KHADAR SHAREEF vs. THE INCOME TAX OFFICER

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WP/13608/2026HC KarnatakaKAHC01029800202623 June 2026Author: B M SHYAM PRASAD9 pages
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What did the High Court hold?

The High Court allowed the petition, quashed the impugned ex-parte assessment order and the consequential penalty order. The Court reasoned that the assessment was concluded primarily on the ground that the petitioner had not produced documentary evidence. However, the petitioner has now produced certain documents with the writ petition to substantiate his claim regarding payments for the cost of improvement and the eligibility for deduction based on indexed cost of construction. Therefore, the Court held that the petitioner must be given an opportunity to file a response to the show cause notice dated February 17, 2026. This would enable a decision on merits rather than imposing a liability without examining the petitioner's case. The proceedings were restored for reconsideration with this opportunity. The Court did not decide on the merits of the disallowance of the cost of improvement itself.

What were the facts?

The petitioner, Khadar Shareef, is challenging an ex-parte assessment order dated March 6, 2026, passed under Section 143(3) read with Section 144B of the Income Tax Act, 1961, for Assessment Year 2024-25. He is also challenging a consequential penalty order dated March 6, 2026, under Section 274 read with Section 270A of the Act. The petitioner's grievance stems from the disallowance of the cost of improvement while computing Long Term Capital Gains. The petitioner failed to respond to a show cause notice dated February 17, 2026, due to issues with his erstwhile tax practitioner managing the email IDs used for communication, which were not actively monitored by the petitioner. Subsequently, a new tax practitioner updated the petitioner's email ID on the e-filing portal.

What were the issues?

1. Whether the High Court should interfere with the assessment order and restore the assessment proceedings to provide the petitioner an opportunity to file a response to the show cause notice dated February 17, 2026, considering the circumstances that led to the petitioner's non-participation? (Mixed question of law and fact, turning on principles of natural justice and procedural fairness). Assessee's Contention: The petitioner argues that the disallowance of the cost of improvement would be impermissible if the Court restores the proceedings and grants an opportunity to file a response. The failure to respond was due to the tax practitioner's mismanagement of email accounts, which were not under the petitioner's direct control. The petitioner has now updated his email ID and seeks to demonstrate that the disallowances are not legally sustainable. The petitioner also claims eligibility for deduction under Section 54F and that the entire construction area should be treated as cost of improvement eligible for deduction. Revenue's Contention: The judgment does not record specific arguments from the revenue's side regarding the issues raised by the petitioner. However, the assessment order indicates that the disallowance was made due to the non-production of documentary evidence to support the claimed cost of improvement.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 144B,Section 274,Section 270A,Section 54F

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 23RD DAY OF JUNE, 2026 BEFORE THE HON'BLE MR. JUSTICE B M SHYAM PRASAD WRIT PETITION NO. 13608 OF 2026 (T-IT) BETWEEN:

KHADAR SHAREEF AGED 73 YEARS, S/O K SABJAN SAB, FLAT NO.905, 9TH FLOOR, BLOCK A, ALPINE FIESTA APARTMENT, SY.NO. 105/5, HOODI VILLAGE, KR PURAM HOBLI, BANGALORE EAST TALUK, BANGALORE - 560048. …PETITIONER (BY SRI. RAVI SHANKAR S V., ADVOCATE) AND:

1.

THE INCOME TAX OFFICER WARD 4(2)(3), BANGALORE- 560095.

2.

NATIONAL FACELESS ASSESSMENT CENTRE, ADDITIONAL/JOINT/DEPUTY/ ASSISTANT COMMISSIONER OF INCOME TAX/INCOME TAX OFFICER, INCOME TAX DEPARTMENT, MINISTRY OF FINANCE, ROOM NO. 401, 2ND FLOOR,

Digitally signed by VANAMALA N Location: HIGH COURT OF KARNATAKA

E-RAMP, JAWAHARLAL NEHRU STADIUM, DELHI 110003. …RESPONDENTS (BY SRI. E.I. SANMATHI., ADVOCATE A/W SRI. NIRMAL MATHEW., ADVOCATE)

THIS WP IS FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA PRAYING TO 1. ISSUE A WRIT OF CERTIORARI OR DIRECTION IN THE NATURE OF A WRIT OF CERTIORARI QUASHING THE ORDER PASSED U/S 143(3) R.W.S 144B DATED 06/03/2026 BEARING DIN ITBA/AST/S/143(3)/2025- 26/1087015828(1) PASSED BY THE RESPONDENT NO.2 FOR THE ASSESSMENT YEAR 2024-25 HEREIN MARKED AS ANNEXURE - A; II) ISSUE A WRIT OF CERTIORARI OR DIRECTION IN THE NATURE OF A WRIT OF CERTIORARI QUASHING THE PENALTY ORDER U/S 274 R.W.S 270A OF THE ACT DATED 06/03/2026 BEARING DIN ITBA/PNL/S/270A/2025- 26/1087033451(1) BY THE RESPONDENT NO.2 FOR THE ASSESSMENT YEAR 2024-25 HEREIN MARKED AS ANNEXURE - A1.

