Ita/188/2009 Of The Commissioner Of Income Tax,Trichur v. Shri.thomy .P.chakola,Trichur

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE B.P.RAY FRIDAY, THE 12TH NOVEMBER 2010 / 21ST KARTHIKA 1932 ITA.No. 188 of 2009() --------------------- ITA.307/COCH/2002 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT: -------------------- THE COMMISSIONER OF INCOME TAX, TRICHUR. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): --------------- SHRI. THOMY P. CHAKOLA, TRICHUR (DECEASED) 2. MRS. ROSY THOMMY CHACKOLA, W/O. LATE THOMMY CHACKOLA, CHACKOLA WATER FALL, CHACKOLAS HABITAT, THEVARA, COCHIN. CHACKOLA WATER FALL, CHACKOLAS HABITAT, THEVARA, COCHIN. 3. MR. PAUL THOMMY CHACKOLA, SON OF LATE THOMMY CHACKOLA, CHACKOLA WATER FALL, CHACKOLAS HABITAT, THEVARA. CHACKOLA WATER FALL, CHACKOLAS HABITAT, THEVARA. ADV. SRI. JOSEPH MARKOSE, JOSEPH KODIANTHARA FOR R2 & 3 SRI.TERRY V.JAMES FOR R2 & 3 THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 12.11.2010, ALONG WITH ITA NO. 347 OF 2009 ITA NO. 471 OF 2009 THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.R. C .N. RAMACHANDRAN NAIR, &BHABANI PRASAD RAY, JJ. -------------------------------------------- I.T.A. Nos. 188, 347 & 471 of 2009 -------------------------------------------- Dated this the 12th day of November, 2010 JUDGMENT Ramachandran Nair, J. Under the relevant instruction issued by the Board of DirectTaxes, these appeals filed by the Revenue in February, 2004 are notmaintainable for the reason that tax effect is much below the minimumrequired for the revenue to file appeal, that is Rs. 2 lakhs. We thereforedismiss all the appeals as not maintainable. 2. However, standing counsel for the revenue submitted that both the issues raised in the appeals are likely to arise in the case of otherassessees and so much so department seeks a decision by this Court onthe questions raised. We therefore proceed to consider the questionsraised by the revenue which are substantial questions of law. 3. The assessees who were owners of agricultural land within themunicipal limits sold the same in the year relevant for the assessmentyear 1991-92. However, assessees did not pay any tax on capital gainbut claimed exemption under Section 54B(2) of the I.T. Act, which ITA 188/2009 and connected cases. provides for exemption from payment of tax on capital gains, if thesame is deposited in specified Bank Account before the due date andutilised within two years from the date of transfer for purchase of a newasset which again has to be agricultural land. Assessments of all theassessees were completed for the assessment year 1991-92 grantingexemption. However, assessees did not purchase agricultural landwithin the period of two years utilising the capital gain in terms of thedeclaration furnished for the assessment year 1991-92 and thereforethey became liable to pay tax on such capital gains under Section 54B(2)(i) of the Act for the assessment year 1993-94. This position wasconceded by all the assessees in the returns filed by each of them forthe assessment year 1993-94. However, for payment of tax on capitalgains for the assessment year 1993-94, the assessees once againcomputed capital gains on the same transaction by applying theamended provisions of Section 48 which provides for deduction ofindexed cost of acquisition and indexed cost of improvement in thecomputation of long-term capital gain. The amendment to Section 48introducing the above method of computation of capital gains cameinto force only from 1.4.1993 onwards. The assessing officer rejected ITA 188/2009 and connected cases. ITA 188/2009 and connected cases. the assessees' claim and processed the returns by just demanding tax onthe capital gain that was carried over to the assessment year 1993-94,but not utilised for the purchase of agricultural land in terms of Section54B (2) of the Act. While in the case of two assessees tax demandswere raised by processing returns under Section 143(1)(a), in the caseof other assessee the proceedings issued by the assessing officer underSection 143 (1)(a) was rectified under Section 154 of the Act and thecapital gain held by the assessee was brought to tax for the assessmentyear 1993-94. 4. In the appeals filed before the CIT (Appeals), assessees raisedtwo issues, namely, (1) the assessment of tax on capital gains in thecase of one set of assessees by way of prima facie adjustments in thereturns under Section 143(1)(a) is illegal and (2) the rectification oforder issued in the case of the other set of assessees to levy tax is alsonot permissible as it is not an apparent mistake that could be correctedunder Section 154 of the Act. Besides jurisdictional issue, the otherquestion raised is on merits, that is, whether the assessees are entitledto the benefit of amended provisions of Section 48 which came intoforce from 1.4.1993 onwards in the computation of capital gain. ITA 188/2009 and connected cases. 