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2016 (3) TMI 289 - ITAT CHENNAI

2016 (3) TMI 289 - ITAT CHENNAI - TMI - Validity of exercising jurisdiction u/s.263 - transfer of capital asset inherited - Held that:- In this case before us, the assessment order passed by the AO lacks judicial strength to stand. It is not a case where the order is short but is not supported by judicial strength. It is in this view of the matter that we feel that the learned CIT has correctly exercised his revisional jurisdiction under s. 263.

The line of difference between ss. 263 .....

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decisions of the AOs and thus destroy the very fabric of sound tax discipline. If erroneous orders, which are prejudicial to the interest of the Revenue, are allowed to stand, the consequences would be disastrous in that the honest taxpayers would be required to pay more than others to compensate for the loss caused by such erroneous orders. For this reason also, we are of the view that the orders passed on an incorrect assumption of facts or incorrect application of law or without applying the .....

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urisdiction u/s.263 by CIT is rejected.- Decided against assessee

Application of the principle of diversion of income by overriding title - expenditure claimed on transfer of property inherited from the father - cost incurred on acquisition by the successor - Held that:- The true test for the application of the rule of diversion of income by an overriding charge is whether the amount sought to be deducted in truth never reached the assessee as his income. Further, obligations, no doub .....

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ssee, the same consequence, in law, does not follow; it is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied.

In our view, therefore, the exclusion of the payment made by the assessee, in this case, by applying the principle of diversion of income by overriding title cannot be allowed. However, in our opinion the entailing a cost .....

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Shri N.D.Basavaraja ₹ 4,00,000/- and other expenses ₹ 32,500/-. Hence, these expenses cannot be allowed as a cost to transfer the capital asset. - Decided against assessee - I.T.A.No.1876/Mds. /2015 - Dated:- 10-2-2016 - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND Shri Duvvuru RL Reddy, JUDICIAL MEMBER For The Appellant : Mr.T.N.Seetharaman,Advocate For The Respondent : Mr.Parashivaiah,CIT, D.R ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER: This appeal is filed by the Assessee is dir .....

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demise of his father on 11-06-2011 through a will. The assessee claimed ₹ 68,02,500/- as expenditure on transfer of the above property, the details of Which are as under:- Payment made to Sri Sai Spiritual Center Trust : Rs.10,00,000 Payment made to Help age India : Rs.25,00,000 CRY (Child Rights and You) : Rs.15,00,000 Sri Ramana Ashramam Thiruvannamalai : Rs.10,00,000 Payment made to Sri M.S. Narayanan : ₹ 50,000 Professional fees paid to Sri M.S.Narayanan : ₹ 3,20,000 Commis .....

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ins in the scrutiny order u/s 143(3). Hence a show cause notice was issued to the assessee u/s 263 of the Income-tax Act, 1961 on 12-03- 2015 for the above reasons by the Ld.CIT. In response, the assessee submitted his reply dated 18-03-2015 objecting to the exercise of powers u/s 263 by Ld.CIT and on merits in regard to allowability of the claim of expenses of ₹ 68,02,500/-. After examining the submissions of the assessee, the Ld. CIT viewed that the Assessing Officer took the sale consid .....

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g Officer is prejudicial to the interest of the Revenue. The Ld. CIT placed reliance on the decision of the Hon ble Madras High Court in the case of MIs Ashok Leyland Ltd. Vs Commissioner of Income-tax (260 ITR 599) wherein the Court held that failure on the part of the assessing officer to examine in depth the claim of the assessee and his failure to do so is not only erroneous but also prejudicial to the interest of Revenue. He also drew support from the judgement of Hon ble Apex Court in the .....

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t the copy of sale deed dated 10-11-2011 available on record shows that assessee had already obtained katha certificate of this property from Bruhat Bangalore Mahanagar Palike on 26-10-2011 itself which is before the date of sale i.e. assessee was absolute owner of the property and thus there is no diversion by overriding title Further, the said property was sold by assessee and not by the Executor to the will This contradicts the claim of assessee that he got only the balance amount after makin .....

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re incurred wholly and exclusively in connection with the transfer in view of the binding decisions of jurisdictional High Court on identical situations in the following cases: 1. Rugmani Varma Vs CIT (Mad) - 222 ITR 357 2. CIT Vs A Venkataraman (Mad) - 137 ITR 846 From the above facts, the Ld.CIT was of view that no in-depth enquiry had been made about payment of Professional fees paid to Shri M S Narayanan (Rs. 3,20,000/-), Commission paid to N D Basavaraja (Rs. 4,00,000/-) and Other expenses .....