THIS PETITION, COMING ON FOR PRELIMINARY HEARING, THIS DAY, ORDER WAS MADE THEREIN AS UNDER: CORAM: HON'BLE MR. JUSTICE B M SHYAM PRASAD

ORAL ORDER

The petitioner is aggrieved by the disallowance of the cost of improvement while computing Long Term Capital Gains in the impugned ex parte Assessment Order dated 06.03.2026 [Annexure-A] under Section 143[3] read with Section 144B of the Income Tax Act, 1961 [for short, ‘the IT Act’]. The petitioner has also called in question the consequential Penalty Order dated 06.03.2026 [Annexure-A1] under Section 274 read with Section 270A of the IT Act.

2.

Sri Ravi Shankar S V, the learned counsel for the petitioner, argues for interference with these impugned Orders for restoration of the assessment proceedings contending that if this Court restores the proceedings with an opportunity to the petitioner to file Response to the Show Cause Notice dated 17.02.2026, the petitioner can demonstrate that the disallowances will be impermissible in law. On the reason for the petitioner’s failure to participate in the

proceedings, the learned counsel invites this Court’s attention to following assertions in Memorandum of Writ Petition. “4. [o] The Respondent No.2 has selected the return of income for scrutiny by issuing statutory notices, which were served on email (khasim4988shareef@gmail.comPremsub bu20000@gmail.com). The said email IDs were created and managed by the Petitioner’s erstwhile tax practitioner for statutory compliance and were not actively accessed or used by Petitioner. The credentials of the said email accounts were also in the control of the said tax practitioner.

[p] In the above circumstance, the email was not brought to the attention by the practitioner, since petitioners personnel email id is not registered in the e-filing portal. Subsequently the petitioner’s new tax practitioner has updated email i.d as btkfca@gmail.com The copy of the profile page of the petitioner as per the income tax e-filing portal of the petitioner has annexed and attached as Annexure G.”

3.

On merits, Sri Ravi Shankar S V submits that [a] the petitioner, joined by the other owners, has offered his immovable property for development under a Joint Development Agreement with the Developer agreeing to deliver certain units to the petitioner upon terms including the assurance by the petitioner that he will pay costs towards electricity/water and such other facilities proportionate to the built up area and agreeing to pay all the Value Added Tax, Service Tax and other taxes, [b] the petitioner, in discharge of the obligation as afore, has paid a sum of Rs.3,50,00,000/- to the Developer towards the statutory levies and deposits and has filed Returns returning Long Term Capital Gains in a sum of Rs.1,85,54,106/- computed thus: SL.NO. PARTICULARS AMOUNT IN RS. 1. Total sale consideration 14,36,20,300

Less: Indexed cost of land 1,66,79,291 3. Less: Indexed cost of improvement 7,28,06,329 I

4.

Less: Cost of improvement for the AY 2023-24 3,50,00,000I

Long term capital gain 1,85,54,106

4.

Sri Ravi Shankar S V submits that the Assessing Officer has failed to consider that [a] the Long Term Capital Gains was taxable in the year of transfer [2009], [b] the petitioner was eligible for deduction under Section 54F of the IT Act in respect of the built up area of 29 units [c] the entire construction area could be indexed as cost of improvement eligible for deduction and [d] the petitioner has returned the Long Term Capital Gains based on such indexed cost of improvement and the amount paid to the Developer.

5.

The question for consideration viz., whether this Court must interfere with the Assessment Order in the light of the circumstances as afore to restore the assessment proceedings with opportunity to the petitioner to file Response to the Show Cause

Notice dated 17.02.2026 is considered upon hearing Sri E I Sanmathi/Sri Nirmal Mathew, the learned Senior Standing Counsel/the learned standing counsel for the respondents.

6.

This Court must observe that disallowance of the cost of improvement is essentially in the premise that the petitioner has not produced documentary evidence in support of the cost of improvement. The reasoning for the Assessment Order is premised in the following.

“However, on verification documents furnished, it was observed that no primary or independent documentary evidence was submitted in support of the improvement cost claimed. The assessee furnished only the computation of capital gains, copies of sale deeds, and bank statements showing lump sum payments of Rs.3,50,00,000/- made to M/s Alpine Housing Development Corporation Limited. Since the specific requisitions made under section 142(1) were not fully complied with and the claim remained unsupported by

verifiable evidence, a detailed Show Cause Notice dated 17.02.2026 was issued proposing disallowance cost improvement.”

7.

This Court is of the considered view that because the assessment is concluded primarily on the ground that the petitioner has not produced documents and with the petitioner producing certain documents along with the petition to substantiate his case that the payments are towards the cost of improvement and that the deduction is claimed based on the permissible Indexed Cost Of Construction in the year relevant to the transfer, the petitioner must have an opportunity to file Response to the Show Cause Notice dated 17.02.2026 as that would enable a decision on merits rather than a decision imposing a liability without examination of the cause that could be against assessment. Hence the following:

ORDER [A] The petition is allowed. [B] The second respondent’s impugned ex parte Assessment Order dated 06.03.2026 [Annexure-A] and the consequential Penalty Order dated 06.03.2026 [Annexure-A1] are quashed. [C] The proceedings are restored for reconsideration with opportunity to the petitioner to file Response to the Show Cause Notice dated 17.02.2026 as and when enabled in the portal consequent to this Order.

Sd/- (B M SHYAM PRASAD) JUDGE

AN/-

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