2025 (6) TMI 1834 - AT - Income Tax

Reopening of assessment - Period of limitation - notice issued u/s. 148 of the Act before six years from the end of the assessment year 2015 -16 - old regime notices - mandation to take prior approval of the ld. PCIT as per provisions of section 151 - allegation of mechanical approval by competent authority and without proper service of notice u/s. 148 - undisclosed capital gain HELD THAT - In the old regime section 149(ii) prescribes the time limit for issuing notice u/s. 148 as four years but not more than six years from the end of the assessment year if the income chargeable to tax which has escaped assessment amounted to or was likely to amount Rs. 1, 00, 000/- or more. In the instant case AO found that the income/sale consideration of Rs. 45, 00, 000/- under the head capital gain which was not depicted in assessee s ITR was surely over one lakh rupees. Hence notice dated 31.03.2021 issued u/s. 148 before six years from the end of the assessment year 2015-16 falls within the time limit prescribed u/s.149 of the Act of the old regime. Perusal of the assessment order that prior approval of the jurisdictional Principal Commissioner of Income-tax was taken in accordance with section 151 of the Act of the old regime before initiating assessment proceedings u/s. 147/148 - AR has though mentioned that such approval was casual and in a mechanical manner however failed to elaborate the same. The assessee has not made any efforts to procure the said approval either through the process of this Tribunal or by any other mode available under law. Hence it cannot be accepted that the approval/sanction was given in a casual or mechanical manner by the sanctioning authority. Service of notice u/s. 148 dated 31.03.2021 it is an admitted fact that the Revenue issued notice through electronic platform on assessee s email ID available with the department in consonance with section 282 r.w.s. 292BB of the Act. All modes of service of notice are not required to be effected. The service through either of the given modes of service is sufficient. It also transpires that the assessee participated in the assessment proceedings which were being proceeded in the faceless manner u/s. 144B and entire procedure of faceless assessment of income escaping assessment was adopted by the AO as provided u/s. 151A of the Act. We accordingly do not find any illegality or invalidity either in the notice u/s. 148 r.w.s. 142(1) or at any stage of the assessment proceedings. In view of the aforesaid discussion the first point is accordingly determined against the assessee and in favour of the department. Exemption u/s 54 - Whether an immovable property consisting predominantly four shops at the ground floor along with a single room at the first floor can be treated as a residential house within the meaning of section 54 thereby qualifying for exemption of capital gains? - Admittedly the assessee has claimed deduction u/s. 54 of the Act in respect of capital gains arising from the transfer of a long term capital asset on the ground that the assessee had invested in other residential properties within the stipulated period. One of such two properties purchased by the assessee comprises four shops at the ground floor and one room at the first floor. A perusal of section 54 shows that this section provides exemption from capital gains tax if the capital gains arise from the transfer of a long-term capital asset being a residential house (buildings or lands appurtenant thereto) the income of which is chargeable under the head income from house property and the assessee has within the prescribed time invested in the purchase or construction of another residential house. The term residential house is not specifically defined under the Act but the legislative intent makes it clear that the nature and usage of the property are key determinants of the true character of the said property. The property should not be predominantly commercial in character. In the present case the immovable property in question admittedly consists of four shops at ground floor and one room at first floor which is also substantiated by the conveyance deed dated 04.02.2014 submitted by the assessee through his paper book. In common parlance shops are not capable to be characterized as residential house. Based on the composition and functional usage of the property it is evident that the property purchased by the assessee was predominantly commercial in nature. The presence of a single room at the first floor of the commercial structure does not alter the dominant character of the property as the same is expected to be used for incidental and ancillary activities/for commercial purposes. The primary usage and income generation from the property appear to be from commercial activity and not from residential house thereby disqualifying the eligibility of capital gains for exemption u/s. 54. AR has utterly failed to adduce any corroborating evidence like electricity bills municipal records etc. to justify the property in question to be a residential house. Hence we do not find any infirmity in the findings of the revenue authorities that the investment in second new property does not qualify for exemption from capital gain tax. The sale deed dated 29.08.2014 which is part of assessee s paper book at page 8 to 24 shows that the assessee Hazi Alauddin and his wife Smt. Hajjan Shahnaz Begum are shown to be the joint sellers/owners of the property. Hence the share of the assessee in the sale consideration of Rs. 45, 00, 000/- is half whereas the Revenue has computed the capital gain after considering the entire sale consideration in the hands of the assessee. Revenue seems to have ignored this fact that only 50% of the sale consideration can be taken into account for computation of capital gains in the hands of the assessee. For this limited point the AO is directed to re-compute the capital gain on 50% share of the aforesaid sale consideration in the hands of assessee. The second point is accordingly determined partly in favour of the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(i) Whether the proceedings initiated under section 147 and notice issued under section 148 of the Income-tax Act, 1961 (the Act) are invalid due to being barred by limitation, based on mechanical approval by the competent authority, and/or improper service of notice under section 282 of the Act?

(ii) Whether the Commissioner of Income-tax (Appeals) erred in confirming the assessment order denying the assessee's claim for exemption under section 54 of the Act on capital gains arising from sale of immovable property, particularly regarding the characterization of the newly purchased property as residential or commercial for the purpose of claiming deduction?

