IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 15.11.2010 CORAM: THE HONOURABLE MR. JUSTICE F.M. IBRAHIM KALIFULLA and THE HONOURABLE MR.JUSTICE N.KIRUBAKARAN Tax Case (Appeal) No.1029 of 2010 V.Lakshmi Reddy .. Appellant vs. The Income Tax Officer Ward-IV(1) 121, Mahatma Gandhi Road Chennai 600034. .. 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/2008. For Appellant : Mrs.Pushya Sitaraman, Senior Counsel for Mr.T.R.Janardhanan For Respondent : Mr.Patty B.Jagannathan Standing Counsel for Income-tax ---
(Judgment of the Court was delivered by
The assessee has come forward with this appeal raising the following substantial questions of law:
“1. Whether the amount spent for rectifying the defects in the title to the property and removing encumbrance to transfer, is expenditure incurred in connection with the transfer for the purpose of computation of capital gains as per Section 48 of the Income Tax Act? and
2. Whether on the facts and circumstances of the case, the Appellate Tribunal was right in upholding the assessment u/s 144 when neither a notice u/s 142(1), nor a show cause notice proposing to make a best judgment assessment were issued by the Assessing Officer prior to making the assessment?”
2. The brief facts, which are required to be stated, are that the appellant is an individual and she filed the returns upto the assessment year 1998-1999 and she did not file the return for the assessment year 1999-2000. In the letter dated 10.12.2002, where the subject matter related to the non-filing of the return for the assessment year 2001-2002, in paragraph 3, the Assessing Authority called upon the appellant to furnish the details regarding the returns filed by the appellant for the assessment years 1999-2000, 2000-2001 and 2002-2003 to enable him to up-date the records of the appellant.
3. The Assessing Authority was stated to have realised that the income (capital gain) chargeable to tax had escaped assessment and after getting approval from the competent authority, initiated proceedings under Section 147 of the Act and issued a notice under Section 148 of the Act, on 15.03.2006. The said notice was served by affixture on 23.03.2006.
4. Thereafter, a date of hearing was also fixed as 27.10.2006 at 11.00 a.m. by notice dated 10.10.2006 issued under Section 143(2) of the Act. The hearing was adjourned to 08.11.2006 at 3.30 p.m. It was subsequently adjourned to 15.11.2006. The appellant’s advocate appeared on 15.11.2006. He was asked to produce the copy of the agreement for sale and also the details of the property and such other details for passing an order of assessment.
5. According to the respondent, as the appellant failed to furnish the details, a proposal to complete the assessment was issued on 05.12.2006. The appellant was asked to submit her objections/views on the proposal on or before 11.12.2006. It was also made clear that if the appellant failed to submit her objections/views before the said date, the assessment would be completed on the lines indicated in the said notice.
6. The appellant failed to submit her objections before 11.12.2006. The order of assessment came to be passed by the respondent on 12.12.2006, wherein the tax liability was determined along with interest in all a sum of Rs.1,74,71,219/-. The Assessing Authority also indicated that penalty proceedings under Section 271(1)(c) would be initiated separately.
7. It is in the above stated background, the appellant went before the Tribunal and the Tribunal by the order impugned in this appeal dated 26.02.2010 passed in ITA.No.1852/2008 having rejected the stand of the appellant, the appellant has come forward with this appeal.
8. We heard Mrs.Pushya Sitaraman, learned senior counsel for the appellant and Mr.Patty B.Jagannathan, learned standing counsel for the respondent.
9. The learned senior counsel in her submissions contended that when the ultimate order of assessment dated 12.12.2006 was best judgment assessment made under Section 144 of the Act, by virtue of the first proviso to Section 144(1) of the Act, there should have been a specific notice calling upon the appellant to show cause by fixing a date and time to be specified in the notice to state why the assessment should not be completed to the best of judgment. The learned senior counsel would contend that in the case on hand, there was non-compliance of such statutory requirements for making an assessment under Section 144 and therefore, the whole proceedings was ab initio void.
10. Learned senior counsel would then contend that in the case on hand, the appellant had valid grounds to contend that the entirety of the sale consideration, namely Rs.1.10 crores under the development agreement dated 18.11.1998 with M/s. CEE DEE YES Estates Ltd. to develop the property, by which she received a part of consideration, could not be acted upon, as the original title deeds of the property was with the Jammu & Kashmir Bank Ltd., as collateral security for the loan availed by M/s.PAN Clothing and Consolidated Ltd., Chennai, that to get back the title deeds from the bank, the appellant filed a suit, which was pending in the High Court and because of the said litigation and yet another litigation preferred by one of her creditors, namely Papa Reddy Navaneetha, who had a decree in her favour and got an order of attachment of the property in question and that to get the property free from such litigations, the appellant had to spend substantial amount, which the appellant is entitled to be deducted from the total consideration of Rs.1.10 crores agreed between her and the developer.
