2004 (8) TMI 354 - AT - Income Tax

Validity of reassessment proceedings u/s 147 and issuance of notice u/s 148 - Requirement and timing of notice u/s 143(2) - 'remodel' and 'renovation' of house is eligible for exemption u/s 54F?. HELD THAT - Admittedly, in the assessee's case, no notice u/s 143(2) was issued after the date on which the assessee informed the Assessing Officer of treating the original return a return in response to notice u/s 148. It is also settled law that notice u/s 143(2) could be issued only if the return has been filed. The notice u/s 143(2) issued prior to the filing of return was non est. The notices u/s 148 or 142(1) could be issued prior to filing of the return of income also. But it was not so in the case of notice u/s 143(2). Thus, the re-assessment order passed u/s 143(3)/148 without the issue of a valid notice u/s 143(2) was illegal and the same is cancelled. Capital gains u/s 54F - The terms 'remodel' and 'renovation' sufficiently refer to new construction also and therefore, the assessee has to be held to have made investment in construction of residential house within the stipulated time. In coming to this conclusion, we have derived due support from the definition of the said terms as also various case laws as have been mentioned in the submissions that have been reproduced by us in para 19 above. In principle, it is entitled to exemption u/s 54F of the Act and we hold accordingly. Still the claim for exemption is not effectively available to the assessee in this year. It has rightly been observed by the ld. CIT(A) that in this particular year i.e., assessment year 2000-01, the proviso below section 54F specifically lays down that the exemption shall not be available to an assessee if he owns another house on the date of transfer. In the present case, the assessee owned house No. 3/3/74, Rekabganj, Faizabad. If remodel and renovation is treated as construction of house, as has been held by us earlier, the effect would be that the assessee becomes owner of a house other than the house that he owned earlier. In view of the proviso to section 54F as was applicable from the assessment year 2000-01, the claim for exemption u/s 54F is not effectively allowable and we hold accordingly. Thus, we hold that the sum of Rs. 3,45,000 could not have been subjected to capital gain, even if, it is held that the assessee's case is adversely hit by the applicability of proviso to section 54F. Conclusion The appeal was partly allowed, with the reassessment order being cancelled due to the invalid notice u/s 143(2). The court upheld the AO's right to initiate reassessment proceedings but denied the exemption u/s 54F for the assessment year 2000-01 due to the proviso. For the assessment year 2001-02, the court allowed the exemption u/s 54F due to the change in law effective from 1-4-2001.

Issues Involved:

1. Validity of proceedings u/s 147.
2. Non-issuance of notice u/s 143(2).
3. Denial of exemption under section 54F.
4. Computation of income under the head 'Income from house property'.
5. Liability for interest under various sections.

Summary:

1. Validity of Proceedings u/s 147:

The assessee challenged the initiation of proceedings u/s 147, arguing that the notice was issued during the pendency of a valid return. The Tribunal held that the availability of time to issue notice u/s 143(2) does not debar the Department from initiating proceedings u/s 147. The Tribunal stated, "the re-assessment could be made where the return has been filed but the assessment was not done," thus rejecting the assessee's argument.

2. Non-issuance of Notice u/s 143(2):

The Tribunal found that no notice u/s 143(2) was issued after the assessee filed the return in compliance with the notice u/s 148. The Tribunal emphasized that "notice under section 143(2) was mandatory if the Assessing Officer wants to vary the returned income," and its absence invalidates the assessment order. Consequently, the re-assessment order passed without a valid notice u/s 143(2) was deemed illegal and cancelled.

3. Denial of Exemption under Section 54F:

The assessee's claim for exemption under section 54F was initially denied on the grounds that the investment was made in 'remodel and renovation' rather than in the construction of a new house. The Tribunal, however, accepted the assessee's argument that 'remodel' and 'renovation' signify new construction, thus entitling the assessee to exemption under section 54F. However, due to the proviso applicable from assessment year 2000-01, the exemption was not effectively available as the assessee owned another house on the date of transfer.

4. Computation of Income under the Head 'Income from House Property':

The Tribunal did not find any specific submissions made regarding the recomputation of income under the head 'Income from house property' and thus, no interference was called for.

5. Liability for Interest under Various Sections:

The Tribunal did not specifically address the issue of liability for interest under various sections, as it was not elaborated upon in the submissions.

Conclusion:

The appeals for both assessment years were partly allowed, with the Tribunal cancelling the re-assessment orders due to the non-issuance of mandatory notice u/s 143(2) and addressing the merits of the assessee's claims regarding exemption under section 54F and capital gains.

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