Section 54G — Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking to non-urban area — Investment by assessee in land and building for its business in non-urban area — Whether is it necessary that the investment in land and building in non-urban area is for the purposes of the business of the industrial undertaking transferred — Held, No.

Section 54G — Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking to non-urban area — Investment by assessee in land and building for its business in non-urban area — Whether is it necessary that the investment in land and building in non-urban area is for the purposes of the business of the industrial undertaking transferred — Held, No.

The assessee-company was carrying on its business of manufacturing activity at its leased premises in Mumbai for more than 45 years. Due to severe competition and high operational overheads in Mumbai, the assessee incurred losses and the activity was commercially not feasible. During the financial year 1999-2000, it decided to shift its undertaking to a non-urban area. As the plant and machinery was very old, the assessee sold them immediately, but for surrendering the tenancy rights it took some time and after protracted negotiations with the lessor, the leased premises on which the industrial undertaking operated was finally surrendered on 1-10-2003 and compensation of Rs.4.12 crore was received. It earned capital gain of an equivalent amount as the cost of acquisition of the leased premise was nil. Out of this amount the assessee invested Rs.1.4 crore in Capital Gain Account Scheme and Rs.1.14 crore in purchase of land and building in non-urban area. The assessee claimed deduction u/s.54G of the amount of Rs.2.54 crore and offered the balance amount as taxable income.

According to AO, the assessee sold its entire plant and machinery in the financial year 1999-2000 and since there was no existence of an undertaking, having sold the entire plant & machinery, the claim u/s.54G, which provides for exemption for shifting of industrial undertaking from urban area to non-urban area is not eligible to the assessee. However, the CIT(A) on appeal allowed the claim of the assessee.

Held:

On closer reading of the provisions of section 54G the Tribunal noted that whereas u/s.54G(1)(a), the requirement is that the new machinery or plant has to be purchased for the purposes of the business of the industrial undertaking, section 54G(1)(b) merely requires that the acquisition of building or land or construction of a building should be for the purposes of its business in such non-urban area. In other words, the phrase ‘of the industrial undertaking’, which is there in clause 1(a) is conspicuously missing in clause 1(b). It further compared the provisions of section 54G with section 54D and noted that while section 54D mandates that, for the capital gains to exempt, the new land or building, have to be used only for either shifting or re-establishing or establishing an industrial undertaking (and no other purpose), the provisions of section 54G of the Act permits the use of capital gains for acquiring land or building or constructing building for the purposes of (any) business in the non-urban area. Thus, according to the Tribunal, the provisions of section 54G can be interpreted that assessee should carry on any business in non-urban area. If the amounts are utilised for acquisition of assets for the purpose of its business, this should qualify for the purpose of exemption u/s.54G as there is no requirement that the land and building should be used for the purpose of the business of industrial undertaking.

The Tribunal also did not agree with argument of the AO that the assessee’s industrial undertaking ceased to exist in 1999-2000. According to it, the assessee was in the process of shifting and even the section itself provides that shifting was ‘in course of or in consequence of’ of such industrial undertaking.