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Validity of proceedings under section 147/148

Relevant legal framework and precedents: The reopening of assessment under section 147 requires the Assessing Officer to have "reason to believe" that income chargeable to tax has escaped assessment. Prior approval of the Principal Commissioner of Income Tax is mandatory under section 151 before issuing notice under section 148. The time limit for issuance of notice under section 148 is governed by section 149; for income escaping assessment exceeding Rs. 1,00,000, the limit is six years from end of the relevant assessment year. Service of notice under section 148 must comply with section 282 and section 292BB, which allow electronic service as a valid mode.

Court's interpretation and reasoning: The Tribunal noted that the Assessing Officer received information from the ADIT/DDIT (Investigation) indicating the assessee sold immovable property for Rs. 45,00,000 but failed to disclose capital gains in the return. The Assessing Officer formed reasons to believe that income had escaped assessment and obtained prior approval from the Principal Commissioner of Income Tax under section 151. The notice under section 148 was issued within the six-year period prescribed by section 149.

The Tribunal rejected the assessee's contention that the approval was mechanical or casual, as no evidence was produced to substantiate this claim. The service of notice through electronic mode was held valid under section 282 read with section 292BB. The assessee's participation in faceless assessment proceedings under section 144B and 151A further evidenced proper notice and compliance with procedural requirements.

Key evidence and findings: Information from the Investigation wing, prior approval record, electronic service of notice, and procedural compliance in faceless assessment.

Application of law to facts: The reopening was within prescribed time limits, with proper approval and valid service of notice, thus meeting all statutory requirements.

Treatment of competing arguments: The assessee's allegations of invalid notice and casual approval were dismissed due to lack of substantiation. The Tribunal emphasized adherence to procedural safeguards under the old regime applicable at the time.

Conclusions: The reopening of assessment and issuance of notice under sections 147/148 were valid and not barred by limitation or procedural infirmities.

Issue (ii): Denial of exemption under section 54 of the Act

Relevant legal framework and precedents: Section 54 provides exemption from capital gains arising from transfer of a long-term capital asset being a residential house, if the assessee invests the capital gains in purchase or construction of another residential house within prescribed time. The term "residential house" is not explicitly defined; the character and predominant use of the property are determinative. Exemption is denied if the new property is predominantly commercial.

Court's interpretation and reasoning: The Tribunal examined the nature of the second property purchased by the assessee, described in the conveyance deed as consisting of four shops on the ground floor and one room on the first floor. It held that shops are inherently commercial in nature and the presence of a single room does not convert the entire property into a residential house. The dominant character of the property is commercial, thus disqualifying it from exemption under section 54.

The Tribunal noted that the assessee failed to produce corroborative evidence such as electricity bills or municipal records to establish residential use. The Tribunal further observed that the first property purchased, consisting solely of a residential house, qualified for exemption, and the Assessing Officer had allowed deduction accordingly.

Key evidence and findings: Registered sale deed showing composition of the property, absence of corroborative evidence for residential use, and the nature of shops as commercial units.

Application of law to facts: Since the second property was predominantly commercial, the exemption claim under section 54 was rightly denied for that property. The exemption was allowed for the first residential property purchased.

Treatment of competing arguments: The assessee argued that the two properties were adjoining and constituted a single residential unit, and that the second property was used for residential purposes despite the presence of shops. The Tribunal rejected these contentions for lack of evidence and because the registered deed clearly described the commercial character of the second property.

Additionally, the Tribunal addressed the computation of capital gains. The sale deed showed joint ownership between the assessee and his wife, implying the assessee's share in sale consideration was only 50%. The Revenue had computed capital gains on the full sale consideration, which was erroneous. The Tribunal directed recomputation of capital gains considering the assessee's 50% share.

Conclusions: The exemption under section 54 was correctly allowed only for the first residential property. The second property being predominantly commercial was not eligible for exemption. Capital gains computation was to be corrected to reflect the assessee's actual share.

3. SIGNIFICANT HOLDINGS

"The term 'residential house' is not specifically defined under the Act, but the legislative intent makes it clear that the nature and usage of the property are key determinants of the true character of the said property. The property should not be predominantly commercial in character."

"In common parlance, shops are not capable to be characterized as residential house. Based on the composition and functional usage of the property, it is evident that the property purchased by the assessee was predominantly commercial in nature. The presence of a single room at the first floor of the commercial structure does not alter the dominant character of the property."

"The reopening of assessment under section 147/148 was valid and within limitation, having been preceded by proper reasons to believe, prior approval under section 151, and valid service of notice under section 282 read with section 292BB."

"The assessee's share in the sale consideration of jointly owned property must be considered for computation of capital gains, and not the entire sale consideration."

The Tribunal's final determinations on each issue are:

(i) The reopening proceedings and notices under sections 147/148 are valid and not barred by limitation or procedural defects.

(ii) The claim for exemption under section 54 of the Act is allowed only in respect of the first residential property purchased. The second property, being predominantly commercial, does not qualify for exemption. However, capital gains are to be recomputed considering the assessee's 50% share in the sale consideration.