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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI N. V. VASUDEVAN & SHRI CHANDRA POOJARI
IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ITA No.8/Bang/2021 Assessment Year : 2015-16 Shri. G. S. Shivanna (HUF), PCIT, Vs. No.3, Basaveshwara Nilaya, Bengaluru – 4, Yelachenahalli, Kanakapura Road, Bengaluru. Bengaluru – 560 078. PAN : AAAHG 7097 K APPELLANT RESPONDENT Assessee by : Shri. Satish S, Advocate Revenue by : Shri. Manjunath Karkihalli, CIT(DR)(ITAT), Bengaluru. Date of hearing : 25.08.2022 Date of Pronouncement : 30.08.2022 O R D E R Per N. V. Vasudevan, Vice President
This is an appeal by the assessee against the order dated 20.03.2022 of Principal Commissioner of Income Tax (PCIT), Bengaluru - 4, passed under section 263 of the Income Tax Act, 1961 (Act), relating to Assessment Year 2015-16.
The assessee is a HUF. For the Assessment Year 2015-16, the assessee filed return of income declaring total income of Rs.5,41,170/-. The assessee sold vacant sites and derived long term capital gain (LTCG) on sale of those vacant sites. The assessee claimed deduction while computing long term capital gain on sale of the sites, u/s.54F of the Act.
ITA No.8/Bang/2021 Page 2 of 10
The assessee derived long term capital gain of Rs.1,79,59,403/- on sale of 7 vacant sites. The assessee claimed deduction under section 54F of the Act of the entire capital gain, on the ground that he had used the sale proceeds for construction of house in Jayanagar. After claiming deduction as above, the LTCG on sale of vacant sites was declared as Nil by the assessee.
The return so filed by the assessee was taken for limited scrutiny under CASS for the reason to verify large deduction claimed under section 54F of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The AO issued a notice under section 143(2) of the Act dated 20.09.2019 to produce the evidence in support of the return of income. Another notice under section 142(1) dated 17.01.2017 was issued calling for the following details: Bank Statement for the period from 01.04.2015 to 1) 31.3.2016 Copy of Return of Income & Computation. 2) Financials for A.Y 2015-16 & Statement of Affairs. 3) Full details of TDS for A.Y 2015-16. 4) Large deduction claimed u/s 54B, 54C, 54D, 54G: 54GA 5)
The assessee in reply dated 08.11.2017 submitted the following details:
Copy of the return for A.Y 2014-15 was filed. 1) Statement of Assessee’s SB A/c no: 12982 with Vijaya 2) Bank which was closed on 03.01.2013. . The Assessee submitted that it had invested the sale 3) consideration of Rs. 1,87,00,000/- for constructing Residential house at No: 169,36th A Cross, Jayanagar 7th Block , Bangalore. The site was purchased on 08.11.2013 for a sum of Rs.3,32,10,000- copy of sale deed was
ITA No.8/Bang/2021 Page 3 of 10 submitted. The Assessee claimed that LTCG on sale of site is exempt u/s 54F. Copy of the sanction plan of the house was enclosed. 4) Copy of some of the material purchase bills were 5) submitted. 5. The order sheet entry of the AO in the assessment proceedings on 31.07.2017 records the fact that the assessee had produced copy of ITR, Bank Statement, 26AS copy, Sale Deed copy and further states that the case was discussed and the learned Counsel for the assessee has been asked to produce details of deduction claimed under section 54. In another hearing held on 09.11.2017, the AO has recorded the fact that the Chartered Accountant of the assessee appeared and produced details of deduction under section 54 like BBMP plan, vouchers, etc. Thereafter, the AO passed an Order of Assessment under section 143(3) of the Act on 09.11.2017 observing as follows:
4) The assessee has declared income from House Property of Rs. 2,62,395/-, and income from other sources of Rs.3,18,621/-. Other than the CASS related information as above, assessee's Bank accounts and all other details filed by the AR were examined during the course of assessment. 5) After Verification of details filed by the assessee & after examination of the Bank accounts and after obtaining the clarifications from the authorized representative, the assessment is concluded by accepting the returned income. 6. The PCIT in exercise of his powers under section 263 of the Act was of the view that the aforesaid order of the AO was erroneous and prejudicial to the interest of the Revenue for the following reasons:
