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2025 (4) TMI 1488 - AT - Income TaxAddition of long term capital gain - CIT(A) deleted addition - whether CIT(A) was violative of Rule 46A of the Income Tax Rules because the additional evidence had been admitted without giving an opportunity to the ld. AO? HELD THAT - It does appear from the order or the ld. CIT(A) that before acting upon the additional evidences presented before him i.e. the copy of the Khatauni and a certificate dated 29.09.2016 the ld. CIT(A) did not offer an opportunity to the ld. AO to consider these evidences in remand proceedings. Therefore his actions appear to be in violation of the Rule 46A. However in our opinion this will not materially impact the fate of the case because these evidences were only supporting evidences with regard to facts that had already been placed before the ld. AO in the form of the sale deed. That sale deed showed that the land in question which formed part of the auctioned assets belonged to Smt. Shakuntla Devi the partner of the firm and not to the firm. In view of the same the firm could not be charged long term capital gain on alienation of an asset which did not belong to it. The only gains attributable to the firm could be on account of building structure and plant and machinery which were owned by the firm and depicted in its schedule of fixed assets. For the same the ld. AO was required to arrive at the figures of amounts realized on sale of building structure and plant and machinery and compute the profits on the sale of the same after deducting the written down value as it stood in the books of the assessee. No other amount could be taxed in the hands of the assessee as capital gains for assets which did not belong to it. In the circumstances we are inclined to agree with the ultimate decision of the ld. CIT(A) in granting relief to the assessee. Therefore the appeal of the Revenue on the actual grant of relief i.e. ground no. 1 is dismissed. Appeals on ground nos. 2 and 3 with regard to the entertaining of additional evidences in violation of Rule 46A of the Income Tax Rules are upheld. Thus the appeal of the Revenue is partly allowed. Reopening of assessment - Information that was available with the ld. AO coupled with the fact that the assessee had not filed a return of income earlier gave rise to a valid reason to believe that the income had escaped assessment - In considering the material available before the ld. AO and subsequently before the Addl CIT Range-1 Bareilly and considering that at that point of time the amendments to the act that provided for seeking the explanation of the assessee before issuance of notice under section 148 had not yet come into play we see no infirmity in the initiation of the assessment proceedings or the approval given to the said assessment proceedings by the Addl CIT Range-1 Bareilly. Thus it cannot be said that the assessment proceedings were void ab initio or that the approvals were given mechanically. Assessee has appeared before the ld. AO in response to the notice issued by him. Therefore in view of the provisions of secton 292B and 292BB the notice cannot be said to be invalid or the proceedings vitiated on account of service of an incomplete notice. We therefore also cannot conclude that the assessment proceedings were illegal bad in law or without jurisdiction. Therefore even while we have held that the addition was not sustainable in the hands of the assessee the grounds raised in the Cross Objection are not found to be maintainable
Issues Presented and Considered
The core legal questions considered by the Tribunal are: (i) Whether the deletion of the addition of Rs. 5,28,97,000/- as long term capital gains by the CIT(A) was justified, given that the Assessing Officer (AO) had recorded detailed reasons for making the addition under section 147 read with section 144 of the Income Tax Act, 1961. (ii) Whether the CIT(A) erred in admitting additional evidence filed by the assessee under Rule 46A of the Income Tax Rules, 1962 without providing the AO an opportunity to examine such evidence, thereby violating procedural safeguards. (iii) Whether the CIT(A), having accepted the additional evidence, ought to have recalculated the taxable income or determined the rightful owner of the income instead of merely deleting the addition. (iv) Whether the assessment proceedings initiated under section 147 read with section 144B of the Income Tax Act, 1961 were illegal, bad in law, and void ab initio due to infirmities in the reason to believe and mechanical sanction under section 151. (v) Whether the AO's assessment order was valid despite the alleged procedural and substantive errors, including the correctness of the initiation of reassessment proceedings based on purportedly erroneous Form 26AS data. Issue-Wise Detailed Analysis Issue (i): Validity of Deletion of Addition of Long Term Capital Gains Legal Framework and Precedents: Under section 147 of the Income Tax Act, reassessment can be initiated if the AO has reason to believe that income has escaped assessment. Capital gains are taxable only when the asset belongs to the assessee and is transferred. The burden lies on the AO to establish ownership and assessable capital gains accordingly. Court's Interpretation and Reasoning: The Tribunal noted that the AO treated the entire auction sale proceeds of Rs. 5,28,97,000/- as long term capital gains in the hands of the assessee firm without proper consideration of ownership details. The sale deed and other evidences, including audited accounts, indicated that the land belonged to a partner of the firm, not the firm itself. The auction sale was a distress sale by the bank to recover a loan secured by both the firm's assets (building, plant, machinery) and the partner's land. Key Evidence and Findings: The sale deed, audited financial statements, and