Income Lax Officer v. Act, Amount Invested In The New Asset Need Not Be Entirely Sourced From

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH ITA No.12 of 2015 (O&M)Date of decision: 4.11.2015 Commissioner of Income Tax, Faridabad .....- Appe Shri Kapil Kumar Agarwal| ....mesponden CORAM: HON’BLE MR. JUSTICE AJAY KUMAR MITTALHON’ BLE MR. JUSTICE HARI PAL VERMA 1. Whether Reporters of local papers may be allowed to see the judgment?2. To be referred to the Reporters or not?3. Whether the judgment should be reported 1n the Digest? Present: Mr. Teyinder K.Joshi, Advocate for the appellant.(UTA No.12 of 2015)Mr. Denesh Goyal, Advocate for the appellant.(ITA Nos.26 and 161 of 2015) Mr. Sanjay Bansal, Sr.Advocate with Mr. B.M.Monga, Advocatefor the respondent (in ITA No.12 of 2015). Ajay Kumar Mittal,J, 1].This order shall dispose of ITA Nos.12, 26 and 161 of 2015 aslearned counsel for the parties are agreed that the issue involved in all theseappeals is identical. However, the facts are being extracted from ITA No.12of 20145 ) -ITA No.12 of 2015 has been filed by the revenue under Section 260A of the Income Tax Act, 1961 (in short, “‘the Act’) against the ordedated 16.7.2013, Annexure-A.III passed by the Income Tax AppellateTribunal, Delhi Bench 'D', New Delhi in ITA No.2975/DEL/2013 for the assessment year 2009-10. The substantial question of law reads as under:- "Whether on the facts and in the circumstances of the case, theTribunal was legally correct in reversing the finding of the CIT(A) and that of the Assessing Officer whereby the addition of=1.21 crores was made by disallowing the claim for exemptionunder section 54F of the Income Tax Act, 1961 as the sameamount of sale consideration had not been utilized towards thepurchase of property prior to the date of sale as per the saidprovisions?” 3]A few facts relevant for the decision of the controversy,involved as narrated in ITA No.12 of 2015 may be noticed. The returndeclaring income ofLv1,27,04,920/- was filed by the assessee on29.7.2009.Assessment was completed under Section 143(3) of the Act on30.12.2011, Annexure A.1 at total income of|=a2,48,37,560/- after makingan addition oftL1,21,32,636/- on account of capital gain as the assessee hadclaimed benefit of section 54F of the Act even though he had not entirelysourced the amount invested in his new asset from capital gain receipts. Onappeal by the assessee, the Commissioner of Income Tax (Appeals) [CIT(A)] vide order dated 11.3.2013, Annexure A.II, upheld the addition madeby the Assessing Officer. Aggrieved thereby, the assessee filed appealbefore the Tribunal. The Tribunal vide order dated 16.7.2013, AnnexureA.III allowed the appeal relying upon decision of the Kerala High Court in Income lax Officer vs. K.C.Gopalan,(1999) 107 Taxman 591 (Ker.)holding that section 54F of the Act did not put any restriction whether theinvestment was made out of loan amount or from the sale consideration. Itwas held by the Tribunal that for availing the benefit of Section 54F of the Act, amount invested in the new asset need not be entirely sourced from capital gain. Hence the instant appeals by the revenue. 4We have heard learned counsel for the parties. 4 Mr. Tejinder K. Joshi, learned counsel for the revenue in ITANo.12 of 2015 submitted that the shares were sold by the assessee on8.11.2008 and 16.3.2009 and it was not from the said sale proceeds that theproperty worth=a3.22 crores was purchased by the assessee. It was urgedthat in such circumstances, capital gains amounting to =a1.3 crores wereexigible to tax as benefit under Section 54F of the Act was not available tothe assessee. Reliance was placed upon sub section 4 of Section 54F of theAct to support the contention. Act, amount invested in the new asset need not be entirely sourced from capital gain. Hence the instant appeals by the revenue. 4We have heard learned counsel for the parties. 4 Mr. Tejinder K. Joshi, learned counsel for the revenue in ITANo.12 of 2015 submitted that the shares were sold by the assessee on8.11.2008 and 16.3.2009 and it was not from the said sale proceeds that theproperty worth=a3.22 crores was purchased by the assessee. It was urgedthat in such circumstances, capital gains amounting to =a1.3 crores wereexigible to tax as benefit under Section 54F of the Act was not available tothe assessee. Reliance was placed upon sub section 4 of Section 54F of theAct to support the contention. 6.Mr. Denesh Goyal, learned counsel for the appellant in ITANos.26 and 161 of 2015 submitted that the Tribunal was in error in givingthe benefit of Section 54F to the assessee in view ofjudgment of the KeralaHigh Court 1n|K.C.Gopalan'scase (supra). It was contended by the learnedcounsel that the case of.K.C.Gopalan"S case (Supra) was for the assessmentyear 1984-85 whereas the amendment was brought in the provisions ofcapital gains in Section 54F w.e.f 1.4.1988 whereby sub section (4) wasinserted in the said provision. On the aforesaid premises, 1t was urged thatno benefit could be derived by the assessee from Section 54F of the Act orany other provision which had followed the said judgment. TdOn the other hand, learned counsel for the respondent-assesseesupported the impugned order and relied upon judgments inK.C. Gopalan'case (supra),CIT vs.Anandra], (2015) 56 Taxmann.com 176 (Karn.),CITvs. Kajesh Kumar Jalan,(2006) 286 ITR 274 (Gau.) and |CIT vs.VR. Desai,(2011) 197 ‘Taxman 52 (Ker.). 