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aid a sum of ₹ 60 lakhs to various persons and this should be a diversion by overriding title. Since the said sum was paid as a condition precedent subject to which only said property stood bequeathed to, among others. Further, Ld.A.R drew attention to the letters dated 18.03.2015 and 31 .03.2015 stating the reason for exclusion of the sum of ₹ 68,02,500/- with reference to the terms of the assessee s father s will dated 30.10.2008 and the sale deed dated 10.11.2011 of the Bangalore .....

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effected before the period of one year after his demise stipulated in the will by the testator are matters of no consequence and in no way militate against the sale as per the substance of the will or deductibility of the total sum of ₹ 68,02,500/- being payments to charities etc., as per the will in computing the Long Term Capital Gains on sale of the inherited property. The ld.A.R further prayed that on merits the sum of Rs. .68,02,500/- has been properly allowed by the Income Tax Offic .....

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e and the enquiry during the hearing on 29.05.2014 the ld.A.R had submitted Legal Opinion (dated 30.11.2011); the Income Tax Officer had accepted the Opinion and referring in the assessment order to the claim of exclusion of payments of amounts to various charities as per Will dated 30.10.2008 of the assessee s father, professional fees, commission paid and other expenses adopted the net consideration offered by the assessee for purposes of computation of Long Term Capital Gains on sale of the i .....

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umstances of the present appellant s case. Hence, the appellant submits and urges that the impugned order of the Commissioner deserves to be struck down on the ground of want of jurisdiction and on the basis of the grounds setout above alone. 3.3 Regarding the validity of invoking the provisions of Sec.263 of the Act, ld.A.R relied on the decisions of the Hon ble Apex Court in the case of Malabar Industrial Company Ltd. reported in (2000) 243 ITR 83(SC) and of the Hon ble Jurisdictional High Cou .....

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cordance with the provisions of the Act and this task is entrusted to the Revenue. If due to erroneous order of the AO, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interest of the Revenue. As held in the case of Malabar Industries Co. Ltd. vs. CIT (supra) the CIT can exercise revision jurisdictional under s. 263 if he is satisfied that the order of the AO sought to be revised is (i) erroneous and also (ii) prejudicial to the interests of the Re .....

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natha Aiyer's Law Lexicon, Reprint 2002, the word 'error' has been defined to mean' "error . A mistaken judgment or deviation from the truth in matters of fact, and from the law in matters of judgment 'error' is a fault in judgment, or in the process or proceeding to judgment or in the execution upon the same, in a Court of Record; which in the civil law is called a Nullityie' (termes de la ley)' Something incorrectly done through ignorance or inadvertence s. .....

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of misconception of the nature of a case. An error may be from the absence of knowledge, a mistake is from insufficient or false observation. Blunder is a practical error of a peculiarly gross or awkward kind, committed through glaring ignorance, heedlessness, or awkwardness. An error may be overlooked or atoned for, a mistake may be rectified, but the shame or ridicule which is occasioned by a blunder, who can counteract. Strictly speaking, hallucination is an illusion of the perception, a pha .....

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sought to be revised under s. 263 is erroneous, it should be seen whether it suffers from any of the aforesaid forms of error. In our view, an order sought to be revised under s. 263 would be erroneous and fall in the aforesaid category of "errors" if it is, inter alia, based on an incorrect assumption of facts or an incorrect application of law or nonapplication of mind to something which was obvious and required application of mind or based on no or insufficient materials so as to af .....

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s powers to regard an order as erroneous on the ground that in the circumstances of the case, the AO should have made further inquiries before accepting the claim made by the assessee in his return. The reason is obvious. Unlike the Civil Court which is neutral in giving a decision on the basis of evidence produced before it, the role of an AO under the IT Act is not only that of an adjudicator but also of an investigator. He cannot remain passive in the face of a return, which is apparently in .....

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orily required to make the assessment under s. 143(3) after scrutiny and not in a summary manner as contemplated by sub-s. (1) of s. 143. Bulk of the returns filed by the assessees across the country are accepted by the Department under s. 143(1) without any scrutiny. Only a few cases are picked up for scrutiny. The AO is therefore, required to act fairly while accepting or rejecting the claim of the assessee in cases of scrutiny assessments. He should be fair not only to the assessee but also t .....

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rtain the truth of the facts stated and the genuineness of the claims made in the return when the circumstances of the case are such as to provoke inquiry. Arbitrariness in either accepting or rejecting the claim has no place. The order passed by the AO becomes erroneous because an enquiry has not been made or genuineness of the claim has not been examined where the inquiries ought to have been made and the genuineness of the claim ought to have been examined and not because there is anything wr .....

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w, we are supported by the decisions of the Hon'ble Supreme Court in Rampyari Devi Saraogi vs. CIT (1968) 67 ITR 84(SC); Smt. Tara Devi Aggarwal vs. CIT 1973 CTR (SC) 107: (1973) 88 ITR 323(SC) and Malabar Industrial Co. Ltd's case (supra). 8. In Malabar Industrial Co. Ltd. (supra) case the Hon'ble Court has held as under : "There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the AO, it is only when an order .....

