Reassessment Beyond Four Years Is Impermissible When All

Reassessment Beyond Four Years Is Impermissible When All Depreciation Details Were Fully Disclosed Under Scrutiny

Issue

Whether the Assessing Officer can validly issue a notice under Section 148 to reopen an assessment after the expiry of four years from the end of the relevant assessment year when the assessee had fully and truly disclosed all material facts regarding a change in depreciation method during the original scrutiny assessment under Section 143(3).

Facts

The assessee-company, engaged in processing and trading yarn, filed its return of income for AY 2012-13 on September 28, 2012, declaring an income of approximately ₹50.94 lakhs.
The case was selected for scrutiny, and a notice under Section 143(2) was issued calling for the tax audit report under Section 44AB and certified final accounts.
On May 16, 2014, the assessee submitted all requested documents, including audited financial statements, tax audit reports, and detailed notes on accounts.
The disclosures clearly detailed a change in the depreciation calculation method from Straight Line Method (SLM) to Written Down Value (WDV), the underlying accounting policy, and the charging of depreciation arrears to the profit and loss account (depreciation/amortization expense of ~₹2.28 crores and arrears of ~₹1.70 crores).
After examining the submitted records, the Assessing Officer completed the assessment under Section 143(3) on March 20, 2015, assessing total income at approximately ₹1.20 crores after making additions of about ₹69.26 lakhs.
On March 27, 2019—after the expiry of four years from the end of AY 2012-13—the Assessing Officer issued a reassessment notice under Section 148 alleging escapement of income.

Decision

Full Disclosure Verified: Held, yes. The assessee had fully and truly disclosed all material facts—including financial notes, accounting policy changes, and depreciation arrear calculations—during the original scrutiny assessment proceedings under Section 143(3).
Reassessment Notice Quashed: Held, yes. Under the proviso to Section 147, reopening an assessment after four years from the end of the relevant assessment year without any failure or omission on the part of the assessee to disclose material facts is impermissible, rendering the Section 148 notice invalid.

Key Takeaways

Protection Under First Proviso to Section 147: Reassessment initiated beyond the four-year mark requires explicit proof that the assessee failed to disclose primary material facts during the original assessment.
Prohibition on Change of Opinion: Once an Assessing Officer examines disclosed financial notes and tax audit records during Section 143(3) scrutiny, a subsequent reassessment on the same material constitutes an impermissible change of opinion.

IN THE ITAT BANGALORE BENCH ‘A’

GPFE Hosuing Co-operative Society Ltd.

Income-tax Officer

SOUNDARARAJAN K., Judicial Member
and Waseem Ahmed, Accountant Member

IT Appeal No. 827 (Bang.) of 2026
[Assessment year 2015-16]

JUNE 30, 2026

R.E. Balasubramanyam and Deepak Gunashekar, AR for the Appellant. N. Balusamy, JCIT (DR) for the Respondent.

ORDER

Waseem Ahmed, Accountant Member. – The present appeal has been instituted by the assessee against the order of the NFAC, Delhi passed u/s 250 of the Act dated 09.02.2026 relevant to AY 2015-16.

2. The ground Nos. 1, 2 and 3 of the appeal have not been pressed by the assessee before us. Therefore, the issues raised therein are hereby dismissed as not pressed.

3. The last issued raised by the assessee through Ground No. 4 is that learned CIT(A) erred in confirming the computation of capital gain by taking cost of acquisition at NIL.

4. The facts in brief are that the assessee is a housing society which was formed for the benefit of the members to get residential house. The layout was formed and the sites were registered in favour of the members in the year 1980. While forming the layout there were 2 sites remained in balance. As per the assessee, after a prolong discussion, the member agreed for sale of the 2 sites to outsider and utilise the sale proceeds for pending development in the layout.

4.1 The impugned 2 sites were sold during the year relevant to A.Y. 2015-16 for a consideration of Rs. 1.78 crores and Rs. 74 Lakh respectively. However, the assessee did not offer the sale proceeds of the impugned 2 sites to tax by contending that the receipts were in the nature of capital receipt of the society which is not taxable. Thus, the same was claimed as exempt in the return filed under section 148 of the Act.

