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Issues: (i) whether the assessment was invalid for want of a notice under section 143(2) in the prescribed CBDT format; (ii) whether capital gains on the sale of two Mumbai offices were taxable in the impugned year or had already arisen in the earlier year when the agreement, consideration, and possession were completed; (iii) whether the cost of improvement claimed for the Visakhapatnam land was to be allowed; (iv) whether the cost of acquisition based on fair market value as on 01.04.2001 and the cost of improvement for the Jagi Road land were to be allowed; (v) whether the rent received during the year could again be taxed despite earlier accrual-based disclosure; and (vi) whether the disallowance of club membership and business promotion expenses was sustainable.
Issue (i): whether the assessment was invalid for want of a notice under section 143(2) in the prescribed CBDT format
Analysis: The notice issued under section 143(2) was held to be not in conformity with the binding CBDT instruction governing the prescribed format. On that footing, the subsequent assessment proceedings were treated as flowing from an invalid notice and therefore incapable of being sustained.
Conclusion: The assessment was quashed as invalid; this issue was decided in favour of the assessee.
Issue (ii): whether capital gains on the sale of two Mumbai offices were taxable in the impugned year or had already arisen in the earlier year when the agreement, consideration, and possession were completed
Analysis: The material showed that the offices had been sold in the earlier year, consideration had been received, possession had been handed over, and the transferee had become a member of the society. The later registration of the documents did not change the year in which the transfer had effectively occurred for capital gains purposes. The gain had already been offered to tax in the earlier year, so taxing it again in the impugned year would be unsustainable.
Conclusion: The addition on this account was deleted; this issue was decided in favour of the assessee.
Issue (iii): whether the cost of improvement claimed for the Visakhapatnam land was to be allowed
Analysis: The expenditure had been reflected in the successive audited balance sheets and formed part of the fixed assets schedule. The demand for old bills and vouchers, after such a long lapse of time and in the face of consistent audited records, was held to be unwarranted. The cost of improvement was treated as duly supported by the books and accepted business records.
Conclusion: The cost of improvement was allowed; this issue was decided in favour of the assessee.
Issue (iv): whether the cost of acquisition based on fair market value as on 01.04.2001 and the cost of improvement for the Jagi Road land were to be allowed
Analysis: The same reasoning applied to the claimed improvement expenditure, since it had been incurred in earlier years and reflected in the audited accounts. On valuation, the adoption of a backward-calculated fair market value was accepted, and the lower figure adopted by the tax authorities was found unsustainable in the absence of a proper basis for rejection.
Conclusion: The assessee's claim for indexed cost and related relief was allowed; this issue was decided in favour of the assessee.
Issue (v): whether the rent received during the year could again be taxed despite earlier accrual-based disclosure
Analysis: The assessee had followed the mercantile system and had already offered the rental income on accrual basis in the earlier year. Receipt in the current year, accompanied by TDS reporting, did not justify taxing the same amount again as current-year income.
Conclusion: The addition was deleted; this issue was decided in favour of the assessee.
Issue (vi): whether the disallowance of club membership and business promotion expenses was sustainable
Analysis: The expenses were accepted as incurred for commercial expediency in the course of business. No sufficient basis was found to sustain the disallowance.
Conclusion: The disallowance was deleted; this issue was decided in favour of the assessee.
Final Conclusion: The assessment did not survive because the foundational notice was held invalid, and the additions/disallowances challenged on merits were also deleted except for the ground not pressed.
Ratio Decidendi: A notice that is not issued in the prescribed CBDT format can vitiate the assessment proceedings, and for capital gains purposes a transfer may be treated as completed when the effective transfer of rights and possession has already taken place, even if registration occurs later.
Invalid notice format and double taxation of capital gains were rejected; audited cost claims and business expenses were allowed.
A notice issued under section 143(2) that was not in the prescribed CBDT format was treated as invalid, and the assessment based on it was quashed. Capital gains on the sale of two Mumbai offices were held to have arisen in the earlier year when agreement, consideration and possession were completed, so taxation again in the impugned year was unsustainable. Claimed cost of improvement for the Visakhapatnam and Jagi Road lands was allowed on the strength of audited records, and the fair market value-based indexed cost claim was accepted. Rental income already offered on accrual basis could not be taxed again on receipt, and the disallowance of club membership and business promotion was deleted for lack of basis.
