SHRI RAJEEV NATARAJ LEGAL HEIR OF LATE SHRI P NATARAJ ,BANGALORE vs. INCOME TAX OFFICER WARD-10(2), BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No. 848/Bang/2019 Assessment Year : 2008-09 Shri Rajeev Nataraj, L/H of Late Shri P Nataraj, No. 63, 1st Cross, The Income Tax Udaya Nagar, Officer, Chikkalsandra, Off Ward 10(2), Uttarahalli Road, Bangalore. Vs. Bangalore – 560 061. PAN: AHAPN9475D APPELLANT RESPONDENT Assessee by : Shri H. Siva Prasad Reddy, AR : Shri Priyadarshi Mishra, Addl. Revenue by CIT (DR) Date of Hearing : 09-02-2022 Date of Pronouncement : 31-03-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against the order dated 11/02/2019 passed by the Ld.CIT(A)-3, Bangalore for assessment year 2008-09 on following grounds of appeal: “1. The impugned order passed by the learned Commissioner of Income-tax [Appeals] u/s 250 of the Act and that of the order of assessment passed by the learned assessing officer under Section 143[3] r/w 147 of the Act to the extent which is against the appellant is opposed to law, weight of evidence, probabilities, facts and circumstances of the Appellant's case. 2. The order of assessment passed by the learned assessing officer under Section 143[3] r.w.s 147 of the Act is bad in law since the mandatory conditions as envisaged

Page 2 of 17 ITA No. 848/Bang/2019 in the Act to assume jurisdiction did not exist or having not been complied with and consequently, the reassessment requires to be cancelled on the facts and circumstances of the case. 3. Without prejudice, the appellant denies himself liable to be assessed to tax on a total Income of Rs 1,68,60,550/- as against the income reported by the appellant of Rs 1,90,000/- on the facts and circumstances of the case. 4. The learned authorities below were not justified in denying the benefit of exemption under section 54 of the Act amounting to Rs. 65,51,000/- on the facts and circumstances of the case. 5. The learned Commissioner of Income-tax [Appeals] and the learned assessing officer were not justified in restricting the benefit of exemption under section 54 of the Act on investment in one residential property instead of extending the benefit of exemption under section 54 of the Act on investment in multiple residential houses on the facts and circumstances of the case. 6. The learned Commissioner of Income-tax [Appeals] ought to have appreciated that consent cannot confer jurisdiction and ought to have granted relief under section 54 of the Act on investment in multiple residential houses by the appellant on the facts and circumstances of the case. 7. The learned authorities below were not justified in adopting the cost of acquisition at a lesser fair market value as regard to the land as well as cost of construction of building for the purposes of computation of capital is gains, consequently the computation of capital gains by the authorities below is not in accordance with settled principles of law on the facts and circumstances of the case. 8. The learned Commissioner of Income-tax [Appeals] is not justified in not considering the submissions and the contentions taken by the appellant in the written submissions filed, which is against the principles of natural justice on the facts and circumstances of the case. 9. Without prejudice to the right to seek waiver as per the parity of reasoning of the decision of the Hon'ble Apex Court in the case of Karanvir Singh 349 ITR 692, the Appellant denies herself liable to be charged to interest

Page 3 of 17 ITA No. 848/Bang/2019 under section 234 B of the Income Tax Act on the facts and circumstances of the case. Further the levy of interest under section 234 B of the Act is also bad in law as the period, rate, quantum and method of calculation adopted on which interest is levied are all not discernible and are wrong on the facts of the case. 10. The appellant craves leave of this Hon'ble Tribunal to add, alter, modify, delete or substitute any or all of the above grounds of appeal as may be necessary at the time of hearing of the appeal. 11. For these and other grounds that may be urged at the time of hearing of appeal, the Appellant prays that the appeal may be allowed for the advancement of substantial cause of justice and equity.” 2. Brief facts of the case are as under: 2.1 The assessee is an individual, a retired professor in Psychology in Mysore University, Mysore, filed his return of income on 31.03.2010 for the Assessment Year 2008-09 declaring a total income of Rs. 1,90,000/- (Income from pension) after claiming Long Term Capital Gains exemption u/s. 54 to the extent of Rs.1,68,60,550/-. 2.2 The Ld.AO observed that the assessee computed LTCG as exempt under section 54 as under: Sl.no Particulars Amount(Rs) A Computed Long Term Capital Gains 1,68,60,550 B Exemption Claimed u/s 54 Two Residential Apartments situated 1 1,26,00,000 in JDA Property. One Residential Property situated at No. 580, 6th Cross 3rd Main, 2 65,51,000 Gokulam 3rd Stage, Devaraja Mohalla Mysore. Total (B) 1,91,51,000 Net Capital Gains (A-B) NIL