4.2 However, the AO rejected the assessee’s claim and proceeded to compute the long-term capital gain on transfer of the impugned property. The AO noted that the assessee has not provided the details of cost of acquisition, hence the cost of acquisition was taken at NIL. Accordingly, the AO treated the entire sales consideration of 2 sites for Rs. 2.52 crores in aggregate as long-term capital gain and added the same to the total income of the assessee.

4.3 On appeal by the assessee, the learned CIT(A) confirmed the action of the AO by treating the entire sale consideration as capital gain without providing cost of acquisition.

5. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.

6. The learned AR before us filed a paper book running from pages 1 to 82 which comprises written submission, copy of computation of cost of acquisition, copy of guidance value of the land property for the year 1997 and 1998 in the locality of property sold, copy of sale deed, and copies of various case laws. The written submission of the learned AR reads as under:

The appellant is a society providing the benefit of availing residential sites to its members. The society developed sites for its members out of land allotted by BDA in the year 1977 and these sites were duly registered in the name of the members of the society. After this process, 2 sites remained with the society which were used by the society for its own use. During the previous year relevant to AY 2015-16, both these sites were sold by the appellant society for a consideration of Rs. 2,52,00,000.

The first property was sold by the Appellant Society to Sri Narayan Ram Patel and Sri Rana Ram Patel for a consideration of Rs. 74,00,000/- under sale deed dated 26.05.2014. The said property is described in the sale deed as Residential Vacant Site bearing No. 26, BBMP Khata No. 452/26, situated at Chikkabettahalli Village, Vidyaranyapura, Bangalore-560097, having New PID No. 003-M005-58, earlier vacant Site No. 26, carved out of Survey No. 30/1 of Chikkabettahalli Village, Yelahanka Hobli, Bangalore North Taluk, now within the revenue administrative jurisdiction of Bruhat Bangalore Mahanagara Palike, Bangalore, measuring 2320 square feet. The sale deed records that the Vendor Society had purchased the said schedule property under a sale deed dated 17.02.1994 and that the property was thereafter held and possessed by the Appellant Society.

The second property was sold by the Appellant Society to Sri C. Giriyappa for a consideration of Rs. 1,78,00,000/- under sale deed dated 03.11.2014. The said property is described in the sale deed as residential immovable property being vacant site bearing No. 920, PID No. 14-77-920, situated at 6th Main Road, West of Chord Road, 2nd Stage, Bangalore-560086, formed in Survey No. 164/1B of Kethamaranahalli Village, Yeshwanthpura Hobli, Bangalore North Taluk, within the revenue administrative jurisdiction of Bruhat Bangalore Mahanagara Palike, Ward No. 014, measuring 2035 square feet. The sale deed records that the Bangalore Development Authority had released sites to the Society vide letter dated 19.09.1977.

The Appellant respectfully submits that the above two properties were old and identifiable immovable properties of the Society as demonstrated by the sale deeds placed on record.

Therefore, while computing capital gains, if at all the receipts are held to be chargeable under that head, the cost of acquisition could not have been adopted at Nil merely because the Appellant could not produce all old cost records during the reassessment proceedings.

The Appellant Society is now defunct. The records relating to acquisition, allotment, development and retention of the sites pertain to a very old period. In view of lapse of time and the present defunct status of the Society, the Appellant is not in a position to obtain and produce exact historical cost details with mathematical precision.

For the year under appeal, the case was reopened on the basis that the Appellant had sold the above two immovable properties for an aggregate consideration of Rs. 2,52,00,000/- during the financial year 2014-15 and had also made investments in time deposits. The notice u/s 148 of the Act was issued on 29.03.2022. In response thereto, the Appellant filed its return of income on 26.04.2022 declaring total income of Rs. 2,45,592/-. In the said return, the sale proceeds were reflected as exempt income. Alternatively, if the transaction is to be examined under the head “Capital Gains”, the computation ought to be made only after allowing the cost of acquisition (or fair market value as on 01.04.1981), cost of improvement and transfer-related expenditure in accordance with law. The Ld AO completed the reassessment u/s 147 r.w.s 144B of the Act by assessing the total income at Rs. 2,54,45,592/- and raising a demand of Rs. 1,55,46,168/-. While doing so, the Ld AO brought to tax the entire sale consideration of Rs. 2,52,00,000/- as capital gains by adopting the cost of acquisition at Nil. The Ld AO proceeded essentially on the basis that the Appellant had not furnished documentary evidence for the cost of acquisition and had not established the provision under which the entire receipt was claimed as exempt. The Appellant carried the matter in appeal before the National Faceless Appeal Centre. The Ld. NFAC, by order dated 09.02.2026 passed u/s 250 of the Act, confirmed the action of the Ld. AO. Aggrieved by the same the appellant has come up in appeal.

