Reassessment enhancement cannot tax a new income source; residential property exemptions apply where substantive conditions are met.

In reassessment, the first appellate authority cannot enhance the assessment by taxing long-term capital gain from a source never examined by the Assessing Officer; enhancement on that basis was beyond jurisdiction. The property sold was treated as a residential house property on the strength of the sale deed, occupation certificate and supporting records, so indexed cost of construction and improvement was allowable in computing capital gains. Deduction under sections 54/54F could not be refused merely because the unutilised amount was not deposited in the Capital Gain Account Scheme, as the substantive investment conditions were satisfied within time.

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Issues: (i) Whether the first appellate authority could enhance the assessment by bringing to tax long-term capital gain arising from a source not examined in the reassessment proceedings; (ii) whether the property sold by the assessee was a residential house property so as to permit indexed cost of construction/improvement in computing capital gains; (iii) whether deduction under sections 54/54F could be denied merely for non-deposit of the unutilized amount in the Capital Gain Account Scheme.

Issue (i): Whether the first appellate authority could enhance the assessment by bringing to tax long-term capital gain arising from a source not examined in the reassessment proceedings.

Analysis: The reassessment was initiated only on the basis of alleged unexplained investment in the Panchkula property. The assessment proceedings, reasons recorded, and reassessment order were confined to that issue. The taxability of capital gain arising from sale of the Manesar property was never examined by the Assessing Officer. The settled principle applied by the Court is that wide appellate powers do not extend to introducing a new source of income which was not considered in the assessment or reassessment proceedings, and enhancement cannot be used to assess income that was outside the scope of the recorded reasons for reopening.

Conclusion: The enhancement made by the first appellate authority on account of long-term capital gain was beyond jurisdiction and could not be sustained.

Issue (ii): Whether the property sold by the assessee was a residential house property so as to permit indexed cost of construction/improvement in computing capital gains.

Analysis: The sale deed described the asset as a residential house plot, the occupation certificate showed existence of a constructed building fit for occupation, and the supporting documents, including approved plans, loan records and valuation material, established that substantial residential construction existed. The finding that only a vacant plot had been sold was unsupported by the record.

Conclusion: The property was a residential house property and the assessee was entitled to indexed cost of construction/improvement while computing capital gains.

Issue (iii): Whether deduction under sections 54/54F could be denied merely for non-deposit of the unutilized amount in the Capital Gain Account Scheme.

Analysis: The assessee had invested the sale consideration in purchase of the Panchkula property and construction of a residential house within the prescribed period. The provisions of sections 54 and 54F are beneficial and were applied liberally. On the facts, the substantive conditions stood satisfied, and the absence of deposit in the Capital Gain Account Scheme could not defeat the claim.

Conclusion: Deduction under sections 54/54F could not be denied on the technical ground invoked by the appellate authority.

Final Conclusion: The enhancement and the consequential addition were unsustainable both on jurisdictional grounds and on merits, and the assessee's appeal succeeded in full.

Ratio Decidendi: In reassessment proceedings, the first appellate authority cannot, by way of enhancement, bring to tax a new source of income not examined by the Assessing Officer, and beneficial exemptions for residential property investments cannot be denied where the substantive statutory conditions are otherwise fulfilled.

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