Section 54F Exemption Claim in Reassessment Proceedings, Matter Remanded for Verification

Issue: Whether an assessee can claim an exemption under Section 54F of the Income-tax Act, 1961, for the first time in a return filed in response to a reassessment notice under Section 148, and if so, whether the Assessing Officer is obligated to consider this claim on its merits.

Facts:

For the assessment year 2016-17, the assessee received sale consideration as his share of income from a housing society.
The entire sale consideration was reinvested in a residential flat by transferring it to a builder.
Crucially, the assessee did not declare this sale transaction in his original return of income.
The Assessing Officer (AO) issued a reopening notice under Section 148 on the ground that this amount of long-term capital gain (LTCG) was not offered for taxation in the original return.
In response to the Section 148 notice, the assessee filed a return declaring the said LTCG and, for the first time, claimed an exemption under Section 54F.
The AO disallowed the Section 54F claim, computed the LTCG, and raised a tax demand.

Decision: The matter was remanded back to the Assessing Officer. The High Court held that when an assessee raises a claim under Section 54F in a return of income filed in compliance with a notice under Section 148, it is obligatory on the part of the Assessing Officer to deliberate on the assessee’s entitlement to the exemption on merits. Since the AO had not had an occasion to deliberate upon the satisfaction of the requisite conditions under Section 54F, the matter was sent back for necessary verifications and to allow the claim in accordance with the law.

Key Takeaways:

Claim in Reassessment Proceedings: An assessee can introduce new claims, including exemptions like Section 54F, in a return of income filed in response to a Section 148 notice, even if these claims were not made in the original return.
AO’s Obligation to Consider Merits: When such a claim is made, the Assessing Officer is duty-bound to examine the claim on its merits and verify if the conditions for the exemption are met, rather than rejecting it solely because it was not made in the original return.
Principle of Natural Justice/Fairness: Denying an opportunity to substantiate a legitimate claim, especially when the assessment is reopened, would be against principles of fairness.
Remand for Factual Verification: If the AO has not had the opportunity to verify the conditions of the exemption, the matter will likely be remanded to allow for such verification and a decision based on the facts. This ensures that genuine claims are not rejected on technical grounds.

IN THE ITAT AHMEDABAD BENCH ‘C’

Rahul Monal Chokshi

National Faceless Assessment Centre

T.R. Senthil Kumar, Judicial member
and DR. BRR KUMAR, Vice president

IT Appeal No. 1494 (Ahd) of 2024
[Assessment Year 2016-17]

DECEMBER 31, 2024

Vartik Chokshi, A.R. for the Assessee. Rignesh Das, Sr. D.R. for the Revenue.

ORDER

T.R. Senthil Kumar, Judicial Member. – This appeal is filed by the Assessee as against the appellate order dated 12.07.2024 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, (in short referred to as “CIT(A)”), arising out of the reassessment order passed under section 147 r.w.s. 144B of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year 2016-17.

2. Brief facts of the case is that the assessee is an individual filed his Return of Income for the Asst. Year 2016-17 on 12-12-2017 declaring total income of Income of Rs. 5,95,430/-. The assessee received a sale consideration of Rs.1,40,00,000/- as his share of income from Mairushish Co-operative Housing Society, but the same was not offered for taxation which has escaped assessment within the meaning of Section 147 of the Act. Therefore the assessment was reopened by issuing notice u/s. 148 of the Act dated 31-03-2021.

3. In response, the assessee filed his Return of Income as declared in the original return but also claimed deduction u/s. 54F on long term capital gain of Rs.1,40,00,000/-. The Assessing Officer held though the assessee received the amount of Rs.1,40,00,000/- in his bank account on 10-05-2016. On perusal original Return of Income, the assessee has neither declared the income under LTCG nor also claimed exemption u/s. 54F of the Act and no documentary proof filed and no details of depositing the sale consideration in Capital Gains Account Scheme. Thus computed the long term capital gain and demanded tax thereon.

4. Aggrieved against the reassessment order, assessee filed an appeal before Ld. CIT(A) who has confirmed the addition made by the Assessing Officer on the ground that the sale consideration should have been deposited before the due date of filing of the return u/s. 139(1) of the Act in specified Capital Gains Account Scheme (CGAS) bank account with authorized banks and utilized in the manner prescribed under the Act. Thus dismissed the appeal filed by the assessee.

5. Aggrieved against the same, assessee is in appeal before us raising the following Grounds of Appeal:

1. In law and in the facts and circumstances of the appellant’s case, the reassessment notice issued u/s 148 of the Act is bad in law and deserves to be quashed

2. In law and in the facts and circumstances of the appellant’s case, the Ld. CIT(A) has erred in upholding disallowance of Assessee’s claim of deduction under section 54F of the Act for Rs.1,40,00,000/- The Ld. CIT(A) ought to be appreciated that the Appellant has duly fulfilled all conditions precedent to claim deduction under section 54F of the Income Tax Act and addition made by AO deserves to be deleted.

3. In law and in the facts and circumstances of the appellant’s case, the Ld. CIT(A) has erred in denying deduction u/s 54F claimed in return of income u/s 148 of the Act by holding that non- disclosure of claim of deduction under section 54F of the Act, in return of income filed under section 139(1) of the Act render the provisions of section 54F(4) of the Act as infructuous.

4. In law and in the facts and circumstances of the case, the Ld. CIT(A) has erred in dismissing the appeal of appellant without awarding opportunity of video hearing which was specifically requested by the appellant.

