Venkata Dilip Kumar,Kartha-Huf v. The Commissioner Of Income Tax, Chennai-5(I/C), Office Of The Principal Commissioner Of Income Tax, Aayakar Bhavan, Wanaparthy Block

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 05.11.2019 Reserved on 01.11.2019Delivered on 05.11.2019C O R A M THE HON'BLE Mr.JUSTICE K.RAVICHANDRABAABU W.P.No.16249 of 2018 Venkata Dilip Kumar,Kartha-HUF,No.5, (Old No.3), Seshadri Road,Alwarpet,Chennai 600 018....Petitioner vs 1.The Commissioner of Income Tax, Chennai-5(i/c), Office of the Principal Commissioner of Income Tax, Aayakar Bhavan, Wanaparthy Block, 121, Mahatma Gandhi Road, Nungambakkam, Chennai 600 034. 2.The Assistant Commissioner of Income Tax, Non-Corporate Circle-3, New Building, Aayakar Bhavan, 121, Mahatma Gandhi Road, Nungambakkam, Chennai 600 034. ...Respondents Prayer:Writ petition filed under Article 226 of theConstitution of India for issuance of a writ ofCertiorarified mandamus to call for the records of theOrder No.C.No.1(3)/PCIT-5/264/CR-5/AAIHV5089G/2017-18 dated08.03.2018 passed by the first respondent in proceedingsunder Section 264 of the Income Tax Act, 1961 and to quashthe same and consequently to direct the respondents torevise the assessment and allow additional exemption ofRs.57.25 lakhs due under Section 54 of the Income Tax Act,1961 to the petitioner for the assessment year 2014-15. For petitioner : Mr.Abdul RavoofFor Respondents : Mrs.Hema Muralikrishnan Senior Standing Counsel O R D E RThis writ petition is filed challenging the order ofthe first respondent dated 08.03.2018, in rejecting thepetition filed by the assessee under Section 264, whereinand whereby the assessee sought for enhancement of thededuction of Rs.1,02,13,527/- as the additional cost ofconstruction under Section 54 of the Income Tax Act, 1961. 2. The case of the petitioner is as follows: For petitioner : Mr.Abdul RavoofFor Respondents : Mrs.Hema Muralikrishnan Senior Standing Counsel O R D E RThis writ petition is filed challenging the order ofthe first respondent dated 08.03.2018, in rejecting thepetition filed by the assessee under Section 264, whereinand whereby the assessee sought for enhancement of thededuction of Rs.1,02,13,527/- as the additional cost ofconstruction under Section 54 of the Income Tax Act, 1961. 2. The case of the petitioner is as follows: The petitioner is the Kartha of the HinduUndivided Family (HUF), which is being assessed to incometax by the second respondent. The petitioner was the ownerof a property situated in No.5 (Old No.3) Seshadri Road,Alwarpet, Chennai-18, wherein1/4th share of the assessee isheld on HUF account and the remaining 3/4th share is heldon individual account. The individual and HUF accounts arebeing assessed separately with different PAN numbers. Thepetitioner had entered into a Development Agreement on15.04.2013 with Sumanth & Co for the development of theabove property. As per the Development Agreement, thepetitioner would release 3/4th share in the ownership ofthe property on completion of its development in favour ofthe Developer or its nominees. The overall considerationfor the release of 3/4th share of the property was fixed atRs.1600 lakhs by cash and constructed area of 3850 Sq.ft.was valued at Rs.125 lakhs. As the owner of only 1/4thshare in the property, the share of the petitioner HUFcomes to Rs.431.25 lakhs. Accordingly, the petitioner HUFfiled return for the assessment year 2014-15 aftercomputing the capital gains for the 1/4th share i.e. cashconsideration of Rs.400 lakhs and construction cost ofRs.31.25 lakhs only. The petitioner HUF deposited theamount of Rs.37.50 lakhs within the prescribed time inCapital gains Deposit Scheme with the State Bank of Indiaand submitted a proof thereafter along with the income taxreturn. The income tax return filed by the petitioner wasaccepted under Section 143(1) of the said Act videcommunication dated 29.06.2015. The petitioner requestedthe Developer to allow him to decide on the constructionquality and type of material to be used for superstructureand promised to bear the additional costs involved and topay to the suppliers/professionals directly. By the time,the above proposals incurring additional expenditure onpetitioner's portion of the superstructure was accepted bythe developer, the time for depositing the money intoCapital Gains Deposit Scheme had lapsed. The petitionersubsequently submitted a petition on 29.12.2016 underSection 264 of the Income Tax Act, 1961, seeking revisionof the above assessment dated 29.06.2015 after taking into account the additional expenditure incurred by thepetitioner towards acquiring the new Capital Asset withinthe prescribed time limit of 3 years. An overallexpenditure of Rs.4,08,54,108 was incurred towardsadditional cost of construction in which 1/4th share of HUFcomes to Rs.1,02,13,527. The petitioner submitted beforethe first respondent all the details and particulars ofextra expenditure incurred towards the additional cost ofconstruction to justify the above claim of deduction ofRs.1,02,13,527/-. However, the first respondent rejectedthe request of the petitioner through the impugned order.Hence, the present writ petition. 