INCOME-TAX OFFICER vs. SHRI NARESH KISHOR MALKANI, PUNE

आदेश / ORDER

PER VIKAS AWASTHY, JM

These cross appeals by the assessee and Revenue are directed against

the order of Commissioner of Income Tax (Appeals)-13, Pune dated 30.06.2015

for the assessment year 2009-10.

Aundh, Pune on 11.02.2009 (during the period relevant to assessment year

2009-10) for a consideration of Rs.7,20,75,000/-. The assessee purportedly

inherited the aforesaid property from his father in the period relevant to assessment year 2002-03. Since the property was acquired by the father of

assessee prior to 01.04.1981, the cost of acquisition as on 01.04.1981 was

determined at Rs.35,50,000/- by the approved valuer. The assessee also

claimed cost of improvement amounting to Rs.70,46,978/-. After deducting cost of acquisition and cost of improvement, the assessee computed long term

capital gain at Rs.4,43,67,022/-. The assessee invested Rs.4,50,00,000/- in

Capital Gain Account Scheme and claimed exemption u/s. 54 of the Income

Tax Act, 1961 (hereinafter referred to as ‘the Act’) in assessment year 2009-10. Subsequently, on 12.12.2009 i.e. in the period relevant to assessment year

2010-11, the assessee withdrew the amount deposited in the Capital Gain

Account Scheme and offered the capital gain to tax in the return of income for

the assessment year 2010-11.

3 ITA Nos.1236 & 1263/PUN/2015 A.Y.2009-10

2.1 The Assessing Officer on the basis of capital gain offered in the

assessment year 2010-11, reopened the assessment for assessment year

2009-10 and made addition of capital gains in the assessment year 2009-10.

The Assessing Officer further disturbed the cost of acquisition on the basis of

data procured from the office of Registrar Office and computed the capital gain

at Rs.6,76,12,581/-. The Assessing Officer vide order dated 30.03.2014

passed u/s.143(3) r.w.s. 147 of the Act assessed the capital gain on sale of

residential property in assessment year 2009-10 and also enhanced the

capital gain by Rs.2,32,45,559/-. The Assessing Officer further disallowed

assessee’s claim of cost of improvement Rs.70,46,978/-.

Commissioner of Income Tax(Appeals) challenging re-opening of assessment,

as well as addition on merits. The Commissioner of Income Tax (Appeals)

rejected the contentions of assessee with respect to re-opening and upheld the

findings of the Assessing Officer. However, the Commissioner of Income Tax

(Appeals) granted part relief to the assessee with respect to cost of acquisition.

Against the findings of Commissioner of Income Tax (Appeals), the assessee

and the Revenue, both are in appeal before the Tribunal.

Income Tax (Appeals) by raising following grounds:

“1. The learned CIT erred in law and on facts in upholding the validity of reassessment u/s 147 which was initiated without any tangible material or information so as to form a reason to believe that income has escaped assessment. The reasons recorded by the learned AO do not reflect any escapement of income in the hands of the appellant for the relevant year. 2. The learned CIT(A) erred in law and on facts in upholding the reassessment so as to assess the capital gains which was accepted for A.Y.2010-11 as also the cost of acquisition, indexation and cost of improvement. The reopening of assessment for change of opinion for the year under consideration is bad in law without reference to any fresh facts or material.

4 ITA Nos.1236 & 1263/PUN/2015 A.Y.2009-10

Tax(Appeals) by raising following grounds :

“1. Whether the learned Commissioner of Income-tax(Appeals)-13, Pune, erred in law and in facts by directing the Assessing Officer to adopt the cost of acquisition as on 1-4-1981 at three times the then prevailing Government rate on the basis of current sale instances. 2. Whether the learned Commissioner of Income-tax(Appeals)-13, Pune, erred in law and facts by disregarding the information received from the Registrar's office. 3. The appellant craves leave to add, amend, alter, delete or modify all or any of the above grounds of appeal or raise new grounds of appeal.”

the Authorities below have erred in coming to the conclusion that capital gains

arising from sale of property is liable to be assessed to tax in assessment year

2009-10. The ld. Counsel pointed that the property was sold in the period

relevant to the assessment year 2009-10, and the entire capital gain was

invested in Capital Gain Account Scheme. Thus, the assessee had claimed

exemption u/s.54 of the Act in assessment year 2009-10. The ld. Counsel

further submitted that the assessee is a non-resident Indian. Initially,

assessee had planned to return to India and had intended to purchase house.

