2025 (3) TMI 830 - AT - Income Tax

ITAT sets aside STCG assessment on ancestral property sale due to incorrect year determination

ITAT Chennai set aside CIT(A) order regarding STCG taxation on ancestral immovable property sale. Assessee and ten co-owners allegedly sold property for ... Short Term Capital Gain [STCG] - taxability related to transfer of share/interest on an ancestral immovable property (scheduled property) sold by assessee and ten (10) co-owners for a consideration of Rs 9.08 crores - transfer of property after reducing ad-hoc 10% of the consideration received towards cost of acquisition from the entire income from sale of immovable property HELD THAT:- Assessment order passed in the case of the present assessee, based on CIB information that the assessee has sold immovable property along with ten (10) other co-owners for a consideration of Rs.9,08,95,000/- and the assessee’s share out of the above was Rs.82,62,181/- (Rs.9.08 crores/11), the AO’s action perse of computing the STCG at Rs.74,36,863/- cannot be legally sustained for the simple reason that very same transfer of immovable property had been subjected to scrutiny after reopening the assessment in the case of assessee’s sister (Smt P.Yasodha) and other heir Shri Parthasarathy Varadhan and similar additions made by the AO in the hands of both persons have been deleted by the CIT(A)-10, which has been accepted by the Department. Hence, the STCG computed on the transfer of property which took place on 17.02.2014 i.e. in AY 2014-15 in the relevant year i.e. AY 2016-17 is per-se erroneous and therefore, cannot be added in AY 2016-17. Therefore, action of the CIT(A) brushing aside the relevant documents filed by the assessee cannot be countenanced and therefore, we set aside the impugned order of the Ld.CIT(A); and restore it to the file of the JAO for a limited purpose i.e. to examine the veracity of the assesse’s contention that she has not made any sale/transfer of any immovable property in the relevant year i.e. AY 2016-17; and if it is found that the assessee didn’t undertake any transfer/sale of immovable property in AY 2016-17, then no capital gain to be taxed in the hands of the assessee for AY 2016-17; and if it is found that the assessee along with ten (10) co-owners have sold immovable property for Rs 9.08 Crs, in AY 2016-17, then AO to assess the capital gains from such transfer of property in accordance to law; after giving opportunity to assessee. Penalty u/s.271(1)(c) for concealment of income - HELD THAT:-Nassessee which emanates from the Assessment order u/s.147 r.w.s.144 of the Act dated 27.03.2022 which has been set aside back to the file of the JAO for limited purpose to examine whether assessee had carried out any transfer of immovable property in AY 2016-17; and if the answer is in the affirmative, then AO to assess the capital gains from such transfer of property and thereafter, the AO to proceed against the assessee in accordance to law for levy of penalty. then AO to assess the capital gains from such transfer of property; and if it is found that the assessee didn’t undertake any transfer/sale of immovable property in AY 2016-17, then no capital gain to be taxed in the hands of the assessee for AY 2016-17, then no penalty to be initiated against the assessee for AY 2016-17. Therefore, impugned penalty confirmed by the Ld.CIT(A) is set aside back to the file of JAO with the liberty to proceed against the assessee (levy penalty) after the assessment if any framed against the assessee. Penalty u/s.271F - non-disclosure and non-filing of returns by the assessee - HELD THAT:- Penalty u/s.271F can be imposed only if the AO is able to show that assessee had in the first-place taxable income beyond the threshold limit, then only the fault can be attributed on the assessee for failure to file return of income u/s.139(1). And since, we have set aside the assessment back to the JAO to find an answer to the said question, the penalty levied u/s.271F of the Act cannot be sustained and therefore, it is set aside back to the JAO and he is at liberty to take action in this regard after assessment is made as ordered. Therefore, we set aside the impugned order of the CIT(A) and restore the same back to the file of the AO to take action after the assessment is made as directed for AY 2016-17. ISSUES: Whether reopening of assessment for AY 2016-17 on the basis of alleged transfer of immovable property in that year was valid when the actual transfer occurred in AY 2014-15. Whether the land sold was a capital asset within the meaning of section 2(14) of the Income Tax Act, 1961. Whether the computation of Short Term Capital Gain (STCG) by dividing the total sale consideration equally among eleven co-owners was correct. Whether penalty under section 271(1)(c) for concealment of income can be sustained when the assessment order itself is set aside for further verification. Whether penalty under section 271(1)(b) for failure to comply with notices is justified when assessee participated in appellate proceedings. Whether penalty under section 271F for non-filing of return of income is sustainable when taxable income is below threshold limit or when the transfer of property is disputed. RULINGS / HOLDINGS: The reopening of assessment for AY 2016-17 was held to be 'bad in law' because the foundation of the reopening-i.e., transfer of property in AY 2016-17-was erroneous; the transfer occurred on 17.02.2014 in AY 2014-15, and therefore the AO lacked 'reason to believe' under section 147 of the Act. The land in question was held not to be a capital asset within the meaning of section 2(14) of the Act, being agricultural land, and thus no capital gains tax was leviable on its transfer. The AO erred in computing the assessee's share of profit by dividing the gross sale consideration by eleven; the correct share was as per the family partition deed dated 15.12.2010, accepted by the Department in co-owners' cases. The penalty under section 271(1)(c) was set aside and remanded for fresh consideration after the assessment is finalized, since the underlying assessment order was set aside for further inquiry. The penalty under section 271(1)(b) was partly confirmed but reduced from ?20,000 to ?10,000, as the assessee participated in appellate proceedings and no sufficient cause for non-compliance was found. The penalty under section 271F was set aside because penalty can be imposed only if taxable income exceeds the threshold limit and since the issue of taxable income is under inquiry, the penalty cannot be sustained at this stage. RATIONALE: The Court applied the statutory provisions of the Income Tax Act, 1961, particularly sections 2(14), 139(1), 50C, 147, 271(1)(b), 271(1)(c), and 271F, and procedural rules under Income-tax Rules, 1962 (Rule 46A). The principle of 'reason to believe' under section 147 requires a valid foundation based on correct information; erroneous foundation invalidates reopening, invoking the maxim 'sublato Fundmento Credit opus'. The Court relied on precedents and the powers of the first appellate authority under section 250(4) of the Act to examine the merits of whether land qualifies as capital asset. The Court emphasized the need to consider partition deeds and family arrangements for correct computation of share in property sale proceeds, rejecting arbitrary division by number of co-owners. The Court recognized the necessity of opportunity and due process before imposing penalties, especially when the underlying assessment is under reconsideration. The decision reflects a doctrinal adherence to procedural fairness, evidentiary requirements, and correct application of substantive tax law in assessing capital gains and penalties.