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Facts
The assessee, an individual and NRI, claimed a deduction under Section 54F of Rs. 1,00,92,000/- on the sale of a commercial property. The Assessing Officer allowed this deduction in his assessment order. However, the Principal Commissioner of Income Tax (Pr. CIT) initiated proceedings under Section 263, believing the assessee was ineligible for the deduction as she owned two other residential properties outside India at the time of transfer.
Held
The Tribunal held that the Assessing Officer's order was passed without proper inquiry and application of mind, making it erroneous and prejudicial to the interest of revenue. The Tribunal did not delve into the interpretation of Section 54F but agreed that the assessment order was flawed due to lack of proper scrutiny.
Key Issues
Whether the Pr. CIT was justified in invoking Section 263 when the Assessing Officer had allowed the deduction under Section 54F after conducting scrutiny and whether the assessee was eligible for deduction under Section 54F despite owning multiple residential properties outside India.
Sections Cited
263, 54F, 143(3), 144B, 142(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, Hyderabad ‘B’ Bench, Hyderabad
Before: SHRI VIJAY PAL RAO & SHRI MADHUSUDAN SAWDIA
आयकर अपीलीय अधिकरण, हैदराबाद पीठ IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘B’ Bench, Hyderabad BEFORE SHRI VIJAY PAL RAO, VICE PRESIDENT AND SHRI MADHUSUDAN SAWDIA, ACCOUNTANT MEMBER आ.अपी.सं /ITA.No.628/Hyd/2025 Assessment Year 2020-2021 Sumanth Badiga, The DCIT, Circle-5(1), Hyderabad – 500 004. vs. Hyderabad. Telangana. Telangana. PAN AHQPB8508F (Appellant) (Respondent) निर्धारिती द्वधिध/Assessee by : CA C S Subrahmanyam and Sri V. Siva Kumar, Advocate िधजस् व द्वधिध/Revenue by : Sri LV Bhaskara Reddy, CIT-DR सुिवधई की तधिीख/Date of hearing: 02.02.2026 घोषणध की तधिीख/Pronouncement: 06.02.2026 आदेश/ORDER PER VIJAY PAL RAO, VICE PRESIDENT :
This appeal by the Assessee is directed against the Order dated 14.02.2025 of the learned Principal Commissioner of Income Tax, Hyderabad-4, Hyderabad for the assessment year 2020-2021.
2 ITA.No.628/Hyd./2025 2. The assessee has raised the following grounds of appeal:
Ground No.1 The order passed u/s 263 by the learned Pr. CIT, Hyderabad-4 is erroneous on law and on facts of the case.
Ground No.2 The learned Pr. CIT, Hyderabad-4 ought not to have invoked provisions of Section 263, as the facts of the appellant's case do not satisfy either of the twin conditions, viz., the order of Assessing Officer being erroneous or prejudicial to the interest of revenue.
Ground No.3 The learned Pr. CIT, Hyderabad-4 erred in invoking the jurisdiction u/s 263, despite absence of any error in the assessment order which was passed after taking into consideration of all the material facts disclosed by the assessee and the Assessing Officer took one of the plausible views on the issue under consideration.
Ground No.4 The learned Pr. CIT, Hyderabad-4 ought not to have invoked the jurisdiction u/s 263, since, the order is not prejudicial to the interest of revenue as there is no error in the assessment order.
Ground No.5 The learned Pr. CIT, Hyderabad-4 erred in invoking the jurisdiction u/s 263, since, during the assessment, there was a specific query from the Assessing Officer on the issue under consideration and 3 ITA.No.628/Hyd./2025 the assessment was completed basing on the reply. from assessee to such query.
Ground No.6 The learned Pr. CIT, Hyderabad-4, ought not to have invoked the jurisdiction u/s 263, for the reason that the assessee is having two properties outside India which in his opinion is violation of Section 54F which made the assessment order u/s 143(3) as prejudicial to the interest of revenue.
Ground No.7 The learned Pr. CIT, Hyderabad 4 erred in passing the order u/s 263, despite the assessee bringing to his notice, judicial position, which is in favour of the assessee on the issue under consideration which makes the assessment neither erroneous nor prejudicial to the interest of revenue.
Ground No.8 Any other ground that may be raised during the appellate proceedings, with the kind prior permission from the Hon'ble Tribunal.”
