LAGGISETTY MANOHAR KARTHIK,CHENNAI vs. ITO NON CORPORATE WARD 15(2), CHENNAI

The NFAC, Delhi failed to appreciate that having not adhered to the prescription of faceless regime, the consequential assessment passed should be reckoned as bad in law.

The NFAC, Delhi failed to appreciate that there was no proper opportunity given before passing of the impugned order and any order passed in violation of the principles natural justice would be nullity in law.

The brief facts of the case are that the assessee along with his brother, Shri L.M.Vinod had sold a land and building situated at Plot No.8 & 9, Labipetta, Vijayawada for a sale consideration of Rs.2,59,30,000/-. The assessee had filed the return of income for the assessment year under consideration on 11.11.2014 by declaring income of Rs.6,83,243/-.

The Jurisdictional Assessing Officer(AO) had received information regarding the sale of the aforesaid immovable property and it is the case of the AO that the same was not offered to tax in the said return of income filed for the assessment year under consideration.

The assessee upon receipt of the notice u/s.142(1) of the Act had filed his objections to the same vide letter dated 18.11.2019, wherein the assessee objected to the assumption of jurisdiction u/s.147 of the Act on the premise of escapement of income in relation to the sale of the immovable property as captured in the said notice u/s.142(1) of the Act in as much the assessee submitted that the said immovable property had belonged to the HUF having PAN: AABHL9827Р, wherein the transaction of sale was reported in the return of income filed by the HUF dated 11.11.2014 having E-filing Acknowledgement No. 406040310111114.

The assessee submitted the purchase deed by the assessee’s father dated 17.11.1997, gift deed dated 19.02.2010, sale deed dated 17.06.2011, valuation report dated 20.02.2011, lease agreement for purchase of land on lease dated 15.09.2014 along with the return of income filed by the HUF and the computation in pleading for dropping the re-assessment proceedings initiated for the assessment year under consideration in the hands of the assessee in the capacity of an individual. The AO had thereafter issued the Show Cause Notice dated 27.12.2019 in proposing to assess the capital gains arising from sale of the immovable property situated at Vijayawada in the hands of the assessee herein in the capacity of the individual.

The AO furthermore proposed to reject the claim of the indexed cost of acquisition computed by the assessee in as much the FMV of the property computed by the assessee as on 01.04.1981 was rejected in substituting the FMV of the said property from FY 2009-10. Further, the AO proposed to reject the claim of deduction u/s.54 of the Act on the capital gains arising from the said sale by observing that the assessee had not reinvested the sale consideration towards purchase of new immovable property / construction of a new residential house.

The assessee in response to the said Show Cause Notice once again objected to the assumption of jurisdiction u/s.147 of the Act initiated in the hands of :-5-: ITA. No: 746/Chny/2025 the assessee individual in view of the fact of the sale consideration received in relation to the sale of immovable property situated at Vijayawada was assessable only in the hands of the HUF.

With regard to the issue of re-computing of the FMV from FY 2009-10 as against the claim of the assessee on the same being the FMV as on 01.04.1981, the assessee placed reliance upon the provisions in Section 49(1) of the Act in view of the fact the subject immovable property was initially purchased by the assessee's father in the year 1977 and accordingly by virtue of the provisions in Section 48(iii) of the Act, the indexation benefits ought to be reckoned from 01.04.1981 on the facts of the present case.

With regard to the issue of creation of new asset in relation to the claim of deduction u/s.54 of the Act, the assessee placed on record the details of payments made towards re-investment in new asset through banking channel and accordingly pleaded to accept the returned income. The AO as a consequence proposed to assess the LTCG in the hands of the assessee herein at Rs.1,13,79,142/-, being 50% of the total capital gains arising therefrom (Rs.2,27,58,281/-).

However, the re-assessment order dated 30.12.2019 came to be passed in terms of Section 147 of the Act in rejecting the contentions of the assessee in adding back a sum of Rs.1,13,79,142/ - as Long Term Capital Gains and a sum of Rs.12,76,142/- as interest income in addition to the interest income already offered by the assessee in the return of income filed by the assessee in response to notice u/s.148 of the Act.

The assessee had filed appeal against the re-assessment order before the Ld.CIT(A) in challenging the validity of the assumption of jurisdiction u/s.147 of the Act and the consequently re-assessment order passed in terms of Section 147 of the Act. Furthermore, the assessee challenging the action of the AO in assessing the sale consideration in the hands of the assessee herein as well as the rejection of the claim of deduction u/s.54 of the Act.