8.|The issue that arises for consideration relates to whether theassessee in order to avail benefit of Section 54F of the Act is required toutilize the amount for the purchase of the new asset from the sale proceedsof the original capital asset only. Q It would be expedient to refer to Section 54F of the Act, therelevant portion thereof reads as under:- OAK(1) Subject to the provisions of sub-section (4), where,in the case of an assessee being an individual or a Hinduundivided family, the capital gain arises from the transfer ofany long-term capital asset, not being a residential house(hereafter 1n this section referred to as the original asset), andthe assessee has, within a period of one year before or twoyears after the date on which the transfer took placepurchased, or has within a period of three years after that dateconstructed, a residential house(hereafter 1n this sectionreferred to as the new asset), the capital gain shall be dealtwith in accordance with the following provisions of thissection, that is to say,— (O) 1f the cost of the new asset is not less than the netconsideration 1n respect of the original asset, the whole ofsuch capital gain shall not be charged undersection 455 (b) uf the cost of the new asset is less than the netconsideration in respect of the original asset, so much of thecapital gain as bears to the whole of the capital gain the sameproportion as the cost of the new asset bears to the netconsideration, shall not be charged undersection 45 Providedthat nothing contained in this sub-section shallapply where— (O) the assessee,— (|) owns more than one residential house, other than the newasset, on the date of transfer of the original asset; or (a) purchases any residential house, other than the new asset, within a period of one year after the date of transfer of theoriginal asset; or (III) constructs any residential house, other than the new asset,within a period of three years after the date of transfer of theoriginal asset; and (b) the income from such residential house, other than the oneresidential house owned on the date of transfer of the originalasset, 18 chargeable under the head “Income from houseproperty”. Explanation.—For the purposes of this section,— Providedthat nothing contained in this sub-section shallapply where— (O) the assessee,— (|) owns more than one residential house, other than the newasset, on the date of transfer of the original asset; or (a) purchases any residential house, other than the new asset, within a period of one year after the date of transfer of theoriginal asset; or (III) constructs any residential house, other than the new asset,within a period of three years after the date of transfer of theoriginal asset; and (b) the income from such residential house, other than the oneresidential house owned on the date of transfer of the originalasset, 18 chargeable under the head “Income from houseproperty”. Explanation.—For the purposes of this section,— “net consideration’, in relation to the transfer of a capitalasset, means the full value of the consideration received oraccruing as a result of the transfer of the capital asset asreduced by any expenditure incurred wholly and exclusively1n connection with such transfer. 33333333333333(2) & (3) xx(4) The amount of the net consideration which 1s notappropriated by the assessee towards the purchase of the newasset made within one year before the date on which thetransfer of the original asset took place, or which 1s notutilised by him for the purchase or construction of the newasset before the date of furnishing the return of income undersection 139, shall be deposited by him before furnishing suchreturn such deposit being made in any case not later than thedue date applicable in the case of the assessee for furnishingthe return of income under sub-section (1) of.section 139.1nan account 1n any such bank or institution as may be specifiedin, and utilised in accordance with, any schemewhich theCentral Government may, by notification in the OfficialGazette, frame in this behalf and such return shall beaccompanied by proof of such deposit ; and, for the purposesof sub-section (1), the amount, if any, already utilised by theassessee for the purchase or construction of the new assettogether with the amount so deposited shall be deemed to be the cost of the new asset : Providedthat 1f the amount deposited under this sub-section|is not utilised wholly or partly for the purchase ofconstruction of the new asset within the period specified 1nsub-section (1), then,— (1) the amount by which— (G) the amount of capital gain arising from the transfer of theoriginal asset not charged undersection 45on the basis of thecost of the new asset as provided in clause (O) or, as the casemay be, clause (b) of sub-section (1), exceeds (b) the amount that would not have been so charged had theamount actually utilised by the assessee for the purchase orconstruction of the new asset within the period specified 1nsub-section (1) been the cost of the new asset, shall be charged undersection 45as income of the previousyear in which the period of three years from the date of thetransfer of the original asset expires ; and (a) the assessee shall be entitled to withdraw the unutilisedamount 1n accordance with the scheme aforesaid. 