2025 (5) TMI 950 - AT - Income Tax

Validity of reassessment order passed - notice u/s 143(2) was not issued by AO within prescribed time - denial of claim u/s 54F - HELD THAT - Issuance of notice u/s 143(2) which is qua the returns filed u/s 139 of the Act shall apply in cases where the returns are filed u/s 148 also as going by the provisions of section 148 it is clarified that the provisions of the Act shall so far as may be apply accordingly as if such return (u/s 148 r.w.s. 139) were a return required to be furnished under section 139. Adverting the facts of present case the Return of Income in response to notice u/s 148 was filed by the assessee on 31.03.2021 and the notice u/s 143(2) was issued on 20.11.2021 which in accordance with the applicable provisions of proviso to sub-clause (ii) of section 143(2) was to be issued within 3 months i.e. on or before 30.06.2021 however the notice was issued on 20.11.2021 beyond the prescribed time as per aforesaid provisions thus was barred by limitation. The explanation by the revenue that the notice u/s 143(2) was issued within period of 1 year from the end of the month in which the return was furnished cannot be accepted as the same was not substantiated or supported by any material decision or the mandatory provisions of the Act. Therefore undoubtedly the notice issued u/s 143(2) was beyond the prescribed time under the provisions of section 143(2) which needs to be strictly adhered to by the revenue. In absence of a valid notice u/s 143(2) which was not issued within the prescribed time limit for the purpose of making the assessment is a violation of mandatory provisions of law therefore the reassessment impugned order passed u/s 147 r.w.s. 144B of the Act dated 30.03.2022 dehors a valid notice u/s 143(2) is a nullity and liable to be quashed. Decided in favour of assessee.

The core legal questions considered by the Tribunal in this matter are:

1. Whether the Commissioner of Income Tax (Appeals) was justified in deleting the addition of Rs. 3,05,19,169/- made by the Assessing Officer as income under section 45 of the Income Tax Act, 1961, by denying the claim of deduction under section 54F?

2. Whether the reassessment order passed by the Assessing Officer under section 147 read with section 144B of the Act is valid, given that the notice under section 143(2) was issued beyond the prescribed time limit?

3. Whether the reassessment order framed without issuance of a valid notice under section 143(2) within the prescribed time is illegal and void ab initio, thereby liable to be quashed?

Issue-wise detailed analysis:

Issue 1: Validity of deletion of addition of Rs. 3,05,19,169/- by CIT(A) on account of denial of deduction under section 54F

Relevant legal framework and precedents: Section 54F of the Income Tax Act provides deduction from capital gains if the net consideration is invested in purchase or construction of a residential house within the stipulated period. The deduction is available only if the residential house is held for the prescribed period and not transferred within that period. If transferred earlier, the capital gain becomes taxable in the year of transfer.

Court's interpretation and reasoning: The Assessing Officer (AO) had made an addition of Rs. 3,05,19,169/- on the ground that the capital gain amount claimed as deduction under section 54F was invested in a property which was used for commercial purposes, which is not permissible under the Act. The AO relied on Google Earth images and statements recorded during survey proceedings to conclude that the property was used commercially from the beginning.

The CIT(A) examined the submissions and evidences including building construction permission certificate, land use conversion certificate, layout plans, and statements of the assessee. The CIT(A) noted that the land use was residential during the relevant assessment year 2015-16 and was converted to commercial use only in financial year 2017-18. The assessee had offered the capital gain for taxation in AY 2018-19, the year in which the land use was converted, and had paid tax accordingly.

The CIT(A) observed that the AO's reliance on Google Earth images was not sufficient to deny the deduction, especially when the assessee had complied with the conditions of section 54F, including timely construction and possession of the residential house. The CIT(A) emphasized that the law clearly provides that if a residential house, on which deduction under section 54F is claimed, is transferred within the stipulated period, the capital gain is taxable in the year of transfer. Since the conversion to commercial use and offer of income happened in FY 2017-18, the addition in AY 2015-16 would amount to double taxation.

Key evidence and findings: Building construction permission, land use conversion certificate, statement recorded during survey, and the fact that tax was offered and accepted in AY 2018-19 on the capital gain amount.

Application of law to facts: The CIT(A) applied the principles of section 54F, holding that the assessee was entitled to the deduction in AY 2015-16 as the property was used as residential and only converted later. The capital gain was rightly taxed in AY 2018-19 when the property was converted to commercial use.

Treatment of competing arguments: The AO's argument based on Google Earth images and survey statements was rejected as speculative and not supported by documentary evidence. The assessee's documented compliance and tax payment in the relevant year were accepted.

Conclusion: The CIT(A) was justified in deleting the addition made by the AO, and the claim under section 54F was upheld.

