V.lakshmi Reddy v. The Income Tax Officer Ward-Iv(1)

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 15.11.2010 CORAM: THE HONOURABLE MR. JUSTICE F.M. IBRAHIM KALIFULLAandTHE HONOURABLE MR.JUSTICE N.KIRUBAKARAN Tax Case (Appeal) No.1029 of 2010 V.Lakshmi Reddy .. Appellant/Appellantvs. The Income Tax OfficerWard-IV(1)121, Mahatma Gandhi RoadChennai 600034... Respondent/Respondent Tax Case Appeal filed under Section 260A of the Income Tax Act,1961, against the order of the Income Tax Appellate Tribunal, Madras'D' Bench, Chennai dated 26.02.2010 passed in I.T.A.No.1852/Mds/2008against the order of the Commissioner of Income-Tax(Appeals)-VIII,Chennai dated 24.06.2008 and made in ITA NO.002/07-08 for theAssessment year 1999-2000 against the order of the Income Tax Officerward IV (1) Chennai dated 12.12.2006 and made in PAN/GIR No.AAB PR2379 E for the Assessment year 1999-2000. For Appellant : Mrs.Pushya Sitaraman, Senior Counsel for Mr.T.R.JanardhananFor Respondent : Mr.Patty B.Jagannathan Standing Counsel for Income-tax JUDGMENT (JUDGMENT OF THE COURT WAS DELIVERED BY F.M.IBRAHIM KALIFULLA,J.) The assessee has come forward with this appeal raising thefollowing substantial questions of law: "1. Whether the amount spent for rectifying thedefects in the title to the property and removingencumbrance to transfer, is expenditure incurred inconnection with the transfer for the purpose ofcomputation of capital gains as per Section 48 of theIncome Tax Act? and https://hcservices.ecourts.gov.in/hcservices/ 2. Whether on the facts and circumstances of thecase, the Appellate Tribunal was right in upholding theassessment u/s 144 when neither a notice u/s 142(1),nor a show cause notice proposing to make a bestjudgment assessment were issued by the AssessingOfficer prior to making the assessment?" 2. The brief facts, which are required to be stated, are thatthe appellant is an individual and she filed the returns upto theassessment year 1998-1999 and she did not file the return for theassessment year 1999-2000. In the letter dated 10.12.2002, where thesubject matter related to the non-filing of the return for theassessment year 2001-2002, in paragraph 3, the Assessing Authoritycalled upon the appellant to furnish the details regarding thereturns filed by the appellant for the assessment years 1999-2000,2000-2001 and 2002-2003 to enable him to up-date the records of theappellant. 3. The Assessing Authority was stated to have realised that theincome (capital gain) chargeable to tax had escaped assessment andafter getting approval from the competent authority, initiatedproceedings under Section 147 of the Act and issued a notice underSection 148 of the Act, on 15.03.2006. The said notice was served byaffixture on 23.03.2006. 4. Thereafter, a date of hearing was also fixed as 27.10.2006 at11.00 a.m. by notice dated 10.10.2006 issued under Section 143(2) ofthe Act. The hearing was adjourned to 08.11.2006 at 3.30 p.m. Itwas subsequently adjourned to 15.11.2006. The appellant's advocateappeared on 15.11.2006. He was asked to produce the copy of theagreement for sale and also the details of the property and suchother details for passing an order of assessment. 5. According to the respondent, as the appellant failed tofurnish the details, a proposal to complete the assessment was issuedon 05.12.2006. The appellant was asked to submit herobjections/views on the proposal on or before 11.12.2006. It wasalso made clear that if the appellant failed to submit herobjections/views before the said date, the assessment would becompleted on the lines indicated in the said notice. 5. According to the respondent, as the appellant failed tofurnish the details, a proposal to complete the assessment was issuedon 05.12.2006. The appellant was asked to submit herobjections/views on the proposal on or before 11.12.2006. It wasalso made clear that if the appellant failed to submit herobjections/views before the said date, the assessment would becompleted on the lines indicated in the said notice. 6. The appellant failed to submit her objections before11.12.2006. The order of assessment came to be passed by therespondent on 12.12.2006, wherein the tax liability was determinedalong with interest in all a sum of Rs.1,74,71,219/-. The AssessingAuthority also indicated that penalty proceedings under Section 271(1)(c) would be initiated separately. 7. It is in the above stated background, the appellant wentbefore the Tribunal and the Tribunal by the order impugned in this https://hcservices.ecourts.gov.in/hcservices/ appeal dated 26.02.2010 passed in ITA.No.1852/2008 having rejectedthe stand of the appellant, the appellant has come forward with thisappeal. 