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2025 (7) TMI 186 - HC - Income TaxReopening of assessment u/s 147 - denial of deduction u/s 54 -disallowing the capital gains only on the ground that the amount was deposited after the sad demise of original assessee in the name of the petitioners as legal heirs - allowability of investments made by the legal heirs in their own names after the death of the original assessee HELD THAT - The reasons recorded by the AO which are reflected in the impugned assessment order only refers to the disallowance as it was on the ground that the same was not disclosed in the return of income and the entire amount of sale consideration would be liable to be taxed under the head of capital gain. Thereafter it appears that the respondent-AO without there being any tangible information that income had escaped assessment and without considering the fact that the petitioners have filed the return of income after the sad demise of the late Kamalbhai Ramniklal Shah wherein the petitioners have disclosed the fact of sale of the immovable property and deposit of such sale consideration to claim the deduction under Sec. 54 amounting to Rs. 3 crores as against the amount liable for capital gains and as such no capital tax was payable by the petitioners in view of the investments made as required under Sec. 54 of the Act has passed the impugned Assessment Order by disallowing the capital gains only on the ground that the amount of Rs. 90 lakhs was deposited after the sad demise of Kamalbhai Ramniklal Shah in the name of the petitioners as legal heirs and therefore the same could not have been considered as an amount invested as required under Sec. 54 of the Act. Such an hyper-technical approach adopted by the respondent-AO can never be said to provide ground for assumption of jurisdiction to reopen the assessment. This petition succeeds and accordingly the impugned notice issued u/s 148 as well as the Assessment Order passed u/s 147 read with Sec. 144B.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Court in this matter include:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Jurisdiction to Reopen Assessment under Section 148 Relevant Legal Framework and Precedents: Section 148 of the Income Tax Act empowers the Assessing Officer to reopen an assessment if there is reason to believe that income chargeable to tax has escaped assessment. The reopening must be based on tangible material indicating escapement of income. Court's Interpretation and Reasoning: The Court noted that the petitioners, as legal heirs, had filed the return of income declaring the capital gains and had made investments to claim exemption under Section 54. The Assessing Officer's assumption of jurisdiction was based on an alleged non-disclosure of capital gains, which was factually incorrect as the return had been filed by the legal heirs post the original assessee's death. The Court observed that the reopening was without jurisdiction as there was no escapement of income. Key Evidence and Findings: The return of income was filed on 05.08.2013 after the death of the original assessee on 12.03.2013. The petitioners disclosed the sale of property and investments made under the Capital Gain Account Scheme. The Assessing Officer issued multiple notices and received detailed replies including sale deeds, settlement deeds, and bank statements confirming investments. Application of Law to Facts: The Court held that since the petitioners had disclosed the relevant facts and complied with conditions under Section 54, there was no justification for reopening the assessment. The reopening notice and subsequent assessment order were therefore without jurisdiction. Treatment of Competing Arguments: The Revenue contended that the petitioners failed to inform the Department about the death of the original assessee before issuance of the notice and that the return was filed by legal heirs, not the deceased. The Court rejected this as a ground to assume jurisdiction, emphasizing that the return was filed by legal heirs who are recognized representatives of the deceased. Conclusion: The Court concluded that the Assessing Officer lacked jurisdiction to reopen the assessment under Section 148 as there was no escapement of income. Issue 2: Eligibility of Investments Made by Legal Heirs for Exemption under Section 54 Relevant Legal Framework and Precedents: Section 54 of the Income Tax Act provides exemption from capital gains tax where the capital gains arising from sale of a residential property are invested in another residential property or capital gain account scheme within prescribed time limits. The term "assessee" is used in the statute. The Court relied on the decision of the Andhra Pradesh High Court in Mir Gulam Ali Khan, which held that the term "assessee" should be given a liberal interpretation to include legal heirs, especially where the sale and subsequent investment/purchase are part of the same chain of events, and the original assessee has died. Court's Interpretation and Reasoning: The Court observed that the investments made by the legal heirs in their own names were in accordance with the conditions of Section 54, given that the original assessee had died prior to the investment. The Assessing Officer's strict interpretation that the investment must be in the name of the deceased assessee was rejected as hyper-technical and contrary to the object of the provision. Key Evidence and Findings: Investments totaling Rs. 90 lakhs were made after the death of the original assessee in the names of