2025 (4) TMI 975 - AT - Income Tax

Disallowance of Assessee s claim of deduction u/s 54F - CIT(A) who has confirmed the addition made by the AO on the ground that the sale consideration should have been deposited before the due date of filing of the return u/s. 139(1) of the Act in specified Capital Gains Account Scheme (CGAS) bank account with authorized banks and utilized in the manner prescribed under the Act - HELD THAT - It is clear from the bank statement filed by the assessee the assessee received sale consideration on 10-05-2016 and the entire sale consideration was reinvested in a residential flat on 17-05-2016 by transferring it to the Builder. However the assessee has not declared the sale transaction in the original Return of Income but claimed for the first time the claim of exemption u/s. 54F of the Act in the reassessment proceedings. Since the assessee has made reinvestment of the entire sale consideration within seven days from the date of sale of the original Asset the question of depositing the sale consideration/Capital Gain amount is specified CGAS account does not arise. As perused the statutory provision contemplated u/s 54F and are of the considered view that the same does not cast any statutory obligation on the part of assessee to file his return of income within the stipulated time period as contemplated u/s 139 or 148 of the Act as a precondition for entitling him to claim exemption under the said statutory provision. Therefore we are of the considered view that the reference to the term due date for furnishing of return of income u/s 139 as contemplated in section 54F(4) is in context of the time limit within which the amount which had not been appropriated by the assessee towards making of investment in the purchase and/or construction of the new residential house is permitted to be deposited in the Capital Gains Account Scheme 1988. Which thereafter is to be withdrawn and utilized as per the terms contemplated in the said statutory provision. Section 54F neither provides as a pre-condition the requirement of filing of the return of income by the assessee within the stipulated time period nor places any embargo as regards the claim of such exemption in a case the return of income filed by the assessee involves some delay. Since the A.O. has no occasion to have deliberated upon the satisfaction of the requisite conditions as contemplated u/s 54F of the Act as claimed by the assessee. Therefore in all fairness we restore the matter to the file of J.A.O for making the necessary verifications and allow the claim in accordance with law. Appeal filed by the Assessee is allowed for statistical purpose.

Summary

The core legal questions considered in this appeal are:

1. Whether the reassessment notice issued under section 148 of the Income Tax Act, 1961 (the Act) is valid and sustainable in law.

2. Whether the assessee is entitled to claim deduction under section 54F of the Act for the long-term capital gain amounting to Rs. 1,40,00,000/- despite not having declared the same in the original return of income.

3. Whether the non-disclosure of the claim of exemption under section 54F in the original return filed under section 139(1) of the Act precludes the assessee from claiming such exemption in the reassessment proceedings, with specific reference to the interpretation of section 54F(4).

4. Whether the failure to provide the assessee an opportunity of video hearing, as requested, constitutes a procedural irregularity warranting interference with the appellate order.

Issue 1: Validity of the Reassessment Notice under Section 148

The reassessment notice was issued on the ground that the assessee had received sale consideration of Rs. 1,40,00,000/- from the sale of an asset but failed to disclose this income in the original return, thereby escaping assessment within the meaning of section 147 of the Act. The legal framework governing reassessment notices under section 148 requires that the Assessing Officer (AO) must have reason to believe that income chargeable to tax has escaped assessment.

The Court observed that the sale consideration was indeed received by the assessee on 10-05-2016 but was not declared in the original return filed on 12-12-2017. This non-disclosure constituted a valid ground for reopening the assessment. Hence, the reassessment notice was legally sustainable. No competing argument was raised by the assessee challenging the validity of the notice on procedural or jurisdictional grounds beyond the claim of exemption under section 54F.

Conclusion: The reassessment notice issued under section 148 was valid and not liable to be quashed.

Issue 2: Entitlement to Deduction under Section 54F

Section 54F of the Act provides exemption from capital gains tax if the net sale consideration from the transfer of a long-term capital asset, other than a residential house, is invested in the purchase or construction of a residential house within the prescribed period. The assessee claimed exemption under section 54F by stating that the entire sale consideration was reinvested in a residential flat within seven days of receipt of sale proceeds.

