2025 (4) TMI 338 - HC - Income Tax

Reopening of assessment u/s 147 - denial of allowance u/s 54 of the Act as well as deduction u/s 54EC - HELD THAT - ITAT had rejected the reasoning that the deduction under Section 54 of the Act is available in respect of investment in one residential unit only. ITAT following the decision in the case of Arun K. Thiagarajan 2020 (6) TMI 513 - KARNATAKA HIGH COURT held that Section 54 of the Act contemplated investment in a residential house which did not mean one residential house. The learned ITAT held that expression a residential house could not be construed as a singular house. It is not necessary to examine the merits of the learned ITAT s decision as the Revenue has accepted the ITAT s decision and has not filed an appeal against the impugned order. Thus we must proceed on the basis of the AO s reasoning that the deduction under Section 54 of the Act was confined to investment made in one residential house has not been sustained. Second reason that the deduction under Section 54EC of the Act is confined to Rs. 50, 00, 000/- only the same was also not sustained by the ITAT. ITAT had following the decision of C. Jaichander 2014 (11) TMI 54 - MADRAS HIGH COURT concluded that the issue whether a deduction u/s 54EC of the Act could exceed the said amount as claimed by the Assessee was covered in the Assessee s favour. The Revenue s appeal against the CIT(A) s order was accordingly dismissed. The principal question to be addressed is whether the additions made by the AO are sustainable if the reasons for which the reassessment proceedings had been initiated are not sustained. Undisputedly the said question is squarely covered by the several decisions of this court. In Ranbaxy Laboratories Limited 2011 (6) TMI 4 - DELHI HIGH COURT Sub-section (2) of section 148 mandates reasons for issuance of notice by the Assessing Officer and sub-section (1) thereof mandates service of notice to the assessee before the Assessing Officer proceeds to assess reassess or recompute the escaped income. Section 147 mandates recording of reasons to believe by the Assessing Officer that the income chargeable to tax has escaped assessment. All these conditions are required to be fulfilled to assess or reassess the escaped income chargeable to tax. As per Explanation 3 if during the course of these proceedings the Assessing Officer comes to conclusion that some items have escaped assessment then notwithstanding that those items were not included in the reasons to believe as recorded for initiation of the proceedings and the notice he would be competent to make assessment of those items. However the Legislature could not be presumed to have intended to give blanket powers to the Assessing Officer that on assuming jurisdiction under section 147 regarding assessment or reassessment of the escaped income he would keep on making roving inquiry and thereby including different items of income not connected or related with the reasons to believe on the basis of which he assumed jurisdiction. Question of law as framed is answered in favour of the Assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered was whether the reopening of the assessment under Section 148 of the Income Tax Act, 1961, survives when the additions made on the basis of reasons recorded for reopening are deleted. This involved examining the validity of the reassessment proceedings initiated by the Assessing Officer (AO) and the subsequent additions made to the Assessee's income.

2. ISSUE-WISE DETAILED ANALYSIS

Reopening of Assessment under Section 148

- Relevant Legal Framework and Precedents: The reopening of assessment is governed by Section 147 of the Income Tax Act, which allows the AO to reassess income if there's reason to believe income has escaped assessment. Section 148 mandates issuing a notice for such reassessment. The legal precedent set by Ranbaxy Laboratories Limited v. Commissioner of Income-tax and other cases establishes that if the reasons for reassessment are not sustained, the AO cannot independently assess other income.

- Court's Interpretation and Reasoning: The Court noted that the AO's reasons for reopening were not sustained by the ITAT. The Court relied on the interpretation that the AO must assess the income for which the reassessment was initiated; if not, other income cannot be assessed independently.

- Key Evidence and Findings: The ITAT had rejected the AO's reasons for reassessment, specifically regarding the deductions under Sections 54 and 54EC of the Act. The ITAT found the Assessee's claims under these sections valid, contrary to the AO's findings.

- Application of Law to Facts: The Court applied the legal principle that if the basis for reassessment is not upheld, the AO cannot make additions for other income not initially cited in the reassessment notice.

- Treatment of Competing Arguments: The Revenue argued for the validity of the AO's actions, but the Court found the issue covered by existing legal precedents, which the Revenue's counsel conceded.

- Conclusions: The Court concluded that the reassessment and subsequent additions by the AO were not sustainable since the original reasons for reopening were not upheld.

Determination of Fair Market Value and Deductions

- Relevant Legal Framework and Precedents: Section 54 of the Income Tax Act allows deductions for investments in residential properties, and Section 54EC allows deductions for investments in specified bonds. The Court referred to the ITAT's findings and the decision in Arun K. Thiagarajan v. Commissioner of Income-tax (Appeals) for interpretation.

- Court's Interpretation and Reasoning: The ITAT found that the Assessee was entitled to deductions under Section 54 for multiple properties and under Section 54EC for investments exceeding Rs. 50,00,000/-. The Court did not need to re-examine these findings as the Revenue accepted them.

- Key Evidence and Findings: The ITAT accepted the Assessee's claims for deductions based on investments made from advance consideration received, contrary to the AO's findings.

- Application of Law to Facts: The Court upheld the ITAT's interpretation that Section 54 does not limit deductions to a single residential property and that Section 54EC allows for the claimed deductions.

- Treatment of Competing Arguments: The ITAT's findings were not contested by the Revenue, leading the Court to accept them as the basis for its decision.

- Conclusions: The Court upheld the ITAT's decision on the fair market value and deductions, reinforcing the Assessee's entitlement to the claimed deductions.

3. SIGNIFICANT HOLDINGS

- The Court held that the reassessment proceedings under Section 148 could not survive if the reasons for reopening were not sustained. This aligns with the principle that the AO cannot assess other income if the initial reasons for reassessment are invalidated.

- The Court affirmed the ITAT's interpretation that Section 54 allows deductions for investments in more than one residential property and that Section 54EC deductions can exceed Rs. 50,00,000/- if justified by the facts.

- The Court set aside the additions made by the AO, as the reasons for reassessment were not sustained, thereby ruling in favor of the Assessee.