Validity of scrutiny notice - Transfer of capital asset - Cost of improvement - Fair market value as on 01.04.2001 - Accrual of rental income - Business expenditure Validity of scrutiny notice - Binding nature of CBDT instructions - notice issued u/s 143(2) was not in the format prescribed by the CBDT instruction governing such notice - HELD THAT: - The Tribunal found, on examination of the notice placed in the paper book, that the notice u/s 143(2) had not been issued in consonance with CBDT Instruction F. No. 225/157/2017/ITA-II dated 23.06.2017. It held that the prescribed format was mandatory and that a notice issued contrary to the binding instruction was invalid. Since the assessment was founded on such invalid notice, all consequential proceedings were held to be void ab initio. [Paras 3] The notice u/s 143(2) was held invalid and the consequential assessment was quashed. Transfer of capital asset - Extinguishment of rights - Possession and enjoyment of property - Capital gains on sale of the two Mumbai offices taxable in AY 2022-23 when the assessee had already transferred the property, handed over possession and offered the gains to tax in AY 2016-17 - HELD THAT: - The Tribunal recorded that the assessee had sold the two offices in AY 2016-17, handed over possession, received consideration and the purchaser had also become member of the co-operative society in that year. On these facts, it held that the assessee's rights in the property had already ceased and extinguished earlier, and that the subsequent registration in the year under appeal did not shift the chargeability to AY 2022-23. It therefore held that the decision in CIT Vs. Balbir Singh Maini [2017 (10) TMI 323 - SUPREME COURT] was not applicable to the facts before it, and followed the principle applied in Tamal Kundu [2025 (4) TMI 1270 - CALCUTTA HIGH COURT] and Maimoon Fashion Accessories (P.) Ltd. [2025 (10) TMI 1094 - ITAT MUMBAI] [Paras 4] The addition towards capital gains on the two Mumbai offices was directed to be deleted. Cost of improvement - AO rejected the claim of cost of improvement to the land at Vishakhapatnam, which was used by the assessee company for the purpose of its business - HELD THAT: - The Tribunal noted that the improvement expenditure had been incurred in earlier years, formed part of the books of account and was consistently reflected in the fixed asset schedules of successive balance sheets. It held that the Revenue had not doubted these figures in earlier years and that it was unwarranted to reject the claim solely because the assessee could not now produce supporting vouchers for expenditure incurred long back. It also took note of the fact that the accounts were audited and no adverse inference had been drawn by the auditors. [Paras 5] The cost of improvement claimed on the Visakhapatnam land was allowed. Fair market value as on 01.04.2001 - Indexed cost of acquisition - Cost of improvement - HELD THAT: - As regards cost of improvement, the Tribunal applied its reasoning given for the Visakhapatnam land and held that old improvement expenditure reflected in the audited balance sheets could not be rejected for want of preserved records. On the valuation issue, it held that the original purchase price in 1981 could not, without more, be treated as the value as on 01.04.2001. Since the assessee had adopted the fair market value on the basis of a registered valuer's report and reverse indexation, the Tribunal held that the Assessing Officer could not reject that figure without assigning reasons or determining a proper fair market value. For this proposition it followed Millie Dey Vs ITO [2024 (4) TMI 983 - ITAT KOLKATA] [Paras 8] The assessee's claim of indexed cost and cost of improvement for the Jagi Road land was accepted. Accrual of rental income - Mercantile system of accounting - Taxability of income vis-a-vis TDS credit - year of taxability - HELD THAT: - The Tribunal found that the assessee was consistently following the mercantile system and had already offered the rental income to tax on accrual basis in the preceding year. The subsequent receipt during AY 2022-23, and the corresponding reflection in Form 26AS because of deduction of tax at source, did not alter the year of taxability. It therefore held that the same income could not be assessed again in the year of receipt. [Paras 9] The addition made by treating the rent as income of the current year was deleted. Business expenditure - Commercial expediency - Club membership and related expenditure - HELD THAT: - The Tribunal accepted the assessee's explanation that the expenditure was incurred for business purposes, including entertaining company guests, and found merit in the plea of commercial expediency. On that basis, it held that the disallowance sustained by the appellate authority could not be maintained. [Paras 11] The disallowance of club membership and related expenses was deleted. Final Conclusion: The Tribunal held that the scrutiny notice under section 143(2) was invalid for not being in the prescribed format, and on that ground quashed the assessment. It also decided the other grounds on merits in favour of the assessee.