The Appellant now humbly submits his arguments on the grounds raised against the impugned order as follows:

On the issue of incorrect adoption of cost of acquisition as Nil while computing capital gain

1.1 At the outset it is submitted that the Ld AO has treated the entire sale consideration of Rs. 2,52,00,000/- as capital gains by adopting the cost of acquisition at Nil. With respect, this approach is not in accordance with the scheme of sections 45 and 48. The two properties are identified in the sale deeds and were not assets that came into existence without any cost. The difficulty faced by the Appellant is essentially one of availability of very old records, since the Society is now practically defunct and the acquisition/development of the properties pertains to an old period. Such evidentiary difficulty cannot lead to the conclusion that the cost itself was Nil.

1.2

It is respectfully submitted that section 55 is directly relevant to the computation of capital gains in respect of old capital assets. For the assessment year under appeal, where a capital asset became the property of the assessee before 01.04.1981, the assessee is entitled, at its option, to adopt the fair market value as on 01.04.1981 as the cost of acquisition. The sale deed relating to the West of Chord Road property records that the Bangalore Development Authority had released sites to the Society vide letter dated 19.09.1977. Therefore, in respect of the said property, the Appellant is entitled to adopt the fair market value as on 01.04.1981 as the cost of acquisition and to claim indexation thereon in accordance with law.

1.3

Insofar as the Vidyaranyapura property is concerned, the sale deed records that the Vendor Society had purchased the schedule property under an earlier sale deed dated 17.02.1994. Therefore, unless any further old document demonstrates that the property became the property of the Appellant before 01.04.1981, the Appellant respectfully submits that at the minimum the actual cost of acquisition relatable to the 1994 acquisition, together with any allowable cost of improvement and transfer expenses, must be verified and granted. The Ld AO could not have adopted the cost as Nil merely because the Appellant was unable to produce complete old records during reassessment proceedings.

1.4

The property under consideration was acquired much prior to 01.04.1981 and, therefore, for the purposes of computation of long-term capital gains, the fair market value as on 01.04.1981 is required to be determined. Since no guidance value, Circle rate or other statutory benchmark is available for the relevant area as on 01.04.1981, and even the earliest officially available guidance value pertains only to the financial year 1996-97, the fair market value as on 01.04.1981 has been arrived at by adopting the guidance value available for 1996-97 and working backwards on the basis of the Cost Inflation Index. This approach provides a rational and objective mechanism for estimating the value as on the statutory base date in the absence of direct contemporaneous evidence.

1.5

The methodology adopted is commonly referred to as the “time-gap method” or “reverse indexation method”. Under this method, a known value pertaining to a later year is adjusted backwards by applying the Cost Inflation Index in reverse so as to arrive at the corresponding value as on the earlier date. The method derives support from the scheme of section 48 itself, which recognises inflation as a significant factor affecting property values and provides a statutory indexation mechanism for neutralising the impact of inflation in the computation of capital gains.

1.6

Judicial support for this approach is available from the decisions of the Jodhpur Bench of the Income-tax Appellate Tribunal. In Deen Dayal Rathi v. ITO (ITA No.108/Jodh/2013), the Tribunal accepted the application of the time-gap or reverse indexation method for determining the fair market value as on 01.04.1981. The said decision was subsequently followed by the Jodhpur Bench in DCIT v. Rajendra Kumar Singhvi (ITA No.313/Jodh/2010), wherein the Tribunal specifically noted that the issue stood covered by its earlier decision in Deen Dayal Rathi and upheld the adoption of the reverse indexation methodology for estimating the fair market value as on 01.04.1981.

1.7

The rationale underlying the aforesaid decisions is that where reliable market evidence is unavailable for the valuation date, a scientific and objective backward-working exercise based on recognised inflation indices constitutes a reasonable method of estimation. The approach avoids arbitrary valuation and ensures that the determination is linked to verifiable market data available for a later period. In circumstances where the earliest available guidance value itself arises several years after the statutory valuation date, reverse indexation represents a fair and reasonable basis for arriving at the historical value.

