GADDAM MOHAN REDDY,NIZAMABAD vs. INCOME TAX OFFICER, WARD 1, NIZAMABAD, NIZAMABAD

During the course of the assessment proceedings, the assessee disclosed capital gains of Rs. 36,17,137/- (i.e., 2/3rd share of the assessee) on transfer of land admeasuring 1041.34 sq yds, against 3 Gaddam Mohan Reddy vs. ITO which, he had after considering the residential house property that was received by him from the developer, viz., M/s. Venki Infra & Developers, Nizamabad, claimed the deduction of the entire amount of capital gain under section 54 of the Act. Accordingly, the assessee had not offered any capital gain for tax on the transfer of 1041.34 sq yds of land to the developer, viz., M/s. Venki Infra & Developers, Nizamabad. The AO, vide his order passed under section 143(3) r.w.s 147 of the Act, dated 11/12/2017 accepted the income as was returned by the assessee.

Thereafter, the Principal Commissioner of Income Tax (PCIT), Hyderabad-2, called for the assessment records of the assessee. It was observed by him that the working of the capital gains arising on the transfer of 1041.34 sq yds of land was erroneous, as the period of holding of 517.87 sq yds of land was only 9 months (less than 36 months) as on the date of transfer, i.e., vide document, dated 16/07/2012 entered into between the assessee and the developer, viz., M/s. Venki Infra & Developers, Nizamabad. Thus, the PCIT observed that out of 1041.34 sq yds of land transferred, the assessee had derived short term capital gain (STCG) in respect of 517.87 sq yds of land (as the period of holding of the said piece of land was less than 36 months). Accordingly, it was observed by him that the assessee’s claim for deduction under section 54 of the Act w.r.t STCG arising on the transfer of 517.87 sq yds of land was not maintainable. The PCIT observed that 4 Gaddam Mohan Reddy vs. ITO as the AO while framing assessment had lost sight of the aforesaid material fact and had wrongly accepted the assessee’s claim for deduction under section 54F of the Act regarding the STCG on transfer of 517.87 sq yds of land, thus, the same had rendered his order passed under section 143(3) r.w.s 147 of the Act, dated 11/12/2017, as erroneous insofar as it was prejudicial to the interest of the revenue under section 263 of the Act. The assessee on being confronted with the aforesaid fact by the PCIT, vide show cause notice (SCN) under section 263 of the Act, dated 08/10/2018, admitted that deduction under section 54 of the Act, insofar the same pertained to the STCG arising on transfer of 517.87 sq yds of land was inadvertently/wrongly claimed, and requested him to pass a consequential order modifying the reassessment order, dated 11/12/2017.

The PCIT based on the aforesaid facts set aside the order passed by the AO under section 143(3) r.w.s 147 of the Act, dated 11/12/2017 to the file of the Faceless Assessing Officer (FAO), i.e., Assessment Unit (AU), with a direction to give effect to his order passed under section 263 of the Act, dated 09/03/2021.

Thereafter, the AO vide his order under section 144 r.w.s 263 r.w.s 144B of the Act, dated 30/03/2022, gave effect to the directions of the PCIT, and disallowed the assessee’s claim for deduction under section 54F insofar the same pertained to the short-term capital gains of 5 Gaddam Mohan Reddy vs. ITO Rs.16,29,727/-. The AO while culminating the assessment, inter alia, initiated penalty proceedings under section 274 r.w.s 271(1)(c) of the Act.

Thereafter, the AO vide his order passed under section 271(1)(c) of the Act, dated 28/09/2022 imposed the penalty for concealment of income of Rs.5,03,585/- upon the assessee, i.e., with respect to the wrong claim of deduction under section 54F of the Act of Rs.16,29,727/- pertaining to the STCG arising on the transfer of 517.87 sq yds of land (out of 1041.34 sq yds).

Aggrieved, the assessee assailed the order passed by the AO under section 271(1)(c) of the Act, dated 28/09/2022, before the CIT(A) but without success.

The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us.

We have heard the Learned Authorized Representatives of both parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by the Ld. AR to drive home his contentions.

Sri AV Raghuram, Advocate, the Learned Authorized Representative (for short, “Ld. AR”) for the assessee, at the threshold of 6 Gaddam Mohan Reddy vs. ITO hearing of the appeal, submitted that as the assessee had furnished his return of income pursuant to the notice issued under section 148 of the Act. The Ld. AR submitted that the assessee remaining under a bona fide belief that his income was below the basic exemption limit, thus, for the said reason had not filed his return of income for the subject year, i.e., AY 2013-14. The Ld. AR submitted that the assessee on account of an inadvertent mistake and an oversight had raised the claim for deduction under section 54 of the Act regarding the STCG arising on the transfer of 517.87 sq yds of land, which claim was accepted by the AO vide his order of assessment passed under section 143(3) r.w.s 147 of the Act, dated 11/12/2017. The Ld. AR submitted that as the claim for deduction under section 54 of the Act was backed by a bona fide mistake, that was immediately corrected by the assessee when the said fact was brought to his notice by the PCIT in the course of the proceedings under section 263 of the Act, therefore, he ought not to have been visited with penalty under section 271(1)(c) of the Act for alleged concealment of income for the aforesaid inadvertent error. The Ld. AR to support his contention had relied upon the judgment of the Hon’ble Supreme Court in the case of Price Waterhouse Coopers Pvt. Ltd vs. Commissioner of Income Tax & Anr. (2012) 348 ITR 306 (SC).

