By C. N. Vaze, Shailesh Kamdar, Chartered Accountants
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17 (2008) 24 SOT 312 (Mum.)
Mukesh G. Desai HUF v. ITO
ITA No. 2077 (Mum.) of 2007
A.Y. : 1996-97. Dated : 24-6-2008
S. 54F of the Income-tax Act, 1961 — On facts, investment of
long-term capital gain in a flat in a building under construction was a case of
‘construction’ and time limit of three years (and not two years) was applicable
— Exemption u/s.54F was available.
The assessee invested a sum of Rs.30.50 lacs with a builder
for purchase of a row house. Subsequently, the assessee having come to know that
there was a drive by District Authorities for demolition of row houses,
cancelled the aforesaid agreement dated 26-8-1996 and received back whole amount
from the builder. Subsequently, the assessee entered into an agreement with a
company ‘S’, which was engaged in construction of a building known as Abhijit,
and paid a sum of Rs.30.50 lacs to ‘S’ for purchasing ‘block of shares’ of
company ‘S’ and got them transferred to his name. On this basis, the assessee
became entitled to allotment of a flat in the under-construction building,
Abhijit. The said building was constructed and the assessee got occupancy
certificate from the Municipal Corporation of Greater Mumbai (MCGM). The
assessee’s claim for exemption u/s.54F was denied by the Assessing Officer, on
the ground that the investment in the row house was an investment for purchase
of a ‘new asset’ as per Ss.(1) of the S. 54F and that cancellation of the above
transaction amounted to transfer of new asset during the lock-in period of 3
years, violating the condition of Ss.(3) of S. 54F. He, therefore, ignored the
investment in flat in Abhijit building and, thus, denied the exemption u/s.54F.
The CIT(A) held that the assessee’s case is the case of
purchase of new asset and not the construction of new asset and, accordingly,
the applicable time limit is of two years and not three years, hence the
exemption is not available. Further, the CIT(A) also observed that the assessee
has not utilised long-term capital gains for the purchase or construction of new
asset before filing the return of income u/s.139 and also failed to deposit the
same as per the scheme specified in Ss.(4) of S. 54F and, therefore, the
exemption should be denied on this ground also.
The Tribunal held that the assessee was entitled to exemption
u/s.54F. The Tribunal relied on the decisions in the following cases :
(a) CIT v. T. N. Aravinda Reddy, (1979) 120 ITR 46/
2 Taxman 541
(b) Jagan Nath Singh Lodha v. ITO, (2004) 85 TTJ 173
(Jodh.)(Para 6)
(c) Asst. CIT v. Smt. Sunder Kaur Sujan Singh Gadh,
(2005) 3 SOT 206 (Mum.)(Para 6)
(d) Mrs. Seetha Subramanian v. Asst. CIT, (1996) 56
TTJ 417 (Mad.)
The Tribunal noted as under :
(a) The sequence of events in the instant case revealed
that the assessee’s intention to invest the capital gains in the residential
house to avail of the exemption u/s.54 was beyond any doubt. The Assessing
Officer had not established that the agreement with the first builder and the
agreement for cancellation were bogus. Therefore, the cancellation of the
agreement by the assessee would fall within the ambit of the doctrine of
caveat emptor (i.e., buyers beware) and surrender of row house was
legally justified. The assessee was not expected to proceed to buy a defective
residential house (new asset), which was prone to demolition by the Municipal
Authorities, in order to qualify for exemption for exemption u/s.54F.
Therefore, the decision of the lower authorities in treating the row house as
a new asset was misplaced.
(b) Ss.(3) of S. 54F stipulates that the ‘new asset’
purchased or constructed must not be transferred within the lock-in period of
3 years from the date of such purchase or construction of ‘new asset’. The
Assessing Officer denied the claim of exemption u/s.54F for the reason of
violation of the said condition, considering the row house as a ‘new asset’.
The assessee did not actually purchase a ‘new asset’ and, therefore, the
refund received by the assessee from ‘D’ in respect of the surrender of the
row house was not relatable to any transfer of the new asset. Resultantly, the
violation of the said condition in Ss.(3) of S. 54F did not arise.
(c) Ss.(4) of S. 54F provides for depositing the unutilised
capital gains in the bank as per the prescribed Capital Gain Scheme and manner
of taxing such gains if not utilised before the due date for furnishing the
return of income u/s.139. Since the assessee had already parted with the
capital gain before the due date for filing the return in connection with the
‘row house’ acquisition, there was no way in which the assessee would have
complied with the condition of depositing it in the bank as per Ss.(4) of S.
54F. There was no violation of the condition of Ss.(4) of S. 54F by the
assessee.
(d) Ignoring the events involving the surrendered row house
and on examination of the facts regarding the flat in Abhijit building, the
assessee’s investment of capital gain in the purchase of block of shares of
company ‘S’, which, in turn, got him entitled to a flat in the Abhijit
building, was within the period of three years. After all, the purchases of
block of shares of company ‘S’ and procuring the entitlement to a flat were
composite transactions which were interlinked. Therefore, the investment in
block of shares of the company ‘S’ was the investment of capital gain in the
flat.
