Decision cited :

Circular no. 14 - XZ (35) dated 11/04/1955 issued by CBDT laid down that the Officers and Department must not take advantage of ignorance of an assessee as to his rights. It is one of their duty to assist a taxpayer which in the long run benefit the Department that would inspire confidence in the minds of public.

In the case of Goetze (India) Ltd. v. CIT (2006) 284 ITR 323 the Apex Court has held that the power of the Tribunal under section 254 of the Income-tax Act, 1961, is to entertain for the first time a point of law provided the fact on the basis of which the issue of law can be raised before the Tribunal. The decision does not in any way relate to the power of the Assessing Officer to entertain a claim for deduction otherwise than by filing a revised return.

In the case of CIT v. Indian Express (Madurai) (P.) Ltd. (1983) 140 ITR 705 the Madrash High Court observed that unlike a suit in civil appeals, in tax litigation, it cannot be treated as a “lis” between two rival parties but the job of the AO is to arrive at the correct taxable income. Therefore, merely on account of fact that the assessee has not claimed exemption, the same could not have been denied.

In the case of CIT v. Pruthvi Brokers & Shareholders (2012) 349 ITR 336 (Bom) the hon’ble court has observed that the hon’ble Supreme Court in the case of National Thermal Power Corpn. Ltd. v. CIT [1998] 229 ITR 383 has not laid down as a matter  of law that there is a bar for the AO in entertaining the claim for deduction or otherwise than by filing a revised return.

In the case of CIT v. Jai Parabolic Springs Ltd. (2008) 306 ITR 42 (Delhi) wherein the hon’ble High Court has held that the Tribunal has power to allow deduction to assessee to which he was otherwise entitled even though no such claim was made in the return of income.

In the case of CIT v. J.H. Gotla (1985) 156 ITR 323 the Apex Court held that if strict literal construction leads to an absurd result, which is not subserved by the object of the legislation and if another construction is possible apart from strict literal construction is to be preferred to the stict literal construction.

Facts of the case :

The assessee, an individual by status, filed his return of income for AY 2010-11 and the same was processed accordingly. Later on, it was selected for scrutiny under CASS and a notice u/s. 143(2) of the Act was issued. As per the AIR data, the AO noticed that the assessee made transaction of sale of property of Rs. 51,91,000/-. The assessee neither admitted the said transaction of sale of property nor claimed exemption under any of the provisions of Income Tax Act in the return of income.

Therefore, the AO called upon the assessee to furnish the details of sale of property and reasons for not admitting the capital gains thereon.  

In response, the assessee furnished the information called for and stated that the assessee is entitled to exemption u/s 54F of the Act on the capital gains since his share of sale consideration of the property was utilised for construction of a residential property. The AO accepted the income returned and thereby accepted the utilisation of the sale consideration for construction of residential property. 

Proceedings before CIT u/s. 263 of the Act :

The CIT being the Revisional Authority noted that in the absence of disclosure of capital gains in return of income, the assessee is not entitled to get any deduction u/s. 54F. He also observed that the AO has not verified whether sale proceeds have actually been utilised for construction of house property and whether all the conditions laid down u/s. 54F have been fulfilled or not.

Thus, the CIT was of the opinion that the AO proceeded to complete the assessment without proper examination of the facts, thereby resulting in an assessment which is erroneous and prejudicial to the interest of the Revenue. Accordingly, the assessment was set aside with a direction to verify the facts and re-do the assessment as per law.

Proceedings before AO u/s.143(3) r.w.s 263 of the Act :

The AO passed an order u/s 143(3) r.w.s 263 of the Act wherein he observed that the assessee neither declared the transaction of sale of property nor made any claim of deduction u/s 54F of the Act in the return of income. In the absence of any claim, the assessee is not entitled to get any deduction u/s. 54F of the Act. Accordingly, the capital gains was added to the income of the assessee as 'undisclosed income' under the head long term capital gains.

Proceedings before CIT(A) :

CIT(A) opined that the Revisional Authority has given a categorical finding that the assessee is not entitled to get any deduction u/s. 54F for investment in new residential house and since the assessee has not appealed against the said order, it achieved finality. CIT(A), therefore, rejected the claim of the assessee.  

Issue before ITAT :

The judicial pronouncements have been given enough powers to the appellate authorities to approve the claim made by the assessee in appeal proceedings even if the assessee has not claimed it in the return of income.

The assessee submitted that the AO was never directed to disallow the claim of deduction u/s. 54F but AO was directed to verify as to whether the sale proceeds have actually been utilised for construction of house property and whether all the conditions laid down u/s. 54F have been fulfilled or not. Further, the AO and CIT(A) wrongly interfered the direction of the Revisional Authority and thereby failed to entertain the claim of the assessee which is against the Circular issued by CBDT (supra) and various High Court and ITAT decisions.

The DR submitted that the finding of the Revisional Authority that "AO ought not to have considered the claim u/s. 54F, in the absence of any claim", is an independent finding. If there was any grievance against the order of the Revisional Authority, an appeal should have been filed against such order rather than the consequential order passed by the AO.

ITAT’s verdict :

The ITAT noticed that the Revisional Authority has categorically directed  to verify the facts and re-do the assessment as per law, and in such an event it is a duty of the AO to consider the issue afresh.

The AO having now concluded that assessment, it was the duty of the CIT(A) being the CIT(A) to consider the issue on merits since the decision of the Supreme Court in the case of Goetze (India) Ltd. (supra) would not debar the CIT(A) to consider the fresh claim, if any, so as to arrive at the correct taxable income.