2026 (4) TMI 186 - AT - Income Tax

Mandatory reassessment notice and non-taxability of sale advances absent transfer or forfeiture shaped the tax treatment dispute.

In reassessment proceedings, notice under section 143(2) was treated as mandatory, and its absence was regarded as a jurisdictional defect that vitiated ... Validity of assessment on non issue of notice u/s. 143(2) - Taxability of advance received under uncompleted sale transaction - Real income doctrine - sale consideration received by the assessee under an Agreement to Sale - “Income from Other Sources” - Mandatory notice for scrutiny of return filed pursuant to reassessment notice - Validity of reassessment - HELD THAT: - The Tribunal held that service of notice u/s 143(2) is mandatory where the AO proceeds to scrutinise a return filed in response to a reassessment notice. Since the assessment was framed u/s 143(3) read with section 147 without issuance of such notice, the defect went to the root of the matter and rendered the assessment invalid. Hon'ble Bombay High Court in the case of Geno Pharmaceuticals Ltd. [2013 (10) TMI 218 - BOMBAY HIGH COURT] has dealt with the similar issue and held that “notice u/s. 143(2) is mandatory, and in absence of such service, Assessing Officer cannot proceed to make an inquiry on return filed in compliance with notice issued u/s. 148”[Paras 6] The assessment was held to be vitiated for want of mandatory notice under section 143(2). Taxability of advance received under uncompleted sale transaction - Income from other sources - Real income doctrine - Amount received as advance under an agreement to sale, where no sale deed was executed and no forfeiture was shown - primary basis adopted by the Ld. AO for making the addition is that assessee received the aforesaid sum and did not offer to tax - HELD THAT: - The Tribunal found that the amount was received only as advance towards proposed sale of immovable property. In the absence of execution of sale deed or transfer within the meaning of law, the receipt could not be taxed as capital gains. It also could not be brought under the residuary head merely because it was received, since an advance in such transaction retains the character of a liability unless adjusted on completion of transfer or forfeited under the agreement. As there was no material to show forfeiture during the relevant year, the receipt had not crystallised into income, and only real income, not hypothetical or contingent receipt, could be taxed. [Paras 6] The addition made under the head income from other sources was deleted. Final Conclusion: The Tribunal allowed the appeal, holding that the assessment was invalid for want of mandatory notice under section 143(2). It further held that the amount received as advance under the uncompleted sale agreement, not being shown to have been forfeited, could not be taxed as income from other sources. Issues: (i) Whether the reassessment was vitiated for want of notice under section 143(2) of the Income-tax Act, 1961. (ii) Whether the amount received under an agreement to sell could be taxed as income from other sources in the absence of transfer, execution of sale deed, or forfeiture of advance.Issue (i): Whether the reassessment was vitiated for want of notice under section 143(2) of the Income-tax Act, 1961.Analysis: The assessment was framed in reassessment proceedings, and the absence of notice under section 143(2) was treated as a jurisdictional defect. The statutory requirement was considered mandatory, and without such notice the Assessing Officer could not validly proceed to scrutinise the return filed in response to notice under section 148.Conclusion: The reassessment was held to be vitiated for want of notice under section 143(2), in favour of the assessee.Issue (ii): Whether the amount received under an agreement to sell could be taxed as income from other sources in the absence of transfer, execution of sale deed, or forfeiture of advance.Analysis: The receipt was characterised as an advance toward proposed sale consideration of immovable property. In the absence of execution of a registered sale deed or transfer within the meaning of section 2(47), the receipt could not be taxed as capital gains. The amount also could not be brought to tax under the residuary head as income from other sources merely on receipt, because an advance ordinarily retains the character of a liability unless adjusted against completed transfer or forfeited under the agreement. No material showed forfeiture during the relevant year, and the principle of real income was applied to reject taxation of a contingent or hypothetical receipt. Reference was also made to the rule applicable to forfeiture of advance in relation to transfer of capital assets under section 51.Conclusion: The addition of the amount as income from other sources was deleted, in favour of the assessee.Final Conclusion: The reassessment and the impugned addition were set aside, and the appeal succeeded in full.Ratio Decidendi: In reassessment proceedings, notice under section 143(2) is mandatory, and an advance received under an agreement to sell does not become taxable income unless it is shown to have been transferred, forfeited, or otherwise crystallised as income under the Act.