5. Standing counsel appearing for the revenue relied on thedecision of this Court in CIT V. KERALA SOLVENTEXTRACTIONS LTD., (2008) 217 CTR (Ker.) 311 and contended thatassessment of capital gain under clause (i) of the proviso to Section54B(2) is permissible in the course of processing of returns underSection 143(1)(a) as it is a case of prima facie adjustment, which isonly demand of tax on taxable income. On the merits, standing counselsubmitted that Tribunal held against the assessees. However, seniorcounsel Sri. Joseph Markose appearing for the legal heirs of thedeceased assessees contended that assessment of capital gain cannot bemade through prima facie adjustment in the course of processingreturns under Section 143(1)(a) of the Act and the Tribunal's findingagainst the assessees that the amended provisions of Section 48 whichcame into force with effect from 1.4.1993 are not applicable is also notcorrect. In other words, according to him, even though capital gain onsale of agricultural land is assessable in the assessment year 1993-94 onaccount of non-utilisation of capital gain within two years from the dateof sale, still the assessees are entitled to recomputation of capital gainsby deducting indexed cost of acquisition and indexed cost of improvement in terms of the amended provisions of Section 48 which came into force in the year 1993-94 onwards. 6. Since our decision on the issues raised will depend upon the scope and meaning of Section 54B, we extract hereunder the saidSection for easy reference: 54B. Capital gain on transfer of land used foragricultural purposes not to be charged in certain cases. (1) Subject to the provision of sub-section (2), wherethe capital gain arises from the transfer of a capital assetbeing land which, in the two years immediately precedingthe date on which the transfer took place, was being usedby the assessee or a parent of his for agricultural purposes(hereinafter referred to as the original asset) and theassessee has, within a period of two years after that date,purchased any other land for being used for agriculturalpurposes, then, instead of the capital gain being charged toincome tax as income of the previous year in which thetransfer took place, it shall be dealt with in accordance withthe following provisions of this Section, that is to say-- 54B. Capital gain on transfer of land used foragricultural purposes not to be charged in certain cases. (1) Subject to the provision of sub-section (2), wherethe capital gain arises from the transfer of a capital assetbeing land which, in the two years immediately precedingthe date on which the transfer took place, was being usedby the assessee or a parent of his for agricultural purposes(hereinafter referred to as the original asset) and theassessee has, within a period of two years after that date,purchased any other land for being used for agriculturalpurposes, then, instead of the capital gain being charged toincome tax as income of the previous year in which thetransfer took place, it shall be dealt with in accordance withthe following provisions of this Section, that is to say-- (i) if the amount of the capital gain is greater than thecost of the land so purchased (hereinafter referred toas the new asset), the difference between the amountof the capital gain and the cost of the new asset shallbe charged under section 45 as the income of theprevious year; and for the purpose of computing inrespect of the new asset any capital gain arising fromits transfer within a period of three years of itspurchase, the cost shall be nil; or (ii) if the amount of the capital gain is equal to or lessthan the cost of the new asset, the capital gain shallnot be charged under section 45; and for the purpose of computing in respect of the new asset any capitalgain arising from its transfer within a period of threeyears of its purchase, the cost shall be reduced by theamount of the capital gain. (2) The amount of the capital gain which is not utilised bythe assessee for the purchase of the new asset before thedate of furnishing the return of income under Section 139,shall be deposited by him before furnishing such return(such deposit being made in any case not later than the duedate applicable in the case of the assessee for furnishing thereturn of income under sub-section (1) of Section 139) inan account in any such Bank or institution as may bespecified in, and utilised in accordance with, any schemewhich the Central Government may, by notification in theOfficial Gazette, frame in this behalf and such return shallbe accompanied by proof of such deposit, and, for thepurpose of sub-section (1), the amount, if any, alreadyutilised by the assessee for the purchase of the new assettogether with the amount so deposited shall be deemed tobe the cost of the new asset. Provided that if the amount deposited under sub-section is not utilised wholly or partly for the purchase ofthe new asset within the period specified in sub-section (1),then,- (i) the amount not so utilised shall be charged undersection 45 as the income of the previous year inwhich the period of two years from the date of thetransfer of the original asset expires; and (ii) the assessee shall be entitled to withdraw suchamount in accordance with the scheme aforesaid. What is clear from sub-section (2) above is that an assessee who wishes ITA 188/2009 and connected cases. Provided that if the amount deposited under sub-section is not utilised wholly or partly for the purchase ofthe new asset