. A. K. Chauhan and other