submissions by the assessee demonstrated that only the building structure and plant and machinery belonged to the firm, while the land was owned by the partner. The AO failed to deduct the written down value (WDV) of depreciable assets or consider brought forward unabsorbed depreciation, resulting in an inflated capital gains addition. Application of Law to Facts: The Tribunal held that capital gains could only be computed on assets owned by the firm, i.e., building and plant and machinery, after deducting WDV. The land, belonging to the partner, could not be taxed in the hands of the firm. The CIT(A) rightly deleted the addition on this basis. Treatment of Competing Arguments: The Revenue argued that the addition was justified and supported by detailed reasons of the AO. The Tribunal found that the AO's reasoning ignored crucial ownership facts and failed to properly compute capital gains, thus the CIT(A)'s relief was warranted. Conclusion: The deletion of the addition by the CIT(A) was upheld as correct on merits. Issue (ii): Admission of Additional Evidence under Rule 46A Legal Framework: Rule 46A of the Income Tax Rules prescribes procedure for admission of additional evidence during appellate proceedings, including the requirement to provide the AO an opportunity to examine such evidence. Court's Reasoning: The Tribunal observed that the CIT(A) admitted additional evidence (Khatauni and certificate from Nayab Tehsildar) without remanding the matter to the AO for examination, thereby violating Rule 46A. Key Findings: Despite this procedural lapse, the Tribunal held that the additional evidence was only corroborative of facts already on record (sale deed showing land ownership). Hence, the procedural violation did not materially affect the outcome. Application of Law to Facts: The Tribunal partly allowed the Revenue's appeal on this ground, upholding the procedural violation but clarifying it did not vitiate the substantive relief granted to the assessee. Conclusion: The CIT(A)'s admission of additional evidence without AO's opportunity was held to be a procedural error, but not fatal to the correctness of the order. Issue (iii): CIT(A)'s Failure to Recalculate Taxable Income or Identify Income Owner Legal Framework: The CIT(A) has co-terminus powers with the AO and can re-compute income or determine ownership for tax purposes. Court's Reasoning: The Tribunal noted that while the CIT(A) deleted the addition, he did not explicitly compute the taxable income or hold definitively on the ownership of income. However, the Tribunal found that the AO was required to compute capital gains only on assets owned by the firm after deducting WDV, and no other amount was taxable as capital gains. Conclusion: The Tribunal found no prejudice in the CIT(A)'s order and upheld the relief granted, implicitly affirming the ownership and computation principles. Issue (iv): Validity of Assessment Proceedings and Sanction under Section 151 Legal Framework: Reassessment proceedings require a valid "reason to believe" and proper sanction under section 151. The reason to believe must be based on material available at the time of initiation. Court's Reasoning: The Tribunal observed that the AO had a valid reason to believe that income escaped assessment based on ITD database and non-filing of return for AY 2017-18. Although the reason to believe was later found to be based on erroneous facts (mistake in Form 26AS), the initiation was valid as it was based on prima facie material. The sanction under section 151 was also found to be valid and not mechanical. Application of Law to Facts: The Tribunal emphasized that subsequent change in facts does not vitiate the initiation if the initial reason to believe was reasonable. The assessee had also appeared before the AO, and notices were held valid under sections 292B and 292BB. Conclusion: The reassessment proceedings were not illegal, void ab initio, or bad in law. Issue (v): Validity of Notice under Section 148 and Procedural Compliance Legal Framework: Notices under section 148 must comply with prescribed procedural requirements, including proper signing and service. Court's Reasoning: The Tribunal found that despite the assessee's contention regarding unsigned notice and short time to respond, the notice was valid and the assessment proceedings were not vitiated. Conclusion: The procedural objections raised by the assessee were rejected. Significant Holdings "The firm could not be charged long term capital gain on alienation of an asset which did not belong to it. The only gains attributable to the firm could be on account of building structure and plant and machinery which were owned by the firm and depicted in its schedule of fixed assets. For the same, the ld. AO was required to arrive at the figures of amounts realized on sale of building structure and plant and machinery and compute the profits on the sale of the same after deducting the written down value as it stood in the books of the assessee. No other amount could be taxed in the hands of the assessee as capital gains, for assets which did not belong to it." "The reason to believe of the ld. AO at that stage is a prima facie belief, which is based upon the information which is before him at that stage. This reason to believe could subsequently be altered in the course of assessment depending upon the facts placed before the ld. AO. The fact that the ld. AO may later come to a conclusion that the grounds on which the proceeding was initiated, were not valid, would not vitiate the initiation of the proceeding because the initiation has to be viewed in the context of the material that was available at that time and whether the same could lead to a reasonable inference, that income had escaped assessment." Core principles established include:
Final determinations:
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