PATHAN SHAHAZADIBEGUM,ANATAPUR vs. INCOME TAX OFFICER, WARD-1, ANANTAPUR

The Learned CIT(A) is not justified in sustaining the addition of Rs 10,00,000/- u/s 69A towards cash deposits during the demonetization period, without appreciating the evidence that the deposit was out of earlier withdrawals and that the Assessing Officer also could not bring any adverse material to establish that such withdrawals were utilised elsewhere.

The Learned CIT(A) is not justified in sustaining the addition of Rs 3,04,500/- u/s 69A made by Assessing Officer towards cash deposit made on 09.06.2016, without appreciating the cash flow statement and other details substantiating the availability of funds for making deposits.

The Learned CIT(A) is not justified in confirming the disallowance of Rs 5,76,043/-towards cost of improvement while computing Long-Term Capital Gains on sale of house property, ignoring the appellant's detailed explanation supported by purchase and sale deeds evidencing increase in plinth area and conversion from mud slab to RCC slab

The Learned CIT(A) is not justified in confirming the disallowance under the head LTCG without appreciating the fact that the cost of improvement claimed at Rs 3,82,000/- was reasonable and in line with prevailing PWD rates.

The appellant craves, leave to add amend or alter any of the grounds at the time of the hearing of the appeal.”

Succinctly stated, the assessee had filed her return of income for AY 2017-18 on 16/07/2018, declaring an income of Rs.4,34,820/-. Subsequently, the assessee's case was selected for “limited scrutiny” under CASS to verify the cash deposits she made during the demonetization period. Thereafter, the AO issued notice under section 143(2) of the Act, dated 29/09/2019, which is stated to have been duly served upon the assessee. However, the aforesaid proceedings were dropped in view of the Pathan Shahazadibegum vs. ITO guidelines issued by the CBDT vide F.No.225/333/2019/ITA-II, dated 29/11/2019, for the reason that the return of income filed by the assessee was invalid.

Thereafter, the AO, based on information that the assessee had during the demonetization period, made cash deposits of Rs. 10,35,000/- in her bank account, initiated proceedings under section 147 of the Act. Notice under section 148 of the Act, dated 31/01/2020, was issued and duly served upon the assessee. However, the assessee failed to comply with the notice and did not furnish her return of income within the stipulated time period.

As is discernible from the record, the AO issued notices under section 142(1) of the Act, but the same were not complied with by the assessee. However, the assessee filed replies online on 23/03/2021 and 25/03/2021, wherein she filed her computation of income for AY 2016-17 and AY 2017- 18, a copy of the bank statement, and the reply in respect of the cash transactions carried out in the year 2016. The assessee in her aforesaid replies had stated that the cash deposit of Rs.10,35,000/- was sourced, viz., (i) out of her past savings: Rs.30,000/-; (ii) out of cash withdrawals made from her bank account on 24/10/2016: Rs.9,55,000/-; and (iii) cash withdrawals made from her bank account on 05/10/2016: Rs.50,000/-.

The AO, while framing the assessment, called upon the assessee to furnish a copy of the sale deed and purchase deed in respect of the property that was sold by her during the year under consideration. Also, the Pathan Shahazadibegum vs. ITO assessee was called upon to place on record the documentary evidence in respect of the “cost of improvement” of Rs. 3,82,000/- that was claimed as a deduction while computing her income under the head “capital gains”. Apart from that, the assessee was asked to furnish a detailed list of her opening cash balance, date-wise cash withdrawals from the bank, date-wise cash deposits in the bank, and closing cash in hand for the year under consideration. Apart from that, it transpires from the record that the AO subsequently called upon the assessee to explain the purpose of cash withdrawals she made from her bank account during the demonetization period. As the assessee failed to furnish a reply in response to the aforesaid query letter, dated 08/04/2021, issued by the AO, the latter was constrained to proceed with and frame the assessment to the best of his judgment under section 144 of the Act.

Ostensibly, the AO did not find favour with the explanation of the assessee that the cash withdrawals made from her bank account were utilised for redepositing the amount during the demonetization period. The AO held that, as the cash withdrawals of Rs.9,55,000/- made by the assessee on 24/10/2016 were not round figures, it could safely be concluded that the same were withdrawn for a specific purpose and/or to incur a specific expenditure. The AO, observing that the assessee had failed to provide an explanation for the source of cash deposits of Rs. 10 lakhs made into her bank account during the demonetization period, held that the Pathan Shahazadibegum vs. ITO same were sourced from her unexplained money under section 69A of the Act.