1) On verification of computation of total income statement it is noticed that the assessee arrived at long term capital gains of Rs.1.79.59.403 on sale of 7 vacant sites and claimed the entire capital gains u/s 54F as deduction. As seen from the documents obtained during the course of
ITA No.8/Bang/2021 Page 4 of 10 scrutiny proceedings, it is observed that the assessee holds two residential house properties, the first one located at no. 3, Basaveshwara Nilaya, Yelachenahalli. Kanakapura Road. Bangalore-78 and the second one at no. 28, Kanakpura, Yelachenhalli Main Road, Bangalore-78. Therefore, the claim of deduction u/s 54F of Rs. 1.79.59,403/- allowed by the AO is not in order as the assessee is having more than one residential house at the time of transfer of property and not entitled for the same. 2) The failure of the Assessing Officer to conduct necessary enquiries and to assess the correct income to tax renders the assessment erroneous andyrejttdicial to revenue as contemplated by the provisions of section 263 of the 1.T. Act. 7. The show cause notice under section 263 of the Act dated 02.07.2019 was issued by the PCIT. To the aforesaid show cause notice, the assessee submitted a reply dated 21.07.2019 which is as follows:
Residential house property at No.3, Basaveshwara Nilaya, 1) Yellachenahalli is my self acquired property, I am declaring the same in my individual tax return from the beginning. Copy of the return is enclosed. Property No.28, Yelachenahalli, kanakapura main road is 2) a commercial shop, I have declared the rental income in my return. Copy of rental agreement and tax paid receipt of commercial property is enclosed. I do not own two residential houses, I own one 3) commercial shop. Hence, deduction u/s 54F is correctly Assessed. 8. On receipt of the reply, PCIT issued another show cause notice dated 20.02.2022 in which the PCIT called upon the assessee to show cause as to why the income on sale of the 7 vacant sites should not be treated as income from business rather than income under the head “capital gain”.
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The assessee sent a reply to the aforesaid show cause notice dated 09.03.2020 in which the assessee pointed out that the lands in question were held by the assessee as a capital asset and therefore the gain on sale of those assets have to be regarded only as capital gain. Assessee submitted that the lands were owned by the assessee’s ancestors and in this regard gave the following details:
a) The land in question was originally purchased by my father late Sri. Sangappa on 12-02-1959. (Copy of the document is enclosed as Annexure A) b) This land, along with other assets, was partitioned between my brother sri. G.S. Gangadhar and me, on 15-02-1968, under which each of us got 7 Acres and 37 Guntas as our shares. (Copy of the document is enclosed as Annexure B) c) Out of this land I got 4 Acres converted for residential purposes as per Order No. B.Dis. ALN.SR(S)- 64/199-2000 dated 13-10- 1999. This land was converted to escape from the acquisition proceedings of the Bangalore Development Authority. (Copy of the document is enclosed as Annexure — C ). d) However, the BDA has notified 4 Acres and 3 Guntas for acquisition. e) As directed in the Karnataka High Court's Order dated 30-08- 2006, BDA finally acquired 3 Acres and 13 Guntas leaving balance land of 30 Guntas to me. (Copy of the document is enclosed as Annexure – D)
The PCIT however has not made any reference to the reply of the assessee dated 09.03.2020. He held that the Order of the AO was erroneous and prejudicial to the interest of the Revenue because the AO did not make enquiries which were required to be made before completing the assessment and therefore, he set aside the Order of the AO and directed the AO to redo the assessment on 2 aspects viz., (1) whether the assessee would be entitled to the deduction under section 54F of the Act and in this context examine