1.8

Accordingly, in the present case, the fair market value as on 01.04.1981 has been computed by adopting the earliest available guidance value for the financial year 1996-97 and applying the Cost Inflation Index in reverse. The resulting value represents a bona fide estimate founded upon an objective methodology recognised in judicial precedents and is therefore liable to be accepted for the purposes of computation of long-term capital gains. The Appellant has sold 2 properties during the year – 1 in Kethmaranahalli which was acquired in 1977 and another in Chikkabettahalli which was acquired in 1994. The computations for both these properties has been made by using the reverse indexation method.

1.9

In common practice, it is found that the actual market value of properties is consistently higher than the guidance value notified by the Govt. Accordingly, it is humbly submitted that it is assumed that the market value was merely 25% above the guidance value for the purposes of our computation of the estimated market value as on 01-04-1981 for the property located at Kethmaranahalli. The same method is used for computation of the estimated market value as cost of the property acquired in 1994 in Chikkbettahalli since the property was purchased over 30 years ago and the records are unable to be treaced. Accordingly, the cost for this property has also been computed by reverse computing the cost in 1994 based on the guidance value in 1998. The computation for both the properties has been attached herewith as Annexure -1 for your kind perusal.

1.10

At this juncture, reliance is placed on the decision of the Honourable Bangalore Bench of the Tribunal in Shri C.H. Prahalada Rao v. DCIT, ITA No.1152/Bang/2009, order dated 17.09.2010 wherein the Tribunal considered the fair market value as on 01.04.1981 of a property situated in Jayanagar, Bangalore. After considering the material placed before it, the Tribunal adopted fair market value at Rs. 200/- per square foot as on 01.04.1981. The said decision is respectfully relied upon not as a rigid rule of valuation but as a persuasive jurisdictional precedent showing that, in respect of developed Bengaluru localities, a reasonable fair market value as on 01.04.1981 must be adopted on the basis of surrounding facts and comparable material.

1.11

The Appellant respectfully submits that the computation may kindly be accepted or, in the alternative, the Ld. AO may be directed to consider the computation furnished by the Appellant for cost of acquisition by estimating the market value of the property as on 01.04.1981 for the West of Chord Road property and the actual or estimated acquisition cost for the Vidyaranyapura property, together with indexation and allowable transfer expenses, in accordance with law.

7. On the contrary, the learned DR supported the orders of the lower authorities and submitted that the assessee failed to furnish any evidence regarding the cost of acquisition despite adequate opportunities. In the absence of supporting records, the AO was justified in adopting the cost at Nil. However, if additional material is produced, the matter may be remanded to the AO for verification as per law.

8. We have heard the rival submissions of both the parties and perused the materials available on record. The only effective issue which survives for our consideration is whether the lower authorities were justified in computing the capital gain by adopting the cost of acquisition of the two sites at Nil.

8.1 The relevant facts are not in dispute. The assessee is a housing cooperative society. It was formed for providing residential sites to its members. The layout was formed and sites were registered in favour of the members in the year 1980. According to the assessee, after formation of the layout, two sites remained with the society. These two sites were sold during the year relevant to A.Y. 2015-16 for consideration of Rs. 1.78 crores and Rs. 74 lakhs respectively. The assessee did not offer the sale proceeds to tax by claiming that the receipts were capital receipts of the society and not taxable. The AO rejected the claim and proceeded to compute long-term capital gain. Since the assessee could not furnish old records relating to the cost of acquisition during reassessment proceedings, the AO adopted the cost of acquisition at Nil and brought the entire sale consideration of Rs. 2.52 crores to tax as long-term capital gain.

8.2 The learned CIT(A) also confirmed the action of the AO. Thus, the grievance of the assessee before us is limited to the computation of capital gain and, more particularly, to the denial of cost of acquisition.

Before us, the learned AR submitted that the two properties were old and identifiable immovable properties of the assessee society. The first property situated at Chikkabettahalli/Vidyaranyapura was sold for Rs. 74 lakhs under sale deed dated 26.05.2014. The sale deed records that the said property was earlier purchased by the assessee society under sale deed dated 17.02.1994. The second property situated at West of Chord Road/Kethamaranahalli was sold for Rs. 1.78 crores under sale deed dated 03.11.2014. The sale deed records that the Bangalore Development Authority had released sites to the society vide letter dated 19.09.1977.