Issue 2: Validity of reassessment order framed under section 147 read with section 144B in light of delay in issuance of notice under section 143(2)

Relevant legal framework and precedents: Section 147 empowers the Assessing Officer to reopen assessments if there is reason to believe that income has escaped assessment. Section 148 mandates issuance of notice before reassessment. Section 143(2) requires the AO to issue a notice within prescribed time limits to verify the correctness of the return. The proviso to section 143(2) (as amended effective 1.4.2021) mandates that no notice shall be served after expiry of three months from the end of the financial year in which the return is furnished.

Judicial precedents include the Supreme Court decision in ACIT vs. Hotel Blue Moon (2010) 321 ITR 362 (SC), which held that issuance of notice under section 143(2) within prescribed time is mandatory and a sine qua non for valid assessment under section 143(3). Similar principles were reiterated in CIT vs. Laxman Das Khandelwal (2019) 417 ITR 325 (SC) and upheld by coordinate benches of the Tribunal.

Court's interpretation and reasoning: The assessee contended that the notice under section 143(2) was issued on 20.11.2021, whereas the return in response to notice under section 148 was filed on 31.03.2021. The proviso to section 143(2) requires issuance of notice within three months from the end of the financial year in which the return is filed, i.e., by 30.06.2021. The AO issued the notice beyond this period, thus violating the mandatory time limit.

The Tribunal examined the legislative history and noted that the explanation inserted after 1.10.2005 clarifies that the provisos to section 148 do not apply to returns filed in response to section 148 notices, making the provisions of section 143(2) applicable to such returns as well. The phrase "so far as may be" in section 148 does not exempt the AO from strict compliance with section 143(2) requirements.

The Tribunal relied on the authoritative Supreme Court rulings and consistent judicial precedents that non-issuance or delayed issuance of notice under section 143(2) vitiates the assessment framed under section 147/143(3).

Key evidence and findings: The record showed the date of filing of return (31.03.2021) and date of issuance of notice under section 143(2) (20.11.2021), which was beyond the prescribed three-month period ending 30.06.2021. The AO's report failed to substantiate any valid explanation for the delay.

Application of law to facts: The Tribunal applied the mandatory time limits under section 143(2) and held that the notice issued beyond the prescribed period was invalid. Consequently, the reassessment order based on such invalid notice was also invalid and liable to be quashed.

Treatment of competing arguments: The revenue argued that the notice was issued within one year from the end of the month in which the return was filed, but failed to produce any material or legal provision to support this claim. The Tribunal rejected this argument as contrary to the statutory mandate and judicial pronouncements.

Conclusion: The reassessment order passed under section 147 read with section 144B without valid notice under section 143(2) within prescribed time was held to be illegal and void ab initio, and was quashed.

Issue 3: Consequence of quashing reassessment order on revenue's appeal

Since the reassessment order was quashed on the ground of invalid notice under section 143(2), the appeal filed by the revenue against the order of CIT(A) deleting the addition became infructuous. The Tribunal accordingly dismissed the revenue's appeal.

Significant holdings and core principles established:

1. "The law is very clear on this, that in case the residential house, on which the deduction under section 54F is claimed, is transferred within the stipulated period, then in the year it is transferred the taxability of the earlier capital gain claimed will arise." The Tribunal upheld the principle that the deduction under section 54F is available only if the property is used as residential during the relevant period, and any conversion to commercial use triggers taxability in the year of conversion.

2. The Tribunal emphasized the necessity of compliance with the mandatory time limit for issuance of notice under section 143(2). It held: "Omission on the part of the assessing authority to issue notice under Section 143(2) cannot be a procedural irregularity and the same is not curable and, therefore, the requirement of notice under Section 143(2) cannot be dispensed with."

3. It was held that the phrase "so far as may be" in section 148 does not exempt the Assessing Officer from strict compliance with the provisions of section 143(2) and 143(3) when completing reassessment proceedings.

4. The Tribunal followed the binding precedent of the Hon'ble Supreme Court in ACIT vs. Hotel Blue Moon and subsequent decisions, reaffirming that an assessment or reassessment framed without a valid notice under section 143(2) within the prescribed period is invalid and void ab initio.

5. The Tribunal stated: "If no notice is issued within 3 months, the revenue must face the consequence of this, irrespective of whether a notice has been issued belatedly or no notice has been issued at all," relying on the Madras High Court decision in Amec Foster Wheeler Iberia SLU- India Project Office vs. DCIT.

6. The final determination was that the reassessment order dated 30.03.2022 was quashed for lack of valid notice under section 143(2), resulting in dismissal of the revenue's appeal and allowance of the assessee's cross objection.

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