BANGALORE, DEC 05, 2012: THE issues before the Bench are - Whether the action initiated u/s 147 can be challenged before the appellate authorities without challenging the same before the AO, particularly in a case where the return of Income is only processed - Whether for claiming exemption under section 54F, the construction of new house within three years and completion of the substantial part is sine-qua-non. And the verdict goes against the assessee.

Facts of the case

Assessee is an Individual. She filed her Income Tax Return declaring positive Income. During the course of assessment proceedings the AO observed that the assessee had earned huge amount of Long Term Capital gain on sale of some shares and claimed the exemption under section 54F. In order to enquire the claim the AO deputed an Inspector who found that new house was not constructed within three years. Accordingly the AO denied the exemption. The CIT(A) affirmed the order of the AO. In appeal before the Tribunal, the AR of the assessee challenged the action of the AO under section 147.

After hearing the parties the ITAT held that,

++ the AO was within his realm to reopen the assessment by issuance of a Notice u/s 148 of the Act to verify the claim of the assessee as to whether the assessee is entitled to claim exemption of Rs.95,33,925/- u/s 54F of the Act. Moreover, the assessee had not objected to either the reopening of the assessment or the issue of a Notice u/s 148 of the Act. Instead, the assessee in her reply dated 9.11.2010 filed with the AO on 10.11.2010 submitted that “………..under the circumstances, the original return filed on 27.7.2008 (sic) 27.7.2007 for the assessment year 2007-08 may be treated as return filed in response to your notice u/s 148.” [courtesy: P 20 – 21 of PB AR]. This assertion of the assessee makes it implicit that the assessee had not objected to whatsoever the reopening of the assessment during the reassessment proceedings;

++ with due respects, we have perused the observations of the earlier Bench of the Tribunal as well as the ruling of the Hon’ble Court in the case of Sambandam Udayakumar. In this connection, we would like to point out that, that assessee had been put in possession of the property (residential house) and he was in actual possession. The assessee had invested the sale consideration in acquiring a residential premise and took possession of the residential building and was living in the said premises. Therefore, the Hon’ble Court took a view that “the object of enacting section 54 of the Act i.e., to encourage investment in a residential building is completely fulfilled.” However, in the present case under dispute, the assessee was expected to construct a residential house not later than 18.1.2010 whereas when the AO made a spot inspection along with his Inspector as late as on 19.10.2010 and found in the presence of the assessee’s representative that the construction was just started and the very fact has been acknowledged by the assessee herself. She had accordingly filed a revised return for the AY 2010-11 admitting the said amount as her income for the said assessment year;

++ in view of the above facts, we are of the firm view that the Ruling of the Hon’ble High Court is clearly distinguishable and it cannot come to the rescue of the assessee in anyway as her case is on a different footing. On the other hand, the Hon’ble earlier Bench of the Tribunal in the case of ITO v. M.B.Ramesh (2009-TIOL-590-ITAT-BANG) took a divergent view and, accordingly, observed that the assessee was not entitled for exemption u/s 54 of the Act;

++ the assessee took up the issue with the High Court for relief. On hearing the rival parties, the High Court had, in its ruling reported in (2010-TIOL-128-HC-KAR-IT) observed that the assessing authority refused exemption under s.54 on a factual verification of the place where the assessee claimed to have had the residential property as he found only a mud structure not worthy of a residential house. The Tribunal also found that as a matter of fact there was never any structure fitting into description of ‘habitable residential house’ on the property which had been initially sold by the assessee and, therefore, allowed the appeal of the Revenue, reversed the finding of the first appellate authority and affirmed the order of the assessing authority. Such finding of fact by Tribunal cannot be interfered with under s.260A;

++ we are of the considered view that the CIT (A) was justified in upholding the action of the AO in rejecting the assessee’s claim for exemption u/s 54F of the Act in respect of the sum of Rs.95.33 lakhs. It is ordered accordingly.

(See 2012-TIOL-734-ITAT-BANG)