8.3 The learned AR further submitted that the assessee society is now defunct and the records relating to acquisition, allotment, development and retention of the sites are very old. Therefore, the assessee is not in a position to produce exact historical cost records. However, it was submitted that this difficulty in producing old records cannot lead to the conclusion that the cost of acquisition of the properties was taken as Nil. We find substantial force in the above contention of the assessee. It is not the case of the Revenue that the two properties came into existence without any cost. It is also not the case of the Revenue that the properties were not owned by the assessee or that the sale deeds relied upon by the assessee are not genuine. Once the properties are identifiable and the sale deeds themselves show their old acquisition or release in favour of the society, the cost of acquisition cannot be mechanically taken at Nil merely because complete old records could not be produced during reassessment proceedings.

8.4 The computation of capital gains has to be made in accordance with sections 45, 48 and 55 of the Act. Section 48 contemplates deduction of cost of acquisition, cost of improvement and expenditure incurred wholly and exclusively in connection with transfer while computing capital gains. Section 55 further provides for adoption of fair market value as on the statutory base date, where applicable, in respect of old capital assets. Therefore, once transfer of capital asset is brought to tax under the head “Capital Gains”, the AO is duty bound to compute the gain in the manner prescribed under the Act. The entire sale consideration cannot be treated as capital gain unless the law permits such computation on the facts of the case.

8.5 In the present case, the West of Chord Road/Kethamaranahalli property appears to have been connected with BDA released in the year 1977. Therefore, for this property, the assessee’s claim for adoption of fair market value as on 01.04.1981 requires proper verification. In respect of the Chikkabettahalli/Vidyaranyapura property, the sale deed records acquisition under sale deed dated 17.02.1994. Therefore, at least the actual or estimated cost relatable to the acquisition in the year 1994, together with eligible indexation and allowable expenses, requires examination. The AO was not justified in rejecting the entire claim only on the ground that the assessee could not produce all old cost records.

8.6 We also note that the assessee has furnished a computation of cost of acquisition by applying reverse indexation method. The contention of the assessee is that guidance value or circle rate as on 01.04.1981 was not available and that the earliest available guidance value pertained to later years. Therefore, the assessee has worked backwards from the available guidance value by applying the Cost Inflation Index in reverse. This method, according to the assessee, is also known as the time-gap method or reverse indexation method.

8.7 In our considered view, where direct evidence of fair market value as on the relevant historical date is not available, a reasonable estimation has to be made on some rational and objective basis. The reverse indexation method can be one of the possible methods for such estimation, particularly where reliable guidance value of a later year is available, and no direct contemporaneous evidence exists for the base date. Such method cannot be rejected at the threshold. However, the correctness of the base guidance value, locality, area, nature of property, applicable Cost Inflation Index, percentage enhancement over guidance value, and arithmetical working must be verified by the AO.

8.8 The assessee has also relied upon the decisions of the Jodhpur Bench of the Tribunal in Deen Dayal Rathi v. ITO [IT Appeal No. 108 (Jodh) of 2013, dated 4-4-2013] and Dy. CIT v. Rajendra Kumar Singhvi [IT Appeal No. 313 (Jodh) of 2010, dated 10-7-2013], wherein the reverse indexation/time-gap method was accepted for estimating fair market value as on 01.04.1981. The assessee has further relied upon the decision of the Bangalore Bench of the Tribunal in C.H. Prahalada Rao v. Dy. CIT [IT Appeal No. 1152 (Bang) of 2009, dated 17-9-2010], wherein fair market value of a Bengaluru property as on 01.04.1981 was considered. These decisions support the broad proposition that historical cost or fair market value cannot be arbitrarily ignored and that reasonable estimation is permissible where exact evidence is not available.

8.9 At the same time, we are of the view that this Tribunal should not straightaway accept the computation furnished by the assessee without verification of the underlying documents and working. The assessee has placed reliance on guidance value of land for later years and has applied reverse mechanism to arrive at estimated cost. These are matters requiring factual verification. The AO is the proper authority to examine the guidance value, the relevant year of acquisition, the Cost Inflation Index used, and the allowability of transfer-related expenditure, if any.

8.10 Therefore, in the interest of justice and fair play, we deem it proper to restore the issue to the file of the AO for the limited purpose of determining the correct cost of acquisition of the two properties. The AO shall examine the computation furnished by the assessee. The AO shall also consider the applicability of reverse indexation/time-gap method in the facts of the case in accordance with law.

