2010 (11) TMI 367 - HC - Income Tax

Capital gain - Best judgment assessment - Penalty - It was also made clear that if the appellant failed to submit her objections/views before the said date the assessment would be completed on the lines indicated in the said notice - It is not in controversy that based on a notice issued under section 148 of the Act for an assessment to be made under section 147 of the Act in the absence of any materials having been furnished it would be open for the assessing authority to make a best judgment assessment as provided under section 144 of the Act - The question whether the expenses alleged to have been incurred by the appellant in order to get the property free from so-called legal entanglement and that the appellant was eligible to seek deduction of such expenditure for determining the tax liability is purely a question of law since the money was paid by the assessee-company it would also constitute an expenditure wholly and exclusively in connection with the transfer. In the case of payment of Rs. 50, 000 the same analogy would apply - Though the appellant failed to raise those issues before the Tribunal though it was raised in its reply dated December 9 2006 submitted before the assessing authority - the appellant should not be deprived of a fair opportunity of hearing inasmuch as the said issue is a legal issue and if the appellant is able to demonstrate before the assessing authority on the said issue by producing satisfactory materials the appellant would be entitled to gain substantial benefits - Decided in the favour of the assessee by way of remand

Summary

Issues Involved:
1. Whether the amount spent for rectifying the defects in the title to the property and removing encumbrance to transfer is expenditure incurred in connection with the transfer for the purpose of computation of capital gains as per section 48 of the Income-tax Act.
2. Whether the assessment under section 144 was valid when neither a notice under section 142(1) nor a show-cause notice proposing to make a best judgment assessment was issued by the Assessing Officer prior to making the assessment.

Issue-wise Detailed Analysis:

Issue 1: Expenditure Incurred in Connection with the Transfer
The appellant contended that the expenditure incurred to rectify defects in the title and remove encumbrances should be deductible under section 48 of the Income-tax Act. The appellant argued that these expenses were "intrinsically linked to the transfer of the capital asset" and should be considered as incurred "wholly and exclusively in connection with the transfer of the capital asset." The appellant cited the decision in CIT v. Bradford Trading Co. P. Ltd. [2003] 261 ITR 222 (Mad) to support this claim.

The court acknowledged that this issue is a "purely a question of law" and should be examined with reference to the material papers that the appellant is required to exhibit before the assessing authority. The court referenced the legal principles established in CIT v. N. Vajrapani Naidu [2000] 241 ITR 560 (Mad) and Rm. Arunachalam v. CIT [1997] 227 ITR 222, which supported the appellant's claim for deduction of such expenditures.

The court concluded that the appellant should be given an opportunity to substantiate her claim before the assessing authority. Consequently, the court set aside the orders of the appellate authority and the Tribunal and remitted the matter back to the assessing authority to enable the appellant to substantiate her claim with relevant materials.

Issue 2: Validity of Assessment under Section 144
The appellant argued that the assessment under section 144 was invalid due to non-compliance with the statutory requirements, specifically the lack of a notice under section 142(1) and a show-cause notice proposing to make a best judgment assessment. The appellant contended that this non-compliance rendered the entire proceedings "ab initio void."

The court examined the sequence of notices and hearings, noting that the appellant was called upon to furnish details regarding returns for multiple assessment years. The court found that the initiation of proceedings under section 148, which led to an assessment under section 147, was valid. The court emphasized that the appellant was given several opportunities to submit her objections but failed to do so in a timely manner.

The court concluded that the best judgment assessment made under section 144 was valid and that the non-compliance with the first proviso to section 144(1) did not invalidate the entire proceedings. The court answered this question of law against the appellant, affirming the validity of the assessment under section 144.

Conclusion:
The court allowed the appeal in part, specifically on the first issue, and remitted the matter back to the assessing authority to enable the appellant to substantiate her claim regarding the expenditure incurred in connection with the transfer. The second issue was decided against the appellant, affirming the validity of the assessment under section 144. The assessing authority was directed to provide the appellant with an opportunity to present relevant materials and pass appropriate orders in accordance with the law.