SIVASUNDAR SELVAKUMARI,CHENNAI vs. ITO, NCW-1(6), CHENNAI

The assessee raised the following grounds of appeal:

The brief facts of the case are that the assessee, an individual, filed her return of income on 09.03.2018 u/s.139(4) of the Act, declaring total income of Rs.5,86,740/- and claimed credit for TDS of Rs.20,00,000/- deducted u/s.194IA of the Act in respect of sale of immovable property. A vacant land at No.148, Okkiyam Thoraipakkam Village, Sozhinganallur Taluk, Kancheepuram District, measuring 37,236 sq.ft originally belonged to Mrs.Danabakkiam Ammal. Subsequent to her demise, her legal heirs plotted the land into six plots and sold it to six persons vide six sale deeds all dtd. 13.11.1981. The said six persons in turn sold the plots vide six sale deeds, all dtd.05.10.1998, to the family members of S.Sivasundar, assessee’s husband. One of the owners, Mr.S.Ganesh had created an equitable mortgage of his plot with Axis bank through mortgage deed dtd.09.07.2008, registered as doc.No.2898 of 2008 on the file of SRO Neelankarai. The family members had mortgaged the property

Later on, the persons in SI.Nos.1 to 4 & 6, settled their plots along with share of common pathway and the encumbrance on the same (mortgage) in favour of Mr.S.Sivasundar, by way of 5 separate settlement deeds, registered with the SRO, Neelankarai:

Mr.S.Ganesh had discharged the mortgage through discharge receipt dtd.26.05.2015 registered as Doc.No.4014 of 2015 with the SRO, Neelankarai.

Consequent to the above settlements, the assessee’s husband Mr.S.Sivasundar, became the absolute owner of the 6 plots. Vide a Settlement deed dtd.09.06.2015, registered as Doc No.4376. Mr.S.Sivasundar had settled all the six plots to and in favour of the assessee.

Subsequent to the settlement, the entire property was sold by the assessee to one Dr.S.Rajasabapathy, vide Doc No.5028 of 2015 dtd.

The Long Term Capital Gain arising from sale of the said property was computed after indexation and discharge of mortgage and the same was offered to tax in the return of income of the assessee’s husband for A.Y.2016-17 in terms of section 64(1)(iv) of the Act, since the asset had been transferred to spouse without consideration.

The notice u/s.148 of the Act was issued on 30.03.2021, the assessee duly filed her ROI on 30.04.2021. In spite of having filed her ROI within 30 days of issuing the notice, the AO did not furnish the reasons for reopening to the assessee. Almost 7 months later, the Jurisdictional Assessing Officer (JAO) issued a notice u/s.143(2) of the Act dated 13.11.2021, wherein he stated that the reasons on which clarification was required was as per the Annexure, but the annexure was left blank. Thus, the reasons were not communicated to the assessee. The assessment was then transferred to the National Faceless Assessment Centre (NaFAC) and the Faceless Assessing Officer (FAO) assumed jurisdiction, who then issued notice u/s.142(1) of the Act dated 15.12.2021. The assessee filed her response on 28.12.2021, uploading her financials and mentioned that the income from the sale of the property was clubbed with her husband’s income and the LTCG was offered in his Retrun of income. The AO then issued another notice u/s.142(1) of the Act dated 17.01.2022 wherein he sought for details regarding sale / purchase of property during the year, expenses in connection with the transfer and reason for taking credit of TDS and not offering capital gain income in return of income. The assessee filed her response on 24.01.2022 wherein she again clarified that the income from sale of property was offered in her husband’s return of income after clubbing the income and since the TDS was deducted against her PAN as a vendor, she claimed credit for the same in her ROI. In response to a show-

The assessee e-filed her objections on 11.03.2022, wherein she again explained as to how the property was acquired by both herself and her husband with pre-existing charge and how the clearance of said encumbrance is an allowable expenditure. In spite of the assessee’s detailed submissions, the AO proceeded to pass the impugned order of assessment u/s.147 r.w.s. 144B of the Act. The assessment was completed determining total income at Rs.19,92,03,200/- by computing Long Term Capital Gain at Rs.19,86,16,459/- in the hands of the assessee and denying deduction towards discharge of mortgage liability. The AO held that u/s.45 r.w.s 48 of the Act, only cost of acquisition and transfer expenses are allowable deductions while computing capital gains. He observed that repayment of the mortgage/loan to the bank is neither cost of acquisition nor expenditure incurred wholly and exclusively in connection with the transfer. Accordingly, he rejected the assessee’s claim and taxed the entire capital gain in her hands.

Aggrieved, the assessee preferred her appeal before the ld.CIT(A). The ld.CIT(A) upheld the validity of reopening and confirmed the addition on the ground that the mortgage created with State Bank of India was not an existing encumbrance at the time of acquisition by the assessee. Therefore, he treated it as a self-created mortgage, and held that the amount paid for its discharge cannot be treated as cost of acquisition. Aggrieved by the order of the ld.CIT(A), the assessee is in appeal before us.