3. The respondent filed a counter affidavit, whereinit is stated as follows: account the additional expenditure incurred by thepetitioner towards acquiring the new Capital Asset withinthe prescribed time limit of 3 years. An overallexpenditure of Rs.4,08,54,108 was incurred towardsadditional cost of construction in which 1/4th share of HUFcomes to Rs.1,02,13,527. The petitioner submitted beforethe first respondent all the details and particulars ofextra expenditure incurred towards the additional cost ofconstruction to justify the above claim of deduction ofRs.1,02,13,527/-. However, the first respondent rejectedthe request of the petitioner through the impugned order.Hence, the present writ petition. 3. The respondent filed a counter affidavit, whereinit is stated as follows: It is wrong to state that the first respondent hadaccepted that the total additional expenditure by thepetitioner was Rs.379 lakhs. The first respondent has notaccepted any additional cost of construction to beallowable under Section 54. Only a sum of Rs.150 lakhs wasdeposited into the Capital Gains Deposit Account within thestipulated time. Rest of the claim of the petitioner onadditional cost of construction which was not claimed inthe return, was rejected on the ground that the claim isnot in accordance with the provisions of law. Though theconstruction might have been completed within thestipulated time of three years, as per Section 54(2), theunutilised portion of the capital gain shall have to bedeposited in the notified Capital Gains Deposit Schemewithin the time allowed under Section 139(1) so as to getaway with the rigors of taxation. The petitioner has notcomplied with the conditions of Section 54(2) andaccordingly cannot be granted the benefit of deductionunder Section 54 on the additional cost of construction soclaimed. It is well settled that a beneficiary to availthe benefit of a beneficial provision, the conditionsprescribed therein is to be strictly followed. Therecannot be any deviation or justification whatsoever, whichcan supersede non compliance of Section 54(2). In thisconnection, the decision of the Apex Court reported in 2018SCC online SC 747, Commissioner of Customs v. Dilip Kumarand Company, is relied on. 4. A reply affidavit is filed by the writ petitioner,wherein it is stated as follows: The order impugned in this writ petition was passedtotally contra to the view expressed by the Hon'bleDivision Bench of Karnataka High Court in the case of TheCommissioner of Income Tax and Others vs. K.Ramachandra Raodated 14.07.2014 and various Income Tax Appellate Tribunals 4. A reply affidavit is filed by the writ petitioner,wherein it is stated as follows: The order impugned in this writ petition was passedtotally contra to the view expressed by the Hon'bleDivision Bench of Karnataka High Court in the case of TheCommissioner of Income Tax and Others vs. K.Ramachandra Raodated 14.07.2014 and various Income Tax Appellate Tribunals across India uniformly accepting the above decision of theKarnataka High Court. The petitioner complied with themandatory conditions prescribed under Section 54(1) of thesaid Act by incurring the expenditure on acquiring the newresidential property within the prescribed time limit ofthree years and submitted the relevant accounts forscrutiny and acceptance. The petitioner had also depositedRs.37.50 lakhs into the capital Gain Bond Scheme prior tofiling of the I.T. Return for the relevant assessment yeartowards the anticipated capital expenditure in acquiringthe new residential assets. It is only due to theunforeseen nature of the additional expenditure that had tobe incurred for the reasons stated in the affidavit thatthe petitioner could not comply with the directoryprovision under Section 54(2) while acquiring the newresidential asset. Section 54(2) is only proceduralrequirements in the form of a directory provision to ensurethat the mandatory condition under Section 54(1) iscomplied within the prescribed time limit of three years.The interpretation of exemptions to the benefit of Revenuedoes not mean that the rightful claims of assessees shallbe denied to obtain unjust enrichment to the revenue. Thenon compliance of Section 54(2) has not caused any loss tothe revenue. The respondents have not disputed that thepetitioner have not complied with the conditions in Section54(1). The capital gain transaction involves two legalentities namely the petitioner herein in his individualcapacity as well as the Kartha of Venkata Dilip Kumar(HUF). The capital gain is accounted in the proportion of75%:25% respectively of the above named legal entities.The Income Tax Appellate Tribunal by its order dated24.01.2019 has set aside the Income Tax Officer'srestriction on the cost overrun of Rs.229 lakhs to Rs.12.21lakhs and has directed the Income Tax Officer to re-examineall documents. When the above order applies to 75% of thetransaction, it must also apply to the balance HUF 25%. Inthe light of the above order passed by the AppellateTribunal, it is imperative that the Income TaxCommissioner's rejection of extra cost overrun under HUFmust also be annulled and the IT Department is directed tore-examine the cost overrun submission. 