Reassessment Proceedings Alleging Escapement of Income on transfer of Leasehold Right: Bombay HC sets aside Order as tax already paid [Read Order]

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

Peoples Education Society Thane, the petitioner is a charitable trust registered under the Bombay Public Trust Act, of 1950. Petitioner has been undertaking educational activities since 1926 in running English and Marathi medium schools and colleges.

The Petitioner entered into an agreement on a build, lease and transfer basis with one Global Edu-Infra Development Private Limited on 6th August 2015. As per the agreement, the petitioner was to grant leasehold rights of a certain portion of the newly constructed buildings/premises for 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 the new building/redevelopment of the old building was completed during the Financial Year 2017-18 corresponding to the Assessment Year 2018-19 at an approximate cost of Rs. 43 Crores to the developer.

The petitioner had shown an income of Rs.43 Crores representing the total cost to the developer as arising from the transfer of leasehold rights. Since the transfer of lease hold right was nothing but a consideration for the construction of new buildings by the petitioner the said sum of Rs.43 Crores was also shown as the cost of new school buildings by the petitioner.

Petitioner had filed its return of income for the Assessment Year 2018-19 on 30th October 2018 showing Rs.43 Crores as consideration for transfer of leasehold rights that were also shown/taken as application of income in the form of new school buildings under Section 11 of the Income Tax Act, 1961 (the Act).

The return filed by the petitioner for Assessment Year 2018-19 was selected for scrutiny. During 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 Crores was duly considered and offered to tax as income by the petitioner and the petitioner was called upon to establish why the said amount which was equally claimed as a deduction in form of application of income could not be disallowed due to lack of documentary evidence.

A notice issued under Section 143 of the Act 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 of Rs. 40 Crores on 6th August 2015 and income arising therefrom was not offered to tax under the head “Capital Gains” in the return of income. The reasons also mentioned that the sum of Rs.40 Crores did not appear as part of the receipts/income.

Mr Suresh Kumar agrees to a query posed by the court that if the amount has already been considered in the subsequent assessment years and the assessment order has been passed, the question of escapement of income for the same amount in the previous year will not arise. We are also informed that there is no change in the rate of tax.

A division bench of Justice K R Shriram and Justice Dr Neela Gokhale held that “the petition in terms of prayer clause – (a) which reads as under (a) That this Hon’ble Court may be pleased to issue under Articles 226 and 227 of the Constitution of India, an appropriate direction, order or a writ including a writ like ‘certioraris’ calling for the records of the case and after satisfying itself as to the legality thereof quash the impugned notice dated 31.03.2021 issued by the Respondent No.1 under section 148 of the Act being Exhibit – “F” and the impugned order dated 13.01.2022 being Exhibit “K” as bad in law.”

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