Page 4 of 17 ITA No. 848/Bang/2019 2.3 The Ld.AO accordingly issued notice under section 148 of the Act on 1/01/2013. In response to the notice the assessee vide reply dated 15/01/2013 requested the Ld.AO to treat the return filed on 31/03/2010 as return filed in lieu of notice under section 148 of the Act. 2.4 The Ld.AO observed that during the financial year 2007-08, the assessee entered into Joint Development Agreement with Sankalp construction Pvt. Ltd. on 14.11.2007 and transferred the property used for residential purpose situated at no. 9, 9/1, New no. 12, 12/1, 13th Cross, V.V. Mohalla, Mysore for construction of Residential Apartments. The consideration received by assessee under the JDA was fixed at Rs.2.62 Crores, out of which the developer agreed to pay Rs.1.36 Crores by Cheque and the balance Rs.1.26 Crores by way of two, 3 bedroom flats. 2.5 The assessee, for the purpose of filing the tax returns for the Assessment Year 2008-09, thus arrived Long Term Capital Gains (LTCG) of Rs. 1,68,60,550/- by taking into account the above total consideration of Rs. 2.62 Crores. 2.6 The Ld.AO after perusing the details raised following issues:  Basis of Adopting Cost of Acquisition of the Land and building at Rs. 16.20 Lakhs as at 01/04/1981 (FMV)  Disallowance of Indexed Cost of Improvement Rs. 4,13,250/-  Eligibility of Exemption u/s 54 or u/s. 54F. 2.7 The Ld.AO accepted the FMV of land and building as Rs.6,68,500/- instead of Rs. 16.20 Lakhs as per the valuation report submitted by the assessee from Registered Valuer for which the assessee also agreed.

Page 5 of 17 ITA No. 848/Bang/2019 The assessee has voluntarily agreed for the disallowance since it pertained to the period prior to 01/04/1981. 2.8 The assessee in support of existence of residential building as on the date of JDA (to treat the transferred property as property used for residence) produced various evidences and such evidences were accepted by the Ld.AO and accordingly accepted for eligibility for deduction u/s 54 instead of section 54F which was disputed vide show cause letter dated 24/06/2013. 3. The Ld.AO was of the opinion that assessee was not eligible for exemption claimed under section 54 in respect of investment of Rs.165,51.000/- made in the residential house at Mysore as assessee already had two, 3 bedroom flats as per the JDA. The Ld.AO distinguished all the decisions relied by the assessee of Hon’ble Karnataka High Court and computed the exemption as under: Sale consideration 26200000 Cost of acquisition assessee as discussed in Para 11(a) 668500 3683435 Indexed Cost of Acquisition =668500 X 551/100 Gross Capital Gains 22516565 Less: Exemption u/s 54 Investment in Residential Apartment 12600000 in the same premise (The exemption of Rs.65.51 lakhs claimed in respect of another residential property is disallowed as the assessee is eligible for exemption u/s 54 in respect of one residential house only) LONG TERM CAPITAL GAINS 9916565

Aggrieved by the order of the Ld.AO assessee preferred appeal before the Ld.CIT(A).

Page 6 of 17 ITA No. 848/Bang/2019 4. The Ld.CIT(A) upheld the view of the Ld.AO by observing as under:

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Aggrieved by the order of the Ld.CIT(A) assessee is in appeal before this Tribunal. 5. At the outset, the Ld.AR submitted that, present appeal is filed with a delay of 8 days before this Tribunal. In the affidavit filed by the assessee dated 22/04/2019, the authorised representative wrongly considered the date of receipt of the impugned order to be 18/02/2019 as against 14/02/2019. Further, there was intermittent holidays which caused the delay in computing the last date to file appeal before this Tribunal. The Ld.AR thus submitted that the delay is due to inadvertent mistake in noting the date of receipt of the impugned order while computing the last date of filing the present appeal. The Ld.AR thus prayed for the delay to be condoned. The Ld.Sr.DR though opposed the condonation, however could not establish any misrepresentation of the facts by the assessee.

