MEHUL JAGDISH DHABALIA vs. THE INCOME TAX OFFICER, 25(2)(2)

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ITXA/983/2016HC Bombay12 March 2019Author: HON'BLE SHRI JUSTICE AKIL KURESHI, HON'BLE SHRI JUSTICE SARANG VIJAYKUMAR KOTWAL17 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the Tribunal had not committed an error in interpreting the relevant statutory provisions. The Court reasoned that Section 50C provides a deeming fiction for the purpose of computing capital gain under Section 48. This deeming fiction, where the stamp duty valuation is taken as the full value of consideration if it exceeds the actual sale consideration, must be given its full effect. The Court found no conflict or incongruent consequences in applying Section 50C for the computation of capital gain tax after claiming exemption under Section 54EC. The automatic fallout of giving full effect to the deeming fiction under Section 50C for computation of capital gain under Section 48 is that the computation of the assessee's capital gain, and consequently the computation of exemption under Section 54EC, must be worked out on the basis of the substituted deemed sale consideration. Any other interpretation, as canvassed by the assessee, would render Section 50C redundant. Therefore, the appeals filed by the assessee were dismissed.

What were the facts?

The assessee, Mehul Jagdish Dhabalia, jointly owned a plot of land and transferred his 25% share for Rs. 25 lakhs on September 29, 2007. He invested the entire Rs. 25 lakhs in bonds under Section 54EC of the Income Tax Act, 1961, claiming full exemption for the long-term capital gain of Rs. 21,19,344 declared in his return for Assessment Year 2008-2009. However, the Stamp Duty Authorities valued the property at Rs. 3,04,70,810, making the assessee's share Rs. 76,17,702. The Assessing Officer determined the capital gain at Rs. 49,47,344. The CIT(Appeals) allowed the assessee's claim for full exemption. The Revenue appealed to the Income Tax Appellate Tribunal (ITAT), which reversed the CIT(Appeals)'s order, holding that the deemed sale consideration under Section 50C must be considered for exemption under Section 54EC.

What were the issues?

1. Whether, in law, the Tribunal was right in reversing the order of the CIT(Appeals) and confirming the Assessing Officer's action of taxing capital gain to the extent of the enhanced and notional sale consideration under Section 50C, despite the assessee investing the entire sale consideration in prescribed bonds under Section 54EC? (Mixed question of law and fact, concerning Sections 45, 48, 50C, and 54EC of the Income Tax Act, 1961). Assessee's Contentions: (i) The deeming fiction in Section 50C has no applicability when computing exemption under Section 54EC, as Section 45 is subject to exemption provisions. (ii) Section 50C creates a deeming fiction only for computing capital gain under Section 48 and does not apply to Section 45 or Section 54EC. Relied on CIT vs. Amarchand N. Shroff (1963) 48 ITR 59 (SC) and CIT vs. Vadilal Lallubhai (1972) 86 ITR 2 (SC). (iii) Harmonious construction of provisions is required, and the revenue's interpretation leads to anomalous situations. (iv) The legislature would not expect an impossible task; the assessee could not invest more than the actual sale consideration received. (v) Relied on K.P. Verghese vs. Income Tax Officer, 131 ITR 597 (SC) for avoiding absurd consequences. Revenue's Contentions: (i) The Tribunal correctly interpreted the statutory provisions. (ii) The assessee's interpretation would render Section 50C redundant. (iii) Exemption provisions should be strictly construed; exemption can only be claimed in relation to the investment made.

Which sections of the Income-tax Act were involved?

Section 45,Section 48,Section 50C,Section 54EC

AI-generated summary — verify with the full judgment below

1 / 17 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.981 OF 2016 Jagdish C. Dhabalia An Individual residing at Ground Floor, Bhavsar Compound M.G. Road, Borivali (W), Mumbai – 400 066. .... Appellant versus The Income Tax Officer, 25(2)(1) Having his office at Pratyakshakar Bhavan, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051. ... Respondent WITH INCOME TAX APPEAL NO.983 OF 2016 Mehul Jagdish Dhabalia An Individual residing at 501/502 Alaknanda, B­Wing TPS, III 51st Road Borivali (W) Mumbai – 400 092. .... Appellant versus The Income Tax Officer, 25(2)(2) Having his office at Pratyakshakar Bhavan, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051. ... Respondent ….... • Mr.V.Joshi a/w Mr.Nishith Gandhi, Ms.Namrata Kasa,e Mr.Mayur Patel & Ms.Urvi Patel i/b. M.M. Patel & Co., Advocate for Appellants. • Mr.Arvind Pinto, Advocate for Respondent. Nesarikar CNR No : HCBM020114672016 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:47

2 / 17 CORAM :  AKIL KURESHI & SARANG V. KOTWAL, JJ. DATE :  12th MARCH, 2019. ORAL JUDGMENT ­: (PER : AKIL KURESHI, J.)