Later on, his plan changed and he decided to stay abroad. The assessee

withdrew the amount deposited in Capital Gain Account Scheme in December,

5 ITA Nos.1236 & 1263/PUN/2015 A.Y.2009-10

2009 and offered the same to tax in the return of income for assessment year

2010-11. The ld. Counsel pointed that the proviso to section 54 provides that

the amount not utilized within the period specified in sub section (1) of section

54 shall be charged to tax u/s.45 as income of the previous year in which the

period of three years from the date of transfer of original asset expires. Since

the amount was withdrawn prematurely, the same was offered to tax in the

year of withdrawal.

6.1 The ld. Counsel challenging the re-opening of assessment for

assessment year 2009-10 submitted that a perusal of the reasons for

reopening would show that there was no fresh tangible material available with

the Assessing Officer to reopen the assessment. The only ground for reopening

the assessment for assessment year 2009-10 is the return of income filed by

the assessee for assessment year 2010-11. The return of income filed by the

assessee for the subsequent year cannot be considered as independent

tangible material for reopening the assessment of earlier year. The ld. Counsel

asserted that reopening is bad in law therefore the assessment proceedings

are liable to be set aside on this ground alone.

6.2 The ld. Counsel for the assessee further submitted that the Assessing

Officer has disallowed the cost of acquisition. The assessee acquired the

property from his father in the period relevant to the assessment year 2002-

assessee had taken indexed cost of acquisition as on 01.04.1981 at

Rs.35,50,000/- as per valuation report. The Assessing Officer on the basis of

some information received from Office of Sub-Registrar determined the index

cost of acquisition at Rs.8,92,672/-. The ld. Counsel submitted that in the

first instance, the Assessing officer could not have substituted guideline value

for fair market value by calling report from the office of Sub-Registrar. To

6 ITA Nos.1236 & 1263/PUN/2015 A.Y.2009-10

support her submissions, the ld. Counsel placed reliance on the decision of

Hon'ble Madras High Court in the case of CIT Vs. K.A. Fathima reported as 98

CCH 107. Secondly, as per the provision of section 55A of the Act as they

were applicable during the assessment year under appeal. The assessee could

have made reference for the valuation of capital asset to Valuation Officer only

in case where the value claimed by the assessee is less than the fair market

value. The provisions of section 55A of the Act have been amended by the

Finance Act, 2012 w.e.f. 01.07.2012. The Hon'ble Jurisdictional High Court in

the case of CIT Vs. Puja Prints reported as 360 ITR 697 has held that the

amendment is not applicable prospectively and is effective only from

01.07.2012. Therefore, amended provisions of section 55A are not attracted in

the case of assessee. The Assessing Officer in order to circumvent the

provisions of the Act has directly approached the Sub-Registrar Office which is

against the spirit of law.

vehemently defended the order of Commissioner of Income Tax (Appeals) in

confirming the addition and upholding the re-assessment proceedings. The ld.

DR submitted that the capital gain had accrued to the assessee in the year in

which the property has been sold. The ld. DR submitted that by investing

capital gain in Capital Gain Account Scheme and by withdrawing the same

prematurely in the next assessment year, the assessee has merely postponed

his tax liability. The ld. DR further submitted that the provisions of section

55A are not attracted as the Assessing Officer has not sought valuation report

from the District Valuation Officer (DVO). The ld. DR submitted that valuer of

the assessee had adopted the rate at Rs.1940/- per square metre on ad-hoc

basis, whereas, the Assessing Officer had adopted comparable rate on the

basis of sale instance in the year 1981. Therefore, the rate applied by the

Assessing Officer has more prudence as compared to the ad-hoc rate applied

7 ITA Nos.1236 & 1263/PUN/2015 A.Y.2009-10

by the approved valuer. The ld. DR prayed for dismissing the appeal of the

assessee.

