RAJESH PARASRAM NICHANI,BORIVALI (E) vs. 42(1)(4), BANDRA (E)

The grounds of appeal raised by the assessee are as under: “1. On the facts and in the circumstances of the case and in law, the penalty order passed u/s 271(1)(c) of the I.T. Act is invalid and bad in law. 2. On the facts and in the circumstances of the case and in law, the learned C.I.T. (A) erred in confirming the penalty levied of Rs.5,25,923/- u/s 271(1)(c) of the I.T. Act by dismissing the appeal. 3. On the facts and in the circumstances of the case and in law, the learned C.I.T. (A) erred in confirming the penalty levied of Rs.5,25,923/- although there has been neither any concealment of income nor furnishing of inaccurate particulars of income.” 3. The brief facts of the case are that the assessee, Shri Rajesh Parasram Nichani, sold a residential house property for a consideration of Rs.1,35,00,000/-and computed the resultant long-term capital gain at Rs.72,19,588/-. The assessee claimed exemption under section 54 of the Act in respect of the entire long-term capital gain and filed his return of income for Assessment Year ("A.Y.") 2014-15 under section 139(1) of the Act. The case was selected for scrutiny under CASS, and during the course of assessment proceedings, the Assessing Officer ("AO") examined the computation of long- term capital gain and the claim of exemption under section 54 of the Act. In response to the queries raised, the assessee submitted that he had invested a sum of Rs.68,25,500/- with M/s Damodar Suruchi Developers in respect of their proposed residential project and had further deposited Rs.10,00,000/- in the Capital Gains Accounts Scheme maintained with the State Bank of India.

The assessee further explained during the assessment proceedings that the project undertaken by M/s Damodar Suruchi Developers had been stalled due to reasons beyond the control of the builder. Consequently, he entered into a compromise transaction and purchased another residential property for Rs.49,95,000/-. The resultant shortfall of Rs.24,40,579/- was admitted by the assessee as being chargeable to tax. Accordingly, the AO brought the said amount to tax in A.Y. 2014-15 and simultaneously levied a penalty of Rs.5,25,923/-, being 100% of the tax sought to be evaded, under section 271(1)(c) of the Act

Aggrieved by the penalty order passed by the AO, the assessee preferred an appeal before the Ld. CIT(A), first appellate authority. The Ld. CIT(A) held that the assessee had furnished inaccurate particulars of income by claiming excess exemption under section 54 and had failed to suo motu disclose the resultant shortfall until the case was selected for scrutiny under CASS. Relying upon the decision of the Hon'ble Supreme Court in MAK Data (P.) Ltd., the Ld. CIT(A) observed that any disclosure made after the issuance of a scrutiny notice cannot be regarded as voluntary. According to him, the disclosure of the shortfall was made only after the discrepancy came to light during scrutiny. The Ld. CIT(A) also considered the assessee's contention that the shortfall could be brought to tax only after the expiry of the period of three years contemplated under section 54(2) of the Act. However, he rejected the said contention by holding that the assessee had failed to utilise the funds in accordance with the investment plan disclosed in the return of income, resulting in a taxable shortfall. Accordingly, he confirmed the penalty levied under section 271(1)(c) of the Act.

During the course of hearing before us, the learned Authorised Representative ("Ld. AR") for the assessee primarily relied upon the provisions of section 54(2) of the Act and contended that the shortfall of Rs.24,40,579/- could be brought to tax only in the assessment year relevant to the expiry of the statutory period prescribed under the said provision, i.e., A.Y. 2017-18. It was submitted that since the said amount was not liable to tax in the impugned Assessment Year 2014-15, the very foundation for the levy of penalty under section 271(1)(c) ceased to exist. The learned Departmental Representative ("Ld. DR"), on the other hand, relied upon the orders of the lower authorities.

We have carefully considered the rival submissions and perused the material available on record. The proviso to section 54(2) of the Act provides that where the amount deposited in the capital gains accounts scheme is not utilised for the purchase or construction of a new residential house within the prescribed period of three years, the amount remaining unutilised shall be charged under section 45 as the income of the previous year in which the said period of three years expires.

Strictly speaking, the aforesaid proviso applies only to amounts deposited in the Capital Gains Accounts Scheme. In the present case, the assessee deposited only Rs. 10,00,000/- in the capital gains accounts scheme but substantial amount was invested with M/s Damodar Suruchi Developers and, owing to the stalling of the project, was subsequently utilised for the purchase of another residential property at a lower consideration. Therefore, the proviso is not fully applicable to the facts of the present case. Nevertheless, the underlying legislative intent behind the proviso provides valuable guidance. The scheme of section 54 indicates that where the amount intended to be invested in a new residential house ultimately remains unutilised, such unutilised amount is liable to be brought to tax only in the year in which it becomes evident that the investment has not been made within the prescribed period. The same principle should equally apply where the original investment fails for reasons beyond the control of the assessee and the amount is subsequently reinvested only to a limited extent.

In the present case, the assessee entered into a fresh purchase agreement with Mrs. Avani Asher Vishal Parmar and Mrs. Jyoti Narendra Asher on 28.05.2015, relevant to the previous year corresponding to A.Y. 2016-17. It was only at that stage that the assessee finally invested Rs.49,95,000/- in the new residential property instead of the originally proposed investment of Rs.68,25,500/-with Ms. Damodar Suruchi Developers and Rs. 10,00,000/- in capital gains account scheme. Although the assessee had originally claimed exemption under section 54 in respect of the entire capital gain of Rs.72,19,588/-, comprising Rs.68,25,500/- invested with M/s Damodar Suruchi Developers and Rs.10,00,000/- deposited under the Capital Gains Accounts Scheme, the actual investment ultimately made in the new residential property was only Rs.49,95,000/-. Consequently, the balance amount of capital gain of Rs.24,40,579/- became liable to tax.

In our considered opinion, the aforesaid shortfall could not have been subjected to tax in A.Y. 2014-15. At the time of filing the original return, the assessee was still within the statutory period available for making the investment under section 54. Furthermore, by the time it became apparent that the entire proposed investment would not materialise, the time limit prescribed for filing a revised return under section 139(5) had already expired, whereas the statutory period of three years available for making the investment had not. Therefore, the assessee could not have revised the return to offer the shortfall to tax in A.Y. 2014-15. Accordingly, the unutilised amount could become taxable only in the assessment year in which the statutory period expired or when it became evident that the amount would not be invested in the new residential property, and certainly not in A.Y. 2014-15. Once it is held that the amount of Rs.24,40,579/- was not liable to tax in the impugned assessment year, the very basis for alleging concealment of income or furnishing of inaccurate particulars in A.Y. 2014-15 disappears. Consequently, the penalty levied under section 271(1)(c) of the Act cannot be sustained. We, therefore, direct the Assessing Officer to delete the penalty of Rs.5,25,923/- levied under section 271(1)(c) of the Act.

In the result, the appeal filed by the assessee is allowed.