5. Learned counsel for the petitioner after reiteratingthe contentions raised in the writ petition submitted thatmerely because the deposit was not made under the capitalgain account in respect of the amount for which thededuction is sought for under Section 54(2), the benefit ofdeduction which the petitioner otherwise entitled to cannotbe denied. In this connection, the decision of KarnatakaHigh Court made in ITA No.46 of 2014 dated 14.07.2014 is relied on. The petitioner in fact deposited the saidamount in bank account and invested the same for theconstruction of the petitioner's building. Therefore thesaid amount is not deviated to any other purpose. Inrespect of the very same issue insofar as the individual isconcerned, the Tribunal considered the same and remittedthe matter back to the Assessing Officer to redo theassessment. Therefore the Revenue cannot take a differentstand in the case of HUF in respect of the same issue. 6. Per contra, the learned Senior Standing Counsel forthe respondents submitted as follows: relied on. The petitioner in fact deposited the saidamount in bank account and invested the same for theconstruction of the petitioner's building. Therefore thesaid amount is not deviated to any other purpose. Inrespect of the very same issue insofar as the individual isconcerned, the Tribunal considered the same and remittedthe matter back to the Assessing Officer to redo theassessment. Therefore the Revenue cannot take a differentstand in the case of HUF in respect of the same issue. 6. Per contra, the learned Senior Standing Counsel forthe respondents submitted as follows: In the case of the individual, where the matter wasremitted to the Assessing Officer, the Tribunal has notconsidered the requirement of compliance of the conditionstipulated under Section 54(2). Therefore, the saiddecision cannot be taken advantage by the petitioner. Onthe other hand, the decision to be made in this writpetition will have a bearing on the individual's case. Thepetitioner has not satisfied the mandatory requirement ofSection 54(2), since the petitioner has not deposited thedisputed amount under the Capital Gain Account. Theimpugned order has been rightly passed by stating the abovereasons. The decision of the Karnataka High Court reliedon by the petitioner is on different facts andcircumstances and therefore, it will not help thepetitioner in any manner. In support of the contention,the learned counsel relied on the decision of the Hon'bleSupreme Court reported in 2018 SCC online SC 747,Commissioner of Customs v. Dilip Kumar and Company. 7. Heard both sides. 8. The petitioner is the HUF. The HUF is an assesseeunder the Income Tax Department and its accounts are beingassessed under PAN . The petitioner HUF and theKartha of the HUF in his individual capacity owned aproperty situated at No.5 (Old No.3), Seshadri Road,Alwarpet, Chennai-18 with 1/4th share and 3/4th sharerespectively over the same. The said property wasdeveloped by entering into a development agreement on15.04.2013 with the developer. While the 3/4th share ofthe property, on completion of its development, was agreedto be released in favour of the developer or his nominees,1/4th share of the said property is agreed to be retainedby the petitioner HUF. Accordingly, the petitioner HUF andthe Kartha in his individual capacity deposited a portionof the amount received as consideration towards the abovedevelopment project into capital gain deposit account. Insofar as the petitioner HUF is concerned, it is stated that a sum of Rs.1.50 crores was deposited in the capital gaindeposit account with State Bank of India. The Revenueallowed deduction of the said sum of Rs.1.50crores underSection 54 of the Income Tax Act. However, the petitionerclaims further deduction to the tune of Rs.57.25 lakhsunder Section 54 by contending that though such sum was notdeposited in the capital gain deposit account, the same wasutilised for the purpose of additional expenditure towardsthe construction cost and that the said sum was drawn outof capital gain deposited in the same bank branch, however,in a saving bank account. The Revenue refused to grantdeduction under Section 54 towards the said sum of Rs.57.25lakhs only on the reason that it was not deposited in thecapital gain deposit account and thus, the petitionerhaving not satisfied the mandatory requirement underSection 54(2) of the Income Tax Act, is not entitled todeduction towards the said sum. 9. At this juncture, it is to be noted that insofaras the quantum for which the deduction