SHANTHA ALIAS SHANTHAMMA,BANGALORE vs. DCIT, CENTRAL CIRCLE-2(4), BANGALORE

5. Failure to Provide Satisfaction Note and Seized Materials The Commissioner (Appeals) has erred in not accepting the contention of the Appellant about providing the satisfaction note and the copy of the seized materials, which are crucial for a fair assessment.

7. Incorrect Year of taxation of the Capital Gains. The Commissioner (Appeals) has erred in not accepting the contention of the Appellant that the Capital Gains were taxed during AY 2020-21 instead of AY 2019-20.

8. Taxation of Refundable Deposit .

Page 3 of 22 The Commissioner (Appeals) has erred in not accepting the contention of the Appellant by taxing the refundable deposit received in the year under consideration, which is against the settled principles of taxation.

9. Double Taxation of Apartment Sale Proceeds The Commissioner (Appeals) has erred in not accepting the contention of the Appellant by taxing the receipt from the sale of the apartment twice, leading to unjust enrichment.

10. Violation of Principles of Natural justice The Hon'ble Commissioner of Income Tax (Appeals) erred in not acknowledging that no show cause notice was issued to the Appellant online before the conclusion of the assessment order. The failure to provide an opportunity for the Appellant to present its case constitutes a gross violation of the principles of natural justice. Consequently, the assessment order is illegal and deserves to be annulled. Request for Relief: Considering the aforementioned grounds, your Appellant respectfully request the Honorable Income Tax Appellate Tribunal to consider this appeal and provide appropriate relief by: a. Setting aside the order passed by the Learned Commissioner (Appeals) and allowing the Appeal filed by your Appellant, b. Deleting the additions made by the Learned Assessing Officer, c. Directing the Income Tax Authorities to abate any penalty proceedings initiated, b. Any other relief deemed fit and just by the Honorable Commissioner (Appeals) in the interest of equity and justice. The Appellant craves leave to submit such further facts/documents/evidence at or before the hearing of this appeal as may be necessary to dispose of this appeal according to law.”

3. The assessee in the present appeal has challenged the validity of assessment framed by the Revenue and also agitated the additions made by the lower authorities on merit of the case.

4. The facts in brief are that the assessee is an individual. A search proceeding under section 132 of the Act carried in the case of the assessee’s husband Shri Durgappa Lakkana as on 19th February 2020.

“SJR Plaza City Project”. The assessee, her husband and her husband’s brother Shri D Prakash were the owner of land property admeasuring of 11 acers 33 guntas bearing various survey numbers. Shri D Prakash has gifted his share of land property to Shri Durgappa Lakkana in lieu of 15 flats as a goodwill. Accordingly, in the impugned property, the assessee’s share stood at 72.2% and her husband share stood at 27.8%. The possession of entire land property (11 acers 33 guntas) after conversion as NA Land was transferred to M/s SJR Prime Corporation Pvt as per the above-mentioned JDA for development of Residential Flats. The assessee and her husband were entitled to receive 37% of the super built-up area i.e. 365 Flats (or 519404 sq. ft.). Furthermore, the assessee has received occupancy certificate for 365 flats being her share in the developed property. Besides above, there were also other JDA found during the course of search.

Subsequent to the search proceeding (19th February 2020), the 6. assessee has filed return of income for the year under consideration i.e. A.Y. 2020-21 under section 139 of the Act as on 30th December 2020 declaring total income at Rs. 4,46,26,820/- only.

37,56,42,000/- only. The impugned capital gain was added to the total income of the assessee.

16.1 The ld. AR further contended that issuing a notice under section 153C of the Act after the return had been filed and the income declared was not only bad in law but also violated natural justice. The learned AR emphasized that incriminating material must directly indicate undisclosed . income, financial irregularities, or tax evasion. In this case, there was no such material.

34.1 The foundation of the present assessment is a search conducted under section 132 of the Act at the residence of the assessee’s husband, Shri Durgappa Lakkanna, on 19.02.2020. Based on certain documents allegedly JDAs, Occupancy certificate and other document relating to the JDAs found during the search, the Assessing Officer issued a notice under section 153C of the Act and proceeded to make additions primarily on account of capital gains from joint development agreements (JDAs), treatment of sale proceeds from flats as business income, and inclusion of refundable deposits as income from other sources.

34.2 At the outset, we find force in the contention of the assessee that the jurisdiction assumed under section 153C of the Act is invalid in the absence of incriminating material pertaining to the assessee. It is settled law, as held by the Hon’ble Supreme Court in Abhisar Buildwell Pvt. Ltd. (2023) 149 taxmann.com 399, that for invoking section 153C of the Act, the Revenue must possess incriminating materials belonging to or relating to the assessee which is unearthed during the search. In the present case, the documents relied upon by the AO, such as JDAs and occupancy certificates, were already disclosed in a sworn statement given by the assessee’s husband under section 131 of the Act on 13.05.2019, i.e., much before the date of search. There is no indication that any fresh material was found during the search that had not already .

