Assessee gets capital gains exemption under section 54F despite claiming wrong section 54 deduction

ITAT Patna allowed assessee's appeal after deduction was wrongly claimed under section 54 instead of section 54F. The assessee had purchased residential property and was eligible for capital gains exemption under section 54F. ITAT held that claiming deduction under wrong section doesn't bar relief under correct section if assessee is otherwise eligible. Appellate authority can grant exemption based on facts even if not claimed in return. Matter remitted to AO to allow section 54F claim with opportunity for assessee to provide additional evidence if required.

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The core legal questions considered in this appeal include: (i) whether the assessee was denied the opportunity of virtual hearing as mandated under section 250(2) read with sub-section (6B) and the Faceless Appeal Scheme, 2021; (ii) whether the assessment order was correctly passed under section 143(3) or section 144 of the Income Tax Act, 1961, and the implications thereof; (iii) whether principles of natural justice were violated due to inadequate opportunity of hearing granted by the Assessing Officer (AO); (iv) the correctness of disallowance of deduction claimed under section 54F of the Act on account of purchase of residential house property out of sale proceeds of land; (v) whether the assessee furnished requisite details to substantiate the claim under section 54F; (vi) the interpretation and application of sections 54 and 54F, including the legislative intent and beneficial nature of these provisions; (vii) the validity of levy of tax under section 115BBE despite no addition made by the AO under that section; and (viii) procedural propriety and adherence to principles of natural justice in the appellate proceedings.

Regarding the issue of virtual hearing opportunity under section 250(2) read with sub-section (6B) and the Faceless Appeal Scheme, the Tribunal did not find substantial discussion or evidence indicating denial of such opportunity. The grounds raised in this respect were not elaborated in the orders, and thus this issue did not attract detailed adjudication.

On the question of whether the assessment order was passed under section 143(3) or section 144, the AO's order mentioned assessment under section 144 at the conclusion, but the body of the order reflected a detailed consideration of submissions and enquiries inconsistent with a best judgment order under section 144. The CIT(A) held that the mention of section 144 was an inadvertent mistake and should be ignored. The Tribunal upheld this view, observing that the AO had considered the assessee's submissions and conducted enquiry, indicating that the order was indeed passed under section 143(3). This interpretation aligns with the legal principle that a clerical or typographical error in an order should not invalidate the substantive proceedings when the context and content demonstrate otherwise.

The issue of violation of natural justice due to non-grant of proper and adequate opportunity of hearing was raised by the assessee. The Tribunal noted submissions regarding short timelines and lack of adequate hearing opportunity. However, the CIT(A) had dismissed the appeal without granting a personal hearing. The Tribunal emphasized the settled judicial principle that tax authorities must act fairly and not arbitrarily reject claims when evidence supports them, citing Supreme Court decisions such as CIT v. Suresh Chandra Mittal and PCIT v. Wipro Ltd., and the Bombay High Court ruling in CIT v. Reliance Infrastructure Ltd. These authorities underscore the necessity of adherence to principles of natural justice, including the right to be heard. Consequently, the Tribunal directed that the AO should provide the assessee a reasonable opportunity of hearing before deciding on the claim, thereby reinforcing procedural fairness.

The principal substantive issue concerned the disallowance of deduction claimed under section 54F of the Act. The assessee had sold land and invested the sale proceeds in the purchase of a residential house property in New Delhi. The return of income erroneously claimed exemption under section 54 instead of section 54F. The AO disallowed the exemption on two grounds: (i) the exemption was claimed under the incorrect section, and (ii) the assessee failed to furnish details demonstrating fulfillment of conditions prescribed under section 54F. The CIT(A) concurred with the AO, holding that the assessee neither claimed exemption under section 54F nor provided requisite details to satisfy the conditions.

The assessee contended that the mistake in claiming exemption under section 54 instead of section 54F was inadvertent and that all relevant documents, including sale and purchase deeds, were submitted to the AO. It was argued that the AO had access to these documents and therefore ought to have applied the correct section and allowed the exemption. Reliance was placed on the CBDT Circular No. 14 (XL-35) dated 11.04.1955, which mandates that tax officers should not take advantage of the taxpayer's ignorance but assist in securing legitimate reliefs. The assessee also cited judicial precedents permitting correction of such errors at the appellate stage, including CIT vs. Jai Parabolic Springs Ltd., which distinguished the Supreme Court ruling in Goetze India Ltd. and allowed fresh claims at the appellate level. Additional case laws were cited to support the proposition that the AO has a duty to apply the correct provisions even if the taxpayer erroneously cites the wrong section.

The Tribunal undertook a detailed examination of the AO's order and the appellate submissions. It observed that the AO had acknowledged the sale of a non-residential asset and the applicability of section 54F, but disallowed the exemption due to absence of claim and details. The Tribunal noted that the assessee had furnished sale and purchase deeds and revised computations evidencing investment in a residential house, satisfying the conditions for exemption under section 54F. The Tribunal further considered the Supreme Court ruling in Goetze India Ltd., as discussed in Jai Parabolic Springs Ltd., clarifying that while the limitation for claiming exemption in the return applies to the AO, the appellate authority is not so constrained and may allow exemption if facts warrant.

Applying these legal principles to the facts, the Tribunal concluded that the CIT(A) erred in dismissing the claim without considering the merits and without granting an opportunity of personal hearing. The Tribunal held that the assessee was eligible for deduction under section 54F, and the erroneous claim under section 54 should not deprive the assessee of legitimate relief. Consequently, the matter was remitted to the AO for fresh adjudication, directing that the exemption under section 54F be allowed based on the evidence on record and any further evidence the assessee may furnish, with due opportunity of hearing.

Regarding the levy of tax under section 115BBE, the Tribunal noted that no addition was made by the AO under this section, and the CIT(A) erred in confirming the levy. However, this issue was not extensively discussed, and the Tribunal did not uphold the levy.

In sum, the Tribunal's significant holdings include the following:

"The mention of section 144 in the last para of the assessment order appears to be an inadvertent mistake which needs to be ignored."

"The claim under a wrong section does not bar the assessee from making the claim under the correct section if the assessee is otherwise eligible."

"The limitation for allowing the deduction by filing a revised return is applicable only to the Assessing Officer and not to the Appellate Authority."

"Officers of the Department must not take advantage of ignorance of an assessee as to his rights and it is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs."

"The assessee shall be allowed a reasonable opportunity of being heard before deciding the issue in accordance with law."

These principles underscore the beneficial and liberal interpretation of sections 54 and 54F, the necessity of procedural fairness, and the appellate authority's power to rectify errors in claims to secure substantive justice.

Ultimately, the Tribunal allowed the appeal for statistical purposes, setting aside the orders of the CIT(A) and remitting the matter to the AO for fresh consideration of the deduction under section 54F, with directions to provide the assessee an opportunity of hearing and to decide the matter in accordance with law and evidence.

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