Page 10 of 17 ITA No. 848/Bang/2019 We have perused the submissions advanced by both sides in light of records placed before us. On perusal of the submissions and the affidavit filed by the assessee, we do not find any malafied intention on behalf of the assessee in filing the appeal belatedly. We therefore condone the delay and admit the appeal to be decided on the grounds raised by assessee. 6. The Ld.AR raised legal issue by challenging the validity of the re-opening under section 148 of the Act, by way of following Additional grounds: “ADDITIONAL GROUND NO.1 The learned AO ought to have appreciated that there was no material indicating escapement of income to justify the issue of Notice u/s 148. ADDITIONAL GROUND NO.2 There is no nexus between the material information available on record and the reasons recorded u/s 148 but for the misreading of the law in sections 54 & 54F by the learned assessing officer, which has rendered the impugned Notice u/s 148 invalid.” Accordingly the above additional grounds stands admitted. 7. The Ld.AR submitted that “reason to believe” that income chargeable to tax has escaped assessment is a condition precedent to be satisfied before issuing the Notice u/s 148. It is settled law that the ‘belief’ entertained by the assessing officer must not be arbitrary or irrational. The ‘belief’ must be reasonable and it must be based on the reasons which are relevant and material. It is submitted that ‘reason to believe’ cannot be conjured up either by misreading of the provisions of law or by misinterpretation of the binding decisions of the jurisdictional High Court. Hence it is submitted that the notice

Page 11 of 17 ITA No. 848/Bang/2019 u/s 148 issued by misreading the provisions of section 54/54F and misinterpretation of the decisions of the Hon’ble Jurisdictional High Court is invalid. 8. On the contrary, the Ld.Sr.DR submitted that the notice under section 148 was issued to verify the claim of deduction under section 54 of the Act. We have perused the submissions advanced by both sides in light of records placed before, us. 9. Admittedly, no assessment under section 143(3) was passed in case of assessee for assessment year under consideration. We note that the Ld.AO at the time of issuing intimation under section 143(1)(a), observed that assessee claimed exemption under section 54 on two residential properties, and in order to verify the alleged excess claim, issued notice under section 148 of the Act, after recording reasons for reopening that reads as under:

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held that Section 147 authorises and permits the Ld.AO to assessee or reassess income chargeable to tax if he has “reason to believe” that income for assessment year has escaped assessment. The word ‘reason’ in the phrase, ‘reason to believe’, would mean cause or justification. If the Ld.AO has cause or justification to know or support that income had escaped assessment, it can be said to have “reasons to believe” that, income had escaped assessment. The expression cannot be read to mean that the Ld.AO should have finally ascertained the fact by legal evidence or conclusion. The function of the Ld.AO is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayer. Hon’ble Delhi High Court in case of Central Manganese Ore Co.Ltd. Vs.ITO reported in (1991) 191 ITR 662, observed that, for initiation of action under section 147(a)(as it stood at the relevant time), fulfilment of two requisite conditions in that regard is essential as at that stage the final outcome of the proceedings is not relevant. 12. In other words, at the initiation stage, what is required is ‘reason to believe’, based on tangible material but not the established fact of escapement of income. We also rely on the decisions of Hon’ble Supreme Court in case of ITO vs. Selected Dalutband Co.Pvt.Ltd., reported in (1996) 217 ITR 597 and Raymond Wollen Mills Ltd. vs. ITO reported in (1999) 236 ITR 34. Hon’ble Supreme Court in these cases held that, so long as the ingredients of section 147 are fulfilled, the Ld.AO is free to initiate proceeding under section 147.

Page 14 of 17 ITA No. 848/Bang/2019 Accordingly we do not find any merit in the legal issue raised by assessee and the same stands dismissed. On merits 13. Ld.AR submitted that claim of the assessee relates to exemption under section 54 of the Act in respect of investment made in two residential properties at different locations. The Ld.AR submitted that there is no dispute regarding the fact that assessee invested in two properties. The Ld.AR submitted that Section54(1) was amended by Finance Act, 2014 with effect from 01/04/2015, by which the words 'constructed a residential house' were substituted and the words 'constructed one residential house in India' was substituted. It is submitted that the expression 'a residential house' used in Section54 of the Act refers to the nature of house and the number of residential units to be purchased by the assessee and therefore, the assessee was eligible for exemption. 14. In this connection, reliance has been placed on Circular No.1/2015 issued by Central Board of Direct Taxes dated 20/01/2015 and it is argued that the aforesaid amendment is prospective in nature. It is also urged that several courts including a bench of this court has interpreted the expression 'a residential house' and have held that the letter 'a' in the context, in which it is used should not be construed as singular but the expression also permits use of plural. In support of the submission, reliance is placed on the following decisions: Hon’ble Supreme Court in case of CIT v. Gita Duggal reported in (2014) 52 taxmann.com 246, Hon’ble Karnataka High Court in case of CIT v. Smt. Jyothi K. Mehta reported in (2011) 12 taxmann.com 440,