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ample care to provide for the mechanism to have such prejudice removed. While an assessee can have it corrected through revisional jurisdiction of the CIT under s. 264 or through appeals and other means of judicial review, the prejudice caused to the State Exchequer can also be corrected by invoking revisional jurisdiction of the CIT under s. 263. Arbitrariness in decision-making causing prejudice to either party cannot therefore be allowed to stand and stare at the legal system. It is difficul .....

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y. He is the investigator, prosecutor as well as adjudicator. As an adjudicator he is an arbitrator between the Revenue and the taxpayer and he has to be fair to both. His duty to act fairly requires that when he enquires into a substantial matter like the present one, he must record a finding on the relevant issue giving, howsoever briefly, his reasons therefor. In S.N. Mukherjee vs. Union of India AIR 1990 SC 1984 it has been observed by the Hon'ble Supreme Court as follows : "Reasons .....

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ty serves a salutary purpose, namely, it excludes chances or arbitrariness and ensures a degree of fairness in the process of decision-making. The said purpose would apply equally to all decisions and its application cannot be confined to decisions which are subject to appeal, revision or judicial review. In our opinion, therefore, the requirement that reasons be recorded should govern the decisions of an administrative authority exercising quasi-judicial functions irrespective of the fact may, .....

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hority, if it affirms such an order, need not give separate reasons if the appellate or revisional authority agrees with the reasons contained in the order under challenge." 9. Similar view was earlier taken by the Hon'ble Supreme Court in Siemens Engg. & Mfg. Co. Ltd. vs. Union of India AIR 1976 SC 1785. It is settled law that while making assessment on assessee, the ITO acts in a quasi-judicial capacity. An assessment order is amenable to appeal by the assessee and to revision by .....

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stration of Revenue is bound to suffer. If without discussing the nature of the transaction and materials on record, the AO had made certain addition to the income of the assessee, the same would have been considered erroneous by any appellate authority as being violative of the principles of natural justice which require that the authority must indicate the reasons for an adverse order. We find no reason why the same view should not be taken when an order is against the interests of the Revenue .....

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ct on the face of it. (ii) The order sought to be revised proceeds on incorrect assumption of facts or incorrect application of law. In the same category fall orders passed without applying the principles of natural justice or without application of mind. (iii) The order passed by the AO is a stereotype order which simply accepts what the assessee has stated in his return or where he fails to make the requisite enquiries or examine the genuineness of the claim which is called for in the circumst .....

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0,000/-. However, there is no discussion whatsoever regarding the balance amount ₹ 22,52,500/- and the AO has considered only ₹ 8,19,50,000/- as total consideration received by the assessee. Though it was ₹ 8,80,00,000/-, crores, there was no discussion how he came to a conclusion that total consideration was only ₹ 8,19,50,000/-. As such there is an error in the order of the ld. Assessing Officer to consider the correct sales consideration and it was only capital gains o .....

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hould not be a mere view in vacuum but a judicial view. It is well established that the AO being a quasi-judicial authority cannot take a view, either against or in favour of the assessee/Revenue, without making proper inquiries and without proper examination of the claim made by the assessee in the light of the applicable law. As already stated earlier, we are not able to appreciate on what material was placed before the AO at the assessment stage to take such a view. The assessee has also not .....

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own that the view so taken by the AO contains some apparent error of reasoning or of law or of fact on the face of it. 13. The learned counsel has strongly relied upon the following observations made in the case of Malabar Industrial Co. Ltd. (supra) and submitted that the learned CIT was not justified in substituting his view for that of the AO : "... Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue. For example, .....

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consciously analyse and evaluate the facts in the light of relevant law and bring them on record. It is only then that he can be said to have "adopted" or chosen one of the courses permissible in law. The AO cannot be presumed or attributed to have "adopted" or chosen a course permissible in law when his order does not speak in that behalf. Similarly, "taking" one view where two or more views are possible also necessarily imports the requirement of analysing the fa .....

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e conclusion that more than one view is possible then he has necessarily to choose a view, which is most appropriate on the facts of the case. In order to apply the aforesaid observations to a given case, it must therefore first be shown that the AO has "adopted" a permissible course of law or, where two views are possible, the AO has "taken" one such possible view in the order sought to be revised under s. 263. This requires the AO to take a conscious decision; else he would .....

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alf. We cannot assume, in order to provide legitimacy to the assessment order, that the AO has adopted a permissible course of law or taken a possible view where his order does not say so. The submissions made by the learned counsel, if accepted, would require us to form, substitute and read our view in the order of the AO when the AO himself has not taken a view. It could have been a different position if the AO had "adopted" or "taken" a view after analysing the facts and d .....