10.|Under sub section (1) of Section 54F of the Act, the amount ofcapital gains exempt under this provision 1s equal to the difference betweenthe cost of the new asset and the net consideration received from the transferof the original asset. Where the cost of the new asset 1s equal to or exceedsthe net consideration received, in that situation, the entire amount of capitalgains 1s exempt under this section but 1f the cost of the new asset 1s less than the net consideration received, then the proportionate exemption 1s availableto the assessee. The transfer has to be of long term capital asset not being aresidential house and the assessee 1s required to purchase within a period of one year before or two years after the date on which the transfer takes place 10.|Under sub section (1) of Section 54F of the Act, the amount ofcapital gains exempt under this provision 1s equal to the difference betweenthe cost of the new asset and the net consideration received from the transferof the original asset. Where the cost of the new asset 1s equal to or exceedsthe net consideration received, in that situation, the entire amount of capitalgains 1s exempt under this section but 1f the cost of the new asset 1s less than the net consideration received, then the proportionate exemption 1s availableto the assessee. The transfer has to be of long term capital asset not being aresidential house and the assessee 1s required to purchase within a period of one year before or two years after the date on which the transfer takes place or within three years after the said date, construct a residential house. Inother words, where an assessee purchases a residential house within aperiod of one year before or two years after the date on which transfer takesplace or has constructed a residential house within three years after the saiddate, the capital gains shall be computed as per clauses (a) and (b) of subsection (1) of Section 54F of the Act.11.Finance Act, 1987 had inserted sub section (4) of Section 54Fof the Act effective from 1.4.1988. According to sub section (4) of SectionSAE of the Act where the amount of net consideration 1s not utilized for thepurchase or the construction of a new residential house, it should bedeposited in an account in a specified bank under the Capital Gains AccountScheme, 1988 notified by the Central Government in the Official Gazette.This is required to be deposited by the due date for filing return of incomeunder Section 139(1) of the Act to avail benefit under this provision.12...The scope and effect of the amendments made in Sections 54,54B, 54D and 54F by the Finance Act, 1987 have been elaborated in thedepartmental circular No.495 dated 22[nd]September 1987 reported in (1987)168 ITR (St.) 87. The relevant portion thereof reads thus:- 5New scheme for deposits in respect of exemption from capitalPains — 26.1 Under the existing provisions of sections 54, 54B,54D and 54F, long term capital gains arising from the transfer ofany immovable property used for residence, land used foragricultural purposes, compulsory acquisition of lands andbuildings and other capital assets are exempt from income tax ifsuch gains are reinvested in new assets within the time allowed forthe purpose. The original assessment needs rectification wheneverthe tax payer fails to acquire the corresponding new asset. 26.2 With a view to dispense with such rectification of assessments, the amendments made to sections 54, 54B, 54D andS4F provide for a new scheme for deposit of amounts meant forreinvestment in the new asset. After the aforementionedamendments, where the amount of capital gains or the netconsideration, as the case may be, 1s not appropriated or utilized bythe tax payer for acquisition of the new asset before the date forfurnishing the return of income, it shall be deposited by him on orbefore the due date of furnishing the return of income, undersection 139(1) in an account with a bank or institution and utilizedin accordance with a scheme framed by the Central Government inthis regard. The amount already utilized together with the amountsof deposits shall be deemed to be the amount utilized for theacquisition of the new asset. If the amount deposited 1s not utilizedfully for acquiring the new asset within the period stipulated, thecapital gain relatable to the unutilised amount shall be treated asthe capital