8.11 Needless to say, the AO shall provide adequate opportunity of being heard to the assessee. The assessee shall be at liberty to file all relevant documents, including sale deeds, guidance value certificates, valuation material, computation working and any other supporting evidence. The AO shall consider the same objectively and pass a speaking order limited to the determination of cost of acquisition, indexation and consequential re-computation of capital gains. The AO shall not revisit the grounds which have been dismissed as not pressed. Accordingly, Ground No. 4 of the assessee’s appeal is partly allowed for statistical purposes.

8.12 The assessee has also filed additional grounds of appeal vide application dated 25^th May 2026 which reads as under:

Without prejudice to the above grounds, the Ld. CIT(A) failed to appreciate that the Ld. AO ought to have restricted the levy of interest u/s 234A only upto 31-03-2017, being the last date on which a valid return u/s 139(4) could have been furnished for AY 2015-16, and the interest charged beyond the said date is liable to be deleted.

8.13 The learned AR submitted that the additional ground raised by the assessee is a pure question of law relating to the levy and computation of interest u/s 234A of the Act. It was contended that all the relevant facts necessary for adjudication of the issue are already available on record and, therefore, no fresh investigation of facts is required. The learned AR further submitted that the omission to raise the ground earlier was neither wilful nor deliberate. Reliance was placed on the decisions of the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT 229 ITR 383 (SC) and other judicial precedents to contend that a legal ground going to the root of the tax liability can be raised at any stage of appellate proceedings. Accordingly, it was prayed that the additional ground may kindly be admitted and adjudicated on merits.

9. On the other hand, the ld. DR raised no objection on admissibility of the impugned additional ground of appeal filed by the assessee.

10. We have carefully considered the application filed by the assessee seeking admission of the additional ground of appeal and have also heard the rival submissions on the issue. The additional ground raised by the assessee challenges the levy of interest u/s 234A of the Act on the contention that such interest ought to have been restricted only up to 31.03.2017, being the last date on which a valid return of income could have been furnished u/s 139(4) of the Act for A.Y. 2015-16. According to the assessee, the levy of interest beyond the said date is contrary to law and requires appropriate adjudication.

10.1 We find that the issue raised through the additional ground is a pure legal issue arising from the facts already available on record. No fresh investigation of facts is required for adjudication of the issue. The relevant dates relating to issuance of notice u/s 148 of the Act, filing of return of income and computation of interest are already part of the assessment records. Therefore, determination of the issue would only require examination of the legal implications arising from the admitted facts already on record.

10.2 It is well settled by a catena of judicial precedents that an additional ground involving a pure question of law and not requiring further investigation into new facts can be raised at any stage of appellate proceedings. The Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. (Supra) has held that the Tribunal has jurisdiction to examine a question of law arising from the facts as found by the authorities below and having a bearing on the tax liability of the assessee, even though such question was not raised before the lower authorities. Similar principles have been reiterated in various decisions relied upon by the assessee in the application seeking admission of the additional ground.

10.3 In the present case, the ground raised goes to the correctness of the computation of interest and consequently affects the tax liability of the assessee. Since all material facts necessary for adjudication of the issue are already available on record, no prejudice would be caused to the Revenue by admission of the additional ground of appeal raised by the assessee. Considering the totality of facts and circumstances of the case and respectfully following the principles laid down by the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. (supra), we admit the additional ground raised by the assessee for adjudication on merits.

10.4 The issue raised in additional grounds relates to the levy and computation of interest u/s 234A of the Act. In the present case, the notice u/s 148 of the Act was issued to the assessee on 29.03.2022. In response to the said notice, the assessee filed its return of income on 26.04.2022. Thus, the return of income for the year under consideration was filed for the first time only in response to notice issued u/s 148 of the Act. By that time, the statutory time available for filing the return of income u/s 139 of the Act had already expired.

10.5 While completing the reassessment, the AO levied interest u/s 234A of the Act. The assessee has challenged the levy and computation of such interest on the ground that interest u/s 234A cannot be charged for the entire intervening period during which the assessee was not legally enabled to file a valid return of income. According to the assessee, once the time limit u/s 139 had expired, and before issuance of notice u/s 148 of the Act, there was no operative statutory mechanism available to the assessee to furnish a valid return for the relevant assessment year. Therefore, the assessee cannot be treated as being in continuing default for such entire intervening period.