The brief facts leading to the controversy in the case of the assessee are that the assessee is an individual and NRI and filed her return of income for the year under consideration on 11.09.2020 declaring total income [long term capital gains] of Rs.9,97,46,100/- after claiming deduction u/sec.54 of the Income Tax [in short “ the Act”],
4 ITA.No.628/Hyd./2025 1961 to the tune of Rs.1,00,92,000/-. The case of the assessee was selected to complete scrutiny under CASS. The Assessing Officer passed the scrutiny assessment u/sec.143(3) r.w.s.144B of the Act vide order dated 02.09.2022 accepting the returned income of the assessee. Thereafter, on perusal of the record, the Pr. CIT noted that the assessee has claimed deduction of Rs.1,00,92,000/- u/sec.54F of the Act against the long term capital gains which is not allowable if the assessee owns more than one residential house other than the new house as on the date of transfer of original asset. The Pr. CIT noted that the assessee was having two residential houses, one in Dubai and another in USA and therefore, the assessee is not eligible for deduction u/sec.54F of the Act allowing the same by the Assessing Officer without verification of the issue is erroneous in so far as prejudicial to the interests of the Revenue. The Pr. CIT accordingly issued show cause notice u/sec.263 of the Act on 16.01.2025. The assessee filed her reply to the show cause notice and contended that the assessee does not own more than one residential house in 5 ITA.No.628/Hyd./2025 India other than the new asset on the date of transfer of the original asset. The other two houses are owned and held outside India and therefore, the assessee is eligible for deduction u/sec.54F of the Act. The learned Pr. CIT did not agree with the contention of the assessee and held that when the assessee is owning more than one residential houses, one in India and two in Abroad at the time of transfer of the asset, then the claim of deduction u/sec.54F of the Act needs to be disallowed. He accordingly set aside the order of the Assessing Officer with a direction to recompute the long-term capital gains while passing the impugned order.
Aggrieved by the order of Pr. CIT, the assessee filed the present appeal. Before the Tribunal, the learned Authorised Representative of the Assessee has submitted that as per the provisions of sec.54F of the Act and after amendment vide Finance Act, 2014, the claim of deduction is allowable only when the investment is made in a residential house in India. Therefore, as per the proviso to sub-sec. (1) to sec.54F of the Act, if the assessee owned more than one residential house in India other than the new asset at the 6 ITA.No.628/Hyd./2025 time of transfer of the asset, the claim of deduction u/sec.54F is not allowable. He has further submitted that when the investment in residential house in India is a mandatory condition for availing the deduction u/sec.54F, then the exception of owning more than one residential house is also in India and not outside India. In support of his contention, he has relied upon the order of ITAT, Cochin Bench, Cochin in the case of Smt. Maries Joseph, Thrissur vs. DCIT- (International Taxation), Kochi in ITA.Nos.613, 566/Coch/ 2022 dated 02.01.2023 and submitted that the Tribunal in the said case has considered an identical issue and held that the proviso to sec.54F(1) must be construed harmoniously with the main statute so as to give effect to the legislative object and the section should be read as a whole inclusive of the proviso in such a manner that they mutually lie on each other and result in a harmonious construction. Thus, the learned Authorised Representative of the Assessee has submitted that when the Assessing Officer has taken a plausible view while allowing the deduction u/sec.54F, then the Pr. CIT is not permitted to invoke the provisions of 7 ITA.No.628/Hyd./2025 sec.263 of the Act merely because he does not agree with the view taken by the Assessing Officer. In support of his contention, he has relied upon the following decisions: i. Rampyari Devi Saraogi [1968] 67 ITR 84 (SC); ii. Malabar Industrial Co. Ltd., [2000] 109 Taxman 66 (SC) . iii. Swarup Vegetable Products [1991] 54 Taxman 175 (All.) iv. Rajalakshmi Mills Ltd., [2009] 31 SOT 353 (Chennai) (SB). v. SRM Systems & Software Pvt. Ltd., T.C.(A) No.824 of 2010 dated 31.08.2010 of Madras High Court. vi. Deloitte Haskins & Sells ITA.No.1164/Mad./2012 dated 04.07.2013.
4.1. The learned Authorised Representative of the Assessee has submitted that the Assessing Officer conducted the enquiry during the scrutiny assessment by issuing show cause notice u/sec.142(1) of the Act which was duly replied by the assessee by furnishing relevant details and evidence. Therefore, the Assessing Officer was satisfied with the claim of the assessee and allowed the same while passing the 8 ITA.No.628/Hyd./2025 assessment order, which is a plausible view. Hence, the learned Authorised Representative of the Assessee has pleaded that the impugned order of the Pr. CIT is not sustainable in law and liable to be quashed.