is sought underSection 54 and rejected by Revenue, it appears that someconfusion prevails between the pleadings made before thefirst respondent and before this Court. While the firstrespondent proceeded to decide the matter as if the HUFclaims deduction towards the additional cost ofconstruction of Rs.1,02,13,527/-, the petitioner beforethis Court projects the case as if the deduction sought foris only in respect of a sum of Rs.57.25 lakhs. Whateverthe quantum may be, since the denial of deduction was madesolely on the reason that the said disputed quantum was notdeposited into capital gain account, this Court is inclinedto proceed further and decide the matter, since the quantumin dispute will not have any impact or relevance inanswering the issue involved in this matter. 10. Therefore, the point for consideration in thiswrit petition is as to whether the petitioner is entitledfor benefit of deduction under Section 54 in respect of thedisputed sum, even though the said sum was not deposited inthe capital gain account as required under Section 54(2). 11. Section 54 of the Income Tax Act, 1961, dealswith profit on sale of property used for residence. Itcontemplates that the capital gain arises from the transferof a long term capital asset being buildings or landsappurtenant thereto and being a residential house, theincome of which is chargeable under the head "income fromhouse property" and the assessee has, within a period ofone year before or two years after the date on which thetransfer took place, purchased or has, within a period ofthree years after that date, constructed, one residential https://hcservices.ecourts.gov.in/hcservices/ house in India, then the capital gain shall be dealt within accordance with the provisions made under Section 54(1)(i)(ii) instead of being charged to income tax as incomeof the previous year in which the transfer took place. Inother words, to put it precisely, the capital gain solanded in the hands of the assessee, instead of being dealtwith as income, will be dealt with by giving deduction tosuch capital gain, provided the assessee has satisfied therequirement contemplated under the above said provision.For seeking benefit of deduction under Section 54, theassessee should have purchased one residential house eitherone year before the transfer or two years after the date ofsuch transfer or constructed a residential house within aperiod of three years after the date of such transfer.Therefore, it is evident that the intention of thelegislature for granting deduction under Section 54 is thatthe assessee should be given the benefit of not taxing thecapital gain so received by treating it as income, if hehas purchased the house one year before or two years lateror constructed the same within three years, from the dateof transfer. Thus, this compliance is to be treated andconstrued as substantial compliance to consider the claimof the benefit under Section 54. Thus, it is clear thatmeeting out the expenses towards the cost of constructionof the house within a period of three years entitles anassessee for claiming deduction under Section 54. 12.No doubt, Section 54 (2) contemplates that if theamount of the capital gain is not appropriated by theassessee towards purchase of new assets within one yearbefore the date on which the transfer of original assettook place or which is not utilised by him for the purchaseof new asset before the date of furnishing the return ofincome under Section 139, he has to deposit the said sum inan account in any such bank and utilised in accordance withany scheme which the Central Government may, bynotification frame in that behalf. In other words, if theassessee has not utilised the amount of the capital gaineither in full or part, such unutilised amount should bedeposited in a capital gain account to get the benefit ofdeduction in the succeeding assessment years. 13. In this case, the only objection raised by theRevenue is that the disputed sum has not been deposited inthe capital gain account. At the same time, it is not indispute that the petitioner/assessee has deposited Rs.1.50crores in the capital gain deposit account and thededuction was granted to the said sum under Section 54.The dispute is only with regard to the balance sum spent onadditional construction cost, which according to the Revenue, is not entitled for deduction under Section 54,since it was not deposited in capital gain account asrequired under Section 54(2). 