Capital Gains – Exemption u/s. 54G – Transfer of Unit from Urban Area to Non-Urban Area – Advances paid for the purpose of purchase and/or acquisition of the assets would certainly amount to utilisation by the assessee of the capital gains made by him for the purpose of purchasing and/ or acquiring the aforesaid assets.

The assessee, a private limited company, had an industrial unit at Majiwada, Thane, which was notified urban area as per notification dated 22nd September, 1967 issued u/s. 280Y(d) for the purpose of Chapter XXII-B. With a view to shift its industrial undertaking from an urban area to a non-urban area at Kurukumbh Village, Pune District, Maharashtra, it sold its land, building and plant and machinery situated at Majiwada, Thane to Shree Vardhman Trust for a consideration of Rs.1,20,00,000, and after deducting an amount of Rs.11,62,956, had earned a capital gain of Rs.1,08,33,044. Since it intended to shift its industrial undertaking from an urban area to a non-urban area, out of the capital gain so earned, the appellant paid by way of advances, various amounts to different persons for purchase of land, plant and machinery, construction of factory building, etc. Such advances amounted to Rs.1,11,42,973 in the year 1991-92. The appellant claimed exemption u/s. 54G of the Income-tax Act on the entire capital gain earned from the sale proceeds of its erstwhile industrial undertaking situated in Thane in view of the advances so made being more than the capital gain made by it. Section 54G was introduced by the Finance Act, 1987 with effect from assessment year 1988-89.

The Assessing Officer imposed a tax on capital gains, refusing to grant exemption to the appellant u/s. 54G. According to the Assessing Officer, non-urban area had not been notified by the Central Government and therefore the plea of shifting the non-urban area could not be accepted. Further, it could not be said that giving advance to different concerns meant utilisation of money for acquiring the assets. Hence, failure to deposit the capital gain in the Capital Gains Deposit Account by the assessee the claim could not be allowed.

The Commissioner of Income-tax (Appeals) dismissed the appellant’s appeal. The Income-tax Appellate Tribunal however, allowed the assessee’s appeal stating that even an agreement to purchase is good enough and that the Explanation to section 54G being declaratory in nature would be retrospective.

The High Court reversed the judgment of the Incometax Appellate Tribunal and held that as the notification declaring Thane to be an urban area stood repealed with the repeal of the section under which it was made, the appellant did not satisfy the basic condition necessary to attract section 54G, namely, that a transfer had to be made from an urban area to a non-urban area. Further, the expression “purchase” in section 54G could not be equated with the expression “towards purchase” and, therefore, admittedly as land, plant and machinery had not been purchased in the assessment year in question, the exemption contained in section 54G had to be denied.

The Supreme Court held that on a conjoint reading of the Budget Speech, Notes on clauses and Memorandum Explaining the Finance Bill of 1987, it was clear that the idea of omitting section 280ZA and introducing on the same date section 54G was to do away with the tax credit certificate scheme together with the prior approval required by the Board and to substitute the repealed provision with the new scheme contained in section 54G. It was true that section 280Y(d) was only omitted by the Finance Act, 1990, and was not omitted together with section 280ZA. However, this would make no material difference inasmuch as section 280Y(d) was a definition section defining ‘urban area” for the purpose of section 280ZA only and for no other purposes. It was clear that once section 280ZA was omitted from the statute book, section 280Y(d) had no independent existence and would for all practical purposes also be “dead”. Quite apart from this, section 54G(1) by its Explanation introduced the very definition contained in section 280Y(d) in the same terms. Obviously, both provisions were not expected to be applied simultaneously and it was clear that the Explanation to section 54G(1) repealed by implication section 280Y(d). Further, from a reading of the Notes on Clauses and the Memorandum of the Finance Bill, 1990, it was clear that section 280Y(d) which was omitted with effect from 1st April 1, 1990, was so omitted because it had become “redundant”. It was redundant because it had no independent existence, apart from providing a definition of “urban area” for the purpose of section 280ZA which had been omitted with effect from the very date that section 54G was inserted, namely, 1st April, 1988.

The Supreme Court further held that the idea of section 24 of the General Clauses Act is, as its marginal note shows, to continue uninterrupted subordinate legislation that may be made under a Central Act that is repealed and re-enacted with or without modification. It being clear in the present case that section 280ZA which was repealed by omission and re-enacted with modification in section 54G, the notification declaring Thane to be an urban area dated 22nd September, 1967, would continue under and for the purposes of section 54G. It was clear, therefore, that the impugned judgment in not referring to section 24 of the General Clauses Act at all had thus fallen into error.

The Supreme Court for all the aforesaid reasons was therefore, of the view that on omission of section 280ZA and its re-enactment with modification in section 54G, section 24 of the General Clauses Act would apply, and the notification of 1967, declaring Thane to be an urban area, would be continued under and for the purposes of section 54G. The Supreme Court held that a reading of section 54G makes it clear that the assessee is given a window of three years after the date on which transfer has taken place to “purchase” new machinery or plant or “acquire” building or land. The High Court had completely missed the window of three years given to the assessee to purchase or acquire machinery and building or land. This is why the expression used in section 54G(2) is “which is not utilised by him for all or any of the purposes aforesaid.” According to the Supreme Court, it was clear that for the assessment year in question all that was required for the assessee to avail of the exemption contained in the section was to “utilize” the amount of capital gains for purchase and acquisition of new machinery or plant and building or land. It was undisputed that the entire amount claimed in the assessment year in question had been so “utilized” for purchase and/or acquisition of new machinery or plant and land or building. If the High Court was right, the assessee had to purchase and/or acquire machinery, plant, land and building within the same assessment year in which the transfer takes place. Further, the High Court missed the key words “not utilized” in sub-section (2) which would show that it was enough that the capital gain made by the assessee should only be “utilized” by him in the assessment year in question for all or any of the purposes aforesaid, that is towards purchase and acquisition of plant and machinery, and land and building. Advances paid for the purpose of purchase and/or acquisition of the aforesaid assets would certainly amount to utilisation by the assessee of the capital gains made by him for the purpose of purchasing and/or acquiring the aforesaid assets.