Appellate enhancement requires section 251(2) notice; capital gains timing under a joint development agreement must be examined on merits.

An appellate authority cannot enhance taxable income by reducing an allowance or deduction granted in assessment without issuing notice and giving a hearing under section 251(2); on that basis, the reduction of exemption under section 54F and the cut in construction cost were held unsustainable and the assessment was restored on those points. A ground that goes to the root of the correct year of chargeability of capital gains under a joint development agreement must be admitted and decided on merits, so the additional ground on the deemed transfer year was admitted and remitted for fresh adjudication.

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Issues: (i) Whether the additional ground relating to the year of chargeability of capital gains on transfer of 60% undivided interest in land under the joint development agreement was liable to be admitted and remitted for adjudication. (ii) Whether the disallowance of Rs. 5,00,000 allowed as exemption under section 54F of the Income-tax Act, 1961 could be sustained without notice under section 251(2) of the Act. (iii) Whether the reduction in the cost of construction of the 11 flats sold by the assessee could be sustained and whether the appellate authority could make such enhancement without notice under section 251(2) of the Act.

Issue (i): Whether the additional ground relating to the year of chargeability of capital gains on transfer of 60% undivided interest in land under the joint development agreement was liable to be admitted and remitted for adjudication.

Analysis: The additional ground went to the root of the dispute because the core question was the correct assessment year in which the deemed transfer, if any, arose. The relevant facts had already been placed before the authorities earlier, and the issue was material to the chargeability of capital gains in the proper year. The fact that the revenue side had not obtained a remand report did not justify refusing admission of a ground that directly affected the taxability of the transaction in the correct assessment year.

Conclusion: The additional ground was admitted and the issue was remanded to the appellate authority for fresh adjudication. The assessee succeeded on this issue.

Issue (ii): Whether the disallowance of Rs. 5,00,000 allowed as exemption under section 54F of the Income-tax Act, 1961 could be sustained without notice under section 251(2) of the Act.

Analysis: The appellate authority reduced the exemption already granted in assessment, thereby enhancing the taxable income of the assessee. Such an enhancement could not be made without putting the assessee on notice and affording a reasonable opportunity of being heard as required by section 251(2). The record showed that no such opportunity was given before disturbing the allowance made by the Assessing Officer.

Conclusion: The disallowance of Rs. 5,00,000 was set aside and the assessment order was restored on this point. The assessee succeeded on this issue.

Issue (iii): Whether the reduction in the cost of construction of the 11 flats sold by the assessee could be sustained and whether the appellate authority could make such enhancement without notice under section 251(2) of the Act.

Analysis: The cost of construction had been determined in assessment on the basis of information obtained from the developer, and the appellate authority could not unilaterally reduce the built-up area and correspondingly lower the deductible cost. The reduction in allowable cost resulted in an enhancement of income, which again attracted the mandatory requirement of notice and opportunity under section 251(2). In the absence of such notice, the appellate interference was not sustainable.

Conclusion: The reduction in the cost of construction was deleted and the assessment order was restored on this point. The assessee succeeded on this issue.

Final Conclusion: The appeal was allowed to the extent of admitting and remitting the additional ground and restoring the Assessing Officer's findings on the allowance of exemption and cost of construction, with the remaining connected grounds not adjudicated at this stage.

Ratio Decidendi: An appellate authority cannot enhance an assessee's taxable income by reducing an allowance or deduction granted in assessment without issuing notice and affording a hearing under section 251(2), and a ground that goes to the root of the correct year of taxability must be admitted and decided on merits.

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