2012 (7) TMI 172 - AT - Income Tax

Validity of reasons for reopening of assessment - assessee contested that CIT(A) confirmed the order of AO in bringing to tax a sum as long-term capital gains as against Nil declared by assessee ignoring the provisions of S.54 without offering the reasons recorded - Held that - Perusing the alleged reasons recorded by the AO it is clearly written that hence notice under Section 148 was issued on 10-2-2000 to ascertain details of the aforesaid facts and was served on 14-2-2000 , abundantly shows that the date of issuance and service of notice has been mentioned in the reasons itself, which, inter alia, means that reasons were not recorded prior to issuance of notice under Section 148 i.e. 10-2-2000. Nothing has been brought on the record to contradict that these are not the reasons recorded. It was after a gap of almost 11 years that so-called reasons have been provided and that to when the assessee had to approach the ITAT twice to get the direction for providing the reasons recorded - ITAT had specifically directed the Assessing Officer to provide reasons recorded and decide the issue afresh which was grossly violated - notice had already been issued and served upon the assessee prior to the recording of reasons, the entire proceedings initiated under Section 148 has no legs to stand - decided in favour of assessee.

Issues Involved:
1. Validity of the order passed under Section 143(3) read with Sections 147 and 254 of the Income Tax Act.
2. Violation of principles of natural justice.
3. Validity of the reasons for reopening the assessment.
4. Taxation of long-term capital gains.
5. Denial of deductions under Section 54 of the Income Tax Act.
6. Charging of interest under Sections 234A and 234B.

Issue-wise Detailed Analysis:

1. Validity of the Order Passed under Section 143(3) read with Sections 147 and 254:
The appeal contested the validity of the order passed by the Assessing Officer (AO) under Section 143(3) read with Sections 147 and 254. The tribunal noted that the AO did not comply with the directions of the ITAT to provide the "reasons recorded" for reopening the case and to adjudicate the validity of the proceedings under Section 148. The tribunal emphasized that the AO must record reasons before issuing a notice under Section 148, as mandated by Section 148(2). Since the reasons were recorded after the issuance and service of the notice, the entire proceedings were deemed void ab initio.

2. Violation of Principles of Natural Justice:
The appellant argued that the order of the AO was passed in violation of the principles of natural justice. The tribunal found that the AO failed to provide the "reasons recorded" for reopening the assessment, despite specific directions from the ITAT. This failure constituted a violation of natural justice, as the appellant was not given an adequate opportunity to contest the reopening of the assessment.

3. Validity of the Reasons for Reopening the Assessment:
The tribunal scrutinized the validity of the reasons for reopening the assessment. It was observed that the reasons were recorded after the issuance of the notice under Section 148, which is contrary to Section 148(2). The tribunal held that the recording of reasons prior to the issuance of the notice is mandatory and not a mere formality. The failure to record reasons before issuing the notice rendered the entire proceedings void ab initio.

4. Taxation of Long-term Capital Gains:
The AO had brought to tax a sum of Rs. 1,87,02,463/- as long-term capital gains in respect of the sale of 1/3rd share in 'Bachani Niwas'. However, since the tribunal held that the reopening of the assessment was invalid, the assessment order, including the taxation of long-term capital gains, was cancelled.

5. Denial of Deductions under Section 54:
The appellant contested the denial of deductions for amounts paid to various parties and construction costs while computing capital gains. The tribunal did not specifically address the merits of these deductions, as the assessment order itself was cancelled due to the invalidity of the reopening proceedings.

6. Charging of Interest under Sections 234A and 234B:
The appellant challenged the charging of interest under Sections 234A and 234B. The tribunal's decision to cancel the assessment order rendered this issue academic, as the basis for charging interest no longer existed.

Conclusion:
The tribunal concluded that the entire proceedings initiated under Section 148 were void ab initio due to the failure to record reasons before issuing the notice, as required by Section 148(2). Consequently, the assessment order and the penalty imposed under Section 271(1)(c) were cancelled. The appeals filed by the appellant were allowed.

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