1.

These Appeals arise out of common background. They have   been   heard   together   and   would   be   dispose   of   by   this common order. We may record facts from Income Tax Appeal No.983/16. The   Appeal   is   filed   by   individual   assessee   to challenge the Judgment of Income Tax Appellate Tribunal ('Tribunal' for short). Following question is presented for our consideration; “Whether, in the facts and circumstances of the case, and in law, the Tribunal was right, while reversing the order of CIT in confirming the action of the assessing officer in taxing capital gain, to the extent   of   the   enhanced   and   notional   sale consideration under section 50 C of the Act, inspite of   the   fact   that   the   Appellant   had   invested   the entire sale consideration accruing on transfer of the immovable   property   in   the   prescribed   bonds   in terms of section 54 EC of the Act?” Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:47

3 / 17

2.

The   assessee   was   a   joint   owner   of   a   plot   of   land situated at Borivali, Mumbai, having 25% undivided share in the plot. The assessee and other co­owners transferred the plot in favour   of   purchaser   under   a   sale   deed   dated   29/09/2007 pursuant to which the assessee received a sum of Rs.25 lakhs by way of sale consideration. The assessee invested entire amount of Rs.25 lakhs in the bond of 'Rural Electrification Corporation Ltd.' as specified under section 54 EC of the Income Tax Act, 1961 ('the Act' for short). In the return of income filed for the year 2008­2009 the assessee had declared the long term capital gain   on   transfer   of   land  at   Rs.21,19,344/­   and  claimed   full exemption of such capital gain, under section 54 EC of the Act.

3.

The Stamp Duty Authorities however had valued the land for the purpose of levying stamp duty at Rs.3,04,70,810/­. The Assesse's share of such stamp valuation of the property at 25% comes to Rs.76,17,702/­.

4.

During the course of scrutiny of assessee's return, the Assessing   Officer   determined   the   long   term   capital   gain   of Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:47

4 / 17 Rs.49,47,344/­ and accordingly passed the order of assessment on 29/12/2010. 5. The   assessee   filed   Appeal   against   the   order   of Assessment, before CIT (Appeals). The Assessee contended that since the entire sale consideration of Rs.25 lakhs was invested in the specified bond, the assessee must get full exemption from capital gain, irrespective of the computation of the deemed sale consideration under section 50C of the Act. CIT Appeals allowed the   assessee's   Appeal,   upon   which   the   revenue   filed   Appeal before the Tribunal. The Tribunal by the impugned judgment allowed the revenue's Appeal. The tribunal was of the opinion that for the purpose of exemption under section 54EC of the Act, deeming fiction contained in section 50C of the Act cannot be ignored. The assessee could claim exemption only in relation to the investment made in the specified bond and not qua the entire capital gain.

6.

Learned   Counsel   for   the   Appellant   raised   following contentions; Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:47

5 / 17 (i) Taking   through   the   provisions   contained   in Chapter IV of the Act it was contended that the deeming fiction contained in section 50C of the Act, would have no applicability while computing the exemption as provided in section 54EC of the Act.   He   contended   that   section   45   which   is   a charging   provision,   is   made   subject   to   various exemption   provisions,   including   (though   not   so stated in the section) section 54EC of the Act. (ii) It   was   contended   that   section   50C   of   the   Act creates   a   deeming   fiction   for   the   purpose   of computation of capital gain under section 48 of the Act. Such fiction would have no applicability for the purpose of charging capital gain as per section 45 or for computing exemption under section 54EC of   the   Act.   It   was  contended  that   the   effect  of deeming provision would be limited to the purpose for   which   the   same   has   been   enacted.   In   this context, learned Counsel relied on the decision of Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:47

6 / 17 Supreme Court in the case of CIT Vs. Amarchand Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:47

7 / 17 Income Tax Officer, as reported in 131 ITR 597 (SC)  in support of the proposition that to avoid absurdity and incongruent consequences, the Court would adopt an interpretation not emerging from the plain language of a statute.

7.