14. In my considered view, the contention of theRevenue to deny the benefit of deduction to thepetitioner/assessee cannot be justified for the followingreasons: Section 54(2) cannot be read in isolation and on theother hand, application of Section 54(2) should take placeonly when the assessee failed to satisfy the requirementunder Section 54(1). While the compliance of requirementunder Section 54(1) is mandatory and if complied, has to beconstrued as substantial compliance to grant the benefit ofdeduction, the compliance of requirement under Section 54(2) could be treated only as directory in nature. If theassessee with the material details and particularssatisfies that the amount for which deduction is sought forunder Section 54 is utilised either for purchasing orconstructing the residential house in India within the timeprescribed under Section 54(1), the deduction is bound tobe granted without reference to Section 54(2), whichcompliance in my considered view, would come into operationonly in the event of failure on the part of the assessee tocomply with the requirement under Section 54(1). Mere noncompliance of a procedural requirement under Section 54(2)itself cannot stand in the way of the assessee in gettingthe benefit under Section 54, if he is, otherwise, in aposition to satisfy that the mandatory requirement underSection 54 (1) is fully complied with within the time limitprescribed therein. 15. At this juncture, the Division Bench decision ofthe Karnataka High Court made in ITA No.47 of 2014 in thecase of the Commissioner of Income Tax vs. ShriK.Ramachandra Rao, is relevant to be quoted, wherein whileconsidering the scope of Section 54F(1) to 54F(4) of theIncome Tax Act, it has been observed as follows:"If the intention is not to retain cash butto invest in construction or any purchase of theproperty and if such investment is made withinthe period stipulated therein, then Section 54F(4) is not at all attracted and therefore, thecontention that the assessee has not depositedthe amount in the Bank account as stipulated andtherefore, he is not entitled to the benefit eventhough he has invested the money in constructionis also not correct." 15. At this juncture, the Division Bench decision ofthe Karnataka High Court made in ITA No.47 of 2014 in thecase of the Commissioner of Income Tax vs. ShriK.Ramachandra Rao, is relevant to be quoted, wherein whileconsidering the scope of Section 54F(1) to 54F(4) of theIncome Tax Act, it has been observed as follows:"If the intention is not to retain cash butto invest in construction or any purchase of theproperty and if such investment is made withinthe period stipulated therein, then Section 54F(4) is not at all attracted and therefore, thecontention that the assessee has not depositedthe amount in the Bank account as stipulated andtherefore, he is not entitled to the benefit eventhough he has invested the money in constructionis also not correct." decision of the Supreme Court reported in 2018 SCC onlineSC 747, Commissioner of Customs v. Dilip Kumar and Companyin support of her contention that exemption notificationshould be interpreted strictly and the burden of proof ofits applicability would be on the assessee. I have alreadypointed out that the assessee, in this case, has claimedthat it has utilised the disputed sum towards the cost ofthe additional construction within the period of threeyears from the date of the transfer and therefore, if suchcontention is factually correct, it is to be held that theassessee has satisfied the mandatory requirement underSection 54(1) to get deduction. Therefore, I find that theabove decision relied on by the Revenue is not helping thecase of the respondents under the facts and circumstancesof the present case. 17. The claim of the assessee for deduction of thedisputed sum towards the additional construction cost wasrejected only on the ground that the said sum was notdeposited in the capital gain account. In view of myfindings rendered supra, the Revenue is not justified inmaking such objection. On the other hand, it has to verifyas to whether the said sum was utilised by the petitionerwithin the time stipulated under Section 54(1) for thepurpose of construction. If it is found that suchutilisation was made within such time, the Revenue is boundto grant deduction. Therefore, this Court is of the viewthat the matter needs to go back to the first respondentfor considering the issue as to whether the disputedamount, claimed by the assessee as deduction, has beenutilised by the petitioner towards the additionalconstruction within the time limit prescribing underSection 54(1) and thereafter, to pass fresh orderaccordingly in the light of the findings and observationsrendered supra. Accordingly, the writ petition is allowedand the matter is remitted back to the first respondent topass a fresh order accordingly. Such exercise shall bedone by the first respondent within a period of eightweeks. No costs. Sd/- Assistant Registrar(CS) //True Copy// vri To1.The Commissioner of Income Tax, Chennai-5(i/c), Office of the Principal Commissioner of Income Tax, Aayakar Bhavan, Wanaparthy Block, 121, Mahatma Gandhi Road, Nungambakkam, Chennai 600 034.2.The Assistant Commissioner of Income Tax, Non-Corporate Circle-3, New Building, Aayakar Bhavan, 121, Mahatma Gandhi Road, Nungambakkam, Chennai 600 034.+1cc to Mr.Abdul Ravoof , Advocate SR.No. 91405+1cc to Mrs.Hema Muralikrishnan , Advocate SR.No. 91422W.P.No.16249 of 2018kk A.SK(20/11/2019)