ITAT Hyderabad on Section 263: Capital Gains in Cancelled Sale Deed and AO’s Duty of Enquiry

Background of the Appeal

The dispute in M. Abdul Mannan Vs ITO (ITAT Hyderabad) revolves around whether the Principal Commissioner of Income Tax (“Ld. PCIT”) was justified in invoking revisionary jurisdiction under Section 263 of the Income Tax Act 1961 in a case where:

  • A registered sale deed of immovable property recorded receipt of sale consideration and transfer of possession;
  • A subsequent cancellation deed was executed several years later; and
  • The Assessing Officer (“Ld. AO”) accepted the assessee’s claim that no capital gains were taxable, primarily relying on that cancellation deed and related explanation, without detailed verification.

The Hyderabad Bench of the ITAT upheld the Ld. PCIT’s order under Section 263, holding that the assessment order was erroneous and prejudicial to the interests of Revenue because:

  • The AO did not carry out necessary enquiries and verifications regarding the sale consideration, possession and genuineness of cancellation; and
  • Explanation 2(a) to Section 263(1) was squarely attracted.

In addition, the Tribunal examined whether the appeal filed with a delay of 376 days could be entertained in light of the Supreme Court’s Covid-19 limitation extension orders and concluded that the appeal was within extended limitation and hence admissible.

Condonation of Delay: Effect of Supreme Court’s Covid Limitation Orders

Limitation Issue in the Appeal

The assessee filed the appeal before the ITAT against the Section 263 order dated 11.03.2021 with an apparent delay of 376 days. An affidavit was filed explaining the delay, and the assessee relied on the Supreme Court’s suo motu directions in:

  • Suo Motu Writ Petition (Civil) No.3 of 2020
  • Read with Miscellaneous Application No.665 of 2021 in Miscellaneous Application No.21 of 2022, order dated 10.01.2022

The assessee’s contention was:

  1. The period of limitation for filing the appeal fell between 15.03.2020 and 28.02.2022; and
  2. As per para 5(I) and 5(III) of the Supreme Court’s order, such limitation stood extended and an additional 90 days from 01.03.2022 was available where limitation expired during that Covid period.

Since the appeal was actually filed on 30.05.2022, it was argued that it was within the extended time allowed by the Apex Court.

The Departmental Representative did not seriously contest condonation.

Tribunal’s Finding on Limitation

The ITAT carefully reproduced and examined para 5(I)–5(III) of the Supreme Court’s order, particularly the following directions:

  • Period from 15.03.2020 to 28.02.2022 to be excluded for limitation under all general/special laws for all judicial/quasi-judicial proceedings.
  • If limitation expired between 15.03.2020 and 28.02.2022, parties get 90 days from 01.03.2022; where remaining period from 01.03.2022 exceeds 90 days, the longer period would apply.

Applying these directions, the Tribunal held:

  • The limitation for filing the appeal against the Section 263 order dated 11.03.2021 fell squarely within the Covid-affected period;
  • Therefore, the limitation for filing the appeal stood extended up to 30.05.2022; and
  • Since the assessee actually filed the appeal on 30.05.2022, there was no effective delay once the Supreme Court’s extension was considered.

Accordingly, the delay was condoned and the appeal was admitted for adjudication on merits.

Issues Raised Before the ITAT

Main Grounds in the Appeal

Broadly, the assessee’s grounds challenged:

  • The assumption of jurisdiction by the Ld. PCIT under Section 263 to direct the AO to apply Section 45;
  • The allegation that the original assessment order was neither erroneous nor prejudicial to the interest of Revenue;
  • The Ld. PCIT’s failure, according to the assessee, to appreciate the cancellation deed and the position that no capital gains were chargeable; and
  • The assertion that the AO had adopted a “possible view”, so Section 263 could not be invoked.

An additional ground alleged invalidity of the Section 263 order on account of absence of proper DIN as per CBDT Circular No.19/2019, but at hearing, the assessee did not press this ground; the ITAT therefore dismissed it as not pressed.