Page 15 of 22 been disclosed. Therefore, in our considered opinion the issuance of notice under section 153C lacks jurisdiction and is void ab initio.

34.3 Further, the satisfaction note recorded by the AO does not comply with the legal mandate. In terms of the law laid down by the Hon’ble Karnataka High Court in Sunil Kumar Sharma v. DCIT (2024) 159 taxmann.com 179, a separate satisfaction note must be recorded for each assessment year to which the seized material relates. A consolidated satisfaction note for multiple years is not valid and renders the entire proceedings null. The relevant finding of the Hon’ble Karnataka High Court in the said case is extracted as under: 53. Further, satisfaction note is required to be recorded under section 153C of the IT Act for each Assessment Year and in the impugned proceedings, a consolidated satisfaction note has been recorded for different Assessment Years, which also vitiates the entire assessment proceedings. In view of all these findings, it is said that the appeals do not have any substance for seeking intervention as sought for by the appellant/Revenue.

34.4 In the present case, no such year-wise satisfaction note has been recorded, and therefore, the proceedings under section 153C of the Act are legally unsustainable.

34.5 Another fundamental flaw in the assessment proceedings is the failure to issue a valid notice under section 143(2) of the Act after the assessee filed her return under section 153C of the Act. Though the Revenue contends that the return was invalid due to non-verification, it is undisputed that notice under section153C of the Act was issued on 7th September 2021, the assessee had filed the return within time and had the window to verify it. However, no opportunity was provided by the AO to cure any defect, and assessment was completed vide order dated 30th September 2021. Hence, the assessment was completed within a . month after issue of notice under section 153C of the Act. It is settled law that issuance of a valid notice under section 143(2) of the Act is a jurisdictional requirement, and failure to do so renders the assessment invalid, as held by the Hon’ble Supreme Court in CIT v. Laxman Das Khandelwal [2019] 108 taxmann.com 183.

34.6 We also note that the satisfaction note and seized documents relied upon by the Department were never furnished to the assessee, despite forming the very basis of assumption of jurisdiction. This failure violates the principles of natural justice and procedural fairness, particularly when the assessee has raised specific grounds challenging the jurisdiction under section 153C of the Act.

34.7 We also find merit in the submission that the impugned assessment order was never uploaded on the ITBA portal, and no valid Document Identification Number (DIN) was traceable. As per CBDT Circular No. 19/2019 dated 14.08.2019, every order or communication issued by the Department must bear a valid, system-generated DIN. Any manual issuance is permitted only under exceptional circumstances, and such manual orders must be regularized by uploading them on the system within 15 working days. However, we are also conscious to the fact that the issue of DIN is pending before the Hon’ble Supreme Court in the case of CIT Vs. Brandics Mauritius Holdings Ltd. reported in 158 taxmann.com 247. Hence, we refrain ourselves from giving any final verdict regarding the validity of the assessment in absence of valid DIN. As such, the issue remains open.

34.8 In light of the above legal and factual analysis, we are of the considered opinion that the assessment order passed under section 153C of the Act is invalid for multiple reasons: absence of incriminating material, lack of valid and separate satisfaction notes for each year, non- issuance of notice under section 143(2) of the Act, and violation of principles of natural justice. Accordingly, we set aside the assessment order and allow the appeal filed by the assessee. The additions made by the Assessing Officer are hereby deleted.

34.9 Without prejudice to the above, we proceed to adjudicate the issue on the merit of the addition. In this regard, we note that the learned AR on merit before us submitted that the assessee, had duly filed her return of income for Assessment Year (AY) 2020-21 under section 139(1) of the Act, within the prescribed time limit. The CPC also processed the return under section 143(1) of the Act, and the intimation to that effect is also on record.

34.10 It was further submitted that the assessee had entered into a Joint Development Agreement (JDA) with M/s SJR Prime Corporation Pvt. Ltd. on 17.12.2012, which is much before the date whereas the provisions of section 45(5A) of the Act came into force, i.e. 01.04.2018. The copy of the JDA is already placed on record. Moreover, a Final Supplementary Sharing Agreement was also entered into, clearly indicating the share in constructed area, a copy of which is also enclosed. In addition, the assessee had entered into another JDA with M/s Sunil Mantri Realty Ltd. on 20.03.2009, also prior to the applicability of Section 45(5A) of the Act. All income arising from these development . agreements has been duly disclosed by the assessee in her returns of income filed for the relevant years.

34.11 The learned AR emphasized that section 45(5A) of the Act, introduced by the Finance Act, 2017, applies prospectively from 01.04.2018 and hence is not applicable to JDAs executed prior to that date. Since the assessee’s JDAs were executed in 2009 and 2012 respectively, the income from capital gains has to be taxed in accordance with the law prevailing prior to the introduction of section 45(5A) of the Act.

34.12 To support this, the learned AR relied on judicial precedents. In the case of Chaturbhuj Dwarkadas Kapadia v. CIT [(2003) 129 Taxman 497 (Bom HC)], it was held that capital gains in case of JDAs are taxable in the year in which the agreement is executed and possession is handed over, and not in the year of construction. Similarly, in CIT v. Dr. T.K. Dayalu [(2011) 202 Taxman 531 (Kar HC)], it was held that once possession is transferred under a development agreement, capital gains accrue in the year of such transfer.