Apart from that, the AO observed that the assessee on 09/06/2016 had made a cash deposit of Rs.3,04,500/- in her bank account No.91065521158 maintained with Andhra Pragathi Grameen Bank, Sai Junior College Branch, Taraknath Nagar, Anantapur. As the assessee, despite a specific direction had failed to come forth with any explanation regarding the source of the aforesaid cash deposits, the AO taking cognizance of the fact that the aforesaid amount of cash deposit was not commensurate with the income disclosed by the assessee in her invalid return of income, held the same as having been sourced out of her unexplained money under section 69A of the Act.

Thereafter, the AO observed that the assessee had in her return of income filed on 16/07/2018, inter alia, disclosed “Long term capital gain” (LTCG) of Rs.71,641/- from the sale of house property. On perusal of the record, it was observed that the assessee had claimed the “cost of improvement” of Rs. 3,82,000/-, based on which a deduction of the “indexed cost of improvement” of Rs.10,08,803/- (share of the assessee being 50%) was claimed. The AO called upon the assessee to place on record a copy of the purchase deed and sale deed along with documentary evidence supporting her claim of deduction towards “cost of improvement”. However, as the assessee failed to furnish the requisite details, the AO rejected the Pathan Shahazadibegum vs. ITO improvement cost deduction sought in the return of income. Thereafter, the AO recomputed the assessee’s 50% share in the capital gains arising from the transfer of the aforesaid property at Rs. 5,76,043/-, i.e., after declining her claim for deduction of cost of improvement.

The AO vide his order passed under section 147 r.w.s 144 r.w.s 144B of the Act, dated 28/09/2021, based on his aforesaid deliberations, recomputed the income of the assessee at Rs.22,43,725/-.

Aggrieved, the assessee carried the matter in appeal before the CIT(A) but without success.

The assessee aggrieved with the order of the CIT(A) has carried the matter in appeal before us.

We have heard the Learned Authorised Representatives of both parties, perused the orders of the authorities below and the material available on record.

Shri K A Sai Prasad, CA, Learned Authorized Representative (for short, “Ld. AR”) for the assessee, at the threshold of hearing of the appeal assailed the validity of the juri iction that was assumed by the AO for framing the impugned assessment based on his two-fold contentions, viz., (i) that the AO had issued notice under section 148 of the Act, dated 31/01/2020 during the pendency of the original assessment proceedings which were earlier initiated by him vide his notice under section 143(2) of the Act, dated 29/09/2019, which thus had resulted to initiation of parallel Pathan Shahazadibegum vs. ITO assessment proceedings which is not permissible as per the mandate of law; and (ii) that as no notice under section 148 of the Act was served upon the assessee, a fact which could safely be gathered from the screen shot of her income tax portal account, the framing of assessment by the AO was devoid and bereft of any force of law. Apart from that, the Ld. AR assailed the addition of the cash deposits of Rs.10 lakhs made by the AO under section 69A of the Act. Elaborating on his contention, the Ld. AR submitted that as the assessee had made cash withdrawals from the very same bank account, viz., (i) on 15/10/2016: Rs. 2 lakhs; and (ii) on 24/10/2016: Rs. 9,55,000/-, which was utilized for redepositing in the said bank account on 10/11/2016, the AO was not justified in drawing any adverse inferences and treating the source of the cash deposits as having been made out the unexplained money of the assessee under section 69A of the Act. The Ld. AR, to buttress his contention, had taken us through the relevant bank account on Page 34 of the APB.

Coming to the declining of the assessee’s claim for deduction of “cost of improvement” on the sale of property of Rs. 3,82,000/- (indexed value of Rs.10,08,803/-), wherein the share of the assessee was 50%, the Ld. AR submitted that the assessee had submitted before the AO that vide a purchase deed, dated 09/12/1997, Document No.7834/97, a Mud House was purchased, but she had vide a registered sale deed, dated 25/07/2016, Document No.5315/16, sold 760 sq ft of RCC house, a fact which could safely be gathered on perusal of the respective purchase and sale deeds. The Ld. AR submitted that in the backdrop of the aforesaid factual position, there was no justification for the AO to have declined the assessee’s claim for deduction of cost of improvement pertaining to the construction of the subject property. The Ld. AR to buttress his contention had taken us through a translated summary of the contents of the aforementioned purchase and sale deeds (supported by the vernacular copies of the respective registered deeds). The Ld. AR submitted that based on the aforesaid facts, the claim of the assessee for deduction of “cost of improvement” was well in order and has wrongly been rejected by the authorities below. However, the Ld. AR, on being queried about the ground of appeal No.6 raised by him, submitted that no contentions were being advanced qua the said addition which had been assailed by the CIT(A).