7.1 The ld. DR further submitted that the order of the Commissioner of

Income Tax (Appeals) deserves to be modified qua the valuation of the

property. The Commissioner of Income Tax (Appeals) has erred in directing

that the cost of acquisition should be taken as three times more than that has

been determined by the Assessing Officer. The Assessing Officer had

determined the cost of acquisition on the basis of actual sale instance

whereas, the Commissioner of Income Tax (Appeals) has directed to increase

the value three folds merely on presumptive basis.

and have perused the orders of Authorities below. The assessee in appeal has

assailed the order of Commissioner of Income Tax (Appeals) on the legal issue

of re-opening of assessment as well as on merits of addition. One of the core

issue which has emerged from the submissions of the representatives of both

the sides and documents on record is the year of taxability of long term capital

gains. Whether the capital gains earned on sale of residential property is

taxable in the year of sale of such property i.e. assessment year 2009-10 or in

the year when the amount invested in approved Capital Gain Account Scheme

to claim exemption u/s. 54 is prematurely withdrawn i.e. before the elapse of

three years period as specified in sub section (1) to section 54 of the Act.

gain arising from sale of residential property in Capital Gain Account Scheme

within the prescribed period. However, the amount invested in Capital Gain

Account Scheme was withdrawn by the assessee in the period relevant to the

next assessment years i.e. assessment year 2010-11. Admittedly, the assessee

8 ITA Nos.1236 & 1263/PUN/2015 A.Y.2009-10

has offered capital gain arising from sale of residential property to tax in the

assessment year 2010-11. The contention of the Revenue is that the capital

gain is liable to be assessed to tax in the year in which the assessee has sold

the property i.e. assessment year 2009-10. Before proceeding further, it would

be relevant to refer to the provisions of section 54(2) of the Act which provides

the manner in which the capital gain is to be invested in Capital Gain Account

Scheme:

“[(2) The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilized by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be specified in, and utilized in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilized by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset : Provided that if the amount deposited under this sub-section is not utilized wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,— (i) the amount not so utilized shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and (ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.”

A bare perusal of the proviso to section 54 of the Act makes it clear that

the amount invested in Capital Gain Account Scheme not utilized wholly or

partly shall be charged to tax u/s.45 as the income of the previous year in

which the period of three years from the date of the transfer of the original

asset expires. In other words, unutilized part of the capital gains is liable to be

taxed in the year in which the period of three years as provided in section (1)

of section 54 comes to an end. In the present case, we find that the assessee

9 ITA Nos.1236 & 1263/PUN/2015 A.Y.2009-10

has invested capital gain in Capital Gain Account Scheme and has withdrawn

the same prematurely i.e. before the expiry of three years period.

the Act, the capital gains withdrawn by the assessee from Capital Gain

Account Scheme are liable to be taxed in the assessment year relevant to

previous year in which the same was withdrawn i.e. assessment year 2010-11.

The Assessing Officer has erred in holding that the capital gains accrued to

the assessee on sale of residential property is liable to be taxed in assessment

year 2009-10. Accordingly, we are of considered view that the Assessing

Officer has wrongly invoked the provisions of section 147 of the Act to re-open

the assessment for assessment year 2009-10 to tax the capital gains. Since

the Assessing Officer has erred in assessing capital gains in assessment year

2009-10, the re-opening of assessment is bad in law and thus, is liable to be

set aside. We hold and direct accordingly. Resultantly, the appeal of the

assessee is allowed.

appeal by the Revenue is dismissed.

Revenue is dismissed.

Order pronounced on Monday, the 18th day of June, 2018

Sd/- Sd/- (अ�नल चतुव�द� /ANIL CHATURVEDI) (�वकास अव�थी /Vikas Awasthy) लेखा सद�य/ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER

पुणे / Pune; �दनांक / Dated : 18th June, 2018 SB

10 ITA Nos.1236 & 1263/PUN/2015 A.Y.2009-10

आदेश क� ��त�ल�प अ�े�षत / Copy of the Order forwarded to : अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The CIT(Appeals)-13, Pune. 4. The CIT-IT/TP, Pune. 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, “बी” ब�च, पुणे / DR, ITAT, “B” Bench, Pune. गाड� फ़ाइल / Guard File. 6.

// True Copy // आदेशानुसार / BY ORDER,

�नजी स�चव / Private Secretary आयकर अपील�य अ�धकरण, पुणे / ITAT, Pune.