Page 15 of 17 ITA No. 848/Bang/2019 Hon’ble Karnataka High Court in case of D. Anand Basappa reported in (20019 180 Taxman 4 Hon’ble Karnataka High Court in case of KG Rukminiamma reported in (2010) 8 taxmann.com 121 B. Srinivas v. ITO in ITA No. 1134 of 2008, by order dated 4/07/2014, CIT v. Late Khoobchand M. Makhija in ITA No. 496 of 2007,by order dated 18/12/2013 Hon’ble Madras High Court in case of Tilokchand & Sons v. ITO reported in (2019) 105 taxmann.com 151, Hon’ble Delhi High Court in case of CIT v. Gita Duggal reported in (2013) 30 taxmann.com 230, Hon’ble Madras High Court in case of CIT v. Smt. V.R. Karpagam reported in (2014) 50 taxmann.com 55 On the contrary, the Ld.Sr.DR placed reliance on the orders passed by authorities below. We have perused the submissions advanced by both sides in light of records placed before us. 15. Section54(1) of the Act, read, prior to amendment by Finance (No.2) Act, 2014, as under: Section 54………. (1) Subject to the provisions of sub-Section (2), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head "Income from house property" (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased or has within a period of three years after that date constructed, a residential house, then, instead of the capital gain being charged to income-tax as income of the Previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section. 16. Hon’ble Karnataka High court in case of Smt. KG Rukminiamma (supra) dealt with the meaning of expression 'a residential house' used in Section54(1) of the Act while taking into account Section 13(2) of the General Clauses Act, 1897 held that unless there is anything repugnant in the subject or context, the words in singular shall include the plural and vice versa. It

Page 16 of 17 ITA No. 848/Bang/2019 was further held that context in which the expression 'a residential house' is used in Section 54 makes it evident that it is not the intention of the legislature to convey the meaning that it refers to a single residential house. It was also held that an asset newly acquired after sale of original asset can also be buildings or lands appurtenant thereto, which also should be residential house, therefore, the letter 'a' in the context it is used should not be construed as meaning singular, but the expression should be read in consonance with other words viz., buildings and lands. Similar view was taken by Hon’ble Karnataka High Court in case of Khoobchand M. Makhijasupra, B. Srinivassupra and in the case of Smt. Jyothi K Mehtasupra. 17. We also draw support from the decision of Hon’ble Madras High Court in case of Tilokchand & Sons(supra) wherein Section54 of the Act as it stood prior to amendment by Finance Act No. 2/2014 was the issue of consideration. Hon’ble Court took similar view and held that the word 'a' would normally mean one but in some circumstances it may include within its ambit and scope some plural numbers also. Similar is the view taken by Hon’ble Delhi High Court in case of Gita Duggal supra. We also rely on extracts of Explanatory note to provisions of Finance (No. 2) Act, 2014 reads as under: 20.3 Certain courts had interpreted that the exemption is also available if investment is made in more than one residential house. The benefit was intended for investment in one residential house within India. Accordingly, sub-Section (1) of Section54 of the Income-Tax Act has been amended to provide that the rollover relief under the said Section is available if the investment is made in one residential house situated in India. 20.5 Applicability:- These amendments take effect from 1st April, 2015 and will accordingly apply in relation to Assessment year 2015-16 and subsequent Assessment years.

Page 17 of 17 ITA No. 848/Bang/2019 In the present facts of the case the assessment year under consideration falls prior to 01.04.2015. The only objection by the Revenue is on the applicability of amendment. It is clear from the explanatory note that the amendment is prospective in nature. Therefore, based on the above discussion, we direct the Ld.AO to grant deduction under section 54 to assessee in respect of the investment made in the residential house at Mysore. Accordingly the appeal filed by assessee on merits stands allowed. In the result appeal filed by assessee stands allowed. Order pronounced in the open court on 31st March, 2022.

Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 31st March, 2022. /MS / Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order

Assistant Registrar, ITAT, Bangalore