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2024 (1) TMI 1001 - AT - Income TaxReopening of assessment u/s 147 - incorrect declaration of capital gain by the assessee - as argued reopening was on the basis of audit objection only - as per AO property received by way of gift was not a capital asset within the meaning of section 2(14) of the Act and section 48 is applicable only to capital asset and indexed cost of acquisition has to be allowed from the previous year in which the land was converted to residential purpose - HELD THAT - We have gone through the order of the AO u/s. 143(3) of the Act and the documents submitted as produced by the ld. AR and note that there was no specific query raised by the AO in the original assessment proceedings and there was no submission on the part of assessee. As decided in Subodh Agarwal v. State of U.P. 2023 (2) TMI 211 - ALLAHABAD HIGH COURT has held that Explanation 1, clause (ii) to second proviso of section 148 clearly provides that any audit objection to effect that assessment in case of assessee for relevant assessment year has not been made in accordance with provisions of Act is included in term 'information regarding escaped assessment' . Therefore, it cannot be said that the reopening was on the basis of audit objection only. Legality of the property - As observed that the constructed property sold was different from the property received on gift in the opinion of the AO and the sale of the property did not arise out of the gifted property. The term reason to believe can be gathered and available from the information, leading the Assessing Officer to reopen the assessment. The term itself is suggestive of its prima facie characteristics and not established or conclusive facts or information. Meaning thereby, it is the Assessing Officer's prima facie belief, of course, derived from the some material/information, etc . leading him to reopen the assessment.. It is clear from the reasons recorded that the AO had the belief that there was escapement of income. Therefore, we reject the arguments advanced by the ld. AR on the legal issue and dismiss the same. Mode of computation of capital gain - As the donor of the gift obtained the property in the year 1960 before 01.04.1981 which is not in dispute and it was gifted to the assessee in the FY 2002-03 after converting it from agricultural to residential purpose in the year 1988-89. The assessee has claimed cost of acquisition of the said land as on 01.04.1981 of 1,073 sq.ft. @ Rs. 84 / sq.ft. and after cost indexation the value has been arrived at Rs. 8,46,339 and claimed as cost of acquisition by the assessee. Cost of acquisition of the asset shall be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee. Previous owner of the property has been explained in the Explanation. Accordingly, it is clear that the property was originally purchased before 01.04.1981 and the assessee is eligible to get the cost of acquisition of the land as on 01.04.1981 and cost of indexation shall also be considered from 01.04.1981. In support of our view, we rely on the judgment of the Hon ble jurisdictional High Court in the case of CIT v. Ramaiah Reddy, ( 1984 (12) TMI 56 - KARNATAKA HIGH COURT ) . Respectfully following the judgment of jurisdictional High Court, we delete the addition. Indexed cost of construction of penthouse for the reason that there was no proof of payment of cost of construction and the said apartment was outside the purview of sanctioned plan and holding that it is not a capital assets - It is clear from the confirmation of the developer that the penthouse P2 construction was completed in the year 2006 and this portion was additionally built which was outside the sanctioned plan and the assessee was required to pay for 2505 sq.ft. @ 750/sq.ft and the owner has paid the same to the M/s. BSR Developers. The developer has acknowledged receipt of the same. Nowhere the lower authorities have disputed this confirmation from BSR Developers. Accordingly, the assessee has paid for construction of the pent house. We note that on the date of sale, it was a capital asset and the assessee completed all the formalities and regularised it with BBMP and produced all the documents . Therefore, it cannot be said that the property is illegal on the date of sale. Accordingly the assessee is eligible for indexed cost of construction as claimed in the computation of income. The case law relied by the ld. DR in the case of ITO vs. Bhagwan T. Fatnani 2015 (7) TMI 173 - ITAT MUMBAI is not applicable to the present facts of the case since on the date of sale the property was regularised in the municipal/Govt. records and is covered under the definition of capital asset as defined in section 2(14) of the Act which is evident from the documents submitted by the ld. AR of the assessee. We therefore delete the disallowance of indexed cost of construction. Appeal of assessee partly allowed.
Issues Involved:
1. Legality of the assessment order. 2. Denial of personal hearing opportunity. 3. Reopening of proceedings based on audit objection. 4. Competence of CIT(A) in commenting on the legality of construction. 5. Misinterpretation of Section 48 of the Act regarding cost and indexation benefits. 6. Legality and tax treatment of the constructed penthouse. 7. Liability to pay interest under Sections 234A, 234B, and 234C of the Act. Summary: 1. Legality of the Assessment Order: The assessee argued that the assessment order was "bad in law" and opposed to the facts and circumstances of the case. The Tribunal noted that the case was reopened under Section 148 after recording reasons related to incorrect declaration of capital gain by the assessee. The Tribunal found no specific query raised by the AO in the original assessment proceedings, thereby dismissing the argument that reopening was based solely on an audit objection. 2. Denial of Personal Hearing Opportunity: The assessee contended that the CIT(A) erred by not providing an opportunity for a personal hearing, violating the principles of natural justice. The Tribunal did not explicitly address this issue in the judgment. 3. Reopening of Proceedings Based on Audit Objection: The assessee argued that the reopening was based on a mere change of opinion due to an audit objection, which is not a tangible material for reopening. The Tribunal referred to the Allahabad High Court's ruling that audit objections can be considered as 'information regarding escaped assessment,' thereby justifying the reopening of the case. 4. Competence of CIT(A) in Commenting on the Legality of Construction: The CIT(A) alleged that the penthouse was not arising out of residential land and was an illegal construction. The Tribunal noted that the AO had observed the property sold was different from the property received as a gift and was outside the sanctioned plan. However, the Tribunal found that the property was regularized in municipal records, thus eligible for capital asset treatment. 5. Misinterpretation of Section 48 of the Act: The assessee claimed the cost of acquisition should be considered from 01.04.1981, not from the year of conversion to residential purpose (1988-89). The Tribunal agreed with the assessee, citing Section 49 and the Karnataka High Court's ruling in CIT v. Ramaiah Reddy, thereby allowing the cost of acquisition and indexation from 01.04.1981. 6. Legality and Tax Treatment of the Constructed Penthouse: The AO disallowed the indexed cost of construction of the penthouse, claiming it was outside the sanctioned plan and not a capital asset. The Tribunal found that the penthouse was regularized and acknowledged by the developer, thus eligible for indexed cost of construction. The Tribunal deleted the disallowance of Rs. 35,49,590. 7. Liability to Pay Interest Under Sections 234A, 234B, and 234C: The Tribunal did not explicitly address the issue of interest liability under Sections 234A, 234B, and 234C in the judgment. Conclusion: The appeal by the assessee was partly allowed, with the Tribunal deleting the disallowances related to the cost of acquisition and indexed cost of construction. The reopening of the case based on audit objections was upheld.
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