8. We heard Mrs.Pushya Sitaraman, learned senior counsel for theappellant and Mr.Patty B.Jagannathan, learned standing counsel forthe respondent. 9. The learned senior counsel in her submissions contended thatwhen the ultimate order of assessment dated 12.12.2006 was bestjudgment assessment made under Section 144 of the Act, by virtue ofthe first proviso to Section 144(1) of the Act, there should havebeen a specific notice calling upon the appellant to show cause byfixing a date and time to be specified in the notice to state why theassessment should not be completed to the best of judgment. Thelearned senior counsel would contend that in the case on hand, therewas non-compliance of such statutory requirements for making anassessment under Section 144 and therefore, the whole proceedings wasab initio void. 10. Learned senior counsel would then contend that in the caseon hand, the appellant had valid grounds to contend that the entiretyof the sale consideration, namely Rs.1.10 crores under thedevelopment agreement dated 18.11.1998 with M/s. CEE DEE YES EstatesLtd. to develop the property, by which she received a part ofconsideration, could not be acted upon, as the original title deedsof the property was with the Jammu & Kashmir Bank Ltd., as collateralsecurity for the loan availed by M/s.PAN Clothing and ConsolidatedLtd., Chennai, that to get back the title deeds from the bank, theappellant filed a suit, which was pending in the High Court andbecause of the said litigation and yet another litigation preferredby one of her creditors, namely Papa Reddy Navaneetha, who had adecree in her favour and got an order of attachment of the propertyin question and that to get the property free from such litigations,the appellant had to spend substantial amount, which the appellant isentitled to be deducted from the total consideration of Rs.1.10crores agreed between her and the developer. 11. The learned senior counsel would contend that the saidexpenditure was intrinsically linked to the transfer of the capitalasset and that as the payment made was wholly and exclusively inconnection with the transfer of capital asset, the appellant wasentitled to seek for deduction of the said payment. The learnedsenior counsel contended that such a proposition of the appellant, asfound favour in the decision of this Court, reported in 261 (2003)ITR 222 (Commissioner of Income-tax vs. Bradford Trading Co. P.Ltd.). 12. According to the learned senior counsel, the said issuebeing purely a question of law, which in the event of having 11. The learned senior counsel would contend that the saidexpenditure was intrinsically linked to the transfer of the capitalasset and that as the payment made was wholly and exclusively inconnection with the transfer of capital asset, the appellant wasentitled to seek for deduction of the said payment. The learnedsenior counsel contended that such a proposition of the appellant, asfound favour in the decision of this Court, reported in 261 (2003)ITR 222 (Commissioner of Income-tax vs. Bradford Trading Co. P.Ltd.). 12. According to the learned senior counsel, the said issuebeing purely a question of law, which in the event of having satisfactorily demonstrated before the Assessing Authority, theappellant is entitled to succeed, which would enure to her benefitsand therefore, the appellant should be given an opportunity to putforth the said contention before the Assessing Authority 13. As against the above submissions, Mr.Patty B.Jagannathan,learned standing counsel for the respondent, contends that therespondent had complied with the requirements of Section 144 of theAct, and the proviso contained therein and therefore the bestjudgment order passed by the respondent dated 12.12.2006 cannot beinterfered with. 14. The learned standing counsel would further contend that thecontention now raised on behalf of the appellant as regards theentitlement of certain deductions having not been raised eitherbefore the Assessing Authority or before the Tribunal, cannot bepermitted to be raised at this stage. 15. According to the learned standing counsel, the appellantwas given several opportunities to submit her detailed objections andthe appellant failed to avail those opportunities. Therefore, nomore opportunity should be extended to the appellant. According tothe learned standing counsel, inasmuch as the respondent hasinitiated proceedings by invoking Section 143 of the Act, for passingorders under Section 147 of the Act, the respondent was fullyempowered to pass orders under Section 144 of the Act, by making abest judgment assessment in the absence of any material or detailfurnished by the appellant. 