gain of the previous year in which the period specifiedin these provisions expires. In such cases, the threshold deductionof ten thousand rupees as well as the deduction under section 53will not be admissible. Further, the tax payer shall be entitled towithdraw such amount in accordance with this scheme. Thisscheme will be applicable 1n relation to the new section 54G also.” 13.)The combined reading of the aforesaid provisions shows that 1norder to avail benefit under Section 54F of the Act, the assessee 1s requiredto either purchase a residential house within a period of one year before ortwo years after the date on which transfer takes place or construct aresidential house within a period of three years after that date. In such cases,the capital gains shall be computed as per clause (a) and (b) of sub section(1). In case, the assessee 1s not able to appropriate the sale proceeds of long term capital gain, then before filing of a return under section 139(1) of theAct, he 1s required to deposit the same under any Capital Gain Account Scheme with a bank or institution specified by the Central Government inthe official gazette. The assessee has to file proof of such deposit alongwiththe return for claiming exemption under Section 54F of the Act. 14The assessee has to purchase or construct a house propertyduring the period specified under Section 54F of the Act in order to getbenefit thereunder. Section 54F of the Act nowhere envisages that the saleconsideration obtained by the assessee from the original capital asset 1smandatorily required to be utilized for the purchase or construction of ahouse property. No provision has been made by the statute that in order toavail benefit of Section 54F of the Act, the assessee has to utilize theamount received by him on sale of original capital asset for the purposes ofmeeting the cost of the new asset. Once that 1s so, the assessee was entitledfor benefit under section 54F of the Act. 15.It has been categorically recorded by the Tribunal that theassessee had made investment in between February 2008 upto August 20081.e. well within the stipulated period. The property was purchased forv3.32 crores whereas the shares which were sold had resulted in capitalgain ofL1.93 crores. The investment was more than the capital gain earnedby him. The relevant finding reads thus:- “In the present case, the first date of capital gain 1s November8, 2008. The assessee can acquire a house within a periodNovember 8, 1997 upto November 2010 1.e. one year prior totransfer of original capital assets and two years after thetransfer of capital assets. The assessee had made investment inbetween February 2008 upto August 2008 1.e. well withinperiod. Learned Assessing Officer has also not disputed aboutthe investment made by the assessee. His grievance is that “In the present case, the first date of capital gain 1s November8, 2008. The assessee can acquire a house within a periodNovember 8, 1997 upto November 2010 1.e. one year prior totransfer of original capital assets and two years after thetransfer of capital assets. The assessee had made investment inbetween February 2008 upto August 2008 1.e. well withinperiod. Learned Assessing Officer has also not disputed aboutthe investment made by the assessee. His grievance is that investment was made after taking loan from the employer andtherefore, assessee cannot claim benefit under section 54F(1)qua the loan amount utilized for purchasing of the new house.Hon'ble Kerala High Court in the case of ITO vs. KC Gopalan(supra) has held that in section 54, there 1s no condition thatassessee should utilize the sales consideration itself for thepurpose of acquisition of new property. Similar are the otherorders of the ITAT relied upon by the assessee. On perusal ofsection 54F(1) and sub section (4), it reveals that these sectionsdo to put any restriction that only capital gain would be utilizedfor purchase of the new house. The law permits utilization ofcapital gain within the specified time, the assessee may usesuch funds for other purposes and may find resources fromother source for investment in time. The section providesinvestment in a house prior to one year of the transfer of longterm capital assets. It will make it clear that 1f the transfer hasnot taken place then from where the funds would come formaking the investment. The investment must be from someother sources and when assessee would receive’ salconsideration on transfer of a long term capital assets, he willclaim set off of the capital gains against the investment alreadymade for the purpose of exemption under section 54F. LearnedDR has relied upon an order of the [TAT reported in 27 SOT61. In that case, the ITAT has held that if investment was madeout of loan amount then exemption under section 54F(1) willnot be available. In the opinion of the ITAT, the assessee has todemonstrate source of funds,if investment was made by theassessee from his own source and not from loan taken from thebank then exemption would be available. In