The assessee submitted before the Ld.CIT(A) that the action of the AO in not sharing the reasons recorded for assuming jurisdiction u/s.147 of the Act would vitiate re-assessment order passed by him in view of non adherence to the procedure laid down by the Hon'ble Supreme Court in the case of GKN Driveshafts (India) Ltd. v. Income-tax Officer, reported in 259 ITR 19. Insofar as the merits in the said first appeal was concerned, the assessee submitted that the sale consideration was assessable to tax in the hands of the HUF, thereby establishing there being no escapement of income on the facts of the present case in the hands of the assessee individual. Furthermore, the assessee had placed on record the documentary details of evidence establishing creation of a new asset in support of the claim of deduction u/s.54 of the Act as well placed reliance upon the decision of the Hon'ble Bombay High Court in the case of Commissioner of Incometax-12 v. Manjula J.Shah, reported in 355 ITR 474 in support of the indexed cost of acquisition as on 01.04.1981 in the computation of capital gains.

Before us, the preliminary argument raised by the Ld.AR was on the validity of the re-assessment order passed without adhering to the procedure laid down by the Hon'ble Supreme Court in the case of GKN Driveshafts (supra) by the AO in not sharing the reasons recorded for re-opening of assessment properly as well as not disposing off the objections to the assumption of jurisdiction u/s.147 of the Act by virtue of the response to notice u/s.142(1) of the Act would be fatal to the re-

Furthermore, the Ld.AR also placed reliance upon the decision of this Co- ordinate Bench in the case of M/s.IDFC First Bank Ltd. v. The PCIT / ACIT, Corporate Cirlce1(1), Chennai in & 1171/Chny/2024, wherein this Tribunal after taking into consideration the aforesaid decisions of the Hon'ble Madras High Court and under identical circumstances had quashed the re-assessment order passed u/s.147 of the Act on account of failure on part of the AO to adhere to the procedure laid down by Hon'ble Supreme Court in the case of GKN Driveshafts (supra). On merits of the present appeal, the Ld.AR argued that the assessment of sale consideration received in relation to the sale of the immovable property at Vijayawada was already forming part of the return of income filed by the HUF and the assessment of such sums as Capital Gains in the hands of the assessee herein in the capacity of the individual would tantamount to double taxation. The Ld.AR insofar as the claim of deduction in terms of Section 54 of the Act, had argued that the documentary evidences filed before authorities were not considered in proper perspective inasmuch the assessee had substantiated the fact of creation of new asset within the time limit stipulated under the Act and further argued that the denial of the claim of indexed cost of acquisition as on 01.04.1989 was correct in view of the law declared by the Hon'ble Madras High Court in case of Commissioner of Income Tax, Chennai v. Saroja Naidu, reported in 128 taxmann.com 127.

Per contra, the ld.DR argued that the non adherence to the procedure laid down by the Hon'ble Supreme Court in the case of GKN Driveshafts (supra) was only an curable irregularity and not vitiate the entire re-assessment order passed in terms of Section 147 of the Act by placing reliance upon the decision of the Hon'ble Madras High Court in the case of M/s.Home Finders Housing Ltd. v. ITO. On the :-8-: ITA. No: 746/Chny/2025 merits of the present case, the Ld.DR argued that the action of the AO in assessing such sale consideration received income of the assessee was correct and the disallowance of claim of indexed cost of acquisition as on 01.04.1989 as the claim of deduction u/s.54 of the Act was correct on the facts and in the circumstances of the present and accordingly pleaded for confirming the order of the Ld.CIT(A) by dismissing the appeal of the assessee.

We have heard the rival contentions perused the material available on record and gone through the orders of the lower authorities along with judicial precedents relied on. From the records, it can be seen that the admitted facts of the present case are that the assessee had filed return of income in response to notice u/s.148 of the Act and had filed objections to the action of the AO in assuming jurisdiction u/s.147 of the Act on the facts of the present.

It is seen from the plain reading of the response filed by the assessee to the notice issued u/s.142(1) capturing the reasons for re-opening, the assessee had stated that the property belonged to the HUF and the assessee is surprised that the proceedings are re-opened in the hands of the individual for such non-reporting in his hands. As per the law laid down by the Apex Court, the AO ought to have disposed of such preliminary objection raised by the assessee for assuming jurisdiction in view of non-escapement of income in the hands of the individual.

We find that the AO had not disposed of such objection by passing a speaking order before framing the re-assessment. In fact the objections to the said re-opening of assessment were countered by the AO only at the time of passing the re- assessment order, which is in gross-defiance to the procedure laid down of the Hon'ble Supreme Court in the case of M/s.GKN Driveshafts (India) Ltd. (supra).

Hence, the issue to be decided in the present case is whether the non- adherence to the law laid down by the Apex Court would be curable or fatal to the consequential reassessment proceedings.

