The assessee HUF sold shares during the period from May 1995
to January 1996 and earned long- term capital gains of Rs.27,01,204. It then
entered into an agreement to purchase a row house with one Mr. H and paid
Rs.30.50 lakhs. The agreement was dated 26-8-1996. However, the above agreement
was cancelled due to a demolition drive by the Thane District Authorities. Mr. H
paid back the money on 15-5-1997 and 7-6-1997.
Subsequently, the assessee entered into an agreement with S
company engaged in construction of a building known as Abhijit. The said
building was under construction. The assessee paid Rs.30.50 lakhs on 28-3-1996
and purchased a ‘Block of Shares’ of S company. Through this, he became entitled
to flat no. 5 of the under-construction building. The assessee got occupancy
certificate on 5-12-1998. The Assessing Officer held that :
(a) the assessee’s investment in the row house is a
purchase of ‘new asset’ within the meaning of S. 54F.
(b) the cancellation of transaction with Mr. H is to be
treated as transfer of ‘new asset’. Since this ‘new asset’ is transferred
before completion of 3 years, the condition of S. 54F(3) is violated. The
Assessing Officer ignored the investment in Abhijit building and denied
exemption u/s.54F.
On appeal the CIT(A) held that :
(a) in view of cancellation of agreement for purchase of
row house, there was neither purchase nor any construction within the
stipulated time limit of S. 54F.
(b) considering January 1996 i.e., the last date on which
capital gains arose, the last date for purchase of new asset is March 1998.
(c) The assessee’s case is that of purchase of
asset and not construction of asset.
(d) The assessee has not utilised the capital gains before
filing of return and has also not deposited in capital gains scheme.
On appeal, the Mumbai Tribunal held from the sequence of
events :
(a) The assessee’s intention to invest the capital gains
was a bona fide one. The Assessing Officer has not brought any mala fide
intention. The assessee cannot buy a defective house i.e., row house just to
qualify for exemption under the Income-tax Act. Therefore the contention of
the lower authorities in treating the row house is misplaced.
(b) As regards, the capital gains scheme, the assessee had
already parted with capital gains by paying for acquisition of row house.
There is no way it would have complied with the condition of depositing in
bank for capital gains scheme.
(c) The assessee purchased certain shares of S company.
This entitled him to block no. 5 of Abhijit building. Hence the transactions
are interlinked. So the purchase of shares in S company is nothing but
investment in residential house.
(d) As regards, the time limitation of two years, a
combined reading of Board Circulars Nos. 471 and 672 show that the assessee’s
case has to be treated as that of ‘construction’.
