Bombay High Court Set Aside Reassessment Proceedings Alleging Escapement Of Income On Transfer Of Leasehold Rights

The Bombay High Court has quashed the reassessment proceedings alleging escapement of income on transfer of leasehold rights.

The bench of Justice K.R. Shriram and Justice Neela Gokhale has observed that if the amount was already considered in the subsequent AY and the assessment order was also passed, the question of escapement of income for the same amount in the previous AY will not arise as there was no change in the rate of tax.

The petitioner/assessee is a charitable trust registered under the Bombay Public Trust Act, 1950. Petitioner has been undertaking educational activities since 1926 in running English and Marathi-medium schools and colleges.

Sometime in 2014, the petitioner obtained the necessary building plans approved by the Thane Municipal Corporation (TMC) and commenced construction of the new school building within the same premises. The petitioner entered into an agreement on a build, lease, and transfer basis with one Global Edu-Infra Development Private Limited on August 6, 2015. As per the agreement, the petitioner was to grant leasehold rights to certain portions of the newly constructed buildings and premises for a period of 45 years to the developer.

The ownership rights of the entire land as well as the superstructures were not parted with, and the same continues to belong to the petitioner. The construction of a new building or redevelopment of an old building was completed during the financial year 2017–18, corresponding to the assessment year 2018–19, at an approximate cost of Rs. 43 crore to the developer. An occupancy certificate was also received from T.M.C.

In its books of accounts for Financial Year 2017-18, corresponding to Assessment Year 2018-19, the petitioner had shown an income of Rs. 43 crore, representing the total cost to the developer arising from the transfer of lease hold rights. Since the transfer of leasehold rights was nothing but a consideration for the construction of new buildings by the petitioner, the said sum of Rs. 43 crore was also shown as the cost of new school buildings by the petitioner.

The petitioner filed its return of income for the Assessment Year 2018-19 on October 30, 2018, showing Rs. 43 crore as consideration for the transfer of lease hold rights that was also shown or taken as an application of income in the form of new school buildings under Section 11 of the Income Tax Act, 1961. The return filed by the petitioner for Assessment Year 2018–19 was selected for scrutiny. During the course of the assessment proceeding, the petitioner placed on record copies of the computation of income and financials and also explained the nature of the agreement, etc.

A show cause notice was also issued on the premise that the sum of Rs. 43 crore was duly considered and offered to be taxed as income by the petitioner, and the petitioner was called upon to establish as to why the said amount, which was equally claimed as a deduction in the form of an application of income, could not be disallowed due to a lack of documentary evidence.

The petitioner filed a detailed reply that was accepted by the department, and further notice dated May 28, 2021, under Section 142(1) was issued, calling upon the petitioner to show cause as to why the said income should not be disallowed for the non-compliance of TDS under Section 40(a)(ia). Petitioner responded, and subsequently, an assessment order dated August 27, 2021, under Section 143(3), read with Section 144B, was passed accepting the returned income of the petitioner.

Prior to these events, the petitioner had filed a return of income for Assessment Year 2016–17, which was processed under Section 143(1). A notice came to be issued under Section 143, proposing to assess the income of the petitioner as having escaped income. The reasons were made available to the petitioner, and the reasons indicate that it was issued on the premise that the petitioner had sold an immovable property worth Rs. 40 crores, and income arising therefrom was not offered to tax under the heading “capital gains” in the return of income. The reasons also mentioned that the sum of Rs. 40 crore did not appear as part of the receipts or income.

The petitioner contended that the income of Rs. 43 crore offered to tax for Assessment Year 2018–19 was accepted by the department after a detailed examination.

The court held that there was no change in the rate of tax and quashed reassessment proceedings.

Counsel For Petitioner: V. Sridharan

Counsel For Respondent: Assistant Commissioner of Income Tax

Case Title: Peoples Education Society Thane V/s. Assistant Commissioner of Income Tax

Case No.: Writ Petition No. 2622 Of 2022

Click Here To Read The Order