Capital Gains Account Scheme — Due Date for Deposit

1.2 Ss.(4) of S. 54F provides that the amount of net
consideration, which is not appropriated by the assessee towards the purchase of
the new asset within one year before the date of transfer of the original asset,
or which is not utilised by him for the purchase or construction of the new
asset before the date of furnishing the return of income u/s.139, shall be
deposited by him before furnishing such return into an account with a bank under
the Capital Gains Account Scheme, and utilised in accordance with such scheme.
If this is done, the amount actually utilised by the assessee for the purchase
or construction of the new asset together with the amount so deposited is deemed
to be the cost of the new asset for computing the exemption u/s.54F. In other
words, pending actual utilisation for purchase or construction of the new house,
the amount has to be deposited in the Capital Gains Account Scheme. The amount
deposited under the scheme can be utilised only for the purpose of making
payment for purchase or construction of the new house.

1.3 At times, it may so happen that the assessee fails to
deposit the amount under the Capital Gains Account Scheme before the due date
for filing the return of income u/s.139(1), but actually purchases or constructs
a new residential house before the due date for filing belated return of income
u/s.139(4), i.e., within the stipulated time period of two/three years.
The question that arises in such a case is whether the benefit of the exemption
u/s.54F can yet be availed of by the assessee in spite of such failure.

1.4 While the Delhi Bench of the Tribunal has held that the
assessee is not entitled to the exemption in such a case, the Bangalore Bench of
the Tribunal has held that the assessee can still avail of the benefit of the
exemption if such utilisation is before the due date for filing belated return
of income u/s.139(4).

2. Taranbir Singh Sawhney’s case :

2.1 The issue first came up before the Delhi Bench of the
Tribunal in the case of Taranbir Singh Sawhney v. Dy. CIT, 5 SOT 417.

2.2 In this case, the assessee sold certain shares on 25th
June 1996, and deposited the sale proceeds in his bank account on 3rd August
1996. He purchased a residential house on 1st December 1997, without depositing
any amount under the Capital Gains Account Scheme. Thereafter, the assessee
filed his return of income on 13th November 1998, claiming exemption u/s.54F of
the capital gains on sale of shares on account of property purchased on 1st
December 1997.

2.3 The Assessing Officer denied the claim for exemption
u/s.54F, on the ground that the conditions specified in that Section were not
fulfilled by the assessee, since the assessee did not deposit such consideration
in an account under the Capital Gains Account Scheme pending purchase of a
residential house. According to the Assessing Officer, the date of acquisition
of the new residential property was 1st December 1997, which was after the due
date applicable to the assessee of furnishing his return of income u/s.139(1),
i.e., 30th June 1997. According to the Assessing Officer, the net
consideration was neither appropriated towards the purchase of residential
property before the due date, nor was it deposited in the account under the
Capital Gains Account Scheme before that date, resulting in non-fulfilment of
the conditions prescribed u/s.54F. The AO therefore denied the exemption
u/s.54F.

2.4 Before the Commissioner (Appeals), the assessee submitted
that he had opened an independent bank account for depositing the sale proceeds
for onward investment in a residential property, that the entire sale proceeds
so deposited in his bank ac-count were ultimately used for acquiring residential
property, that this account was only used for the purchase of property, and
therefore, in sum and in substance, he had complied with the provisions of S.
54F. the assessee claimed that not maintaining a bank account under the Capital
Gains Account Scheme was a technical breach, the conditions specified in S. 54 F
having been substantially complied with. The Commissioner (Appeals) rejected the
assessee’s contentions and dismissed the appeal.

2.5 Before the Tribunal, it was argued that the denial of
exemption was done on a mere technical lapse. It was claimed that the sale
proceeds of shares were utilised only for the purpose of investment in the new
house property and not for any other purpose. Though the sale proceeds were not
deposited in a bank account under the Capital Gains Account Scheme 1988, they
were kept in a separate bank account and utilised only for the purpose of
investment in the house property. Accordingly, the assessee had substantially
complied with the conditions specified in S. 54F. It was submitted that the
exemption provisions should be construed liberally, as held by the Supreme Court
in the case of Bajaj Tempo Ltd. v. CIT, 196 ITR 188, and that the
provisions of S. 54F should be construed in the manner to further its objectives
and not to restrain it.

2.6 The Tribunal noted the fact that the appropriation of net
consideration in the house property was not made before the due date of filing
of the return as specified u/s.139(1), and that therefore the net consideration
ought to have been deposited in a bank account under the Capital Gains Account
Scheme, 1988. Since this had not been done, according to the Tribunal, it
disentitled the assessee from exemption. According to the Tribunal, the plea of
the assessee that it was a mere technical breach was not a relevant criterion to
decide the eligibility of the assessee for exemption. The Tribunal also held
that the plea of the assessee that the provisions be construed liberally so as
to further its objectives was not tenable having regard to the clear provisions
of law. The Tribunal therefore rejected the assessee’s claim for exemption
u/s.54F.

