Ita/235/2009 Of The Commissioner Of Income Tax, Cochin v. V.r.desai, Partners, M/S. Desai Brothers

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN THURSDAY, THE 26TH NOVEMBER 2009 / 5TH AGRAHAYANA 1931 ITA.No. 235 of 2009() --------------------- ITA.157/COCH/1999 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT : -------------------- THE COMMISSIONER OF INCOME TAX, COCHIN, BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT: --------------- SHRI. V.R. DESAI, PARTNER, M/S DESAI BROTHERS, COCHIN 682 002. BY ADV. SRI.P.BALAKRISHNAN (E) THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 26/11/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: (C.R) C.N. RAMACHANDRAN NAIR &V.K.MOHANAN, JJ. ---------------------------------------- ITA. No.235 OF 2009 ---------------------------------------- Dated, the 26th day of November, 2009 JUDGMENT Ramachandran Nair, J. This appeal is filed by the Revenue under section260A of the Income Tax Act challenging the order of theIncome Tax appellate Tribunal granting exemption underSection 54 F of the Income Tax Act to the respondent-assessee from paying tax on long term capital gains. Theassessee was the Managing Partner of the firm namelyM/s.Desai Nirman which was engaged, among other things,in real estate business including construction and sale offlats. During the previous year relevant for theassessment year 1995-96, the assessee transferred 12.876cents of land to the said Partnership firm treating it as hiscontribution to the capital of the firm. The firm in turncredited capital account of the respondent-assessee with Rs.38,62,800/- ,the full value of the land brought to the firmby the respondent-assessee as capital contribution. Theassesssee, thereafter availed loan from HDFC bank for theconstruction of the house and within three years from thedate of transfer of land to the firm, he got new houseconstructed by another firm M/s. Desai Home in which alsothe assessee was a partner. In the income tax return filedfor the assessment year 1995-96, the assessee made aclaim for exemption on the capital gains arising from transferof the land under section 54 F of the Act. The AssessingOfficer noticed that the assessee had not invested the saleconsideration in full or part in any of the specifiedaccounts prior to the date of filing return in terms of section54F(4) of the Act. He therefore, completed the assessmentand issued intimation under section 143(1)(a) of the Actholding that the assessee is not entitled to exemption underSection 54F of the Act. The assessment so issued in theform of intimation under section 143(1)(a) was challengedby the assessee before the first appellate authority, who dismissed the appeal. In the second appeal filed by theassessee, the assessee took the contention thatdisallowance of exemption under section 54F cannot bemade while issuing intimation under section 143(1)(a) of theAct and in the alternative, the assessee contended that factsestablish construction of a new house within three yearsfrom the date of sale of land, and so much so, theassessee is entitled to exemption in terms of Section 54 Fof the Act. The Tribunal upheld the claims of therespondent-assessee on both grounds raised and thereforethey cancelled the assessment proceedings issued undersection 143(1) (a) of the Act. It is against this order of theTribunal the Revenue has filed this appeal and we haveheard the Senior Standing Counsel appearing for theRevenue and Sri P.Balakrishnan appearing for therespondent-assessee. 2. There is no dispute that the transfer of the land bythe assessee to the partnership firm towards his capitalcontribution to the firm is a transfer within the meaning of 2. There is no dispute that the transfer of the land bythe assessee to the partnership firm towards his capitalcontribution to the firm is a transfer within the meaning of Section 2(47) of the IT Act which is subject to long termcapital gains under section 45(3) of the Act. In the returnfiled for the assessment year 1995-96, the assessee had infact offered tax on capital gains on the very same transactionof contribution of the above land towards his capitalcontribution as managing partner. However, sinceassessee had availed loan from HDFC bank andconstructed house within three years from the date oftransfer of the land to the firm, the assessee claimedexemption of capital gains on investment made in theconstruction of the new building under section 54F of theAct. The contention raised by the senior counselappearing for the Revenue is that, in order to qualify forexemption under section 54F, the asseseee should havepurchased house within one year or should haveconstructed residential house within a period of threeyears from the date of transfer in either case by utilising thesale proceeds of land. Further, for qualifying for exemption,the assessee should have, before the date of filing return, deposited the net sale consideration received in anationalised bank in terms of the Section 54 F(4) and thereceipts should have been produced along with the returnfiled. The counsel for the assessee on the other hand,contended that in order to qualify for exemption, there is noneed to utilise the sale consideration towards theconstruction cost of the house and it is enough during theperiod of three years, equivalent amount is invested inthe construction of the house. According to the assessee'scounsel, the assessee admittedly had constructed newhouse within three years from the date of transfer of theproperty and therefore is eligible for exemption. 3. On going through Section 54F, particularly sub-section 4, we are of the view that in order to qualify forexemption on capital gains, before the last date for filingreturn, the net sale consideration should have beendeposited in any bank account specified by the governmentfor this purpose. In fact, the requirement of sub-section 4 ofSection 54F is that the assessee should produce along with the return, proof of deposit of the amount under thespecified scheme in a Nationalised Bank. Admittedly, theassessee allowed the firm to which the property wastransferred to retain and use it as a business asset andtowards consideration he got only credit of land value in hiscapital account. In other words, sale consideration was notreceived by the assessee in cash or deposited the same interms of clause 4 of Section 54F with any Nationalised Bankor institution. Consequently the assessee did not have thesale proceeds available for investment in terms of schemeunder section 54F(3) of the Act. In our view, in order toqualify for exemption under section 54F(3), the assesseeshould have first deposited the sale proceeds of theproperty in any bank account and the construction of thehouse to qualify for exemption under Section 54F shouldhave been completed by utilising the sale proceeds alsoavailable with the assessee. In this case, though theassessee constructed new building within the period of threeyears from the date of sale, it was with funds borrowed from HDFC. In our view, the assessee is not entitled toexemption under section 54F because the assessee neitherdeposited the sale proceeds for construction of thebuilding in the bank in terms of sub -section (4) before thedate of filing returns nor was the sale proceeds utilisedfor construction in terms of Section 54F(3) of the Act. Somuch so, the assessee was not entitled to claimexemption on capital gains under section 54F of the Actwhich the assessing officer rightly declined. 4. The next question to be considered is whetherclaim of exemption under Section 54F could be disallowed inthe course of proceedings under section 143(1)(a) of theAct. It is settled position that the section authorises theassessing officer to make disallowance of items which areprima facie inadmissible. The assessee who claimsexemption should prove the ingredients of section withfacts. The assessee has no case that he received anysale proceeds for the sale of the land to the the firm of whichhe is a partner. The firm was allowed to purchase the property from the managing partner of the firm, towards hiscapital contribution at a very low cost and the firm developedthe property and sold the same. It was the duty of theassessee to establish the eligibility for exemption frompayment of tax on capital gains by production ofdocuments in terms of the statutory provisions. According tothe relevant provisions stated above in the first place, itwas the duty of the assessee to deposit the net saleproceeds in the bank before due date for filing return andfurnish proof of the same along with the return filed whichwas admittedly not done. Secondly, by allowing credit ofvalue of transferred property in the capital account of theassessee in the firm, the assessee concedes that the saleproceeds was neither received nor going to be utilised forconstruction or purchase of house. So much so, in ourview, exemption claimed under Section 54 F was primafacie inadmissible and, therefore, the officer was justified inmaking disallowance in the proceedings under section 143(1)(a) of the Act. Consequently, the appeal is allowed ITA 235/09 vacating the order of the Tribunal and by restoring theassessment confirmed by the first appellate authority. C.N.RAMACHANDRAN NAIR JUDGE V.K.MOHANAN, JUDGE kvm/-