Tribunal Upholds Reopening of Assessment under Income-tax Act 1961 despite Exemption Withdrawal

Commissioner Of Income-Tax Versus GK. Devarajulu

Commissioner Of Income-Tax Versus GK. Devarajulu - [1991] 191 ITR 211, 92 CTR 184, 56 TAXMANN 85 Issues Involved:
1. Validity of reopening the assessment u/s 147(b) of the Income-tax Act, 1961.
2. Eligibility of Hindu undivided family (HUF) for exemption u/s 54B(ii) of the Income-tax Act, 1961.

Summary:

1. Validity of Reopening the Assessment u/s 147(b):
The assessee, a Hindu undivided family, was initially granted exemption from capital gains u/s 54B(ii) of the Income-tax Act, 1961. However, based on an audit objection that the exemption u/s 54B(ii) is available only to individual assessees and not to HUFs, the Income-tax Officer reopened the assessment u/s 147(b) and withdrew the exemption. The Appellate Assistant Commissioner, following the Gujarat High Court decision in Kasturbhai Lalbhai v. R. K. Malhotra, ITO [1971] 80 ITR 188, held that an audit objection cannot constitute information within the meaning of section 147(b) and thus, the reopening was invalid. However, the Tribunal, referencing the Supreme Court's reversal in R. K. Malhotra, ITO v. Kasturbhai Lalbhai [1977] 109 ITR 537, upheld the reopening of the assessment as valid.

2. Eligibility of HUF for Exemption u/s 54B(ii):
The Tribunal initially held that the HUF was entitled to the benefit u/s 54B(ii) of the Act. However, the High Court examined whether the term 'assessee' in section 54B includes HUFs. Section 54B was introduced by the Finance Act, 1970, and requires the capital asset (land) to have been used by the assessee or a parent of his for agricultural purposes in the two years preceding the transfer, and the assessee must purchase other land for agricultural purposes within two years after the transfer. The court noted that the term 'assessee' in section 54B, when read in context, clearly indicates that it applies only to individual assessees and not to HUFs. The court reasoned that substituting 'HUF' for 'assessee' in the section would lead to absurd results, as the phrase 'a parent of his' cannot logically apply to an HUF. The court also observed that while section 54(1) was amended to include HUFs, no such amendment was made to section 54B, indicating a legislative intent to exclude HUFs from its scope.

Conclusion:
The High Court concluded that the term 'assessee' in section 54B applies only to individuals and not to HUFs. Therefore, the HUF is not entitled to the exemption u/s 54B(ii) of the Income-tax Act, 1961. The question referred to the court was answered in the negative and in favor of the Revenue. The Revenue was also entitled to costs of Rs. 500.