We have given thought consideration to the contentions advanced by the Learned Authorized Representatives of both parties.

Admittedly, it is a matter of fact that the assessee had failed to file his return of income under section 139 of the Act, and had filed the same only pursuant to the notice issued to him under section 148 of the Act, dated 17/08/2016. In our view, as the income declared by the assessee in his return of income filed on 13/03/2017, i.e., in response to notice under section 148 of the Act amounted to Rs.2,15,730/-, therefore, there is substance in the Ld. AR’s claim that the failure on the part of the assessee to file his return of income was for the reason that he had remained under a bona fide belief that his income chargeable to tax for the subject year was below the basic exemption limit.

Be that as it may, we find that the assessee in his return of income that was filed in response to notice under section 148 of the Act, dated 13/03/2017, had claimed deduction U/sec. 54F for the entire amount of capital gain arising on the transfer of 1041.34 sq yds of land to the developer, viz., M/s. Venki Infra & Developers, Nizamabad. Also, we find that the assessee’s claim for deduction under section 54F of the Act was accepted by the AO while framing assessment, vide order 8 Gaddam Mohan Reddy vs. ITO passed by him under section 143(3) r.w.s 147 of the Act, dated 11/12/2017.

As observed hereinabove, the PCIT in the course of the revision proceedings, had observed that as 517.87 sq yds of land (out of 1041.34 sq yds of land) that was transferred by the assessee during the subject year was held only for a period of 9 months (less than 36 months) as on the date of transfer, i.e., vide document, dated 16/07/2012, between the assessee and the developer, viz., M/s. Venki Infra & Developers, Nizamabad, therefore, the STCG arising on the transfer of the said piece of land, i.e., 517.87 sq yds was not eligible for deduction under section 54F of the Act. Admittedly, the PCIT had rightly observed that the STCG arising on the transfer of 517.87 sq yds of land was not eligible for deduction under section 54F of the Act.

We find that the PCIT had vide his show cause notice (SCN), dated 08/10/2018, called upon the assessee to explain that as to why his claim for deduction under section 54F of the Act, regarding the STCG on transfer of 517.87 sq yds of land may not be withdrawn. In reply, the assessee, in all fairness, had candidly accepted that the aforesaid claim for deduction was erroneously raised, and had requested the Ld. PCIT that a consequential order may be passed by him directing modification of the reassessment order, dated 11/12/2017. 9 Gaddam Mohan Reddy vs. ITO 18. We find on a perusal of the record that the assessee in the present case before us, had on account of bona fide mistake raised the claim for deduction under section 54F insofar the same pertained to the STCG arising on the transfer of 517.87 sq yds of land, which mistake had also not come to the notice of the AO while framing the assessment vide his order under section 143(3) r.w.s 147 of the Act, dated 11/12/2017. 19. Be that as it may, we find that the moment the assessee was confronted with the fact that his claim of deduction under section 54F of the Act with respect to STCG arising on transfer of 517.87 sq yds of land was not as per the mandate of law, the assessee had vide his submission, dated 11/03/2020, admitted his mistake and had requested the PCIT to pass a consequential order modifying the re-assessment order, dated 11/12/2017. In our view, considering the totality of the facts involved in the present case, it can safely be concluded that the claim for deduction under section 54F with respect to STCG arising on transfer of 517.87 sq yds of land was raised by the assessee on account of a bona fide mistake and not on for any mala fide intention.

Considering the facts involved in the case before us, we are of a firm conviction that as there were bona fide reasons leading to the mistake on the part of the assessee in raising a claim for deduction under section 54F of the Act regarding the STCG on transfer of 517.87 10 Gaddam Mohan Reddy vs. ITO sq yds of land, which fact also did not come to the notice of the AO while framing the assessment, and the assessee had on learning about the same fairly accepted the said mistake and requested for modification of the assessment, therefore, there was no justification by the AO to have visited the assessee with penalty U/sec. 271(1)(c) for the alleged concealment of income regarding the aforesaid claim of deduction raised under section 54F of the Act. Our aforesaid view is supported by the judgment of the Hon’ble Supreme Court in the case of Price Waterhouse Coopers Pvt. Ltd vs. Commissioner of Income Tax & Anr (supra). The Hon’ble Supreme Court, had observed that in a case of bona fide and an inadvertent error, and not a case of intended concealment of income or furnishing of inaccurate particulars, imposition of penalty under section 271(1)(c) was not justified.

We, thus, in terms of our aforesaid observations, not being able to persuade ourselves to subscribe to the view taken by the CIT(A), who has upheld the penalty imposed by the AO under section 271(1)(c) of the Act, set aside his order and vacate the penalty of Rs. 5,03,585/- imposed by the AO under section 271(1)(c) of the Act.

Resultantly, the appeal filed by the assessee is allowed in terms of our aforesaid observations.