We find that the Hon'ble Madras High Court in the case of Pentafour Software Employees' Welfare Foundation (supra), decided on 05.08.2019 as well in the case Janak Shanthilal Mehta (supra) decided on 16.12.2020 had held that omission on the part of the AO to follow the binding directions of the Hon'ble Supreme Court in the case of M/s.GKN Driveshafts (India) Ltd., would vitiate the re-opening of assessment and consequent re-assessment order passed u/s.147 of the Act.

We find further in another decision of the Hon'ble Madras High Court in the case of Home Finders Housing Ltd.(supra) dated 25.04.2018, the Hon'ble Madras High Court had held that non-compliance of the directions of the Hon'ble Supreme Court in the case of M/s.GKN Driveshafts (India) Ltd., would tantamount to irregularity and in such cases, the re-assessment be restored back to the file of the AO to pass speaking order on the objections raised by the assessee.

However, we find that the decision rendered in the case of Home Finders Housing Ltd., (supra) was a decision rendered earlier to the decision held by the Hon'ble Madras High Court in the case of CIT v. Janak Shanthilal Mehta (supra) and in such an event i.e. when there are two conflicting views between the order of Hon'ble High Court of co-equal strength (of the same Court) then, later pronouncement of the Hon'ble Court is binding on this Tribunal.

In this regard we draw support of the decision rendered by the Hon'ble Delhi High Court in the case of Bhika Ram & Ors. v. UOI reported in [1999] 238 ITR 113, wherein the Hon'ble Delhi High Court had held that though in the context of two views expressed by the Hon'ble Supreme Court on an issue, wherein, it was held that the later view of the Hon'ble Supreme Court Bench of equal strength will prevail over the earlier view has held as under:-

However, learned counsel for the petitioner relied on Satinder Singh v. Umrao Singh, to submit that compensation would not be treated as income. Learned counsel further submitted that the decision of the Supreme Court in Satinder Singh's case was not brought to the notice of the Supreme Court when Bikram Singh's case [1997] 224 ITR 551, was decided. It is also submitted that the reasoning on which their Lordships have proceeded in the case of Satinder Singh, was also not argued before the Supreme Court in Bikram Singh's case [1997] 224 ITR 551. Not only are we not satisfied about the correctness of the submission so made, we are also of the opinion that such a plea is not open for consideration by us and Bikram Singh's case [1997] 224 ITR 551 (SC), being a later pronouncement of the Supreme Court by a Bench of co-equal strength, it is binding on us.

The senior standing counsel for the Revenue has pointed out that the definition of interest has undergone a change after the pronouncement of the Supreme Court in the case of Satinder Singh. He also submitted that in Satinder Singh's case, the interest paid was by way of compensation while in the case at hand interest has been allowed as interest on the amount of compensation in accordance with the statutory provisions. 7. The petitioner is at liberty to have the income on account of interest assessed by seeking spread over consistently with the law laid down by the Supreme Court in the case of Bikram Singh [1997] 224 ITR 551. So far as the present petition is concerned, we hold the petitioner not entitled to any relief. The petition is dismissed. No order as to costs."

In the light of the above discussion, we are of the view that failure on part of the Assessing Officer in not complying with the binding decision / procedure laid down by the Hon'ble Supreme Court in the case of M/s.GKN Driveshafts (India) Ltd would vitiate the reassessment order passed in terms of Section 147 of the Act. The AO rejecting objections of the assessee against re-opening by merely doing so while passing the re-assessment order was not suffice the requirement of the law laid down by the Hon'ble Supreme Court.

Further, the co-ordinate bench of this Tribunal under identical circumstances in the case of M/s.IDFC First Bank Ltd (supra) had held that non adherence to the procedure laid down by the Hon'ble Supreme Court in the case of M/s.GKN Driveshafts (India) Ltd would vitiate the re-assessment order passed u/s.147 of the Act. Further, the co-ordinate bench of this Tribunal recently in the case of Damayanti

In light of the above discussion and reasoning and respectfully following decisions rendered by the Hon'ble Madras High Court, we find that the failure on the part of the AO in not complying with the directions of the Hon'ble Supreme Court in the case of M/s.GKN Driveshafts (India) Ltd. would strike at the root of the jurisdiction of the AO to re-open the assessment in terms of Section 147 of the Act and the consequential re-assessment order passed u/s.147 of the Act are to reckoned as non-est in the in the eyes of law. Therefore, we the order of the AO u/s.147 of the Act is quashed.

Since we have decided the grounds of appeal raised by the assessee in challenging the validity of the assumption of jurisdiction u/s.147 of the Act in favour of the Assessee, the grounds of appeal raised on merits challenging the additions made in the re-assessment order would become academic and left open.

In the result the appeal of the assessee is allowed.