ITA No.8/Bang/2021 Page 6 of 10 whether the assessee owned more than 2 properties and the nature of the property owned by the assessee. (2) Whether the sale of the 7 residential plots by the assessee was in the nature of adventure, in the nature of trade and income from the sale of the plots has to be regarded as income from business. The following were the observations of the PCIT: “5. I have considered the material available on records ard the submissions made by the assessee. From the submissions made by the assessee, it is clear that while accepting the claim of the assessee regarding deduction u/s 54F of the IT Act,1961; the AO has not made any enquiries about the nature of two properties owned by it when the Act provides that deduction u/s 54F is not available to the assesse, if it is the owner of more than one residential house at the time of transfer of property. During the previous year under consideration, the assessee has sold 7 residential plots after getting the land converted for non-agricultural use. In view of the decision of Hon’ble Supreme Course in the case of Raja J. Rameshwar Rao vs CIT [1961] 42 ITR 179 and the decision of jurisdictional High Course in the case of R. Ramaiah and others [1984] 146 ITR 39 (Kar) there is a possibility of holding these transaction as adventure in the nature of trade and taxing the income from the sale of plots as the income from business. However, no enquiries in this regards has been made by the AO. Therefore, it is held that the assessment order passed by the AO is erroneous and prejudicial to the interest revenue in terms of clause (a) of Explanation 2 to sub-section (1) of section 263 of IT Act, 1961. Accordingly, the assessment order passed by tile AO is set aside to the file of the AO with a direction to examine the aforesaid issue and redo the assessment afresh as per law after affording reasonable opportunity of being heard to the assessee.”
Aggrieved by the order of the PCIT, the assessee is in appeal before the Tribunal. Learned Counsel for the assessee submitted that the order of the AO was not erroneous and the AO made proper enquiries before concluding the assessment. It was also submitted by him when the case was selected for limited scrutiny under CASS to examine deduction under
ITA No.8/Bang/2021 Page 7 of 10 section 54F of the Act, the PCIT cannot expand the scope of CASS by directing the AO to examine whether the gain on the sale of the plots by the assessee would give rise to LTCG or income from business. In this regard he placed reliance on decision of ITAT Bangalore in the case of M/s. Origami Cellulo Pvt. Ltd. Vs. The PCIT ITA No.394/Bang/2020 order dated 15.9.2021 and certain other decisions of the various other Benches of ITAT taking identical view. It was also pointed out that a merely possibility of income from sale of plots being regarded as income from business, cannot be the basis to invoke jurisdiction u/s.263 of the Act. Besides, the above submissions were also made regarding the merits of the case on how the HUF did not own more than 2 residential houses. Learned DR placed reliance on the Order of the PCIT and submitted that on admitted facts, the AO did not make proper verification and hence the Order has to be upheld. 12. We have given a careful consideration to the rival submissions. A copy of the return of income filed by the assessee, which is an HUF, for Assessment Year 2015-16 is given in page 69 to 73 of the assessee’s paper book. From a perusal of the same, it is clear that the Assessee owned Property-1, 28, Kanakapura-Yelanchenahalli Main Road from which it declared income from House property. The PCIT in his SCN u/s.263 of the Act, has mentioned that from the documents available on record, the assessee owned a second house property at No.3, Basaveshwara Nilaya Yelachenahalli. This observation is made purely on the basis that the notice to the assessee was addressed to No.3, Basaveshwara Nilaya, Yelachenahalli. In the reply to the SCN u/s.263 of the Act, the assessee has clarified that the property No.3, Basaveshwara Nilaya, is owned by Shivanna Individual and Not Shivanna (HUF). Thus the observations of the PCIT in his SCN that “from the documents obtained during the course of
