B.V. SATYANARAYANA RAO,MALUR vs. CIT, BANGALORE

Facts apropos are that assessee a document writer, had filed his return for the impugned assessment year declaring income of Rs.1,62,510/-. During the course of assessment proceedings, AO noted that assessee had omitted to include his transactions in an account with Canara Bank, Malur, in his accounts. Assessee stated that there was a cash deposit of Rs.30,90,000/- in the said account which came out of sale of four sites not disclosed in the return of income. Assessee thereafter offered Rs.11,58,289/- as short term capital gains and Rs.5,55,525/- as long-term capital gains after claiming exemption u/s.54F of the Act, for investment in a residential property. AO thereafter completed the assessment making addition for short-term and long-term capital gains.

On 20.02.2012, CIT issued a notice u/s.263 of the Act, inter alia stating that AO had not verified the nexus between sale consideration of the sites as appearing in the respective conveyance deeds and the cash deposits appearing in the bank account. Further, as per the CIT assessee had not deposited the capital gains not used for acquiring the new asset in a bank account as specified u/s.54(2) of the Act. CIT also noted that assessee ITA.976/Bang/2014 Page - 3 would not be eligible for the claim of exemption u/s.54F of the Act since the admission of capital gains was after detection by the Department and not voluntary. Assessee made a reply to the above notice stating that the SB account with Canara Bank, Malur was placed before the AO, who had considered it before completing the assessment. Further as per the assessee, sale of two of the sites for Rs.15 lakhs was made on 06.06.2008 prior to the investment in residential properties made on 06.08.2008 and 13.08.2008. Assessee also pointed out that it had produced the sale deeds of the sites before the AO and the AO was satisfied that the source of amounts deposited with the Canara Bank account was the sale proceeds. As per the assessee, there were four sites which were sold and the total realisations therefrom was Rs.30.36 lakhs.

However, CIT was not impressed with the above reply. According to him assessee had sold two sites on 24.07.2008 for Rs.15 lakhs. Purchase of one residential house for Rs.2,18,000/- was done by the assessee on 13.03.2008 and another house for Rs.6,84,000/- on 06.08.2008. Relying on clause (ii) of proviso (a) to Section 54F(1) of the Act, CIT held that assessee had purchased one another residential house within one year from the date of transfer of the original asset thereby disentitling it from claim of ITA.976/Bang/2014 Page - 4 deduction u/s.54F of the Act. Further as per the CIT it was difficult to establish nexus between cash deposits and sale of sites in the absence of corroborative evidence. He thus held the assessment order erroneous and prejudicial to the interests of Revenue. Exercising the powers vested on him u/s.263 of the Act, he remitted the case back to the AO for redoing the assessment as per his directions.

Now before us, Ld. AR strongly assailing the order of CIT submitted that the notice u/s.263 of the Act and the final order u/s.263 of the Act were at total variance. According to him, the first issue raised by CIT in the notice was that assessee had not deposited the sale consideration in bank before appropriating it for purchase of the new asset. However, in the final order u/s.263 of the Act, there is no finding adverse to the assessee on this point. Secondly, according to the Ld. AR, AO had carefully considered assessee’s explanation that deposits in the bank account were out of consideration received from sale of four sites and was satisfied. CIT, as per the Ld. AR, was only trying to make a roving enquiry in the guise of exercise of powers u/s.263 of the Act. Further as per the Ld. AR, the view taken by the CIT in the notice that exemption u/s.54F of the Act would not be available to the assessee since capital gains were returned after detection ITA.976/Bang/2014 Page - 5 by the assessee, had no legal leg to stand. Even otherwise, as per the Ld. AR this was not appearing in the final order passed by the CIT u/s.263 of the Act. Reliance was placed on the judgment of Hon’ble Mumbai High Court in the case of CIT v. Fine Jewellery (India) Ltd [ITA.296 of 2013, dt.03.02.2015] and also that of Hon’ble Delhi High Court in the case of CIT v. Ashish Rajpal (320 ITR 674).

Per contra, Ld. DR submitted that AO had not done the enquiry as required under the law for correlating the deposits in the bank account with the sale of the assets. Further according to him once an assessee purchased one another residential property either within a period of two years from the date of transfer or within a period of one year prior to the date of transfer, then he could no more claim deduction u/s.54F of the Act, by virtue of sub-section (1) thereon. Thus according to him order passed by AO was erroneous and prejudicial to the interests of Revenue and CIT was justified in taking the view.

We have perused the orders and heard the rival contentions. Notice issued by the CIT u/s.263 of the Act is reproduced here under :

Relevant part of the original assessment order in which the issue regarding the deposits in the Canara Bank account of the assessee has been dealt with by the AO, is reproduced hereunder : “During the course of assessment proceedings, the assessee was asked to furnish the transactions made in Canara bank, Malur. The assessee's Authorised Representative told that the assessee had omitted ITA.976/Bang/2014 Page - 7 the accounts of this bank inadvertently while preparing the accounts. The Authorised Representative stated that the cash deposit of Rs.30,90,000/- in Canara Bank, Malur Branch was on account of sale of four sites which had not been disclosed in the return of income inadvertently. The assessee and his Authorised Representative agreed to offer Rs.11,58,289/- as Short term Capital gains and Rs.5,55,525/- as Long term Capital gains (after indexation and considering the re-investment in residential house property and allowing exemption u/s 54F of the IT Act. 1961) vide the assessee's letter dated 12/10/2011.”

What we find is that AO had done an enquiry and accepted the claim of the assessee that the deposit of Rs.30.90 lakhs in Canara Bank had come out of the sale of four sites. The capital gains arising from such sales though not returned by the assessee in his return of income was admitted during the course of assessment proceedings, pursuant to AO seeking source of deposits in assessee’s Canara Bank account. To take a presumption that an item which has been discovered by the AO during the course of assessment proceedings for which explanations were given by the assessee and which explanations were accepted, were so accepted, without enquiry, would be naive. It is not a case where assessee had returned an amount and the AO had omitted to consider its admissibility or otherwise. It is a case where AO had discovered deposits in the bank account which were explained by the assessee to be out of sale of four sites. It is an ITA.976/Bang/2014 Page - 8 admitted position that the sale deeds of the sites were produced by the assessee before the AO. In the face of this, to say that the AO had not done any enquiry would be incorrect. At the best it can be a case of enquiry not to the satisfaction of the CIT. It cannot be denied that an enquiry was done by the AO. As to the question whether claim of exemption u/s.54F of the Act, was available to the assessee, notice issued by CIT simply mentions that section 54F of the Act could not be allowed since assessee had returned capital gains after the detection. There is nothing in law which prevents an assessee to claim an exemption, for a reason that the claim of exemption had its genesis on a discovery done by the Revenue, earlier not disclosed by the assessee. In any case in the final order u/s.263 of the Act, CIT has simply stated that assessee was not eligible for claim u/s.54F(1) of the Act, in view of proviso (a). Proviso (a) to sub-section (1) of Section 54F is reproduced hereunder :

In the result, appeal of the assessee is allowed.