The AO and the CIT(A) rejected the claim on the ground that the exemption was not claimed in the original return and that the sale consideration was not deposited in the Capital Gains Account Scheme (CGAS) before the due date of filing the return under section 139(1). The assessee contended that since the reinvestment was made within seven days, there was no requirement to deposit the amount in CGAS, and that the exemption claim was valid even if made for the first time in reassessment proceedings.

The Court examined the language of section 54F and held that the statutory provision does not mandate filing the return within the due date under section 139(1) as a precondition for claiming exemption. The reference to "due date" in section 54F(4) pertains only to the time limit for depositing unutilized sale proceeds in CGAS, not to the timing of claiming exemption in the return. Since the assessee reinvested the entire sale consideration within the prescribed period, the requirement of depositing in CGAS did not arise.

Further, the Court relied on precedent from a High Court ruling which emphasized that substantive law confers the benefit of exemption and such benefit cannot be denied on mere technical grounds such as non-disclosure in the original return. The Court noted that the AO had not examined the merits of the exemption claim, including whether the residential property was the only one owned by the assessee, which is a condition under section 54F.

Conclusion: The assessee is entitled to claim exemption under section 54F if the conditions are satisfied. The rejection of the claim on the ground of non-disclosure in the original return was erroneous. The matter was remanded for verification of conditions and reconsideration of the exemption claim on merits.

Issue 3: Interpretation of Section 54F(4) and Timing of Claim

The CIT(A) had held that non-disclosure of the claim of deduction under section 54F in the original return rendered the provisions of section 54F(4) infructuous, thereby disallowing the exemption. The assessee challenged this interpretation.

The Court clarified that section 54F(4) refers to the due date for depositing unutilized capital gains in CGAS and does not impose a statutory bar on claiming exemption after the due date of filing the return. The timing of filing the return or the claim therein is not a condition precedent for entitlement to exemption. The Court emphasized that the statutory language does not support the view that failure to claim exemption in the original return precludes the assessee from claiming it subsequently, especially when the exemption is based on fulfillment of substantive conditions.

Conclusion: The Court rejected the narrow and technical interpretation of section 54F(4) as a bar on claiming exemption after the original return and held that the exemption claim can be entertained in reassessment proceedings.

Issue 4: Denial of Opportunity of Video Hearing

The assessee contended that the CIT(A) erred in dismissing the appeal without granting the requested opportunity of video hearing. The Court noted the procedural aspect but did not elaborate on the impact of this denial on the merits of the case. The appellate order was primarily challenged on substantive grounds of exemption claim.

Conclusion: The issue was noted but did not form a basis for interference with the appellate order, especially since the matter was remanded for fresh consideration on merits.

Significant Holdings and Core Principles Established

"The reference to the term 'due date' for furnishing of return of income u/s 139 as contemplated in section 54F(4) is in context of the time limit within which the amount which had not been appropriated by the assessee towards making of investment in the purchase and/or construction of the new residential house is permitted to be deposited in the 'Capital Gains Account Scheme, 1988. Which thereafter is to be withdrawn and utilized as per the terms contemplated in the said statutory provision."

"Section 54F, neither provides as a pre-condition the requirement of filing of the 'return of income' by the assessee within the stipulated time period, nor places any embargo as regards the claim of such exemption in a case the 'return of income' filed by the assessee involves some delay."

"When the substantive law confers a benefit on the assessee under a statute, it cannot be taken away by the adjudicatory authority on mere technicalities."

"It is obligatory on the part of the Assessing Officer to have deliberated on the entitlement of the assessee towards claim of exemption u/s 54F on merits whether this is the only residential property owned by the assessee, etc."

The Court restored the matter to the file of the Joint Assessing Officer for verification of conditions under section 54F and to allow the claim in accordance with law, thereby setting aside the orders of the lower authorities which had mechanically rejected the exemption claim on technical grounds.