2015 (7) TMI 574 - HC - Income Tax

Addition on transaction of long term capital gains as income from other sources - the said information came to the knowledge of the assessing officer after initiation of proceedings under Section 147 - appellant claimed exemption under Section 54-F on the income shown under the head long term capital gains indicating that the amount was invested in the construction of a house - Held that - The issue relating to long term capital gains was already declared by the appellant in his returns filed under Section 139 of the Act. This issue was discussed in detail in the block assessment proceedings by the assessing officer in the assessment order passed under Section 158-BC. This block assessment order under Section 158-BC was passed prior to the issuance of reassessment notice under Section 148 of the Act. Consequently, information regarding long term capital gains was already existing on the file of the assessee and did not come up as an issue for the first time during reassessment proceedings under Section 147 of the Act nor can it be said that such issue came to the knowledge or notice of the assessing authority subsequently in the case of reassessment proceedings. The assessing officer in the reassessment order under Section 147 of the Act has clearly indicated that the matter was discussed and examined in detail in the block assessment order and an addition of ₹ 36,60,072/- was made on a protective basis in order to protect the interest of revenue. It is apparently clear, that this issue relating to long term capital gains had not come to the notice of the assessing officer subsequently in the course of reassessment proceeding. We are of the opinion, that the assessing officer could not have made this addition in reassessment proceeding under the cover of protective basis . We are of the opinion that protective assessment could only be made at the stage when there was any doubt or dispute about the assessability of a particular sum either in relation to the assessment year and/or in relation to the assessee. The amount which is alleged to have escaped assessment was duly indicated by the assessee in his return under Section 139 of the Act and was also considered in the block assessment order under Section 158-BC. In the block assessment order the assessing authority had assessed this amount on long term capital gains as undisclosed income. The block assessment order was set aside on the ground that such amount was not an undisclosed income which finding was affirmed by the Tribunal. Once the Tribunal has given a categorical finding that the amount was not an undisclosed income, which order has attained finality, the said amount cannot be treated as an escaped income chargeable to tax under Section 147 of the Act. See Vishwanath Prasad Ashok Kumar Sarraf vs. Commissioner of Income Tax and others 2010 (4) TMI 445 - ALLAHABAD HIGH COURT - Decided in favour of assessee.

Summary

Issues Involved:
1. Legitimacy of long-term capital gains claim and exemption under Section 54-F.
2. Validity of reassessment proceedings under Section 147.
3. Authority of the Assessing Officer to add income on a "protective basis" during reassessment.
4. Applicability of Explanation 3 to Section 147 in reassessment proceedings.

Detailed Analysis:

1. Legitimacy of Long-Term Capital Gains Claim and Exemption Under Section 54-F:
The appellant, a doctor by profession, filed his return for the assessment year 2002-03 under Section 139(1) of the Income Tax Act, declaring an income of Rs. 7,20,377/-. This included Rs. 35,85,930/- under "long term capital gains" from the sale of shares, claiming exemption under Section 54-F by indicating the investment in a house. A search and seizure operation under Section 132 led to block assessment proceedings for the period from 1997-98 to 14.12.2002. The assessing authority deemed the transaction a sham and added Rs. 36,60,072/- as undisclosed income. However, the appellate authority and the Tribunal subsequently ruled that the addition was not based on material seized during the search, and thus, the amount was deleted from the appellant's income.

2. Validity of Reassessment Proceedings Under Section 147:
Post block assessment, the assessing officer issued a notice under Section 148 to reopen the assessment for 2002-03, citing receipt of Rs. 1,65,000/- from a private hospital as deemed dividend under Section 2(22)(e). The reassessment order added this amount and Rs. 36,60,072/- on a "protective basis." The appellate authority later ruled that the addition of Rs. 36,60,072/- was beyond the scope of reassessment under Section 147, as the facts were already known to the assessing officer before issuing the notice under Section 148.

3. Authority of the Assessing Officer to Add Income on a "Protective Basis" During Reassessment:
The Tribunal upheld the reassessment, stating that once reopened, other issues arising during the proceedings could be examined and added. However, the High Court disagreed, noting that the long-term capital gains issue was already known and discussed in the block assessment order. The court emphasized that protective assessments are only valid when there's doubt or dispute about the assessability of a particular sum.

4. Applicability of Explanation 3 to Section 147 in Reassessment Proceedings:
Explanation 3 to Section 147 allows the assessing officer to assess any issue which comes to notice during reassessment, even if not included in the initial reasons for reopening. The High Court clarified that this applies only to issues arising subsequently during reassessment, not those already known. Since the long-term capital gains were already declared and discussed in the block assessment, they did not come to notice subsequently. Therefore, the addition of Rs. 36,60,072/- was not justified under Section 147.

Conclusion:
The High Court allowed the appeal, setting aside the Tribunal's order. It held that the assessing officer was not justified in adding the long-term capital gains as income from other sources during reassessment, as this issue was already known and discussed prior to the reassessment proceedings. The court emphasized that reassessment under Section 147 requires new issues to come to notice during the proceedings, which was not the case here. The question of law was answered in favor of the assessee.