Reopening Assessment Under Section 147 Upheld; Cost of Improvement and Section 54 Exemption Reviewed

The ITAT Bangalore upheld the reopening of assessment under section 147, finding no jurisdictional error as the assessee filed a belated return only after notice under section 148. The claim for cost of improvement was disallowed due to lack of documentary evidence, but the tribunal directed the AO to allow a reasonable estimate of ₹800 per sq.ft for 918 sq.ft based on the sale deed, as the CIT(A) improperly disregarded the registered valuer's report without consulting the Departmental Valuation Officer. Regarding exemption under section 54, the AO was directed to verify if two adjacent houses were converted into one unit with a single kitchen and family; if so, the exemption would apply. The matter was remanded to the AO for fresh consideration on these issues.

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ISSUES:

Whether the Assessing Officer (AO) had jurisdiction to reopen assessment under section 148 of the Act where no return of income was originally filed by the assessee.Whether the AO complied with the requirements of notice under section 148A(b) and order under section 148A(d) of the Act, including adequacy of disclosure and correctness of approval authority.Whether the claim for cost of improvement to immovable property can be allowed without contemporaneous documentary evidence, relying on a registered valuer's report.Whether exemption under section 54 of the Act can be denied on the ground that two houses were purchased, despite the assessee's claim of conversion into a single unit.

RULINGS / HOLDINGS:

The AO did not err in assuming jurisdiction under section 148 as the assessee had not filed any return of income originally and filed a belated return only after issuance of notice under section 148; thus, "there is no error in the jurisdiction of the AO."The argument regarding non-issuance of notice under section 143(2) is without merit since the return was filed after notices under section 142(1), and the case law cited by the assessee was distinguishable on facts.The CIT(A) erred in discarding the registered valuer's report without seeking counter comments from the Departmental Valuation Officer; therefore, the cost of improvement claim requires fresh consideration by the AO.In the interest of justice, the Tribunal directed the AO to allow cost of improvement by applying a reasonable estimate of Rs. 800 per sq.ft. for the area of 918 sq.ft. as per the sale deed.The exemption under section 54 of the Act cannot be denied merely because two houses were purchased; the AO is directed to verify if the two houses have been converted into one unit, including factors such as presence of a common kitchen and number of families residing, and if so, exemption must be allowed.

RATIONALE:

The legal framework governing reopening of assessment under section 148 requires that income has escaped assessment and proper jurisdictional conditions are met; non-filing of original return and belated filing post notice satisfy these conditions.The procedural requirements under sections 148A(b) and 148A(d) were examined, but the Tribunal found no jurisdictional infirmity warranting quashing of reopening.The Tribunal applied the principle from the Supreme Court decision in Swati Industrial Estate vs. CIT that technical issues require expert opinion before discarding evidence; hence, the CIT(A)'s summary rejection of the valuer's report without departmental expert input was improper.The Tribunal adopted a pragmatic approach by allowing a reasonable estimate for cost of improvement to avoid remand delay, reflecting a doctrinal shift towards balancing procedural correctness with substantive justice.Regarding exemption under section 54, the Tribunal emphasized factual verification by the AO on whether the two houses constitute a single residential unit, aligning with the statutory intent of the exemption and avoiding mechanical denial based on purchase of multiple properties.

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