The Chandigarh Bench of the Income Tax Appellate Tribunal (ITAT) has held that the Commissioner of Income Tax (Appeals) [CIT(A)] cannot enhance an assessee’s income by introducing a completely new source of income that was never examined by the Assessing Officer during reassessment proceedings. 

The bench of Laliet Kumar (Judicial Member) and Manoj Kumar Aggarwal (Accountant Member) has ruled that once the very basis for reopening an assessment ceases to exist, the appellate authority cannot sustain reassessment by taxing unrelated issues.

The assessee had originally filed her return of income declaring a total income of ₹33.38 lakh for Assessment Year 2013-14. Subsequently, the Assessing Officer received information that she had purchased an immovable property in Sector-26, Panchkula for ₹79.20 lakh. Based on this information, reassessment proceedings were initiated under Section 148 of the Income Tax Act.

During reassessment, the Assessing Officer alleged that the assessee failed to satisfactorily explain the source of investment in the property and consequently treated the investment of ₹79.20 lakh as unexplained under Section 69 of the Act, completing the assessment under Sections 147 read with 144.

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In appeal, the assessee produced sale deeds, bank statements and supporting documents demonstrating that the Panchkula property had been purchased entirely from the sale proceeds of another property situated at IMT Manesar, Gurgaon.

After examining the evidence, the CIT(A) accepted the explanation and deleted the addition of ₹79.20 lakh made under Section 69, recording a categorical finding that the purchase consideration had indeed been paid from the sale proceeds received through banking channels.

However, while disposing of the appeal, the CIT(A) noticed that no long-term capital gain had been offered to tax on the sale of the Manesar property. Exercising powers under Section 251, the appellate authority enhanced the assessee’s income by computing Long-Term Capital Gain of ₹98.94 lakh, holding that the assessee had failed to establish indexed cost of construction and eligibility for exemption under Sections 54/54F.

Before the Tribunal, the assessee argued that the enhancement was wholly without jurisdiction since the reassessment had been initiated only to verify the source of investment in the Panchkula property. The issue of capital gains on the sale of the Manesar property had never formed part of the reasons recorded for reopening, nor had it been examined by the Assessing Officer.

It was further contended that once the addition relating to unexplained investment was deleted, the very foundation of reassessment disappeared, leaving no scope to introduce a fresh source of income through appellate enhancement.

The Tribunal accepted the assessee’s contentions and observed that the reassessment proceedings were confined exclusively to examining the source of investment in the Panchkula property.

It noted that the Assessing Officer had never examined the taxability of capital gains arising from the sale of the Manesar property, conducted no enquiry on that issue and recorded no finding whatsoever in the reassessment order.

Relying upon the Supreme Court decisions in CIT v. Rai Bahadur Hardutroy Motilal Chamaria and CIT v. Shapoorji Pallonji Mistry, as well as the Full Bench judgment of the Delhi High Court in CIT v. Sardari Lal & Co., the Tribunal held that although the appellate authority enjoys wide powers, such powers do not extend to assessing a completely new source of income that had never been considered by the Assessing Officer.

The department relied upon the Full Bench decision of the Punjab & Haryana High Court in CIT v. Smt. Aruna Luthra to justify the enhancement.

The Tribunal rejected the reliance, observing that the said judgment dealt exclusively with rectification proceedings under Section 154 and had no application to the powers of enhancement exercised under Section 251.

According to the Tribunal, the judgment did not address whether the CIT(A) could introduce an entirely new source of income unrelated to the issue for which reassessment was initiated.

The Tribunal also relied upon the decisions of the Delhi High Court in Ranbaxy Laboratories Ltd. v. CIT and the Bombay High Court in CIT v. Jet Airways (I) Ltd., reiterating that where no addition survives on the issue forming the basis of reopening, the Revenue cannot independently assess income on unrelated matters.

The Bench observed that permitting the CIT(A) to tax new issues years later would effectively nullify the statutory safeguards and limitation periods governing reassessment proceedings under Sections 147 to 149 of the Income Tax Act.

It further remarked that what the Assessing Officer himself could not have done directly during reassessment could not be achieved indirectly through appellate enhancement.

Although the enhancement itself was held to be without jurisdiction, the Tribunal also examined the matter on merits.

It found that the property sold at Manesar was not merely a vacant plot but a residential house property, as evidenced by the sale deed describing the property as a residential house. An Occupation Certificate issued in 2008. Approved building plans. Canara Bank housing loan documents. Architect’s valuation report. Other supporting evidence establishing substantial residential construction.

Accordingly, the Tribunal held that the assessee was entitled to claim indexed cost of construction while computing long-term capital gains.

The Tribunal further held that the assessee had invested the sale proceeds in purchasing another residential plot at Panchkula and constructed a residential house within the prescribed statutory period.

It ruled that exemption under Sections 54 and 54F could not be denied merely because the unutilized amount had not been deposited in the Capital Gain Account Scheme before the due date under Section 139(1), particularly when the substantive investment conditions stood satisfied.

Describing Sections 54 and 54F as beneficial provisions requiring liberal interpretation, the Tribunal allowed the exemption.

Allowing the appeal, the Chandigarh ITAT held that the CIT(A) lacked jurisdiction to introduce a completely new source of income through enhancement under Section 251 after deleting the very issue for which reassessment was initiated. The enhancement of ₹98.94 lakh towards long-term capital gains was liable to be deleted. On merits also, the assessee was entitled to indexed cost of construction and exemption under Sections 54/54F.

Accordingly, the appeal of the assessee was allowed in full.

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