within the period specified in sub-section (1),then,- (i) the amount not so utilised shall be charged undersection 45 as the income of the previous year inwhich the period of two years from the date of thetransfer of the original asset expires; and (ii) the assessee shall be entitled to withdraw suchamount in accordance with the scheme aforesaid. What is clear from sub-section (2) above is that an assessee who wishes ITA 188/2009 and connected cases. to avail exemption under the said provision should deposit the capitalgain arising on sale of agricultural land in deposits with such Banks orinstitutions as prescribed by the Central Government. Admittedlyassessees have done this and so much so, if the deposits were utilisedwithin two years for the acquisition of agricultural land, they would nothave been liable to pay any tax. However, the admitted position is thatassessees did not utilise the deposited capital gains on which exemptionwas claimed and allowed in the year in which it was assessable, that isthe assessment year 1991-92, within two years for acquisition ofagricultural land. So much so by virtue of clause (i) of the proviso toSection 54B(2), the unutilised capital gain shall be deemed to beincome chargeable to tax under Section 45 as the income of theprevious year in which the period of two years from the date of transferof original asset expires. The contention raised on behalf of the legalheirs of the deceased assessees that assessees are entitled tocomputation of capital gain by availing deduction of indexed cost ofacquisition and indexed cost of improvement introduced by amendmentto Section 48 with effect from 1.4.1993 cannot be accepted becausewhat is provided in clause (i) of the proviso to Section 54B(2) is to ITA 188/2009 and connected cases. treat the capital gain retained in deposit, and in respect of whichexemption was claimed, as income chargeable under Section 45 of therelevant year in which the assessee failed to utilise the fund foracquisition of agricultural land. In fact, the scheme of the Act is tocompute the capital gain on sale of agricultural land in the assessmentfor the assessment year relevant to the previous year in which the saletook place. If the assessee claims exemption from payment of tax inthat year, then assessee has to deposit capital gain in specified Bankaccounts in terms of sub-section (2) of Section 54B . In other words,assessee need not deposit the full consideration or net considerationobtained on sale of agricultural land, but what is required to bedeposited is only capital gain arising for the assessee on the sale ofagricultural land. However, what is provided in clause (i) of theproviso to Section 54B(2) is that if the assessee does not utilise thecapital gain so deposited in respect of which exemption was claimed inthe assessment year in which the amount was assessable, but for theclaim of exemption made in that year, the same will be treated asincome chargeable to tax under Section 45 of the Act. In other words,no computation or recomputation of capital gain is required to be made ITA 188/2009 and connected cases. ITA 188/2009 and connected cases. in the year in which capital gain obtained on sale of agricultural land isassessable by virtue of the proviso to Section 54B(2) of the Act. Somuch so an assessee who claims exemption by deposit of capital gainfor two years will automatically be liable to pay tax in the assessmentyear immediately following the expiry of the period of two years, if thecapital gain deposited and in respect of which exemption was claimed,was not utilised for acquisition of agricultural land. Therefore, what isrequired is only to assess and demand tax on the deposited capital gainwhich the assessee failed to utilise for acquisition of agricultural land.Since no computation of capital gain is required to be made in the year1993-94, in our view, the assessing officer rightly treated the capitalgain as income assessable under Section 45 of the Act in terms ofspecific provision contained in clause (i) of the proviso to Section 54B(2) of the Act. Therefore recomputation of capital gain based on theamended provisions does not arise at all. Since computation orrecomputation of capital gain was not required, and the capital gaindeposited by the assessees was not utilised by them for purchase ofagricultural land, the assessing officer rightly processed the returns forthe year 1993-94 demanding tax on the same under Section 143(1)(a) ITA 188/2009 and connected cases. of the Act. So much so in principle we declare that assessing officerwas competent to demand tax on capital gain in terms of clause (i) ofproviso to Section 54B(2) through prima facie adjustment in theprocessing of return under Section 143(1)(a) of the Act. If theassessing officer fails to do so while issuing proceedings under Section143(1)(a), he is free to rectify it through proceedings under Section154 and demand tax as the mistake is patent on account of non-application of mandatory provisions of clause (i) of the proviso toSection 54B(2) of the Act. We therefore answer both the questions raised in favour of therevenue and against the assessees. (C.N.RAMACHANDRAN NAIR)Judge. (BHABANI PRASAD RAY) Judge.