5. The Appellant craves leave to add to, amend or to raise any further ground(s) of appeal, as the case may arise.

6. Ld. Counsel Mr. Vartik Chokshi appearing for the assessee submitted that the assessee received the sale consideration of Rs. 1,40,00,000/- on 10-05-2016 and immediately reinvested on 17-05-2016 in a residential apartment namely Iskon Platinum bearing Apartment No. S-1901 having carpet area 33.20 Sq. Ft. for a sale consideration of Rs. 1,40,00,000/- and the Sale Deed was executed on 25-04-2017. Since the entire sale consideration was reinvested in a residential property within seven days, there is no question of depositing the capital gains amount in specified CGAS account. Further there is no question of escapement of income, since the entire sale consideration is reinvested in a residential flat within the provisions of Section 54F of the Act, therefore the reassessment itself is bad in law and liable to be quashed. In support of the same, assessee filed in its Paper Book bank statement of Kalupur Commercial Co-operative Bank wherein the receipt and payment of Rs. 1,40,00,000/- reflected and copy of the Sale Deed executed on 26-04-2017 also placed on record which clearly describes the payment of Rs.1,40,00,000/- through cheque payment on 17-052016.

7. Per contra, Ld. Sr. D.R. Shri Rignesh Das appearing for the Revenue supported the order passed by the Lower Authorities and pleaded that when the assessee failed to make a claim of deduction u/s. 54F in the original Return of Income, the same cannot be claimed in the reassessment proceedings. Therefore requested to uphold the order passed by the lower authorities.

8. We have given our thoughtful consideration and perused the materials available on record. It is clear from the bank statement filed by the assessee, the assessee received sale consideration of Rs.1,40,00,000/- on 10-05-2016 and the entire sale consideration was reinvested in a residential flat on 17-05-2016 by transferring it to the Builder. However the assessee has not declared the sale transaction in the original Return of Income but claimed for the first time the claim of exemption u/s. 54F of the Act in the reassessment proceedings. Since the assessee has made reinvestment of the entire sale consideration within seven days from the date of sale of the original Asset, the question of depositing the sale consideration/Capital Gain amount is specified CGAS account does not arise.

8.1. Further we have perused the statutory provision contemplated u/s 54F and are of the considered view that the same does not cast any statutory obligation on the part of assessee to file his return of income within the stipulated time period as contemplated u/s 139 or 148 of the ‘Act’, as a precondition for entitling him to claim exemption under the said statutory provision. Therefore, we are of the considered view that the reference to the term ‘due date’ for furnishing of return of income u/s, 139 as contemplated in section 54F(4) is in context of the time limit within which the amount which had not been appropriated by the assessee towards making of investment in the purchase and/or construction of the new residential house is permitted to be deposited in the ‘Capital Gains Account Scheme, 1988. Which thereafter is to be withdrawn and utilized as per the terms contemplated in the said statutory provision. Thus Section 54F, neither provides as a pre-condition the requirement of filing of the ‘return of income’ by the assessee within the stipulated time period, nor places any embargo as regards the claim of such exemption in a case the ‘return of income’ filed by the assessee involves some delay.

8.2. Similar issue came up before the Hon’ble High Court of Jammu and Kashmir in the case of Smt. Sneh Lata Jain v. CFT(Jammu & Kashmir), wherein Hon’ble High Court held that assessee being entitled to exemption us. 54F on the evidence produced before the Revisional Authority, the Revisional Authority ought to have considered the matter instead of rejecting the petition on technical grounds. The assessee being not liable to tax, imposition of tax on her was violative of Article 265 of the Constitution of India. Thus, ld. Assessing Officer was directed to reassess the taxable income after considering the benefit under Section 54F. The relevant finding of the Hon’ble High Court in this regard is extracted below:

“Though the assessing authority was not aware of the purchase of the property by the petitioner and proceeded on the basis of the admitted facts disclosed in the return, however, the revisional authority could not be oblivious of its duty to accept the contention of the assessee when the facts were brought to its notice about the capital gain being not chargeable to tax under law. What to say of its duty to advice the assessee the revisional authority rejected the contention of the petitioner only on technical grounds. When the substantive law confers a benefit on the assessee under a statute, it cannot be taken away by the adjudicatory authority on mere technicalities. It is settled proposition of law that no tax can be levied or recovered without authority of law. Article 265 of the Constitution of India and s. 114 of the State Constitution imposes an embargo on imposition and collection of tax if the same is without authority of law. Admittedly, on the basis of facts disclosed before the revisional authorities and this Court, the petitioner is not liable to tax on the capital gain. Once it is found that the petitioner has no tax lability, the respondents cannot be permitted to levy the tax and collect the same in contravention to Art. 265 of the Constitution of India, which provides a constitutional safeguard on levy and collection of tax. It is true that this Court is not to act as Court of appeal while exercising the writ jurisdiction, but at the same time where the admitted facts disclosed nonexercise of jurisdiction by an adjudicatory authority and a citizen is subjected to tax not payable by him, interference by this Court is warranted. The respondent No. 2 is directed to reassess the taxable income of the petitioner, by taking into consideration the benefit available to her under s. 54F of the IT Act and pass appropriate order.”

9. In the facts and circumstances of the case in our considered view, when the assessee had raised the claim u/s 54F in the ‘return of income’ filed by him in compliance to the notice u/s 148, it is obligatory on the part of the A.O to have deliberated on the entitlement of the assessee towards claim of exemption u/s 54F on merits whether this is the only residential property owned by the assessee, etc. Thus in light of our aforesaid observations, we hereby set aside the orders passed by the lower authorities. Since the A.O. has no occasion to have deliberated upon the satisfaction of the requisite conditions as contemplated u/s 54F of the Act as claimed by the assessee. Therefore, in all fairness we restore the matter to the file of J.A.O for making the necessary verifications and allow the claim in accordance with law.

10. In the result, the appeal filed by the Assessee is allowed for statistical purpose.