Section 43CA Inapplicable to AY 2013-14 — Bombay High Court Sets Aside Reopening Notice in Builder's Case

Background and Overview

A significant ruling by the Bombay High Court has reinforced the principle that tax authorities cannot apply statutory deeming provisions to assessment years preceding their legislative commencement. In Zain Constructions Vs ITO (Bombay High Court), the Court examined whether an Assessing Officer could invoke stamp duty valuations to tax the difference between agreement value and market value in the hands of a real estate developer for AY 2013-14 — a year prior to the insertion of Section 43CA of the Income Tax Act, 1961.

The petitioner, a partnership firm engaged in property development, challenged both the notice for reopening of assessment issued under Section 148 and the consequential reassessment order passed thereafter.

Facts of the Case

Original Assessment and Survey Action

The firm had filed its return of income for AY 2013-14 declaring a total income of Rs. 1,15,560/-. Prior to the completion of assessment, a survey was conducted on 15 January 2015 under Section 133A of the Income Tax Act, 1961. During the course of this survey, it emerged that flats in a project called "Zain Tower" had been sold at prices lower than the applicable stamp duty valuation.

The partner of the firm, Mr. Umer Basar, holding a 90% stake, was confronted with a list of customers to whom flats had been sold. He acknowledged that the flats were sold at values lower than the Market Value (Stamp Duty Value) and, in order to avoid litigation, offered the sum of Rs. 76,75,000/- for AY 2013-14 to taxation towards "undervaluation of flats as compared to Market Value (Stamp Duty Value)."

Based on this survey statement and other available material, the Assessing Officer completed scrutiny assessment under Section 143(3) of the Income Tax Act, 1961 on 28 March 2016, determining total income at Rs. 77,90,560/-.

Reasons Recorded for Reopening

Subsequently, the Assessing Officer issued the impugned reopening notice on 28 March 2018 under Section 148. The reasons recorded identified two separate grounds for believing that income had escaped assessment:

Ground 1 — Undervaluation of Flats Sold:

As per AIR/CIB information, the total stamp duty value of 13 flats (each measuring 355 sq. ft.) sold during FY 2012-13 worked out to Rs. 4,46,81,000/-. The assessee had declared sale receipts of Rs. 3,03,70,000/- and had already offered Rs. 76,75,000/- during the survey. The Assessing Officer computed an alleged escapement of Rs. 66,36,000/- as follows:

Rs. 4,46,81,000 (Stamp Duty Value) − Rs. 3,03,70,000 (Declared Sale Consideration) − Rs. 76,75,000 (Declared in Survey) = Rs. 66,36,000/-

Ground 2 — Undervaluation of Closing Stock:

The Assessing Officer further noted that as of FY 2011-12, the assessee held 15 unsold flats valued at Rs. 2,61,93,081/-. During FY 2012-13, one additional flat was constructed and 13 flats were sold. Accordingly, three unsold flats [(15+1)−13] should have remained in closing stock. However, the assessee declared only one unsold flat at Rs. 9,08,114/-.

The Assessing Officer computed the estimated value of three unsold flats as under: