ALLOWABILITY OF CLAIM UNDER SECTION 54F OF THE INCOME-TAX ACT, 1961
RATIO DECIDENDI
The assessee is not expected to proceed to buy a defective residential house (new asset), which is prone to demolition by the Municipal Authorities in order to qualify for exemption under the provisions of Income Tax Act; exemption under section 54F is available to the assessee, if the intention of the assessee from the very beginning is to invest the long term capital gains in the new asset, though certain conditions are not met for genuine facts and circumstances.
IN THE ITAT, ‘B’ BENCH, MUMBAI
Mukesh G. Desai, HUF
v.
ITO
ITA NO. 2077/MUM OF 2007
June 24, 2008
RELEVANT EXTRACTS :
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8. We have heard the rival submissions and perused the orders of the lower authorities. The facts of the case, the grounds of the assessee and orders of the authorities given birth to number of issues in connection with the claim of exemption under section 54F. These issues include (i) whether the Assessing Officer is right in treating the unsuccessful investment of long term capital gains in the row house no 30 as purchase of new asset as per subsection (1) of section 54F and in treating the cancellation of said purchase of row house in June 1997 as transfer of new asset in violation of conditions in subsection (3) of section 54F, which provides for lock in period of 3 years for transfer of a new asset from the date of its purchase, (ii) whether such cancelled purchase of new asset provides necessary immunity from attracting the provisions of subsection (4) of section 54F relating to depositing the capital gains in the bank, (iii) whether Assessing Officer and Commissioner (Appeals) were justified in rejecting the assessee’s claim that the construction of flat n 5 in the under construction building named Abhijit, is the new asset and not the cancelled purchase transaction of row house no 30, (iv) whether the depositing money in Capital Gains Scheme in the bank as per the provisions of section 54F(4) is still a relevant condition even though the capital gains are invested in row house under bonafide belief by the assessee, (v) whether the purchase of ‘block of shares’ of the M/s Sonzol Finance and Investment P. Ltd. as a part of the scheme to become entitled to the allotment of flat no 5 in the Abhijit, should be treated as the investment of long term capital gains in the construction of the new asset, (vi) whether the assessee’s successful reinvestment in the construction of the flat no. 5 in Abhijit building, subsequent to cancellation of the row house, should be treated as investment in purchase of new asset under section54F, and finally (vii) whether the assessee investment in flat no. 5 in Abhijit is the case of purchase or the case of construction and whether applicable limitation of time period is two or three years.
11. Sub-section (1) of 54F mentions to the eligible long term capital assets i.e. any long term capital asset not being the residential house, eligible new asset and modes of investment of such capital gains in the new asset and time limitations when the new asset is purchased or constructed apart from others. We find that there is no dispute on the eligibility of the long-term capital gains and there is dispute on the eligible new asset, mode of investment of such gains and applicable time limitations for such investment of the same. The assessee holds that the investment of gains on 28-3-1998 in the construction of flat no. 5 in under construction building called Abhijit is the investment in eligible new asset for the purpose of subsection (1) and therefore, the assessee’s case is the case of construction and in turn, the applicable time limitation is the period of three for investing the long term capital gains. Whereas, the revenue contends that the assessee investment of capital gains in the Row House no 30 is the eligible new asset and not in the construction of the flat no 5 in Abhijit Building. In other words, what is purchased in connection with the Flat No. 5 is a ‘block of shares’ of M/s Sonzol Finance and Investment P. Ltd. only and such purchase has only made the assessee entitled to a Flat No. 5 in Abhijit Building.
12. We have analysed the above dispute and analyzed the factual matrix relating to the both Row House No. 30 and the Flat 5 in Abhijit Building. The sequence of events from the accrual of long term capital gains of Rs.27,01,204 entering into an agreement with Harshad Rai Poonamchand Doshi, the builder of Row houses in Shanti Park vide the Articles of Agreement dated 26-8-1996 and payment of Rs. 30.50 lakhs for purchase of Row House No. 30 consisting of Ground plus First Floor, Shanti Vidya Nagari, Meera Road, Dist. Thane, termination of the agreement dated 26-8-1996 cancelling the purchase of the said row house vide the Articles of Agreement for cancellation and refund of Rs. 30.5 lakhs by Sri Doshi, revealed that the assessee’s intention to invest the capital gains in the residential house to avail the exemption under section 54 is beyond any doubt. The Assessing Officer has not brought anyting on record to derive any mala fide intention in assessee’s decision to pay the capital gains to Sri Doshi as per the agreement and receiving the refund of the same owing to the possible threat to the proposed row house. Assessing Officer has not established that any of the Articles of Agreement dated 26-8-1996 and Articles of Agreement for cancellation are bogus. Therefore, the cancellation of agreement by the assessee falls within the ambit of the doctrine of caveat emptor (ie buyers beware) and surrender of row house no 30 is legally justified. The assessee is not expected to proceed to buy a defective residential house (new asset), which is prone to demolition by the Municipal Authorities in order to qualify for exemption under the provisions of Income tax Act. Therefore, we are of the considered opinion that the decision of the lower authorities in treating the row house as the new asset is misplaced. We find the relevance of the apex court judgment in the case of T N Aravinda Reddy (120 ITR 46) for the proposition that in the context of relief under section 54, investment has to be understood in a liberal sense without limiting the meaning of ‘lexical legalese’ and word ‘purchase’ should be understood as in the sense of ‘plainspoken people’. Further the decision of Jodhpur Bench of the ITAT in the case of Jagan Nath Singh Lodha (supra) is relevant for the proposition that exemption under section 54F is available to the assessee, if the intention of the assessee from the very beginning is to invest in the new asset, though certain conditions are not met for genuine facts and circumstances. Therefore, we have no confusion in our minds in favour of ignoring the whole issue of investment of capital gains in the purchase of row house no. 30 and in not ignoring the assessee’s investment of said capital gains in the Flat no. 5 in Abhijit Building.
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