2018 (10) TMI 1933 - AT - Income Tax

Revision u/s 263 by CIT - claim of exemption u/s 54F arising out of sale of immovable property - HELD THAT - In order to justify the exercise of the power vested by the Statute u/s 263, it was incumbent upon the Pr.CIT to demonstrate that at the time of investment, the property was not a residential property and in terms of the relevant provisions of the Act i.e. Explanation 2(a), the Pr. CIT was required to demonstrate that the order passed was without making enquiries or investigation. The order passed fails on both these counts. The issue has been enquired into and nowhere in the order, the Pr. CIT he is able to show that the order passed either suffers from any error let alone such an error which is prejudicial to the interests of the Revenue. In the facts of the present case, we have noted that it is sufficiently established that at the time of the purchase of the specific property, the property purchased was a shop-cum-flat wherein admittedly the assessee s share was the first floor. The fact that as per the Inspector s report, sometime between November,2016 and March,2017, it is alleged that it was being used as a godown, in the face of the judicial precedent is not relevant. Admittedly as per the Chandigarh Administration Town Planning, the specific property is described as SCF i.e. shop-cum-flat wherein detailed shop-cumresidential flat plan etc. as per the map approved is available. The issues have been enquired into by the AO in the course of the assessment proceedings as for this specific purpose, admittedly the case was selected for scrutiny in CASS. Before the AO, the assessee s explanation has been offered. The plan and the map site etc. have all been made available. Nothing has been brought out in the order to show the status of the property at the time of investment. Accordingly, in the peculiar facts and circumstances of the present case, the Explanation 2(a) of Section 263 of the Income Tax Act is not attracted. - Decided in favour of assessee.

Issues Involved:
1. Legality of the order passed under Section 263 of the Income Tax Act.
2. Appropriateness of invoking Explanation 2(a) of Section 263.
3. Consideration of documentary evidence and procedural fairness.
4. Examination of the nature of the property for Section 54F deduction.

Issue-wise Detailed Analysis:

1. Legality of the order passed under Section 263 of the Income Tax Act:
The assessee contested the legality of the order passed by the Principal Commissioner of Income Tax (Pr. CIT) under Section 263, which set aside the assessment order framed under Section 143(3). The assessee argued that the assessment order was framed after due inquiry during the course of assessment proceedings. The Tribunal noted that the Assessing Officer (AO) had specifically examined the issue of deduction under Section 54F during the scrutiny proceedings. The AO had considered the investment in the shop-cum-flat (SCF) and had found it compliant with the requirements for claiming the deduction. The Tribunal concluded that the Pr. CIT failed to demonstrate any error in the AO’s assessment that was prejudicial to the interests of the Revenue.

2. Appropriateness of invoking Explanation 2(a) of Section 263:
The Pr. CIT invoked Explanation 2(a) of Section 263, which states that an order is erroneous if it is passed without making inquiries or verification which should have been made. The Tribunal found that the AO had indeed made inquiries and verifications regarding the investment in the SCF. The AO had examined the sale deed, inter-se agreement, and other relevant documents. The Tribunal held that the Pr. CIT’s reliance on the Inspector’s report, which was conducted much later and not confronted to the assessee, was not sufficient to invoke Explanation 2(a). The Tribunal emphasized that the subsequent use of the property by a tenant was irrelevant to the determination of the property’s nature at the time of investment.

3. Consideration of documentary evidence and procedural fairness:
The assessee argued that the Pr. CIT ignored documentary evidence available in the assessment record and documents submitted during the revisionary proceedings. The Tribunal noted that the AO had considered all relevant documents, including the sale deed, inter-se agreement, and sanctioned map showing the residential nature of the first floor of the SCF. The Tribunal criticized the Pr. CIT for not confronting the assessee with the Inspector’s report and for not pointing out any specific error in the AO’s assessment. The Tribunal concluded that the Pr. CIT’s order lacked procedural fairness and was not justified.

4. Examination of the nature of the property for Section 54F deduction:
The core issue was whether the investment in the first floor of the SCF qualified for deduction under Section 54F, which requires investment in a residential property. The Tribunal found that the AO had thoroughly examined this issue during the assessment proceedings. The AO had verified that the first floor of the SCF was a residential portion as per the sanctioned map and other documents. The Tribunal also referred to judicial precedents which held that subsequent change in the use of property does not affect its eligibility for Section 54F deduction if it was residential at the time of investment. The Tribunal concluded that the Pr. CIT’s order was based on an irrelevant factor (subsequent use) and was not sustainable.

Conclusion:
The Tribunal quashed the Pr. CIT’s order under Section 263, holding that the AO had made adequate inquiries and verifications, and the assessment order was neither erroneous nor prejudicial to the interests of the Revenue. The assessee’s appeal was allowed.

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