11. The learned senior counsel would contend that the said expenditure was intrinsically linked to the transfer of the capital asset and that as the payment made was wholly and exclusively in connection with the transfer of capital asset, the appellant was entitled to seek for deduction of the said payment. The learned senior counsel contended that such a proposition of the appellant, as found 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 issue being purely a question of law, which in the event of having satisfactorily demonstrated before the Assessing Authority, the appellant is entitled to succeed, which would enure to her benefits and therefore, the appellant should be given an opportunity to put forth 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 the respondent had complied with the requirements of Section 144 of the Act, and the proviso contained therein and therefore the best judgment order passed by the respondent dated 12.12.2006 cannot be interfered with.
14. The learned standing counsel would further contend that the contention now raised on behalf of the appellant as regards the entitlement of certain deductions having not been raised either before the Assessing Authority or before the Tribunal, cannot be permitted to be raised at this stage.
15. According to the learned standing counsel, the appellant was given several opportunities to submit her detailed objections and the appellant failed to avail those opportunities. Therefore, no more opportunity should be extended to the appellant. According to the learned standing counsel, inasmuch as the respondent has initiated proceedings by invoking Section 143 of the Act, for passing orders under Section 147 of the Act, the respondent was fully empowered to pass orders under Section 144 of the Act, by making a best judgment assessment in the absence of any material or detail furnished by the appellant.
16. Having heard the learned counsel for the respective parties and having perused the material papers placed before us, insofar as the contention based on the first proviso to Section 144 of the Act is concerned, we find that the earliest notice issued by the respondent dated 10.12.2002 in which while issuing the said notice with specific reference to the assessment year 2001-2002, the appellant was called upon to furnish the details regarding the returns filed by the appellant for the assessment years 1999-2000, 2000-2001 and 2002-2003. While calling upon such details, it was stated that it would enable the respondent to up-date the records. The question for consideration is whether such a notice issued on 10.12.2002 can be taken as a notice issued under Section 142(1) of the Act, in order to state that that would attract second proviso to Section 144(1) of the Act and thereby the specific requirement as provided under the first proviso to Section 144(1) of the Act, may not be required to be complied with.
17. It is not in controversy that based on a notice issued under Section 148 of the Act, for an assessment to be made under Section 147 of the Act, in the absence of any materials having been furnished, it would be open for the Assessing Authority to make a best judgment assessment as provided under Section 144 of the Act. However, the only point of controversy is as to when such a best judgment assessment would fall under Section 144 of the Act, non-compliance of the specific prescription contained in the first proviso to Section 144(1) of the Act, would invalidate the entire step taken by the respondent for making an assessment, when such step was taken by initiating a notice under Section 148/147 of the Act.
18. In our considered opinion, having regard to the wide powers available under Section 148 of the Act, the very initiation of the proceedings made under the said Section by issuing notice dated 15.03.2006 cannot be held to be invalidated, merely because the ultimate order of assessment was stated to be one of best judgment assessment falling within Section 144 of the Act. At best, when the proceedings under Section 148 came to be ultimately culminated in an order of assessment of best judgment, the assessee can only claim an opportunity of hearing and when such an opportunity was extended to the appellant, there would be little scope to contend that the whole proceedings would be void ab initio. We are not therefore inclined to 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 an issue, which has to be examined with reference to the material papers, which the appellant is bound to satisfactorily exhibit before the Assessing Authority to support her stand. As far as the said issue is concerned, we are convinced that the issue is purely a question of law. The question whether the expenses alleged to have been incurred by the appellant in order to get the property free from so called legal entanglement and that the appellant was eligible to seek for deduction of such expenditure for determining the tax liability is purely a question of law. In fact, in the decision relied upon by the appellant, the distinction in respect of point of law has been decided by this Court relating to the claim for deduction of money paid against the discharge of mortgage by the vendee, as decided in CIT vs. Vajrapani Naidu reported in (2000) 241 ITR 560, wherein the decision of the Supreme Court in Arunachalam vs. CIT reported in (1997) 227 ITR 222 came to be followed, was distinguished by making a specific reference to the facts involved in the 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 legal consequence of an expenditure incurred by the assessee and as to the assessee’s entitlement for deduction of such expenditure while assessing the capital gains. In fact, at page 226, the very same questions of law framed therein were as under:
“1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding, and had valid materials to hold that the sum of Rs.2 lakhs paid by the assessee to Shri.A.M.Buhari is an expenditure incurred wholly and exclusively in connection with the transfer of the Bradford undertaking?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the sum of Rs.1.5 lakhs received by the assessee from India Tobacco Co. Ltd. and passed on to Shri A.M.Buhari did not become part of the consideration for sale in the hands of the assessee-company and as such the sum of Rs.1.5 lakhs is not available for assessment in the hands of the assessee as part of the sale consideration?
