ITAT Hyderabad Restores Section 54 Appeal Dismissed for Non-Prosecution — Mandates Fresh Adjudication on Merits

Background of the Dispute

In a significant procedural ruling, the Income Tax Appellate Tribunal, Hyderabad, intervened in the case of Shashidhar Nagam Vs ACIT (ITAT Hyderabad) concerning Assessment Year 2022-2023, where the first appellate authority had disposed of an appeal without examining the substantive grounds raised by the assessee. The matter revolved around the denial of a deduction under Section 54 of the Income Tax Act, 1961, amounting to ₹4,60,71,911, arising from the sale of six residential flats and subsequent purchase of a villa.

The Tribunal's intervention was not on the question of whether the exemption was ultimately admissible — that question remains open. Rather, the ITAT addressed a more fundamental procedural concern: whether the Commissioner (Appeals) could legally close an appeal merely because the assessee failed to respond to notices, without rendering any decision on the merits of the grounds raised.

Transaction at the Heart of the Dispute

During the relevant financial year corresponding to Assessment Year 2022-2023, the assessee sold six flats and used the proceeds to acquire a villa. A claim for exemption under Section 54 of the Income Tax Act, 1961, was filed on the basis that the cost of acquisition of the villa exceeded the sale consideration received from the disposal of the flats.

The Assessing Officer, however, declined to allow the Section 54 deduction and brought the entire capital gain of ₹4,60,71,911 to tax. Notably, the Assessing Officer assessed the income arising from the sale of the six flats under the head long-term capital gains — a classification that the assessee would later invoke as an internal inconsistency in the denial of the exemption.

The Problematic Submission: How Loose Drafting Created a Tax Dispute

A significant issue that emerged during assessment proceedings was a submission filed on behalf of the assessee that described him as being engaged in the business of real estate. The Assessing Officer relied on this characterisation to deny the Section 54 exemption on the premise that the properties sold were not capital assets but rather business stock, thereby disqualifying the assessee from claiming relief available only in respect of capital asset transfers.

The assessee, however, strongly contested this characterisation before the appellate authority. As recorded in the grounds of appeal before the ITAT:

"The authorities below failed to appreciate the record of the Appellant from which it would be evident that the Appellant was never involved in any business activity, and that the submission made on behalf of the Appellant in assessment proceedings is loosely worded without, and at any rate was an inadvertent incorrect statement submitted going by the evidences on record."