2023 (12) TMI 987 - HC - Income Tax

Court Quashes Order on Unexplained Rs. 35 Lakhs, Directs Payment of Capital Gains; Petitioner Can Challenge Post-Payment.

Deepa Moti Singh Versus Income Tax Officer, Ward 4 (1) & Ors.

The HC quashed the impugned order concerning the unexplained Rs. 35 lakhs, requiring the petitioner to pay the determined capital gain within 30 days, ... Reopening of assessment - Sales consideration shown double / twice in AIS - allegation of undisclosed source of purchase of property - As per AO the the assessee has purchased two properties and purchase consideration is more than sale consideration of property - Petitioner has been candid in admitting that though the residential flat sold during the year was a short term capital asset and petitioner was liable to pay tax thereon, petitioner did not pay any tax on short term capital gain because petitioner was advised that as the flat was a residential flat and in the same year petitioner had purchased another flat, no income was chargeable to tax - HELD THAT:- On the working of the short term capital gain for the flat sold, the Assessing Officer came to a finding that taxable capital gain was Rs. 13,64,000/-. But strangely in the impugned order dated 29th March 2023 issued under Section 148A(d) of the Act, the Assessing Officer proceeded further on the basis “as regards the two immovable properties purchased by the assessee, the assessee has submitted that, she has purchased only one property for the consideration of Rs. 35,00,000/-”. What we find difficult to digest is even in the notice issued u/s 148A(b) or the information annexed thereto, nowhere does it state petitioner has purchased two properties for Rs. 70 lakhs. Petitioner has provided documents to justify that petitioner has purchased only one property for Rs. 35 lakhs and also has explained the source of funding. If the Assessing Officer has to say that there are two properties purchased, either erroneously the figure of Rs. 35 lakhs is doubled and shown as Rs. 70 lakhs in the AIS, or the Assessing Officer should provide the details of the second property, which according to the Assessing Officer, petitioner has purchased but has failed to disclose resulting in an escapement of income. An assessee cannot prove negative. If the Assessing Officer has any positive information about the details of the second property allegedly purchased, the Assessing Officer was duty bound to apply his mind and confront petitioner with those documents. Simply relying on what the AIS states and passing an order is not something which this Court can accept. As we agreed to entertain this petition only in view of this undertaking given by Mr. Phadke that assessee will pay the capital gain payable and will not raise the issue of limitation under Section 149(1)(b) of the Act. The impugned order to the extent of Rs. 35 lakhs remaining as unexplained is hereby quashed and set aside. AO shall give effect to this order and provide computation of income to petitioner within four weeks of this order being uploaded and as per the undertaking given, petitioner shall pay the amount as computed within four weeks thereafter. Even if petitioner feels the computation is wrong, the amount will be paid and thereafter, petitioner may take such steps as advised in accordance with law to impugn the computation of income. ISSUES PRESENTED AND CONSIDERED 1. Whether a notice under Section 148A(b) of the Income Tax Act is sustainable when it relies on AIS/AIR entries suggesting sale and purchase transactions but the Assessing Officer treats the AIS figure as indicating two purchases without adducing any independent particulars of a second property. 2. Whether the Assessing Officer can treat source of purchase/investment as 'unexplained' where the assessee furnishes sale deed, purchase deed, bank statements, loan statements and working of capital gains for the year under consideration. 3. What is the obligation of the Assessing Officer when AIS/AIR information reflects transactions - specifically, whether the AO must apply independent mind and confront the assessee with positive material if the AO alleges undisclosed transactions distinct from the assessee's explanation. 4. Whether the Court may accept an undertaking from the assessee to pay tax computed by the Assessing Officer (and to waive limitation objections) and grant relief subject to payment and subsequent challenge. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of reopening under Section 148A(b) based on AIS/AIR entries and AO treating AIS as showing two purchases Legal framework: Section 148A(b) requires issue of notice where the Assessing Officer has reasons to believe income chargeable to tax has escaped assessment; reliance on AIS/AIR entries is permissible as information but the AO must form independent belief and record reasons. Precedent Treatment: No specific precedents are cited or applied in the judgment. Interpretation and reasoning: The Court emphasizes that AIS/AIR is source material and cannot substitute for the AO's positive information or independent application of mind. The impugned order proceeded on an assumption that two immovable properties were purchased (aggregate Rs. 70,00,000) notwithstanding the notice and annexed information not stating any second purchase; the Assessing Officer did not produce details of a second property or SRO confirmation, nor did he confront the assessee with any positive