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& Ors. (2002) 176 CTR (SC) 104 : (2002) 255 ITR 147 (SC) the Hon'ble Supreme Court has held that : "... There is always peril in treating the words of a speech or judgment as though they are words in a legislative enactment, and it is to be remembered that judicial utterances are made in the setting of the facts of a particular case, said Lord Morrin in Harrington vs. British Railways Board (1972) 2 WLR 537 (HL) circumstantial flexibility, one additional or different fact may make a .....

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ithout applying the principles of natural justice or without application of mind will satisfy the requirement of the order being erroneous and prejudicial to the interest of the Revenue. If the order sought to be revised under s. 263 suffers from any of the aforesaid vices, it cannot be said that the AO has "adopted", in such an order, a course permissible in law or "taken" a view where two or more views are possible." 16. It was next contended by the learned Authorised .....

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r as the order, which is sought to be revised under s. 263 reflects no proper application of mind by the AO and thus be amenable to revision under s. 263. In this case before us, the assessment order passed by the AO lacks judicial strength to stand. It is not a case where the order is short but is not supported by judicial strength. It is in this view of the matter that we feel that the learned CIT has correctly exercised his revisional jurisdiction under s. 263. In our opinion, the AO has been .....

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But the State Exchequer has no right of appeal against the orders of the AO. Sec. 263 has therefore been enacted to empower the CIT to correct an erroneous order passed by the AO which he considers to be prejudicial to the interest of the Revenue. The CIT has also been empowered to invoke his revisional jurisdiction under s. 264 at the instance of the assessee also. The line of difference between ss. 263 and 264 is that while the former can be invoked to remove the prejudice caused to the State .....

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orders, which are prejudicial to the interest of the Revenue, are allowed to stand, the consequences would be disastrous in that the honest taxpayers would be required to pay more than others to compensate for the loss caused by such erroneous orders. For this reason also, we are of the view that the orders passed on an incorrect assumption of facts or incorrect application of law or without applying the principles of natural justice or without application of mind or without making requisite in .....

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ea of ld.A.R was principally with regard to the application of the principle of diversion of income by overriding title. He submitted that only because of payment of ₹ 68,02,500/- to various parties as discussed in the earlier para, the property has devolved on the assessee. Ld.D.R submitted that the claim of assessee does not fall either under clause(i) or clause(ii) of sec.48 of the Act. Let us examine Section 48 of the Income Tax Act. Section 48: MODE OF COMPUTATION The income chargeabl .....

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on of capital gains. Further with reference to the obligation cast on a legatee under the terms of the instrument on the basis of which the property, which is the subject matter of transfer, devolves on him. It is the entire bundle of rights as acquired by previous owner that constitute the asset or the property under reference and it is its cost to the previous owner as per sec.49(i)(a), which is deemed to be the cost of acquisition to the legality and which continues unabated as long as the pr .....

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r in which previous owner first held the asset and not the year in which the assessee became the owner of the asset. There is, thus, no scope for further adding any 'cost of acquisition', if any, incurred by the assessee, to that by the previous owner. That is, the deeming as to the 'cost of acquisition' and 'holding period' is to be given full effect to, taking it to its logical conclusion. The cost incurred by the legatee/s, if any, as toward discharge of a mortgage cre .....

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s held by the Hon'ble court that non-payment of estate duty did not result in their (legatees) getting an imperfect or incomplete title to the property. It is only when the title is defective, incomplete or imperfect that the cost of making the title complete and perfect could be treated as the cost of acquisition. Like view stands also almost uniformly expressed by the Hon'ble courts in the context of the similar obligations, including those flowing from the instrument conferring or ves .....

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r is cast on the previous owner himself, i.e., in acquiring the capital asset, whether discharged subsequently by him or any of his successor/s, would stand to be considered as a part of his cost of acquisition and, thus, by definition, the cost of acquisition of the successor, deductible u/s. 48(ii). The same, even apart from being so considered in view of the clear provisions of law, would also be so construed on first principles. No one can bestow or confer a title better than what he has. As .....

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te of by the hon'ble High Court in the case of Smt. Rugmani Varma reported in 222 ITR 357(Mad.) (refer pgs. 369-370). It is, thus, only the cost, where so, as incurred by the previous owner, or that which would stand to have been incurred by him, that would qualify for deduction u/s. 48(ii). The law in the matter is well settled, and this also perhaps explains the complete non-reference to any of the decisions relied upon by the Revenue by the Id. AR either before the first appellate authori .....

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preted to exclude payments that are absolutely necessary, so as to arrive at the real and effective consideration. 21. In our opinion as seen from the clause No.7, the assessee s father, A.V Rajaram bequeathed the entire sale consideration received from the sale of immovable property absolutely to his second son i.e. Kumar Rajaram and thereafter he said he has to distribute the sale proceeds after paying property taxes if found due and shall make payment out of the sale consideration and also sa .....

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