EXEMPTION U/S.54F IN CASES WHERE SECTION 50C APPLICABLE

Capital gains on sale of an asset other than a residential house, in the hands of an individual or a Hindu Undivided Family, is eligible for an exemption u/s.54F on purchase or construction of a residential house within the specified period, subject to fulfilment of other conditions. The assessee enjoys a complete exemption from tax where the cost of the new asset is equal or more than the net consideration of the asset transferred and he will get a pro-rated exemption where the cost of the new asset is less than the net consideration.

A question has arisen, in the above facts, as to how such exemption u/s.54F is to be computed in a case where the provisions of section 50C apply. Should one take the sale consideration recorded in the documents of transfer, or should one take the stamp duty value as per section 50C, is an issue which is calling our attention.

To illustrate, if a plot of land is sold for Rs.50 lakhs with its stamp duty valuation being Rs.75 lakhs, and if the cost of the new residential house is Rs.50 lakhs, would the entire capital gains be exempt from tax u/s.54F or would only two-thirds of the capital gains be exempt from tax under this section?

While the Lucknow and the Bangalore Benches of the Tribunal have taken a view that for the purposes of computation of exemption u/s.54F, the stamp duty value being the deemed full value of consideration as per section 50C is to be considered, the Jaipur Bench of the Tribunal has held that it is the actual sale consideration recorded in the document of transfer which is to be considered and not the stamp duty value.

Mohd. Shoib’s case:
The issue first came up before the Lucknow Bench of the Tribunal in the case of Mohd. Shoib v. Dy. CIT, 1 ITR (Trib.) 452.

In this case, the assessee sold 7 plots of land, which had been subdivided from a larger plot of land, for a total consideration of Rs.1.47 crore. In respect of 4 plots of land sold for Rs.83 lakh, the consideration was lower than the valuation adopted by the stamp duty valuation authorities, such valuation being Rs.1,00,61,773. The assessee had purchased a residential house out of a part of the total sale consideration, and claimed exemption u/s.54F which was calculated with reference to the consideration recorded in the documents of transfer by ignoring the difference of Rs.17,61,773 between the stamp duty value and the recorded consideration.

The Assessing Officer enhanced the returned capital gains by Rs.17,61,773, by invoking the provisions of section 50C. In appeal before the Commissioner (Appeals), the assessee challenged the applicability of the provisions of section 50C, which was rejected by the Commissioner (Appeals).

In further appeal to the Tribunal, besides challenging the applicability of section 50C, the assessee claimed that once the assessee had reinvested the net consideration in purchasing the new residential house as per section 54F, then no capital gains would remain to be computed for taxation and therefore provisions of section 50C could not be invoked. It was argued that once the exemption was claimed u/s.54F, there was no occasion to charge capital gains and therefore provisions of section 45 could not be invoked as no capital gains could be computed. Reliance was placed on the use of the words ‘save as otherwise provided in section 54, 54B, . .’ in section 45 for the argument that once the charging section failed, substitution of the sale consideration by the stamp duty valuation would not arise. It was further argued that investment in new asset could be made only of real sale consideration, and not of the notional sale consideration. Once there was no real sale consideration, there could not be any capital gains on notional sale consideration.

On behalf of the Department, it was argued that neither section 45 nor section 50C would fail if the assessee had made investment in exempted assets as per section 54, 54F, etc. According to the Department, section 54F only provided the method of computation of capital gains and did not provide exemption from the charging section 45. It was submitted that if an assessee did not invest the full consideration into a new asset, then he would be required to compute the capital gains in the manner laid down in sections 48 by applying the provisions of section 50C, and the exemption from capital gains was available only to the extent of investment made by the assessee in the new asset. Where a part investment was made in the new asset, then capital gains would be charged with respect to the sale consideration not invested. It was argued that the provisions of section 54, 54F, etc. followed the charging section 45, and that the charging section 45 did not follow the exemption provisions. It was submitted that merely because the assessee did not get an opportunity to invest the difference between the notional sale consideration as per section 50C and sale consideration shown by the assessee, the charging of capital gains on the basis of notional sale consideration as per section 50C could not be waived. According to the Department, there were many provisions where a notional income is taxed without giving any occasion to the assessee to make investment out of such notional income and claim deductions under Chapter VIA, etc. It was thus claimed that the charging section could not be made otiose merely because the assessee did not get an opportunity to claim deduction or make investments for claiming deduction in respect of additional income assessed.

While upholding the applicability of section 50C to the facts of the case, the Tribunal observed that section 45 provided a general rule that profits or gains arising from the transfer of a capital asset would be chargeable to income-tax under the head capital gains, except as provided in section 54, 54F, etc. According to the Tribunal while charging capital gains on profits and gains arising from the transfer of a capital asset, one had to see and take into account section 54F, and to the extent provided in section 54F and other similar sections, capital gains would not be chargeable. The moment there was a profit or gain on transfer of a capital asset, capital gains would be chargeable within the meaning of section 45, except and to the extent it was saved by section 54F and like sections.

Analysing the provisions of section 54F, the Tribunal noted that it was not the case that merely because provisions of section 54F were applicable to an assessee, that the entire capital gains would be saved and that no capital gains be chargeable. Saving u/s.54F depended upon investment in new asset of net consideration received by the assessee on sale of old asset. The quantum of net consideration was the result of transfer of the old asset, charge of the capital gain was only on the old asset, and investment in new asset did not and could not nullify or take away the case from the charging section 45. According to the Tribunal, first it was section 45 which came into operation, then it was section 48 which provided computation of capital gains, and thereafter it was section 54F which saved the capital gains to the extent of investment in the new asset.

The Tribunal observed that once section 45 came into operation as a result of transfer of capita