documentary basis to contradict the assessee's provided sale deed, purchase deed and loan documentation. Ratio vs. Obiter: Ratio - where reopening is predicated solely on AIS/AIR figures without independent corroboration of an alleged additional transaction, the AO must provide particulars or confront the assessee; otherwise the basis for reopening is deficient. Conclusions: The Court found it impermissible for the AO to treat the AIS entry as proof of two purchases without further particulars; the AO's approach in that respect was unsustainable and formed part of the basis for quashing the impugned finding relating to the unexplained Rs. 35,00,000. Issue 2: Whether source of purchase and capital gain remained unexplained where assessee produced deeds, bank statements, loan statements and computation Legal framework: Onus of proof and explanation - an assessee need not prove a negative; where assessee furnishes documentary evidence explaining source of funds for a purchase and computation of capital gains, the AO must examine and confront any contrary material before treating amounts as unexplained or undisclosed. Precedent Treatment: No precedents cited. Interpretation and reasoning: The assessee produced sale deed, purchase deed, index II, working of capital gain, bank statement of brother (reflecting Rs. 5,00,000) and housing loan statements (supporting Rs. 30,00,000). The AO's finding that source remained unexplained ignored these documents and presumed an undisclosed capital gain of Rs. 15,10,200/-, without showing independent material contradicting the documents. The Court notes that an assessee cannot be required to prove non-existence of a second property; the AO must demonstrate positive information if he alleges escapement due to an undisclosed purchase. Ratio vs. Obiter: Ratio - when the assessee produces contemporaneous documentary evidence explaining source and use of funds, the AO cannot treat amounts as unexplained without adducing or confronting positive contradictory material. Conclusions: The Court quashed the impugned order insofar as it treated Rs. 35,00,000 as unexplained, holding the AO's conclusion unsustainable given the documentation and absence of positive contrary material. Issue 3: Duty of the Assessing Officer to apply mind and confront the assessee with positive information Legal framework: Administrative fairness and statutory exercise of power require the AO to record reasons and confront the assessee with material relied upon; reliance on AIS/AIR requires assessment of the specifics and, where AIS suggests discrepancies, AO should identify particulars (e.g., SRO entries) before concluding escapement. Precedent Treatment: No precedents cited. Interpretation and reasoning: The Court criticizes the AO's mechanical reliance on AIS without confronting the assessee with any details of an alleged second property. The AO's failure to request or rely on confirmation from the Sub-Registrar or any corroborative evidence meant the AO did not apply independent mind; mere repetition of AIS figures in the order cannot replace positive information required to sustain reopening and assessment. Ratio vs. Obiter: Ratio - AO must apply independent mind to AIS/AIR information and should confront the assessee with any positive material relied upon to allege undisclosed income; absent such material, conclusions of unexplained source are unjustified. Conclusions: The AO's failure to identify or produce particulars of the alleged second property or other positive material rendered the impugned finding unsustainable. Issue 4: Acceptability and effect of the assessee's undertaking to pay computed capital gains and not to raise limitation objections Legal framework: Courts may condition relief on undertakings; parties can consent to forgo certain defenses and agree to payment subject to later challenge, and the Court may frame directions accordingly. Precedent Treatment: No precedents cited. Interpretation and reasoning: Counsel for the assessee undertook that the assessee would pay actual capital gain as determined within 30 days of receipt of computation and would not raise limitation under Section 149(1)(b). The Court accepted the undertaking and stated that the petition was entertained in view of that undertaking. The Court directed the AO to provide computation within four weeks and directed payment within four weeks thereafter; the assessee retains the right to challenge the computation after payment. Ratio vs. Obiter: Ratio - the Court's acceptance of an undertaking and conditioning relief on payment is a binding component of the decision in this instance; procedural directions given are operative. Conclusions: The Court accepted the undertaking, quashed the impugned order insofar as Rs. 35,00,000 was held unexplained, directed the AO to compute income and communicate within four weeks, directed payment by the assessee within four weeks of receipt of computation (without permitting a limitation defense), and preserved the assessee's right to challenge the computation after payment. Cross-reference The conclusions on Issues 1-3 are interlinked: the core defect in the impugned order was the Assessing Officer's reliance on AIS/AIR figures as conclusive of an additional purchase and unexplained source without producing particulars or confronting the assessee; this procedural and substantive deficiency justified quashing the finding in respect of the Rs. 35,00,000.