ITAT remanded matter to AO for fresh consideration of exemption u/s 54 (of Income Tax Act, 1961)

1. The assessee filed its return of income for Asst. year 2007-08 on 27/03/2008 declaring total income of Rs. 87,770/- The return was processed u/s 143(1) (of Income Tax Act, 1961) and the case was subsequently taken up for scrutiny. The assessment was concluded u/s 143(3) (of Income Tax Act, 1961) accepting the income of Rs. 87,770/- as declared by the assessee in his return of income. Assessee sold a flat for Rs. 39,50,000/-, the capital gains chargeable to tax was worked out at Rs. 27,08,107/- which was entirely claimed to be exempt u/s 54 (of Income Tax Act, 1961) on the ground that the assessee had purchased a flat on 09/06/2008 for a consideration of Rs. 27 lakhs. AO allowed the exemption.

2. CIT(A) held that the AO did not examine the correctness or genuineness of the factual and legal aspects assessee's claim for exemption u/s 54 (of Income Tax Act, 1961) at all and granted the exemption without any application of mind. It disallowed the exemption.

3. On appeal, the ITAT held as under:

"4. In the light of the above proportions, if we examine the material on record, we find that the exercise of jurisdiction u/s 263 (of Income Tax Act, 1961) was called for in the case on hand as the AO has accepted the assessee's claim for exemption u/s 54 (of Income Tax Act, 1961) without making any investigation or inquiry to ascertain the veracity of the claim made, which in our considered view he failed to do. While it is true that the assessee has no control over the AO for passing the order of assessment which is the prerogative of the AO, the assessee has failed to demonstrate that the AO had issued any show cause notice in respect of its claim for exemption u/s 54 (of Income Tax Act, 1961) and that he has filed a reply in this regard. If this discussion is not discernible from the order of assessment on a particular issue, then in order to ascertain whether the AO has applied his mind or not to the concerned issue at hand, the higher forum can go through the show cause notice, if any, issued by the AO and the reply given by the assessee, that would indicate that though the assessment order is silent, the issue must have been discussed in the course of assessment proceedings. In the case on hand, we find that no such material is available to show that the AO examined the veracity of the assessee's claim for exception u/s 54 (of Income Tax Act, 1961). The Hon'ble Apex Court in the case of Malabar Industries Co Vs. CIT (243 ITR 83) has observed that acceptance of accounting entries as it is, without causing any inquiry by the AO would render the order erroneous and prejudicial to the interest of revenue. In our considered view, the Ld. CIT has considered all these aspects while taking action u/s 263 (of Income Tax Act, 1961).

5. We are, however, of the view that the Ld. CIT ought to have set aside the order of the AO and remanded the issue of the assessee's claim for exemption u/s 54 (of Income Tax Act, 1961) for fresh consideration; ought not to have directed the AO to revise the order of assessment by directing the AO to withdrew the exemption allowed to the assessee u/s 54 (of Income Tax Act, 1961) and reverse the assessment by bringing to tax the entire capital gains resulting from the sale of flat at 'Shiv Kailash' on 26/12/2006. We therefore modify the impugned order of the Ld. CIT and hold that the direction of the CIT to the AO to withdraw the exemption u/s 54 (of Income Tax Act, 1961) on sale of flat at 'Shri. Kailash' on 26/12/2006 be deleted. Instead, we direct that the order of assessment for Asst. year 2007-08 dt. 24/12/2009, allowing the assessee, the exemption claimed u/s54 (of Income Tax Act, 1961) is set aside and remanded to the file of the AO for fresh consideration after affording the assessee adequate opportunity of being heard and to file details/submissions in this regard which shall be duly considered. It ordered accordingly.

6. In the result, the assessee's appeal is treated as partly allowed for statistical purposes.”

Case Reference - Mr. Pravin L. Manania vs The Commissioner of Income Tax

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES "C", MUMBAI

BEFORE SHRI JASON P. BOAZ (AM) AND SHRI SANDEEP GOSAIN (JM)

ITA No. 123/MUM/2012

Assessment Year: 2007-08