the legal heirs, including fixed deposits under the Capital Gain Account Scheme and bonds (REC and NHAI). The petitioners provided bank statements and other documentary evidence to substantiate these investments. Application of Law to Facts: Applying the precedent, the Court held that the legal heirs' investments qualify for exemption under Section 54 since they represent the continuation of the original assessee's intent to claim exemption on capital gains arising from the sale of the property. Treatment of Competing Arguments: The Revenue argued that since the investments were not made in the name of the deceased assessee, they are not eligible for exemption under Section 54. The Court rejected this, emphasizing the practical difficulties and recognizing legal heirs as proper claimants. Conclusion: The Court held that the investments made by the legal heirs in their own names are eligible for exemption under Section 54 of the Income Tax Act. Issue 3: Requirement to Inform Department about Death of Assessee and Procedural Aspects Relevant Legal Framework and Precedents: The Income Tax Act does not explicitly prescribe a procedure for informing the Department about the death of an assessee; however, it is a recognized practice that legal heirs must notify the Department to update records. Court's Interpretation and Reasoning: The Court acknowledged that the petitioners did not inform the Department about the death of the original assessee before issuance of the notice under Section 148. However, it held that this procedural lapse does not justify reopening the assessment or disallowing the exemption, especially when the legal heirs participated in the proceedings and furnished all relevant details. Key Evidence and Findings: The Department became aware of the death only during the assessment proceedings, after multiple notices and submissions by the petitioners. Application of Law to Facts: The Court observed that the failure to inform the Department in a timely manner was an afterthought and did not affect the substantive rights of the petitioners to claim exemption. Treatment of Competing Arguments: The Revenue relied on the lack of prior intimation to justify the reopening and disallowance. The Court rejected this, noting that the petitioners had fully cooperated and disclosed facts during the assessment proceedings. Conclusion: The Court held that the procedural lapse did not invalidate the petitioners' claim or justify the reopening of assessment. Issue 4: Appropriateness of Invoking Extraordinary Jurisdiction under Article 227 Relevant Legal Framework and Precedents: Article 227 of the Constitution of India confers inherent powers on High Courts to supervise lower courts and authorities but is to be exercised sparingly, especially when alternative efficacious remedies such as appeals exist. Court's Interpretation and Reasoning: The Revenue contended that the petitioners should have preferred an appeal before the Commissioner of Income Tax (Appeals) instead of invoking writ jurisdiction. The Court, however, found that the challenge was to the jurisdictional validity of the reopening notice and assessment order, which is a question of law fit for consideration under Article 227. Key Evidence and Findings: The petitioners challenged the jurisdictional validity of the notice and assessment order rather than the merits of the assessment. Application of Law to Facts: The Court exercised its extraordinary jurisdiction to quash the notice and assessment order on grounds of lack of jurisdiction and legal correctness. Treatment of Competing Arguments: The Court distinguished this case from routine appeals by emphasizing the jurisdictional nature of the challenge. Conclusion: The Court entertained the petition under Article 227 and did not direct the petitioners to approach the appellate authority. 3. SIGNIFICANT HOLDINGS The Court made the following crucial legal determinations and articulated core principles: "The respondent - Assessing Officer could not have assumed the jurisdiction to reopen the assessment on the ground that only because the investment was made in name of the petitioners who are legal heirs to claim exemption under Sec. 54 of the Act would result into escapement of the income." "The word 'assessee' must be given a wide and liberal interpretation so as to include his legal heirs also. There is no warrant for giving too strict an interpretation to the word 'assessee' as that would frustrate the object of granting exemption." "Such a hyper-technical approach adopted by the respondent-Assessing Officer can never be said to provide ground for assumption of jurisdiction to reopen the assessment." "The failure to inform the Department about the death of the original assessee prior to issuance of the notice does not invalidate the substantive rights of the legal heirs to claim exemption under Section 54." "The impugned notice dated 21.04.2020 issued under Sec. 148 and the Assessment Order dated 27.03.2022 passed under Sec. 147 read with Sec. 144B of the Act are hereby quashed and set aside." The Court established the principle that legal heirs who file returns and make investments in their own names post the death of an assessee are entitled to claim exemption under Section 54, and that reopening of assessment on grounds of non-disclosure of capital gains in such circumstances is without jurisdiction. Final determinations on each issue were in favor of the petitioners, resulting in quashing of the reopening notice and assessment order.
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