On the other had, the learned Counsel Mr.Arvind Pinto for the revenue contended that tribunal has correctly interpreted the relevant statutory provisions. The interpretation advanced by   the   Assessee   would   effectively   render   the   provisions   of section   50C   of   the   Act   redundant.   The   exemption   provision should be strictly construed. Assessee can claim exemption only in relation to investment made in the specified bond and not beyond.

8.

Having heard learned Counsel for the parties, to test the correctness of the interpretation of the tribunal, we may refer to the relevant statutory provisions. Part E of the Chapter IV of the Act pertains to capital gains. Section 45 contained the Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:47

8 / 17 said part is the charging provision for the capital gain arising from transfer of a capital asset. Sub­section (1) of section 45 provides that any profits or gains arising from the transfer of a capital   asset   effected   in   the   previous   year   shall,   save   as otherwise provided in section 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H be chargeable to income tax under the head “Capital gains” and shall be deemed to be the income of the previous year in which the transfer took place. Section 48 of the Act provides the mode of computation of capital gain. In terms of this provision, the income chargeable under the head “Capital gains” would be computed by deducting from the full value of consideration received or accruing as a result of the transfer of the capital any amounts towards expenditure incurred wholly and exclusively with such transfer and the cost of acquisition of the asset and the cost of any improvement thereto.

9.

Section 54EC of the Act pertains to capital gain not to be charged on investment in certain bonds. Relevant portion of this section reads as thus ; Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:47

9 / 17 54 EC. ­ (1) Where the capital gain arises from the transfer of   a   long­term   capital   asset   (the   capital   asset   so transferred being hereafter in this section referred to as the original asset) and the assessee has, at any time within a period of six months after the date of such transfer, invested the whole or any part of capital gains in the long­term specified asset, the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say, ­ (a) if the cost of the long­term specified asset is not less   than   the   capital   gain   arising   from   the transfer of the original asset, the whole of such capital gain shall not be charged under section 45; (b) if the cost of the long­term specified asset is less than the capital gain arising from the transfer of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the long­ term specified asset bears to the whole of the capital gain, shall not be charged under section 45.” Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:47

10 / 17

10.

Section 50C of the Act introduced by the legislature under Finance Act 2002 with effect from 01/04/2003, reads as under ; 50 C. ­ (1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed by any authority of a State Government (hereafter in this section referred to as the “stamp valuation authority”) for the purpose of payment of stamp duty in respect of such transfer the value so adopted or assessed shall, for the purposes of section   48,   be   deemed   to  be   the   full   value   of  the consideration received or accruing as a result of such transfer. "Provided that where the date of the agreement fixing the amount of consideration and the date of registration for the transfer of the capital asset are not the same, the value adopted or assessed or assessable by the stamp valuation authority on the date of agreement may be taken for the purposes of computing full value of consideration for such transfer: Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:47

11 / 17 Provided further that the first proviso shall apply only in a case where the amount of consideration, or a part thereof, has been received by way of an account payee cheque   or   account   payee   bank   draft   or   by   use   of electronic clearing system through a bank account, on or before the date of the agreement for transfer.". (2) Without prejudice to the provisions of sub­section (1), where— (a)  the assessee claims before any Assessing Officer that the value adopted or assessed [or assessable] by   the   stamp   valuation   authority   under   sub­ section (1) exceeds the fair market value of the property as on the date of transfer; (b)  the value so adopted or assessed [or assessable] by the stamp valuation authority under sub­section (1)   has   not   been   disputed   in   any   appeal   or revision or no reference has been made before any other authority, court or the High Court, the Assessing Officer may refer the valuation of the capital asset to a Valuation Officer and where any such reference is made, the provisions of sub­sections (2), (3), (4), (5) and (6) of section 16A, clause (i) of sub­section (1) and sub­ Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:47

12 / 17 sections  (6) and (7)  of section  23A,  sub­section (5) of section 24, section 34AA, section 35 and section 37 of the Wealth­tax Act, 1957 (27 of 1957), shall, with necessary modifications, apply in relation to such reference as they apply   in   relation   to  a  reference  made   by   the  Assessing Officer under sub­section (1) of section 16A of that Act. [Explanation 1] — For the purposes of this section, "Valuation Officer" shall have the same meaning as in clause (r) of section 2 of the Wealth­tax Act, 1957 (27 of 1957). [Explanation 2 ]— For the purposes of this section, the expression "assessable" means the price which the stamp valuation authority would have, notwithstanding anything to the contrary contained in any other law for the time being in force, adopted or assessed,   if   it   were   referred   to   such   authority   for   the purposes of the payment of stamp duty.] (3)  Subject to the provisions contained in sub­section (2), where   the   value   ascertained   under   sub­section   (2) exceeds the value adopted or assessed [or assessable] by the stamp valuation authority referred to in sub­ section   (1),   the   value   so   adopted   or   assessed   [or Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:47

13 / 17 assessable] by such authority shall be taken as the full value of the consideration received or accruing as a result of the transfer.]