21. On the said question of law, in the discussion made in paragraph 3 at page 227 and also the ultimate conclusion at pages 230 and 231 were to the following effect:
“….. The proceedings in the litigation clearly show that a sum of Rs.2 lakhs was paid to A.M.Buhari in settlement of his claim against the transfer of the assets of the company, more particularly, against the hotel undertaking which was to be transferred in favour of India Tobacco Company Limited and he received the money in full and final settlement of his claims against all the respondents in the company petition including the assessee-company. As far as the sum of Rs.5 lakhs contributed by A.M.Buhari is concerned, it was paid to him under the same compromise. We are concerned only with the balance amount of Rs.2 lakhs. We are of the view that if a sum of Rs.2 lakhs was not paid, the litigation would go on, and the asessee-company with a view to purchase peace with A.M.Buhari to enable it to transfer the property in favour of India Tobacco Company Limited had paid the money to A.M.Buhari. We are of the view that the entire chain of events started from the contribution made by A.M.Buhari to the company and the payments made by the company to A.M.Buhari show that there is an inextricable link between the payment to A.M.Buhari and the transfer of the capital asset. We are of the view that the sum of Rs.2 lakhs was paid to A.M.Buhari over and above his contribution of Rs.5 lakhs so as to pave the way for easy transfer of the property in favour of India Tobacco Company Ltd. In other words, we are of the view that only by the payment of Rs.2 lakhs, the assessee was in a position to transfer the property, viz. capital asset in favour of India Tobacco Company Limited, and hence, we hold that the payment was made wholly and exclusively in connection with the transfer of the capital asset.”
We therefore hold that the amount of Rs.2 lakhs was paid to get over the difficulties created by A.M.Buhari for the sale of the property and unless the amount was paid, the transfer of property would not have taken place at all. We, therefore, hold that the Appellate Tribunal was right in holding that the payment had an intimate connection with the transfer of the undertaking as by allowing the litigation to go on the hands of the company would be tied against the transfer of the undertaking in favour of India Tobacco Company Limited and the assessee would not have realised the sale consideration from the prospective purchaser.
In so far as a sum of Rs.1.5 lakhs paid by India Tobacco Company Limited is concerned, we are of the view that though the sum of Rs.1.5 lakhs was paid by the said company only to settle the claim of A.M.Buhari, the money was received by the assessee in connection with the transfer of the hotel undertaking and it would form part of sale consideration. However, since the money was paid by the assessee-company, it would also constitute an expenditure wholly and exclusively in connection with the transfer. In the case of payment of Rs.50,000/-, the same analogy would apply. In so far as the litigation expenditure of a sum of Rs.16,000/- is concerned, we hold that the Appellate Tribunal was right in holding that the litigation expenditure was also incurred wholly and exclusively in connection with the transfer and thus, it was deductible.
Accordingly, we answer the questions of law referred to us as under:
In the affirmative, against the Revenue and in favour of the assessee.
In view of the answer to the first question, no answer is necessary to the second question.
In the affirmative, against the Revenue and in favour of the assessee.”
22. Since the said question is purely a question of law, we are of the view that though the appellant failed to raise those issues before the Tribunal though it was raised in its reply dated 09.12.2006 submitted before the Assessing Authority, we are of the view that the appellant should be given an opportunity to explain her stand. The stand of the appellant, as raised in her reply dated 09.12.2006, could not be considered by the Assessing Authority, inasmuch as the said reply was submitted before the Assessing Authority only on 13.12.2006 i.e. after the order of assessment came to be passed on 12.12.2006. In fact, in the notice dated 05.12.2006, the Assessing Authority has specifically required the appellant to submit her objections/views on or before 11.12.2006, but, unfortunately the appellant’s reply dated 09.12.2006 was stated to have been submitted only on 13.12.2006 i.e. after the order of assessment dated 12.12.2006.
23. We are of the view that on that score, the appellant should not be deprived of a fair opportunity of hearing, inasmuch as the said issue is a legal issue and if the appellant is able to demonstrate before the Assessing Authority on the said issue by producing satisfactory materials, the appellant would be entitled to gain substantial benefits. We are, therefore, convinced that the appellant should be granted an opportunity for substantiating her claim on the first question of law raised.
24. Solely with that view while setting aside the orders of the Appellate Authority dated 12.12.2006 as well as that of the Tribunal dated 26.02.2010, we remit the matter back to the Assessing Authority to enable the appellant to substantiate her claim, as raised in the first question of law. The said question of law is, therefore, answered in favour of the appellant/assessee. It is for the appellant to substantiate before the Assessing Authority as to the entitlement of her claim, as raised in the said question of law with relevant materials.
25. The appeal stands allowed with the above direction to the respondent/Assessing Authority to decide the said question of law, after giving due opportunity to the appellant and pass appropriate orders in accordance with law. No costs.
1. The Secretary
Central Board of Direct Taxes
2. Income Tax Appellate Tribunal
Madras ‘D’ Bench
3. The Commissioner of Income-Tax (Appeals)-VIII
4. The Income Tax Officer
121, Mahatma Gandhi Road