On the other hand, the learned DR has submitted that the proviso to sec.54F(1) of the Act must be given a strict interpretation and cannot be given an interpretation in view of the amendment brought to the provisions of sub-sec.(1) of sec.54F of the Act whereby the deduction for investment in a residential house allowable only when the said investment was made in India. There is no such condition for owning more than one residential house at the time of transfer of original asset only in India and not outside India. In support of his contention, he has relied upon the decision of Visakhapatnam Bench of the Tribunal in the case of DCIT [International Taxation] vs. Babu Rajendra Prasad [2023] 201 ITD 704 (Visakhapatnam – Trib.) and submitted that this Tribunal has considered an identical issue and held that owning more than one residential house at the time of transfer of the original asset by the assessee including the 9 ITA.No.628/Hyd./2025 property situated in USA is in violation of the proviso to sec.54F(1) of the Act and thereby the assessee is not entitled to claim benefit of sec.54F of the Act. He has relied upon the impugned order of Pr. CIT.
We have considered the rival submissions as well as relevant material on record. There is no dispute regarding the fact that the assessee owned more than one house at the time of transfer of the original asset including the one at Dubai and another at USA. However, the assessee claimed the deduction u/sec.54F of the Act on the ground that the houses owned by the assessee outside India cannot be considered for the purpose of proviso to sec.54F(1) of the Act. During the scrutiny assessment, the Assessing Officer issued notices u/sec.142(1) of the Act dated 05.11.2021, 11.02.2022 and 23.02.2022. Vide show cause notice u/sec.142(1) of the Act dated 11.02.2022 the Assessing Officer has raised the following queries:
10 ITA.No.628/Hyd./2025 6.1. Thus, the Assessing Officer in query no.8 has asked the assessee to explain the allowability of deduction u/sec.54 of the Act. The assessee filed her reply vide acknowledgment dated 05.03.2022 as under:
11 ITA.No.628/Hyd./2025 6.2. Thus, neither the Assessing Officer has raised any specific query about the non-satisfaction of the conditions as provided in proviso to sec.54F(1) of the Act nor the assessee has given any reply as to how the assessee has satisfied the conditions contemplated in proviso to sec.54F(1) of the Act. The entire reply of the assessee is focused on the investment
12 ITA.No.628/Hyd./2025 made in a residential house property within the time period as prescribed u/sec.54F(1) of the Act, but the reply of the assessee is completely silent on the point of owning more than one residential house at the time of transfer of the original asset. We further note that the Assessing Officer also not given any finding on this issue in the assessment order and has passed a summary order as under:
13 ITA.No.628/Hyd./2025 6.3. Thus, it is clear that the Assessing Officer has accepted the returned income without discussing any issue in the assessment order which manifest that the Assessing Officer has passed the order without application of mind. Therefore, we find that the Assessing Officer has not expressed any view on this issue of satisfaction of the conditions provided in proviso to sec.54F(1) of the Act. Accordingly, the order passed by the Assessing Officer
14 ITA.No.628/Hyd./2025 without conducting a proper enquiry and without application of mind is erroneous in so far as prejudicial to the interests of the Revenue. A complete lack of enquiry on an issue renders the order of the Assessing Officer erroneous in so far as prejudicial to the interests of the Revenue. Therefore, the decisions relied upon by the assessee on the point that the Assessing Officer has taken a plausible view are not applicable in the facts of the case when no view has been expressed by the Assessing Officer as evident from the record. Though the issue involved is a debatable issue as different Benches of this Tribunal has taken different views on this issue, however, the since the assessment order is erroneous for lack of enquiry, therefore, we do not go into the aspect of interpretation of proviso to sec.54F(1) of the Act. Once the order of the Assessing Officer is found to be erroneous for lack of enquiry or application of mind, then we do not find any illegality in the jurisdiction exercised by the Pr. CIT u/sec.263 of the Act. Since the Assessing Officer has not conducted any enquiry nor applied any mind on the issue under consideration, therefore, we modify the impugned
15 ITA.No.628/Hyd./2025 order of the Pr. CIT to the extent of giving finding on merits of the claim and set-aside the matter to the record of the Assessing Officer for adjudication of this issue without having any influence on the findings of the learned Pr. CIT on this issue. We Order accordingly.
In the result, appeal of the Assessee is allowed for statistical purposes.
Order pronounced in the open Court on 06.02.2026.