10.6 The learned AR submitted that the levy of interest u/s 234A of the Act is not automatic in the manner computed by the AO. It was submitted that section 234A proceeds on the basis that there is a default in furnishing the return of income within the time available under the Act. Therefore, the default must be a legal default and must be attributable to the assessee. It cannot be presumed for a period during which the assessee had no legal means to file a valid return of income.

10.7 The learned AR submitted that in the present case, the original statutory time for filing the return of income had already expired. Thereafter, until the issuance of notice u/s 148 of the Act on 29.03.2022, the assessee had no statutory avenue to file a valid return of income for the relevant assessment year. Therefore, the assessee could not have been treated as being in default for the entire intervening period. The law does not compel a person to do an act which is impossible in law. Hence, where the assessee was not legally enabled to file a valid return, interest u/s 234A cannot be levied by treating the assessee as being in continuing default.

10.8 It was further submitted that the nature of interest u/s 234A is compensatory. The object of the provision is to compensate the Revenue for delay in filing the return where such delay is legally attributable to the assessee. However, the provision cannot be used to charge interest for a period during which no valid return could have been filed by the assessee. In the present case, the assessee filed the return in response to the notice issued u/s 148 of the Act. Therefore, the computation of interest cannot proceed on the assumption that the assessee remained in default for the entire period from the original due date u/s 139 up to the date of filing of return in response to the notice issued u/s 148 of the Act, without first examining whether the assessee could have filed a valid return during such period.

10.9 The learned AR contended that the assessee cannot be penalised or burdened with interest for a period during which performance was not legally possible. Once the time limit for filing a return u/s 139 had expired, and until the reassessment notice was issued, the assessee could not suo motu file a valid return for the year under appeal. Therefore, charging interest for such period would be contrary to the compensatory character of section 234A of the Act.

10.10 The learned AR placed reliance on the decision of the Mumbai Bench of the Tribunal in Ms. Priti Pithawala v. ITO (Mag.) (Mum-Trib), wherein the Tribunal applied the principle of lex non cogit ad impossibilia, meaning that the law does not compel a person to do what is impossible. It was submitted that in the said case, the Tribunal held that the assessee could not be made liable to pay interest for the period during which it was not possible to file a valid return until issuance of notice u/s 148 of the Act.

10.11 The learned AR further relied on the decision of the Jodhpur Bench of the Tribunal in ITO v. Amar Chand Boarad [2013](Jodhpur-Trib), wherein the Tribunal upheld the direction to recompute interest u/s 234A by excluding the period during which the assessee could not have filed a valid return.

10.12 The learned AR also placed reliance on the decision of the Ahmedabad Bench of the Tribunal in Indu Rohitkumar Pathak v. ITO [IT Appeal No. 552 (Ahd) of 2022, dated 19-4-2023]. It was submitted that the said decision also related to A.Y. 2015-16 and the Tribunal followed the decisions in Ms. Priti Pithawala (Supra) and Amar Chand Boarad (Supra). The Tribunal held that where the return was filed in response to notice u/s 148 of the Act, interest u/s 234A should not be charged from the due date u/s 139 for the entire intervening period.

10.13 Accordingly, the learned AR submitted that the facts of the present case are materially similar. The return was filed for the first time in response to notice issued u/s 148 of the Act and the assessment was made for the first time pursuant to reassessment proceedings. Therefore, interest u/s 234A of the Act should be recomputed by excluding the period during which the assessee could not have filed a valid return of income. The learned AR prayed that the AO may be directed to recompute the interest u/s 234A of the Act in accordance with the above judicial precedents and grant of consequential relief to the assessee.

11. The learned DR per contra strongly supported the orders of the AO and the learned CIT(A). It was submitted that interest u/s 234A of the Act is mandatory in nature and is leviable whenever there is a failure to furnish the return of income within the prescribed time. The learned DR contended that the assessee had admittedly not filed the return of income within the due dates prescribed under the Act and, therefore, the AO was justified in levying interest u/s 234A of the Act.

12. We have carefully considered the rival submissions and perused the materials available on record. The issue arising for our consideration is whether interest u/s 234A of the Act has been correctly levied in the peculiar facts of the present case where the return of income was filed for the first time only in response to the notice issued u/s 148 of the Act.