34.13 Accordingly, the AR contended that the assessee has complied with the provisions of law as applicable to her case and offered the capital gains in the correct assessment years. Therefore, no adverse inference should be drawn, and the addition made may kindly be deleted.

34.14 Considering the facts in totality, we find that the assessee had entered into two Joint Development Agreements (JDAs) one with M/s .

SJR Prime Corporation Pvt. Ltd. on 17.12.2012 for the “SJR Plaza City Project” and another with M/s Sunil Mantri Realty Ltd. on 20.03.2009 for the “Mantri Premero Project”. Both agreements were entered into prior to 01.04.2018, the effective date of the introduction of section 45(5A) of the Act. Thus, the deeming provision under section 45(5A), which provides for capital gain taxation in the year of receiving completion certificate, does not apply to the assessee’s case.

34.15 The assessee’s claim is that she has offered the capital gains to tax in the relevant assessment years in accordance with the prevailing law. The assessee filed her return of income under section 139 of the Act for A.Y. 2020–21 declaring total income of ₹4,46,26,820/-, which included gain from the sale of flats. The return was duly processed under section 143(1) of the Act by the CPC, Bangalore, and no discrepancies or mismatches were reported at that stage. These facts indicate that the income offered was consistent with the revenue’s own database and processing systems.

34.16 We also note that the assessee had sold 15 flats from the “SJR Plaza City Project” and 14 flats from the “Mantri Premero Project” during A.Y. 2020–21 and offered the corresponding gains in that year. This is in line with the accepted principle that when flats developed under a JDA are later sold, the income from such sale can be assessed either as capital gains or business income, depending on the facts each case. In the present case, the assessee has treated the gains from the sale of flats as taxable in the year of sale and paid tax accordingly. No evidence has been brought on record by the AO to show that any part of this income remained unoffered to tax or was suppressed.

34.17 Moreover, it is a settled position of law, as held in Chaturbhuj Dwarkadas Kapadia v. CIT [(2003) 129 Taxman 497 (Bom.)] and CIT v. Dr. T.K. Dayalu [(2011) 202 Taxman 531 (Kar.)], that capital gains under a development agreement are taxable either in the year in which possession is handed over or when consideration is crystallized, depending on the facts and circumstances. The assessee’s JDAs, being of earlier origin (2009 and 2012), were not governed by the deeming fiction of section 45(5A) of the Act, and the assessee had already disclosed the capital gains in accordance with the prevailing legal framework.

34.18 Therefore, in our considered view, the additions made by the Assessing Officer on account of estimated capital gains based on the cost of construction of flats rather than actual sale are unjustified. The AO failed to appreciate that the assessee had already offered the income in the year of actual sale and paid tax accordingly. Estimating capital gain based on construction cost and taxing it in A.Y. 2020–21, without any corresponding realization by the assessee in that year, results in double taxation and goes against the principles of real income. Accordingly, on merits also, we hold that the addition of ₹111.29 crore (in respect of SJR Project) and ₹37.56 crore (in respect of Mantri Project) towards capital gains is not sustainable.

34.19 Moving ahead, we note that the AO has added sales proceeds of Rs. 7,53,77,252/- Rs. 8,52,88,148/- from the sale of flats in “SJR Plaza City Project” and “Mantri Premero Project” by assigning the reason that advance tax was not paid. In this regard, we find that the assessee has . already offered tax on sale 15 flats in the “SJR Plaza City Project” and 14 flats in “Mantri Premero Project”. Therefore, taxing the sale proceeds separately by the AO will amount to double taxation. Hence, we hereby direct the AO to delete the addition of receipt of sale proceeds.

34.20 Coming issue of taxing the non-refundable deposit of Rs. 1.5 crore as income under the head ‘other sources’. The learned AR before us reiterated that the amount was received as refundable deposit and the assessee is liable to repay the same as per the term of the JDA. Therefore, the same has been treated as liability in the books of accounts. In this regard, we note that it is not disputed the amount was received under JDA as refundable deposit from the party namely Mantri Reality Ltd. The assessee continues to show the same as liability. Hence in our considered opinion as long as the assessee has not written off, the inclusion of refundable deposits as “income from other sources” is not justifiable.

34.21 Furthermore, we note that the AO in the assessment order has disallowed the 50% amount of expenditure claimed by the assessee as incurred for completion of the project “Mantri Premero Project”. The learned CIT(A) also confirmed the impugned disallowances. However, we note that the assessee before us has not raised specific ground in this connection neither the learned AR made any argument or submission. Be that as maybe, we note that the assessment order itself has been set aside on technical grounds. Eventually, the impugned addition or disallowance is not maintainable.

Accordingly, we delete the additions made by the authorities below and allow the ground of appeal on merits as well. Hence, the ground of appeal of the assessee is hereby allowed.

Order pronounced in court on 4th day of September, 2025