3. Nipun Mehrotra’s case :

3.1 The issue again recently came up before the Bangalore
Bench of the Tribunal in the case of Nipun Mehrotra v. ACIT, 110 ITD 520.

3.2 In this case, the assessee sold shares for a total net sale consideration of Rs.11,10,833, out of which Rs.9,00,000 was paid as part consideration for acquisition of a new flat between February 2000 and June 2000. The assessee had earlier paid an amount of Rs.22lakhs to the builder for purchase of the flat between February 1999 and October 1999.A further sum of Rs.4 lakhs was paid on 4th September 2000 and Rs.3,98,000 was paid after September 2000 till March 2001. The assessee accordingly claimed exemption u/ s.54F of the entire capital gains.

3.3 The Assessing Officer considered only the payments made after the sale of shares, and since the assessee had made payments of only Rs.9 lakhs before the due date of filing of the return of income, denied exemption u/ s.54F in respect of net sale consideration of Rs.2,10,833, on the ground that the assessee should have invested this amount in the Capital Gains Account Scheme before the due date of filing the return of income for assessment year 2000-01, i.e., before 31st July 2000.

3.4 The Commissioner (Appeals) confirmed the order of the Assessing Officer, holding that the language of the statute was clear and unambiguous and that, in the name of liberal interpretation, the provisions could not be circumvented.

3.5 Before the Tribunal, the Department argued that the assessee had not placed any evidence on record to suggest that the sale consideration received from the sale of shares were utilised for the purchase of the new asset, as a sum of Rs.22 lakhs was paid before the shares were sold. According to the Department, the investment of Rs.22 lakhs could not be considered for the purpose of allowing exemption u/ s.54F.

3.6 The tribunal considered the provisions of S. 54F(4). It noted that the assessee had to utilise the amount for the purchase or construction of the new asset before the date of furnishing the return of income u/s.139. Since there was no mention of any sub-section of S. 139, according to the Tribunal, one could not interpret that S. 139 mentioned therein should be read as S. 139(1). Following the decision of the Gauhati High Court in the case of CIT v. Rajesh Kumar [alan, 286 ITR 274 in the context of S. 54(2), the Tribunal was of the view that S. 139 mentioned in S. 54F included not only S. 139(1),but all sub-sections of S. 139.

3.7 According to the Tribunal, the intention behind the insertion of Ss.(4) in S. 54F was to dispense with the rectification of assessments in case the taxpayer failed to acquire the corresponding new asset. Therefore, if the new asset was acquired before the date of filing of the return u/s.139, then the assessee could file such return and there would be no need of rectification. The Tribunal noted that the decision of the Gauhati High Court was not available to the Delhi Bench of the Tribunal in the case of Taranbir Singh Sawhney (supra).

3.8 The Tribunal therefore held that the assessee was entitled to the exemption of the entire amount of Rs.11,10,833 u/s.54F.

4. Observations:

4.1 It is true that the Bangalore Bench has not noted the fact that the subsequent part of S. 54F(4) expressly refers to S. 139(4) – “Such deposit being made in any case not later than the due date applicable in the case of the assesee for furnishing the return of income under Ss.(l) of S. 139 in an account….. “

4.2 However, it is essential to understand the background behind the introduction of the requirement of depositing the amount in the Capital Gains Account Scheme. Prior to introduction of this requirement, it was noticed that assessees would claim the exemption u/ s.54F, by stating their intention to invest in a residential house within the prescribed time period. There was no mechanism for the Assessing Officer to verify whether such investment was made within the prescribed time, and it was felt that many assessees obtained the exemption without any actual investment in a residential house. Hence, this requirement was introduced to ensure that the exemption was not obtained under a false statement that the investment would be made within the prescribed period.

4.3 From that perspective, so long as the investment is made before the date of filing of the income tax return, whether u/s.139(1) or u/s.139(4), the purpose of introduction of the Capital Gains Account Scheme is achieved, namely, ensuring that the investment has actually been made before the return is filed.

4.4 As held by the Gauhati  High Court in the case of Rajesh Kumar [alan (supra), in construing a beneficial enactment, the view that advances the object of the enactment and serves the purpose must be preferred to the one which obstructs the object and paralyses the purpose of the beneficial enactment. Therefore, even if the investment in the house property has been made before the date of filing of the belated return, the purpose of the legislature is achieved, and it is not appropriate to deny the exemption on the ground that there has been a delay in investment, and accordingly a failure to invest in a bank account under the Capital Gains Account Scheme.

4.5 The requirement to invest in a bank account under the Capital Gains Account Scheme is therefore really a procedural requirement to ensure that investment is made in a residential house as claimed in the return of income, where such investment has already not been made. To deny the exemption when there has been substantial compliance by actual investment in a house, on the ground that investment has not been made in the Capital Gains Account Scheme within the prescribed time limit, appears to be unjustified. The time limit therefore needs to be read down as including the time limit for filing of a belated return of income, as held by the Gauhati High Court.

4.6 Therefore,  the view  taken  by the Bangalore Bench of the Tribunal  appears  to be a better view of the matter, as compared  to the view taken by the Delhi Bench.