2024 (5) TMI 108 - HC - Income Tax

Reversal of revisional order under s 263 affirmed: procedural lapses under s 54(2) caused no revenue prejudice

HC affirmed the ITAT's decision reversing the revisional order under s 263, holding that although the AO and CIT noted procedural lapses under s 54(2), ... Revision u/s 263 - as per CIT AO failed to enquire the deduction claimed u/s 54 - ITAT justification in holding that the order passed u/s 263 suffered from 'hypertechnical approach' in following the provision of Section 54(2) - HELD THAT:- Tribunal has opined that the order may not have been prejudicial to the interest of revenue. Though not worded as such that appears to be the real finding of the Tribunal inasmuch as the Tribunal has observed that the revisional authority has not expressed any doubt regarding the quantum of capital gain arising at the hands of the assessee and that it was invested in purchase/construction of residential house. We find, there is no material to doubt the correctness of the findings recorded by the Tribunal. While procedural lapse may have been caused by the assessee in observing the provision of Section 54 of the Act, in absence of real prejudice having arisen to the revenue, upon claim capital gain having been allowed by the Assessing Officer the Tribunal may have rightly allowed the assessee's appeal. Seen in the context of an assessee with modest means, we find, the CIT had unnecessarily drawn up revision proceedings upon a procedural lapse as no real prejudice may have ever arisen to the revenue authorities in the context of petty amount involved. No substantial question of law arises. ISSUES PRESENTED AND CONSIDERED 1. Whether the Tribunal was justified in quashing the order passed under Section 263 of the Income Tax Act on the ground that the Assessing Officer failed to enquire into the deduction claimed under Section 54. 2. Whether the Commissioner's invocation of revisionary powers under Section 263 was vitiated by applying a 'hypertechnical approach' in relation to the provisions of Section 54(2). 3. Whether, once the basic condition of Section 54(1) is satisfied, the requirements of Section 54(2) become redundant for claiming exemption under Section 54. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Justification for quashing order under Section 263 where AO's enquiry into Section 54 claim is alleged to be inadequate Legal framework: Section 263 empowers the Commissioner to revise an assessment if it is prejudicial to the interests of the revenue. Section 54 provides exemption from capital gains tax on sale of a residential house if specified conditions (investment in another residential house or construction within prescribed time) are met. The Assessing Officer conducts original assessment including examination of evidence supporting claim for exemption. Precedent Treatment: The judgment does not cite or rely on any previous decisions; the Tribunal's factual findings about the AO's enquiry are treated as determinative. Interpretation and reasoning: The Tribunal found that the AO had conducted a thorough examination of the sale deed, computation of capital gain, written replies, purchase documents and evidence of investment/construction relied upon by the assessee. The Commissioner's revision was based on alleged procedural non-compliance (not depositing the capital gain in bank account or investing strictly through that account), but the Tribunal concluded that the AO had in fact examined the substance of the claim and allowed the exemption after such enquiry. Ratio vs. Obiter: Ratio - where the Assessing Officer has made a detailed enquiry into the facts and allowed an exemption under Section 54, a revision under Section 263 cannot be sustained merely on a procedural lapse unless the assessment is shown to be prejudicial to revenue. Obiter - none additional on this point. Conclusions: The Court accepts the Tribunal's factual finding that the AO conducted a detailed enquiry and that no material shows the assessment was prejudicial to revenue. Therefore the Commissioner's exercise of revisionary jurisdiction under Section 263 was not justified on these facts. Issue 2 - Whether the Commissioner adopted a 'hypertechnical approach' in applying Section 54(2) Legal framework: Section 54(2) contains procedural or contingent provisions relating to investment of capital gains; the broader statutory scheme requires fulfillment of substantive conditions in Section 54(1) for exemption. Precedent Treatment: No authorities are cited; the Tribunal's characterization of the Commissioner's approach as 'hypertechnical' is upheld by the Court on the facts of the case. Interpretation and reasoning: The Commissioner focused on form/technicalities (e.g., non-deposit of capital gains in bank account) rather than on whether substantive conditions for exemption were satisfied and whether revenue suffered prejudice. The Tribunal viewed that approach as disproportionate given the AO's examination and the modest amounts involved. The Court agrees that initiating revision solely for procedural non-compliance where no real prejudice is demonstrated amounts to a hypertechnical exercise of power. Ratio vs. Obiter: Ratio - revision under Section 263 should not be invoked on hypertechnical grounds where substantive compliance with Section 54 conditions has been established and no prejudice to revenue is shown. Obiter - commentary on the modest means of the assessee influencing proportionality is illustrative rather than a legal rule of general application. Conclusions: The Tribunal rightly found the Commissioner's reliance on technical non-compliance with Section 54(2) to be an improper basis for revision; the Court concurs and declines to disturb that conclusion. Issue 3 - Whether satisfaction of Section 54(1) renders Section 54(2) redundant Legal framework: Section 54(1) sets out the substantive condition for exemption (purchase/construction of a residential house within the prescribed period and investment of capital gain). Section 54(2) addresses manner or further procedural aspects related to the investment/exemption. Precedent Treatment: The judgment does not overrule or expressly follow any precedent; the Tribunal's interpretation that formalistic insistence on Section 54(2) should not defeat exemption where Section 54(1) is satisfied is accepted on the facts. Interpretation and reasoning: The Tribunal and Court emphasize substance over form: when the basic condition under Section 54(1) - namely that the capital gains were invested in acquiring/construction of a residential house within the statutory period - is met, insisting rigidly on the procedural stipulations of Section 54(2) to deny exemption would be unreasonable absent evidence of prejudice. The Court frames this as Section 54(2) being effectively redundant in such factual matrix, particularly where the AO has examined and accepted the investment evidence. Ratio vs. Obiter: Ratio - for the facts before the Court, satisfaction of Section 54(1) coupled with no demonstrable prejudice to revenue means that failure to comply strictly with procedural aspects of Section 54(2) cannot justify revision under Section 263. Obiter - a general pronouncement that Section 54(2) is universally redundant is not made; the Court limits the conclusion to the factual context. Conclusions: The Tribunal was justified in holding that where the substantive requirements of Section 54(1) are fulfilled and no prejudice to revenue appears, Section 54(2) cannot be used as a ground to invalidate the exemption; the Court affirms this view as applicable on the facts. Cross-reference and Overall Conclusion All issues are interrelated: the factual finding of thorough AO enquiry (Issue 1) underpins the rejection of a hypertechnical invocation of Section 54(2) (Issue 2) and supports the conclusion that procedural strictness should not defeat substance under Section 54(1) (Issue 3). The Tribunal's conclusions on these points are accepted by the Court as amounts invested and substantive compliance were found and no prejudice to revenue was demonstrated; hence the revision under Section 263 was not maintainable. The appeal was dismissed accordingly.