16. Having heard the learned counsel for the respective partiesand having perused the material papers placed before us, insofar asthe contention based on the first proviso to Section 144 of the Actis concerned, we find that the earliest notice issued by therespondent dated 10.12.2002 in which while issuing the said noticewith specific reference to the assessment year 2001-2002, theappellant was called upon to furnish the details regarding thereturns filed by the appellant for the assessment years 1999-2000,2000-2001 and 2002-2003. While calling upon such details, it wasstated that it would enable the respondent to up-date the records.The question for consideration is whether such a notice issued on10.12.2002 can be taken as a notice issued under Section 142(1) ofthe Act, in order to state that that would attract second proviso toSection 144(1) of the Act and thereby the specific requirement asprovided under the first proviso to Section 144(1) of the Act, maynot be required to be complied with. 17. It is not in controversy that based on a notice issued underSection 148 of the Act, for an assessment to be made under Section147 of the Act, in the absence of any materials having been furnished, it would be open for the Assessing Authority to make abest judgment assessment as provided under Section 144 of the Act.However, the only point of controversy is as to when such a bestjudgment assessment would fall under Section 144 of the Act, non-compliance of the specific prescription contained in the firstproviso to Section 144(1) of the Act, would invalidate the entirestep taken by the respondent for making an assessment, when such stepwas taken by initiating a notice under Section 148/147 of the Act. 17. It is not in controversy that based on a notice issued underSection 148 of the Act, for an assessment to be made under Section147 of the Act, in the absence of any materials having been furnished, it would be open for the Assessing Authority to make abest judgment assessment as provided under Section 144 of the Act.However, the only point of controversy is as to when such a bestjudgment assessment would fall under Section 144 of the Act, non-compliance of the specific prescription contained in the firstproviso to Section 144(1) of the Act, would invalidate the entirestep taken by the respondent for making an assessment, when such stepwas taken by initiating a notice under Section 148/147 of the Act. 18. In our considered opinion, having regard to the wide powersavailable under Section 148 of the Act, the very initiation of theproceedings made under the said Section by issuing notice dated15.03.2006 cannot be held to be invalidated, merely because theultimate order of assessment was stated to be one of best judgmentassessment falling within Section 144 of the Act. At best, when theproceedings under Section 148 came to be ultimately culminated in anorder of assessment of best judgment, the assessee can only claim anopportunity of hearing and when such an opportunity was extended tothe appellant, there would be little scope to contend that the wholeproceedings would be void ab initio. We are not therefore inclinedto support such a contention raised on behalf of the appellant. We,therefore, answer the second question of law against the assessee. 19. So far as the first question of law is concerned, it is anissue, which has to be examined with reference to the materialpapers, which the appellant is bound to satisfactorily exhibit beforethe Assessing Authority to support her stand. As far as the saidissue is concerned, we are convinced that the issue is purely aquestion of law. The question whether the expenses alleged to havebeen incurred by the appellant in order to get the property free fromso called legal entanglement and that the appellant was eligible toseek for deduction of such expenditure for determining the taxliability is purely a question of law. In fact, in the decisionrelied upon by the appellant, the distinction in respect of point oflaw has been decided by this Court relating to the claim fordeduction of money paid against the discharge of mortgage by thevendee, as decided in CIT vs. Vajrapani Naidu reported in (2000) 241ITR 560, wherein the decision of the Supreme Court in Arunachalam vs.CIT reported in (1997) 227 ITR 222 came to be followed, wasdistinguished by making a specific reference to the facts involved inthe case covered by 261 ITR 222 (Commissioner of Income-tax vs.Bradford Trading Co. Ltd. 20. In page 227, the Division Bench has analysed the legalconsequence of an expenditure incurred by the assessee and as to theassessee's entitlement for deduction of such expenditure whileassessing the capital gains. In fact, at page 226, the very samequestions of law framed therein were as under: "1. Whether, on the facts and in the circumstancesof the case, the Appellate Tribunal was justified inholding, and had valid materials to hold that the sumof Rs.2 lakhs paid by the assessee to Shri.A.M.Buhariis an expenditure incurred wholly and exclusively inconnection with the transfer of the Bradfordundertaking? 