our opinion, thesection does not put any such restriction. Hon'ble Kerala Highcourt has explained the position. Similarly, in a series of otherorders, at the end of ITAT, it has been held that there is nocondition that assessee should utilize the sales considerationonly for the purpose of acquisition of new property. In view of the above discussion, we are of the view that learned revenueauthorities have erred in holding that assessee is not entitledfor exemption under section 54F(1) of the Income Tax Act,1961 for a sum of=a121,32,636/-. The investment of theassessee 1S more than the capital gain earned by him. Therefore,we allow the appeal of the assessee and delete the addition of =121,32,636/- in the total income of the assessee under the head“long term capital gain”. | 16) Adverting to the judicial pronouncements, in .K.C.Gopalan's case (supra), while considering identical issue, it was observed by theKerala High Court as under:- “XXXXXXX The assessee has to construct or purchase a housproperty for his own residence in order to get the benefit ofsection 54. The wording of the section itself would make itclear that the law does not insist that the sale considerationobtained by the assessee itself should be utilised for thepurchase of house property. The main part of section 54provides that the assessee has to purchase a house property forthe purpose of his own residence within a period of one yearbefore or after the date on which the transfer of his propertytook place or he should have constructed a house propertywithin a period of two years after the date of transfer. Clauses(1) and (11) of section 54would also make it clear that noprovision 1s made by the statute that the assessee should utilisethe amount which he obtained by way of sale consideration forthe purpose of meeting the cost of the new asset. 6. A reading ofsections 53and,@ot the Act would make itclear that a special provision 1s made 1n respect of capital gainsarising out of transfer of particular type of capital asset,namely, house property which was being used by the assesseeor a parent of his for the purpose of their residence. Entitlementof the exemption undersection 54relates to the cost of the acquisition of a new asset 1n the nature of a house property forthe purpose of his own residence within the specified period.” 17.|Further, following the judgment of the Kerala High Court inK.C.Gopalan'scase (supra), the Gauhati High Court inCIT vs. RajeshKumar Jalan,(2006) 157 Taxman 398 (Gau.) held as under:- “11.....We are of the view that the assessee had alreadyappropriated the entire capital gain for purchase of the newasset within the stipulated time. In this regard, we find supportfrom the decision of the Kerala High Court in the case of K.C.Gopalan wherein it was held that the assessee is entitled toexemption underSection 54even though for the constructionof the new house, the amount that was received by way of saleof his old property as such was not utilised. It was held by theKerala High Court that no provision is made by the statute thatthe assessee should utilise the amount which he obtained byway of sale consideration for the purpose of meeting the cost ofthe new asset. [t was held thatSection 54only provides that theassessee has to purchase a house property for the purpose of hisown residence within a period of one year before or after thedate on which the transfer of his property took place or heShould have constructed a house property within a period oftwo years after the date of transfer. It was further held thatentitlement of exemption underSection 54relates to the cost ofacquisition of a new estate in the nature of a house property forthe purpose of his own residence within the specified period. 1&8In|CIT, Bangalore vs. Anandraj,(2015) 56 Taxmann.com 176(Karnataka), the relevant conclusion recorded by Karnataka High Court readthus:- In|CIT, Bangalore vs. Anandraj,(2015) 56 Taxmann.com 176 6. It is not in dispute that the assessee sold the agriculturalland and the consideration received is in the nature of a longterm capital gain. Even before the sale of the property, he had borrowed housing loan and started construction on the sitebelonging to him. After the sale, the amount spent towardsconstruction of the house 1s more than the considerationreceived by the sale of agricultural land and therefore, he 1sentitled to the benefit of section S54E of the Act. 19,In the present case, the investment made by the assessee beingwithin the stipulated time and more than the capital gain earned by him, theaddition of|LC1,21,32,636/- was rightly deleted by the Tribunal under thehead long term capital gain. Learned counsel for the revenue has not beenable to point out any error in the approach adopted by the Tribunal reversingthe findings recorded by the CIT(A) and the Assessing Officer, warrantinginterference by this Court. 20.In view of the above, no substantial question of law arises. Theappeals stand dismissed, (Ajay Kumar Mittal)Judge November 4, 2015=4$= (Hari Pal Verma)Judge