Per contra, Shri Vamshi Krishna, Learned Senior Departmental Representative (for short, “Ld. Sr-DR”), relied upon the orders of the authorities below.

We have given thoughtful consideration to the contentions advanced by the Learned Authorised Representatives of both parties in the backdrop of the orders of the authorities below.

At the threshold, we may herein observe that though the Ld. AR has assailed before us the validity of the juri iction that was assumed by the AO for framing the assessment vide his assessment order passed under section 147 r.w.s 144 r.w.s 144B of the Act, dated 28/09/2021. As observed Pathan Shahazadibegum vs. ITO by us hereinabove, it is the assessee’s claim that as the notice under section 148 of the Act, dated 31/01/2020, was issued by the AO, during the pendency of the assessment proceedings initiated in her case under section 143(2) of the Act, dated 29/09/2019, therefore, based on such invalid assumption of juri iction the assessment order passed under Section 147 r.w.s 144 r.w.s 144B of the Act, dated 28/09/2021 being devoid and bereft of any force of law cannot be sustained and is liable to be struck down for want of valid assumption of juri iction. However, we are unable to accept the assessee's claim. We say so, for the reason that the Ld. Sr-DR had in the course of hearing of the appeal placed on record a letter, dated 29/11/2019 issued by the Under Secretary (ITA-II), CBDT to All Principal Chief Commissioners of Income Tax as per which it was directed that the notices under section 143(2) of the Act generated in respect of certain invalid returns of the assessees filed for the AY 2017-18 through CASS Cycle, 2018 be dropped and the said cases be reopened under section 148 of the Act. We find that the AO in the present case before us had specifically referred to the aforesaid letter dated 29/11/2019 issued by the CBDT and observed that in pursuance thereof, the assessment proceedings initiated in the case of the assessee under section 143(2) of the Act, dated 29/09/2019, with respect to the invalid return of income filed by the assessee, were being dropped. In our view, once the assessment proceedings initiated by the AO under section 143(2) of the Act, dated 29/09/2019, had been dropped, there can be no justification for the assessee to claim that the notice under section Pathan Shahazadibegum vs. ITO 148, dated 31/01/2020, was issued during the pendency of the original assessment proceedings.

Appropos the Ld. AR’s contention that the assessment framed by the AO vide his order passed under section 147 r.w.s 144 r.w.s 144B of the Act, dated 28/09/2021, was based on an invalid assumption of juri iction as no notice under section 148 of the Act, dated 31/01/2020, was served upon the assessee, we find no substance in the same. We say so, for the reason that as the assessee had participated in the assessment proceedings and not raised any objection regarding the service of the notice issued under section 148 of the Act, therefore, as per section 292BB of the Act, the same shall be deemed to have been validly served upon her. We thus find no substance in the said contention of the Ld. AR and reject the same.

Appropos the ld. AR’s contention that the AO had grossly erred in law and facts of the case in treating the cash deposits of Rs.10 lakhs made by the assessee in her bank account as having been sourced out of her unexplained money under section 69A of the Act, we find substance in the same. We say so, for the reason that it is a matter of an admitted fact that the assessee had on 15/09/2016 and 24/10/2016 made cash withdrawals of Rs.2 lakhs and Rs.9,55,000/- from her bank account No. 91065521158 with Andhra Pragati Grameena Bank, District Anantapur. In our view, the aforesaid cash withdrawals made by the assessee can safely be held to be available with her to explain the cash deposit of Rs. 10 lakhs made by her in Pathan Shahazadibegum vs. ITO the same bank account on 10/11/2016, i.e., within a time span ranging between 17 and 25 days of the earlier cash withdrawals. Although the AO had observed that the cash withdrawals made by the assessee from her aforesaid bank account of Rs.9,55,000/- were not a round figure, thus, it could safely be concluded that the same was made for a specific purpose and/or specific expenditure, but we are unable to persuade ourselves to subscribe to his observation. We say so, for the reason that it is not the case of the Revenue that it is established beyond doubt that the amount of Rs.9,55,000/-, as well as the earlier withdrawals of Rs.2 lakhs on 15/10/2016, had been proved to have been utilised by the assessee for making an investment or incurring an expenditure. In our view, the observation of the AP that as the cash withdrawal of Rs.9,55,000/- made by the assessee on 25/10/2016 was not a round figure, thus it can be concluded that the same was withdrawn for a specific investment or expenditure, is nothing better then a conjecture, which cannot justifiably dislodge the assessee’s claim regarding the availability of the said amount with her on 10/11/2016, i.e., with a short span of 17 and 25 days of the earlier cash withdrawals to source the cash deposits made in her bank account on 10/11/2016. We thus, in terms of our aforesaid deliberations, not being able to concur with the aforesaid view taken by the authorities below, vacate the addition of Rs.10 lakhs made by the AO under section 69A of the Act.