2. Whether, on the facts and in the circumstancesof the case, the Appellate Tribunal was justified inholding that the sum of Rs.1.5 lakhs received by theassessee from India Tobacco Co. Ltd. and passed on toShri A.M.Buhari did not become part of theconsideration for sale in the hands of the assessee-company and as such the sum of Rs.1.5 lakhs is notavailable for assessment in the hands of the assesseeas part of the sale consideration? "1. Whether, on the facts and in the circumstancesof the case, the Appellate Tribunal was justified inholding, and had valid materials to hold that the sumof Rs.2 lakhs paid by the assessee to Shri.A.M.Buhariis an expenditure incurred wholly and exclusively inconnection with the transfer of the Bradfordundertaking? 2. Whether, on the facts and in the circumstancesof the case, the Appellate Tribunal was justified inholding that the sum of Rs.1.5 lakhs received by theassessee from India Tobacco Co. Ltd. and passed on toShri A.M.Buhari did not become part of theconsideration for sale in the hands of the assessee-company and as such the sum of Rs.1.5 lakhs is notavailable for assessment in the hands of the assesseeas part of the sale consideration? 21. On the said question of law, in the discussion made inparagraph 3 at page 227 and also the ultimate conclusion at pages230 and 231 were to the following effect: "..... The proceedings in the litigation clearlyshow that a sum of Rs.2 lakhs was paid to A.M.Buhariin settlement of his claim against the transfer of theassets of the company, more particularly, against thehotel undertaking which was to be transferred infavour of India Tobacco Company Limited and hereceived the money in full and final settlement of hisclaims against all the respondents in the companypetition including the assessee-company. As far asthe sum of Rs.5 lakhs contributed by A.M.Buhari isconcerned, it was paid to him under the samecompromise. We are concerned only with the balanceamount of Rs.2 lakhs. We are of the view that if asum of Rs.2 lakhs was not paid, the litigation wouldgo on, and the asessee-company with a view to purchasepeace with A.M.Buhari to enable it to transfer theproperty in favour of India Tobacco Company Limitedhad paid the money to A.M.Buhari. We are of the viewthat the entire chain of events started from thecontribution made by A.M.Buhari to the company and thepayments made by the company to A.M.Buhari show thatthere is an inextricable link between the payment toA.M.Buhari and the transfer of the capital asset. Weare of the view that the sum of Rs.2 lakhs was paid toA.M.Buhari over and above his contribution of Rs.5lakhs so as to pave the way for easy transfer of theproperty in favour of India Tobacco Company Ltd. Inother words, we are of the view that only by the payment of Rs.2 lakhs, the assessee was in a positionto transfer the property, viz. capital asset in favourof India Tobacco Company Limited, and hence, we holdthat the payment was made wholly and exclusively inconnection with the transfer of the capital asset." .... We therefore hold that the amount of Rs.2 lakhswas paid to get over the difficulties created byA.M.Buhari for the sale of the property and unless theamount was paid, the transfer of property would nothave taken place at all. We, therefore, hold that theAppellate Tribunal was right in holding that thepayment had an intimate connection with the transferof the undertaking as by allowing the litigation to goon the hands of the company would be tied against thetransfer of the undertaking in favour of India TobaccoCompany Limited and the assessee would not haverealised the sale consideration from the prospectivepurchaser. .... We therefore hold that the amount of Rs.2 lakhswas paid to get over the difficulties created byA.M.Buhari for the sale of the property and unless theamount was paid, the transfer of property would nothave taken place at all. We, therefore, hold that theAppellate Tribunal was right in holding that thepayment had an intimate connection with the transferof the undertaking as by allowing the litigation to goon the hands of the company would be tied against thetransfer of the undertaking in favour of India TobaccoCompany Limited and the assessee would not haverealised the sale consideration