INCOME TAX ACT, 1961

Appeal (Tribunal)- Payment of fees-Refund of excess fee paid

Assessee was a partner in a firm constituting14 partners. The firm acquired the plot for cinema in 1970. Thereafter, a building known as Deep Cinema was constructed. This building was reported to have been burnt in 1984 in Delhi riots. Before burning of cinema building, a dispute arose among the partners of the firm. The Delhi High Court to takeover the business and management including all assets of the partnership firm appointed a receiver. Deep Cinema belonged to the partnership firm, which the assessee had 5 per cent share. The said building was sold by executing fourteen sale deeds, i.e., each partner selling his share in the property. In the return filed, the assessee had declared the cost at 25 per cent of the sale proceeds as on 1-4-1981 and by applying index cost @ 2.44 per cent, the long-term capital gain was computed after deducting indexed cost. During the course of assessment proceedings, AO found that the building known as Deep Cinema belonged to a partnership firm on which depreciation had also been claimed by the firm. Therefore, she held that as per provisions of section 50, the entire excess amount received by the assessee was deemed to be a short-term capital gain. Since the assessee had declared the long-term capital gain in his return of income, AO assessed the same in the hands of the assessee on protective basis. CIT observed that the order passed by AO was erroneous insofar as it was prejudicial to the interest of revenue within the meaning of section 263, for the reason that AO failed to determine the capital gain on the basis of information in her possession. He observed that some other partners of the firm had filed returns of income by taking the market value as on 1-4-1981 as against adopted by assessee. Therefore, CIT issued show-cause notice under section 263 asking the assessee to indicate the basis of adopting market value as on 1-4-1981, a copy of dissolution deed of the firm and a copy of assets and liabilities in the firm as on the date of dissolution. The assessee submitted that market value as on 1-4-1981 was estimated differently by each group of partners. It was submitted that AO had completed the assessment under section 143(3) where cost declared was accepted. Thus, it was submitted that the assessment order could not be considered as erroneous and prejudicial to the interest of revenue. CIT observed that although making separate agreements whereby each partner separately sold his share in the partnership firm made the sale, yet the fact remained that the said property belonged to a partnership firm on which depreciation had been allowed. Therefore, the long-term capital gain in the hands of the assessee even though assessed on protective basis was also required to be computed as per provisions of section 50. Held: AO had assessed the long-term capital gain in the hands of the assessee on protective basis without disturbing the quantum of capital gain shown in the return. CIT had revised the order on the ground that since depreciation was allowed on the building owned by the firm, capital gains should have been computed in the manner as provided under section 50(1), instead of cost adopted by the assessee at 25 per cent on the sale consideration on estimate basis. Assuming that AO had computed capital gain by estimating the cost through some other method and computed the long-term capital gain, the said order though erroneous, yet could not be considered as prejudicial to the interest of revenue because ultimately long-term capital gains has been computed at the same figure as it should be. In such a case, the CIT would have no jurisdiction to exercise his powers vested under section 263 because such order could not be considered as prejudicial to the interest of revenue. , where it was held that prerequisite for the exercise of jurisdiction by the CIT is that the twin conditions must be satisfied, i.e., W the order of the assessing officer sought to be revised is erroneous, and (ii) it is prejudicial to the interests of the revenue. The apex court observed that if one of these conditions is absent, i.e., if the order of assessing officer is erroneous but is not prejudicial to the revenue, recourse cannot be had to section 263. The order could be considered as prejudicial to the interests of the revenue, if the same has not been passed in accordance with the provisions of the Act or the procedure laid down under the law. AO in order to protect the interest of the revenue, completed the protective assessment in the hands of the assessee. But while making the protective assessment, AO was required to apply her mind in regard to the computation of capital gain. The mere fact that the assessee had declared long-term capital gain in the return of income does not mean that AO was not required to apply her mind about the computation of capital gain as to whether the same was correctly computed in accordance with the provisions of the Act or not. If we take assessee's 5 per cent share in the same, the same worked out as against declared in the return. Thus, the order passed by AO was erroneous as she did not apply the correct provisions of law i.e., section 50 (1) of the Act for computing the capital gains in this case. The assessee had also not been able to state under what provisions, the capital gains shown in the return could be considered as correct. Thus, the first condition that the order should be erroneous is fully satisfied in the present case because the same was not computed as per provisions of law. The criteria laid down for exercise of power under section 263 was only demonstrative and not exhaustive and each and every case has to be treated independently on its own facts and circumstances. Therefore, CIT was justified in revising the assessment under section 263. The assessment in this case has been completed on protective basis. Even in the impugned order, CIT has not held that the addition in this case was required to be made on substantive basis. Therefore, the nature of addition as per revised order continues to be only protective and not substantive because such capital gain was liable to be taxed in the hands of firm as per provisions of section 45(4) on substantive basis.