Before us, the ld.AR for the assessee submitted that the reassessment itself is invalid as there was no escapement of income. The capital gain had already been offered to tax in the hands of the assessee’s husband as mandated by section 64(1)(iv) of the Act. It was submitted that once income is statutorily includible in the hands of the transferor spouse, the same cannot be assessed in the hands of the transferee spouse. it is not known if the AO did indeed record reasons and obtain approval u/s.151 of the Act prior to reopening the assessment. The assessee had duly filed her Return of Income within 30 days of issuance of notice u/s.148 of the Act. The AO purporting to provide reasons in the annexure to notice u/s.143(2) of the Act dated 13.11.2021, left the annexure blank. Even in the impugned order, the AO has not furnished the reasons. In fact, the assessee filed a letter dated 04.08.2023 with the JAO on 07.08.2023 requesting him to furnish the reasons along with approval, if any. The assessee has still not received the same. It was further submitted that reasons recorded for reopening were not furnished despite request, which vitiates the reassessment proceedings in view of the judgment of the Hon’ble Supreme Court in Comunidado of Chicalim Vs. ITO (247 ITR 271).

On merits, it was contended that section 64(1)(iv) of the Act clearly provides that income arising from assets transferred without consideration to spouse shall be included in the hands of the transferor. The property having been settled without consideration, the capital gain is required to be assessed only in the hands of the assessee’s husband. It was further submitted that taxing

With regard to denial of deduction towards mortgage discharge, it was submitted that the mortgage existed prior to transfer and the sale consideration was directly utilised to discharge the mortgage. Clearing of encumbrance is an allowable deduction in computing capital gains as held by the Hon’ble Supreme Court in R.M. Arunachalam vs. CIT (227 ITR 222),

Per contra, the ld.DR for the revenue relied on the orders of the AO as well as the ld.CIT(A). Further, the ld.DR submitted that the multiple layer of transactions are made for the same immovable property only to mislead and evade the taxes. Therefore, the ld.DR prayed for confirming the order of the ld.CIT(A) by dismissing the appeal of the assessee.

We have heard the rival submissions, perused the material on record and gone through the orders of the authorities along with the paper books filed and case laws relied upon. It is an admitted position that the property was transferred by the husband to the assessee without consideration through a registered settlement deed. Section 64(1)(iv) of the Act categorically provides that in computing the total income of an individual, there shall be included all such income as arises directly or indirectly to the spouse from assets transferred directly or indirectly to the spouse otherwise than for adequate consideration. The language of the provision is clear and mandatory. Once the asset is transferred without consideration, any income arising there from is required to be included in the hands of the transferor spouse.

In the present case, the capital gain arose from the very asset transferred by the husband without consideration. Therefore, by operation of law, the income is includible only in the hands of the husband. The Assessing Officer’s reasoning that the assessee was the legal owner at the time of sale does not override the statutory mandate of section 64(1)(iv) of the Act. The clubbing provision is asset-centric and operates notwithstanding legal ownership. Accordingly, assessment of capital gains in the hands of the assessee is contrary to law.

Further, it is not in dispute that the husband has already offered the capital gains to tax in his return of income. Taxing the same income again in the

We have carefully perused the findings recorded by the learned Commissioner of Income Tax (Appeals) [“ld. CIT(A)”] in paragraph 8.20 at page 42 of the impugned order. The ld. CIT(A) has categorically observed that, in the facts and circumstances of the present case, the assessee’s husband and his brothers were liable to tax on the capital gains arising from the transfer of the capital asset, which stood mortgaged by them. The ld. CIT(A) has further held that there was no infirmity in the action of the assessee and her husband in filing the return of income by declaring the long-term capital gain in the hands of the assessee’s husband, notwithstanding the fact that the sale deed in respect of the impugned capital asset was executed by the assessee.

Further, in paragraph 9.1 of the said order, the ld. CIT(A) has recorded as under: “9.1 Since, the assessee has declared the income under the clubbing provisions u/s.64(1)(iv) of the Income Tax Act, the capital gains arising in the hands of the assessee may be clubbed in the income of her spouse”

Further, the denial of deduction towards discharge of mortgage is unsustainable. The Hon’ble Supreme Court in R.M. Arunachalam vs. CIT (227 ITR 222) has clearly held that where property is subject to mortgage and the

As regards reopening, when income is statutorily taxable in the hands of another person and has in fact been offered to tax, there cannot be said to be escapement of income in the hands of the assessee. Thus, the very foundation for formation of “reason to believe” that income had escaped assessment is factually incorrect. Reopening based on an erroneous assumption of fact is bad in law and liable to be struck down.

Further, the addition ultimately made by the Assessing Officer is not on account of non-disclosure of capital gains, but only on account of disallowance of mortgage discharge amount under section 48. The reassessment, therefore, travels beyond the recorded reasons and constitutes a mere change of opinion on computation, which is impermissible under law. Further, non-furnishing of recorded reasons despite request is contrary to law laid down by the Hon’ble Supreme Court in Comunidado of Chicalim vs. ITO (247 ITR 271), thereby vitiating the reassessment proceedings.

In view of the foregoing discussion, we hold that the reassessment proceedings are not sustainable in law and the addition of Rs.19,86,16,459/- made towards Long Term Capital Gain in the hands of the assessee is liable to be deleted. Consequently, the order of the ld.CIT(A) confirming the same is set aside by directing the AO to delete the additions made.