The undisputed facts are that the assessee did not file any return of income within the time prescribed under section 139 of the Act. Subsequently, notice u/s 148 of the Act was issued on 29.03.2022. In response thereto, the assessee filed its return of income on 26.04.2022 and the assessment came to be completed pursuant to such reassessment proceedings. The grievance of the assessee is that interest u/s 234A has been charged for the entire period commencing from the original due date for filing the return under section 139 of the Act till the date of filing of return in response to the notice issued u/s 148 of the Act.

12.1 At the outset, we note that interest u/s 234A is compensatory in nature. The object of the provision is to compensate the Revenue for delay in furnishing the return of income where such delay is attributable to the assessee. However, while computing such interest, it is equally necessary to examine whether the assessee was legally in a position to furnish a valid return during the period for which interest is sought to be levied.

12.2 In the present case, once the time available for filing a return under section 139 and section 139(4) of the Act had expired, there was no statutory mechanism available to the assessee to furnish a valid return of income for the relevant assessment year. The assessee acquired the legal right to furnish a return only upon issuance of notice u/s 148 of the Act. Therefore, the question which arises is whether the assessee can be treated as being in continuing default during the interregnum period when the law itself did not permit filing of a valid return.

12.3 In our considered view, the answer has to be in the negative. A person cannot be fastened with consequences for failure to perform an act which was not legally possible to perform. The well-established legal maxim lex non cogit ad impossibilia, namely that the law does not compel a person to do that which is impossible, squarely applies to the facts of the present case. Once the statutory period for filing a valid return had expired, the assessee could not have suo motu filed a valid return until notice u/s 148 was issued. Therefore, treating the assessee as being in default throughout such period would amount to attributing a legal default where none could exist in law.

12.4 We find support for the above view from the decision of the Mumbai Bench of the Tribunal in the case of Ms. Priti Pithawala (Supra), wherein the Tribunal held that interest u/s 234A of the Act cannot be charged for the period during which it was not possible for the assessee to file a valid return and applied the principle that law does not compel performance of an impossible act. The relevant finding of tribunal is extracted as under:

14. The only dispute posed before me pertains to the period for which the interest is to be charged. The contention of the learned counsel was that the assessees should not be made liable to pay interest for the period during which it was not possible on their part to file the returns. Having regard to the facts of the present case and considering the precedents relied upon; I find sufficient force in the contention of the learned counsel on this aspect. I direct the Assessing Officer to recompute the interest in the light of the aforesaid discussion. Accordingly on this aspect I set aside the impugned orders and restore the matter to the file of Assessing Officer, with direction to make fresh computation, after providing adequate opportunity to the assessees of being heard.

12.5 Similar view was taken by the Jodhpur Bench of the Tribunal in the case of Amar Chand Boarad (Supra), wherein recomputation of interest u/s 234A was directed after excluding the period during which the assessee could not have filed a valid return.

12.6 We further notice that the Ahmedabad Bench of the Tribunal in the case of Indu Rohitkumar Pathak (Supra), while dealing with an identical assessment year, namely A.Y. 2015-16, followed the aforesaid decisions and held that where the return was filed in response to notice issued u/s 148 of the Act, interest u/s 234A of the Act should not be charged for the entire intervening period from the original due date prescribed under section 139 of the Act.

12.7 The Revenue has not brought on record any contrary binding judicial precedent. We find that the ratio laid down in the aforesaid decisions is directly applicable to the facts of the present case. The return of income was admittedly filed for the first time pursuant to notice issued u/s 148 of the Act and the assessment was framed pursuant to reassessment proceedings. Therefore, charging interest u/s 234A of the Act for the entire intervening period during which the assessee could not have filed a valid return would be contrary to the compensatory nature of the provision and inconsistent with the legal principle recognised in the above decisions.

12.8 Accordingly, respectfully following the decisions of the coordinate benches referred to above, we hold that the assessee cannot be saddled with interest u/s 234A for the period during which filing of a valid return was not legally permissible. We therefore direct the AO to recompute the interest leviable u/s 234A of the Act by excluding the period during which the assessee could not have furnished a valid return of income in accordance with law. The AO shall grant consequential relief to the assessee while giving effect to this order. Accordingly, the additional ground raised by the assessee is allowed.

13. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.