2025 (7) TMI 750 - AT - Income Tax

Capital gain OR income from other sources - receipt as confirming party in respect of the purchase of immovable property - AO held that being one of the confirming parties the assessee is not eligible for any claim regarding the cost of acquisition or exemption and the said amount was treated as receipt of the assessee thus made addition as income from other sources - HELD THAT - Assessee is owner of the property which was sold as per the sale deed and in fact the assessee being a confirming party to the sale agreement has received a consideration of Rs. 5, 40, 000/- in respect of holding jointly/the said property by the assessee himself as well. Thus the said amount is capital gain only and the treatment given by the AO that of income from other sources is not justified. Hence the AO as well as CIT(A) was not right in treating the same as income from other sources. The contention of the assessee appears to be correct. Besides this the Tribunal in the co-owner of Smt. Santokben Rameshbhai Mali 2023 (10) TMI 1531 - ITAT AHMEDABAD has also treated the same as capital gain. Thus the appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are as follows:

(a) Whether the reopening of the assessment for the assessment year 2012-13 under section 147 of the Income Tax Act was legally valid, considering the issuance and service of notice under section 148, the timing and validity of the reasons recorded for reopening, and the compliance with procedural requirements.

(b) Whether the amount of Rs. 5,40,000 received by the appellant as a "confirming party" in a property sale transaction constitutes capital gains or income from other sources for tax purposes.

(c) Whether the interest charged under sections 234A and 234B of the Income Tax Act was legally and factually justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Legality of Reopening Assessment under Section 147

Relevant legal framework and precedents: Section 147 of the Income Tax Act empowers the Assessing Officer (AO) to reopen an assessment if there is reason to believe that income has escaped assessment. Section 148 requires issuance of a notice before reopening. The validity of reopening depends on the issuance of valid notice within prescribed time limits and the existence of valid reasons recorded prior to or contemporaneous with the notice.

Court's interpretation and reasoning: The appellant challenged the reopening on multiple grounds: non-receipt of hearing notices, issuance of notice on a Saturday (a government holiday), the notice under section 148 being time-barred, and reasons recorded for reopening being dated after the notice issuance. The appellant also contended that the reasons recorded were incomplete and inconsistent, particularly pointing out that paragraph 4 of the reasons was blank yet relied upon, and that the reasons pertained to escapement of capital gain but the reopening was based on income from other sources.

Key evidence and findings: The record showed that notice under section 148 was issued on 30-08-2019 and duly served. The appellant had filed return of income on 26-11-2014 in response. The reasons recorded were dated 27-11-2019, after the notice issuance. The Tribunal noted the appellant's contention regarding the timing and completeness of reasons recorded.

Application of law to facts: The Tribunal observed that the notice was issued and served in accordance with statutory requirements. The mere fact that the notice was issued on a Saturday did not invalidate it. The timing of reasons recorded after issuance of notice does not per se render reopening invalid if reasons existed prior or contemporaneously. The Tribunal did not find sufficient merit in the appellant's contention about invalidity of reopening on procedural grounds.

Treatment of competing arguments: The appellant's technical objections to the reopening were weighed against the statutory framework and procedural compliance. The Tribunal found the reopening procedurally valid and did not uphold the appellant's challenge on legality.

Conclusion: The reopening of assessment under section 147 was held to be valid and not time-barred or procedurally defective.

Issue (b): Nature of Receipt of Rs. 5,40,000 - Capital Gain or Income from Other Sources

Relevant legal framework and precedents: Income derived from transfer of capital assets is taxable under the head "Capital Gains" as per the Income Tax Act. Income from other sources is a residual head for income not taxable under other heads. The characterization of a receipt as capital gain or income from other sources depends on the nature of the transaction and the relationship of the recipient to the asset.

Court's interpretation and reasoning: The Assessing Officer treated the amount of Rs. 5,40,000 received by the appellant as a confirming party in a sale transaction as income from other sources, disallowing the claim of capital gain exemption. The appellant contended that as a confirming party to the sale deed, the amount represented capital gain arising from his share in the property and not income from other sources.

Key evidence and findings: The appellant produced documentary evidence showing that the property was sold for Rs. 1,15,00,000 by multiple co-owners and confirming parties, including the appellant. The appellant's share of Rs. 5,40,000 was part of the sale consideration. The appellant claimed indexed cost of acquisition and exemption on long-term capital gains. The Tribunal also referred to a precedent where a co-owner and confirming party in a similar transaction was held to have received capital gains and not income from other sources.

Application of law to facts: The Tribunal found that the appellant was indeed a co-owner and confirming party to the sale deed and had received consideration proportionate to his share. The amount represented proceeds from transfer of capital asset and thus qualified as capital gain. The AO's treatment as income from other sources was therefore incorrect.

Treatment of competing arguments: The Tribunal rejected the Revenue's argument that the amount should be taxed as income from other sources. It relied on the nature of the transaction and the appellant's status as co-owner to uphold the capital gains characterization.

Conclusion: The amount of Rs. 5,40,000 received by the appellant was held to be capital gain and not income from other sources. The appeal was allowed on this ground.

Issue (c): Charging of Interest under Sections 234A and 234B

Relevant legal framework and precedents: Sections 234A and 234B of the Income Tax Act provide for levy of interest for delay in filing return and for default in payment of advance tax respectively. The applicability depends on the taxpayer's liability and compliance.

Court's interpretation and reasoning: The appellant challenged the levy of interest on two grounds: (i) the AO did not specify the exact section under which interest was charged, merely making a general remark, which was insufficient to constitute an order after application of mind; (ii) the appellant had a bona fide belief that no tax was payable and was not liable to pay advance tax, thus interest under section 234B was not applicable.

Key evidence and findings: The AO's order mentioned charging interest under sections 234A and 234B without detailed reasoning. The appellant claimed that the interest was not correctly calculated and that no advance tax liability arose.

Application of law to facts: The Tribunal noted that the AO's general remark did not amount to a reasoned order for charging interest. The appellant's bona fide belief and absence of advance tax liability negated the applicability of section 234B. The appellant's submissions on incorrect calculation of interest were also noted.

Treatment of competing arguments: The Revenue relied on the assessment order and CIT(A) order upholding interest. The Tribunal found the appellant's arguments more persuasive given the procedural lapses and factual circumstances.

Conclusion: The Tribunal held that interest under sections 234A and 234B was not chargeable and the amounts levied should be deleted.

3. SIGNIFICANT HOLDINGS

"The said amount is capital gain only and the treatment given by the Assessing Officer that of income from other sources is not justified."

"The reopening of assessment under section 147 was held to be valid and not time-barred or procedurally defective."

"The AO's general remark to charge interest under sections 234A/B/C/D, wherever applicable, does not amount to order after application of mind and therefore interest is not chargeable."

Core principles established include:

• Reopening of assessment under section 147 requires valid issuance and service of notice under section 148 and valid reasons recorded, but the timing of reasons recorded after notice issuance does not automatically invalidate reopening.
• Receipts received by a co-owner or confirming party in a property sale transaction constitute capital gains and not income from other sources, provided the transaction is a transfer of capital asset.
• Interest under sections 234A and 234B must be specifically and properly levied with application of mind; general remarks without detailed reasoning are insufficient.

Final determinations:

• The reopening of assessment was valid.
• The amount of Rs. 5,40,000 was capital gain and not income from other sources.
• The interest levied under sections 234A and 234B was not justified and should be deleted.
• The appeal was allowed accordingly.