11.

Combined reading of these provisions would show that capital gain upon transfer of a capital asset is to be charged as per section 45 of the Act and which shall be deemed to be the income   of   the   assessee   for   the   previous   year   in   which   the transfer   took   place.   In   terms   of  the   provisions  contained  in section 48 the capital gain would be computed by deducting from the full value of consideration received or accruing as a result of transfer, expenditure incurred wholly and exclusively in connection with the transfer and the cost of acquisition of the asset and cost of improvement thereof. It is at the stage of computation that section 50C of the Act kicks in. This provision, as can be seen, provides for a deeming fiction. Sub­section (1) of section 50C provides that where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or plot or both is less than the value   adopted   or   assessed   or   assessable   by   stamp   valuation Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:47

14 / 17 authority for the purpose of stamp duty collection in respect of such transfer, the value so adopted, assessed or assessable shall for the purpose of section 48 be deemed to be the full value of consideration for transfer received or accruing as a result of such transfer. In plain terms, the stamp valuation assessment by the stamp duty officer of the State Government would be deemed to be the sale consideration of capital asset, replacing the declared sale consideration, if it happens to be less than stamp duty valuation.  For the purpose of charging capital gain in view of section   45,   to   be   computed   as   provided   in   section   48,   this deemed consideration would be applied.

12.

We may refer to section 54EC which is an exemption of provision. Sub­Section (1) of section 54EC provides that where the capital gain arising from the transfer of a long­term capital asset being land or plot or both and the assessee has, at any time within a period of six months after the date of such transfer, invested the whole or part of the capital gains in specified asset, the capital gain shall be dealt with in accordance with clause (a) Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:47

15 / 17 and (b) of sub­section (1). As per clause (a) if the cost of the long­term specified asset is not less than the capital gain arising from the transfer of the original asset, the whole of such capital gain shall not be charged under section 45. As per clause (b) if the cost of the long­term specified asset is less than the capital gain arising from the transfer of the original asset, the Assessee would receive proportionate exemption from payment of capital gain. Further  proviso of sub­section (1) of section 54EC limits the investment that an assessee can make in any specified asset to Rs.50 lakhs. In other words, therefore clauses (a) and (b) of sub­section   (1)  of   section   54EC  would   always   have   limit  of Rs.50 lakhs specified in the further proviso for investment in the specified asset.

13.

We   do   not   find   any   conflict   or   any   incongruent consequences of applying the provisions of section 50C for the purpose   of   computation   of   capital   gain   tax   after   claiming exemption under section 54EC of the Act. The deeming fiction under section 50C of the Act, must be given its full effect and Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:47

16 / 17 the Court should not allow to boggle the mind while giving full effect   to   such   fiction.   We   are   not   opposing   the   proposition canvassed by the Counsel of the Assessee that deeming fiction must   be   applied   in   relation   to  the   situation   for   which  it   is created. However, while giving full effect to the deeming fiction contained   under   section   50C   of   the   Act   for   the   purpose   of computation of the capital gain under section 48, for which section 50C is specifically enacted, the automatic fallout thereof would be that the computation of the assessee’s capital gain and consequently the computation of exemption under section 54EC, shall have to be worked out on the basis of substituted deemed sale consideration of transfer of capital asset in terms of section 50C of the Act.

14.

Any other interpretation, particularly one canvassed by the   learned   Counsel   for   the   Assessee,   would   render   the provisions of section 50C redundant. In a situation like the one on hand, even if for the purpose of section 48, in terms of section 50C of the Act, the sale consideration deemed to have Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:47

17 / 17 been received by the Assessee may be much higher than one declared in the sale deed, the Assessee would claim no further capital   gain   tax   liability   by   simply   claiming   to   have   made investment in specified asset the full declared sale consideration.

15.

Under   such   circumstances   we   do   not   find   that  the Tribunal   has   committed   error   in   interpreting   the   relevant statutory provision. Income Tax Appeals are therefore dismissed. (SARANG V. KOTWAL, J.) (AKIL KURESHI, J.) Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:47 Powered by TCPDF (www.tcpdf.org)

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