ITA No.8/Bang/2021 Page 8 of 10 scrutiny proceedings, it is observed that the assessee holds two residential house properties”, is itself an incorrect observation. The PCIT has in the impugned order further observed that from the submission made by the assessee it appears that the assessee owned two houses and the nature of the two properties owned by the assessee has not been examined by the AO. This observation is again incorrect because in the reply to the SCN u/s.263 of the Act, the assessee claims that the assessee is an HUF and it owned only one property i.e., property at No.28, Yelanchenahalli, Kanakapura Main Road and that property was a commercial shop. 13. The PCIT however has gone ahead to hold in the impugned order that the from a perusal of the records, it is evident that the AO while completing the Assessment did not enquire into the nature of the two properties owned by the assessee. There is nothing on record to indicate that the assessee owned two properties. The PCIT has not given a finding as to how the assessee owned two house properties, despite the specific reply of the assessee that the HUF owned only one property and that property was also not a residential property but a commercial property. From a perusal of the paper book, we find that the assessee is a HUF and Mr. Shivanna, in his individual capacity has filed return of income for AY 2015-16. In that return of income (copy at page 23 & 24 of paper book) the individual is shown to have owned more than one house property. It appears that the PCIT has confused himself with the return of the individual and that of the HUF. In such circumstances, we are of the view that it would be just and appropriate to set aside the order of the PCIT and remit this issue to the PCIT for consideration afresh, in the light of the observations made as above. If the assessee owned only one house property and that was also a commercial property, then there is no necessity to
ITA No.8/Bang/2021 Page 9 of 10 examine the claim for deduction u/s.54F of the Act on the ground that the assessee owned more than one house property other than the new asset as on the date of transfer.
With regard to the order of PCIT directing the AO to examine the question whether the gain on sale of the plots by the assessee should be regarded as LTCG or income from business, we have already seen that the assessee’s case was taken up for limited scrutiny viz., for examination of the claim of the assessee for deduction under section 54F of the Act. The law is well settled that the limited scrutiny scope cannot be extended by the AO and therefore the AO could not have gone into this question at all the in the course of making assessment of the assessee’s total income for Assessment Year 2015-16. Consequently, the PCIT in exercise of his powers under section 263 of the Act cannot direct the AO to do what the AO was otherwise legally not permitted to do while making the assessment. The decision rendered by the ITAT Delhi Bench in the case of Balvinder Kumar Vs. PCIT (2021) 125 taxmann.com 83 (Delh-Trib) cited by the learned counsel for the assessee clearly lays down the law that in view of CBDT Instruction No.7/2015, 20/2015 and 5/2016 and CBDT letter dated 30.11.2017, the Assessing Officer could not go beyond reason for selection of matter for limited scrutiny. Therefore it was not open to the PCIT to pass revisionary order and remit matter to AO on other aspects other than the reason for selection of case for scrutiny. Therefore, the directions of the PCIT in so far as it relates to the examination of whether the income on sale of plots would give rise to LTCG or income from business cannot be sustained and the said directions are directed to be deleted and are hereby quashed. In so far as the other issue whether the assessee would be entitled
ITA No.8/Bang/2021 Page 10 of 10 to deduction under section 54F of the Act, the PCIT will examine the issue afresh and give his finding that the record shows that the assessee HUF owned more than two residential properties and that the deduction u/s.54F of the Act had to be examined on this parameter afresh by the AO. Thus, the appeal of the assessee is partly allowed as indicated above.
In the result, appeal of the assessee is partly allowed.
Pronounced in the open court on the date mentioned on the caption page.
Sd/- Sd/- (CHANDRA POOJARI) (N. V. VASUDEVAN) ACCOUNTANT MEMBER VICE PRESIDENT Bangalore, Dated: 30.08.2022. /NS/*
Copy to: 1. Appellants 2. Respondent 3. CIT 4. CIT(A) 5. DR 6. Guard file By order
Assistant Registrar, ITAT, Bangalore.