from the prospectivepurchaser. In so far as a sum of Rs.1.5 lakhs paid by IndiaTobacco Company Limited is concerned, we are of theview that though the sum of Rs.1.5 lakhs was paid bythe said company only to settle the claim ofA.M.Buhari, the money was received by the assessee inconnection with the transfer of the hotel undertakingand it would form part of sale consideration.However, since the money was paid by the assessee-company, it would also constitute an expenditurewholly and exclusively in connection with thetransfer. In the case of payment of Rs.50,000/-, thesame analogy would apply. In so far as the litigationexpenditure of a sum of Rs.16,000/- is concerned, wehold that the Appellate Tribunal was right in holdingthat the litigation expenditure was also incurredwholly and exclusively in connection with the transferand thus, it was deductible. Accordingly, we answer the questions of lawreferred to us as under:First question:In the affirmative, against the Revenue and infavour of the assessee.Second question:In view of the answer to the first question, noanswer is necessary to the second question.Third question:In the affirmative, against the Revenue and infavour of the assessee." https://hcservices.ecourts.gov.in/hcservices/ 22. Since the said question is purely a question of law, we areof the view that though the appellant failed to raise those issuesbefore the Tribunal though it was raised in its reply dated09.12.2006 submitted before the Assessing Authority, we are of theview that the appellant should be given an opportunity to explain herstand. The stand of the appellant, as raised in her reply dated09.12.2006, could not be considered by the Assessing Authority,inasmuch as the said reply was submitted before the AssessingAuthority only on 13.12.2006 i.e. after the order of assessment cameto be passed on 12.12.2006. In fact, in the notice dated 05.12.2006,the Assessing Authority has specifically required the appellant tosubmit her objections/views on or before 11.12.2006, but,unfortunately the appellant's reply dated 09.12.2006 was stated tohave been submitted only on 13.12.2006 i.e. after the order ofassessment dated 12.12.2006. 23. We are of the view that on that score, the appellant shouldnot be deprived of a fair opportunity of hearing, inasmuch as thesaid issue is a legal issue and if the appellant is able todemonstrate before the Assessing Authority on the said issue byproducing satisfactory materials, the appellant would be entitled togain substantial benefits. We are, therefore, convinced that theappellant should be granted an opportunity for substantiating herclaim on the first question of law raised. 24. Solely with that view while setting aside the orders of theAppellate Authority dated 12.12.2006 as well as that of the Tribunaldated 26.02.2010, we remit the matter back to the Assessing Authorityto enable the appellant to substantiate her claim, as raised in thefirst question of law. The said question of law is, therefore,answered in favour of the appellant/assessee. It is for theappellant to substantiate before the Assessing Authority as to theentitlement of her claim, as raised in the said question of law withrelevant materials. 24. Solely with that view while setting aside the orders of theAppellate Authority dated 12.12.2006 as well as that of the Tribunaldated 26.02.2010, we remit the matter back to the Assessing Authorityto enable the appellant to substantiate her claim, as raised in thefirst question of law. The said question of law is, therefore,answered in favour of the appellant/assessee. It is for theappellant to substantiate before the Assessing Authority as to theentitlement of her claim, as raised in the said question of law withrelevant materials. 25. The appeal stands allowed with the above direction to therespondent/Assessing Authority to decide the said question of law,after giving due opportunity to the appellant and pass appropriateorders in accordance with law. No costs.Sd/-Asst.Registrar/True Copy/Sub.Asst.Registrar ATR https://hcservices.ecourts.gov.in/hcservices/ To 1. The Secretary Central Board of Direct Taxes New Delhi. Central Board of Direct Taxes New Delhi. 2. The Assistant Registrar, Income Tax Appellate Tribunal Madras 'D' Bench, Rajaji Bhavan, Chennai. 3. The Commissioner of Income-Tax (Appeals)-VIII Chennai. 4. The Income Tax Officer Ward-IV(1) 121, Mahatma Gandhi Road Chennai 600034. 5. The Deputy Commissioner of Income Taxes (Appeals) Besant Nagar, Chennai. 1 cc To Mr.T.R. Janardhanan, Advocate Sr.81849 1 cc To Mr.Patty B. Jeganathan, Advocate Sr. 81869 T.C.(A) No.1029 of 2010 JSV(CO)Eu 9.12.10 https://hcservices.ecourts.gov.in/hcservices/