Coming to the Ld. AR’s contention that the AO while recomputing the income of the assessee under the head “Long term capital gains” (LTCG) of Rs.5,76,043/- arising on the sale of the property had erred in declining her claim for deduction of “indexed cost of improvement” of Rs.10,08,803/- (share of the assessee being 50%), we principally find substance in the Ld. AR’s contention that as the subject property at the time of purchase, vide registered purchase deed No.7834/97, dated 09/12/1997 was a Mud House having a built up area of 568 sq ft, but at the time of sale vide a registered sale deed No.5315/16, dated 27/05/2016 was an RCC house (with a covered area of 760 sq ft), thus, the said fact in itself supports her claim that construction on the subject property was carried out during the intervening period, i.e., 09/11/1997 to 27/05/2016. At the same time, we may herein observe that as the assessee had only placed on record vernacular copies of the registered sale deeds, therefore, in all fairness and in the interest of justice, we deem it fit to set aside the matter to the file of the AO for verifying the veracity of the aforesaid claim of the assessee and redecide the issue. In case the claim of the assessee of having constructed a residential house as against the Mud House purchased on 09/11/1997 is found to be in order, then the AO, after taking cognizance of the material placed by the assessee before him, shall determine the investment made by the assessee towards the construction of the said residential property and accordingly allow her claim for deduction of the “indexed cost of improvement” to the said extent.

As the Ld. AR has not raised any contention regarding the addition of Rs.3,40,500/- made by the AO under section 69A of the Act; the same is dismissed as not pressed.

Resultantly, the appeal filed by the assessee in ITA No. 1401/Hyd/2025 is partly allowed in terms of our aforesaid observations.

We shall now deal with the respective appeals filed by the assessee, wherein she has assailed the penalties imposed by the AO under section 270A of the Act, dated 11/02/2022 and under section 271AAC(1) of the Act, dated 17/02/2022. 24. Shri KA Sai Prasad, Learned Authorised Representative for the assessee, has not put forth any independent contentions with respect to the aforementioned penalties imposed by the AO and had stated that the same would be consequential to the order passed while disposing of the quantum appeal.

As we have while disposing of the quantum appeal vacated the addition of Rs.10 lakhs made by the AO under section 69A of the Act, the impugned penalty imposed under section 271AAC(1) of the Act with respect to the said addition is consequent thereto vacated.

As the addition of Rs.3,40,500/- made by the AO under section 69A of the Act has been upheld by us in terms of our aforesaid observations, the Pathan Shahazadibegum vs. ITO penalty imposed by the AO under section 271AAC(1) of the Act in the absence of any contention advanced by the Ld. AR is sustained.

Apropos the penalty imposed by the AO under section 270A of the Act with respect to the determination of “Long term capital gain” (LTCG) of Rs.5,76,043/- arising on the transfer of the aforesaid property, as the impugned addition has been set aside by us to the file of the AO, the same is accordingly vacated. However, the AO shall remain at liberty to initiate the penalty proceedings under the said statutory provision in the course of the set aside assessment, as per extant law.

Resultantly, the captioned appeals filed by the assessee are partly allowed in terms of our aforesaid observations.

In the result, the appeal filed by the assessee in ITA Nos. 1401 & 1403 /Hyd/2025 are partly allowed, while the appeal in ITA No. 1402/Hyd/2025 is allowed in terms of our aforesaid observations

The Principal Commissioner of Income Tax, Kurnool.

"वभागीय""त"न"ध, आयकरअपील"यअ"धकरण /DR,ITAT, Hyderabad.

The Commissioner of Income Tax 6. गाड"फ़ाईल / Guard file