2025 (3) TMI 830 - AT - Income Tax

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

Smt. Prema Versus The ITO, NCW-22 (1), Tambaram.

Smt. Prema Versus The ITO, NCW-22 (1), Tambaram. - TMI 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.