Facts of the Case

The assessee filed his original return of income for A.Y. 2002-03 on 13.07.2003 declaring total income of Rs.1,68,000/-.

Subsequently, the Department came to know that the assessee had converted a leasehold property into freehold in his own name and thereafter sold the property, thereby earning capital gains. Accordingly, notice under Section 148 was issued on 11.02.2008 requiring filing of return within 30 days.

The assessee did not file a return within the stipulated period. On 10.11.2008, he filed a letter stating that the original return filed on 13.07.2003 may be treated as return filed in response to notice under Section 148.

During assessment proceedings, it was noticed that freehold charges of Rs.10,06,644/- were paid. The assessee claimed that the payment was made by Shri Rajat Kamal Mitra, on whose behalf he acted under power of attorney. A confirmation on plain paper was furnished, stating that Shri Mitra had paid the amount in cash.

The Assessing Officer found the transaction suspicious. The assessee failed to produce Shri Mitra, failed to furnish bank statements, and could not prove identity, creditworthiness or genuineness of the transaction. The AO therefore:

  • Added Rs.10,06,644/- under Section 69C as unexplained investment.
  • Treated the surplus as Short-Term Capital Gain.
  • Disallowed 10% of claimed expenses due to lack of evidence.

The CIT(A) upheld the assessment. The matter reached ITAT in the first round, where it was remanded on the legal issue regarding non-issuance of notice under Section 143(2). In the second round, CIT(A) again dismissed the appeal. The assessee filed the present appeal before the ITAT.

 Issues Involved

  1. Whether reassessment proceedings were invalid due to non-issuance of notice under Section 143(2) after alleged filing of return in response to notice under Section 148.
  2. Whether the letter dated 10.11.2008 constituted a valid return under Section 148.
  3. Whether addition under Section 69C for freehold charges was justified.
  4. Whether capital gain was assessable as Short-Term or Long-Term Capital Gain.
  5. Whether 10% disallowance of expenditure was justified.

 Petitioner’s Arguments

The assessee contended that:

  • The letter dated 10.11.2008 requesting that original return be treated as return under Section 148 constituted valid compliance.
  • Since return was filed, issuance of notice under Section 143(2) was mandatory as per judicial precedents including:
    • Hotel Blue Moon (321 ITR 362, SC)
    • CIT vs Rajiv Sharma (336 ITR 678, All HC)
  • Absence of notice under Section 143(2) rendered reassessment void ab initio.
  • Freehold charges were paid by Shri Rajat Kamal Mitra and duly confirmed.
  • Reliance was placed on CIT vs Smt. P.K. Noorjahan (237 ITR 570).
  • Freehold charges should alternatively be treated as cost of improvement.
  • Capital gain should be assessed as Long-Term Capital Gain.
  • 10% ad-hoc disallowance of expenditure was unjustified.

 Respondent’s Arguments

The Revenue submitted that:

  • The assessee failed to file return within 30 days as required under Section 148.
  • Even extended opportunity granted under Section 142(1) was not complied with.
  • Letter dated 10.11.2008 was beyond permitted time and constituted a non-est return.
  • Since no valid return was filed, issuance of notice under Section 143(2) was not mandatory.
  • Reassessment under Sections 147/144 was valid.
  • Assessee failed to establish identity, creditworthiness and genuineness of Shri Mitra.
  • Disallowance and additions were justified.

 Court Order / Findings

On Legal Issue – Notice under Section 143(2)

  • A return filed beyond the statutory or extended time limit cannot be treated as a valid return.
  • The letter dated 10.11.2008 did not constitute a valid return under Section 148.
  • In absence of a valid return, issuance of notice under Section 143(2) was not mandatory.
  • Assessment under Sections 147 read with 144 was legally sustainable.

The Tribunal distinguished:

  • Hotel Blue Moon (SC)
  • CIT vs Rajiv Sharma (All HC)

holding that these judgments apply only where a valid return has been filed.

Ground Nos. 1 to 7 challenging validity of reassessment were dismissed.

 

On Merits – Freehold Charges & Capital Gains

  • Assessee failed to produce Shri Rajat Kamal Mitra.
  • No bank statements were furnished.
  • No evidence of transfer of Rs.4,50,000/- was produced.
  • Creditworthiness and genuineness were not established.

Therefore:

  • Addition of Rs.10,06,644/- under Section 69C was upheld.
  • Capital gains were rightly assessed in the hands of the assessee.
  • Capital gains were correctly treated as Short-Term Capital Gain since property was converted to freehold and sold within short period.
  • Alternative claim of cost of improvement was rejected.
  • 10% disallowance of expenses was upheld due to lack of supporting evidence.

 Important Clarification

  • Issuance of notice under Section 143(2) is mandatory only where a valid return is filed.
  • A belated or non-est return does not trigger Section 143(2) requirement.
  • Assessment under Section 147 read with Section 144 is legally valid where no valid return is filed.
  • Judicial precedents including Hotel Blue Moon and Rajiv Sharma apply only in cases involving valid returns.

Link to download the order -  https://www.mytaxexpert.co.in/uploads/1770885898_SURENDRAKUMARMISHRAALLAHABADVS.ACITCIR2ALLAHABAD2.pdf 

Disclaimer

 

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.