COMMISSIONER OF INCOME TAX –V vs. KAPIL NAGPAL

2015 Dr. S. Muralidhar, J

For the AY 2007-08 the Respondent-Assessee again claimed deduction under Section 54F amounting to Rs. 2,21,69,090 against the long term capital gains of Rs. 3,74,47,787 on sale of shares of Valleyview Probuild Private Limited („VPPL‟). Copies of the agreement to sell dated 22nd July 2006 in respect of residential building at Village Fatehpur Beri and an unregistered sale deed (agreement to sell dated 10th April 2007) in respect of residential property at Gadaipur had been filed in support of the claim that the said properties were purchased on those respective dates, i.e., 22nd July 2006 and 10th April 2007. Proceedings before the AO

From the above facts the AO concluded that in the AY 2007-08 the Assessee was having more than one residential house, i.e., both the property at Gadaipur and the property at Village Fatehpur Beri. Consequently, the Assessee was issued a questionnaire on 30th November 2009 in which Question No. 9 pointed out that the Assessee had sold 5,000 shares of VPPL on 8th November 2006 for a consideration of Rs. 3.75 crores; that the Assessee had claimed exemption under Section 54F of the 2015:DHC:7552-DB

The explanation offered by the Assessee was that on the date of the transfer of the shares of VPPL, i.e., 8th November 2006 the Assessee had one house at Village Fatehpur Beri which he had purchased on 22nd July 2006 and only 15% share in the house property at Gadaipur. It was clear that the Assessee had purchased 85% share in Gadaipur house on 10th April 2007, thus becoming the full owner of the said house. It is accordingly claimed on the sale of share, i.e., 8th November 2006 the Assessee did not have the full ownership of the residential house at Gadaipur and was only a co-owner along with his father. The ownership of 15% in the Gadaipur house would not constitute the exclusive ownership of a residential house under Section 54F of the Act. The Respondent-Assessee fulfilled the conditions stipulated in Section 54F as he had only one residential house at Village Fatehpur Beri. The Assessee filed the Abhibhog Certificate which had been issued in the joint name of the Assessee and his father Mr. Prem 2015:DHC:7552-DB

The AO did not accept the above explanation. The AO observed that 5000 equity shares of VPPL were originally allotted to one Mr. Shyam Kumar Bagga on 25th October 2005 at the rate of Rs. 10 per share. VPPL itself was incorporated only four days earlier, i.e., on 21st October 2005, with Mr. Manoj Nagpal, one of the brothers of the Assessee as one of the directors, holding 50% of 10,000 equity shares issued. On the same date, i.e, 25th October 2005, the 5000 shares allotted to Mr. Shyam Kumar Bagga were shown transferred in the name of the Respondent-Assessee. The AO further observed that a document purporting to be a photocopy of the register of share transfers filed by the Respondent-Assessee on 26th November 2009 in order to substantiate the plea that the date of acquisition 2015:DHC:7552-DB

As regards the sale of the said shares sold to Mrs. Falguni Nayar on 8th November 2006 by the Assessee, the AO observed that the date of transfer of shares was not found mentioned in the Share Transfer Register. Further the duty on transfer was paid through revenue stamps rather than share transfer stamps. A perusal of the bank statement of the account held by the Respondent-Assessee, Vijaya Bank, showed that the Assessee had already received advance sale consideration of Rs. 50 lakhs on 22nd August 2006 and Rs. 1.75 crores on 27th September 2006 for the sale of the shares to Mrs. Falguni Nayar. Therefore, 60% of the sale consideration received by the Respondent-Assessee by 27th September 2006. It is only the balance 40% consideration that exchanged hands on 8th November 2006. The AO observed that no person would part with substantial amounts without the delivery of goods or at least without any agreement to sell to protect his rights. Thus, the AO concluded that the transfer of sale of shares had apparently taken place by 27th September 2006, i.e. within one year from the date of acquisition, i.e., 25th October 2005. Further it was unusual for the Respondent-Assessee to be in possession of the copies of share transfer form signed by the transferee unless in the light of the fact that the 2015:DHC:7552-DB

The AO further concluded that no evidence had been produced by the Respondent-Assessee to show that he was only 15% co-owner of Gadaipur house. A copy of the building sanctioned plan/drawing had not been produced despite requests. It was not ascertainable whether the construction was on the parcel of land belonging to the Assessee or whether the land belonging to father remained vacant or vice versa or the structure occupied parts of the land belonging to both. The Abhibhog Certificate showed that there are two separate units on ground floor and first floor, meant for independent use/enjoyment by the Respondent- Assessee and his father. Therefore, the Assessee had already owned two residential houses, i.e., Fatehpur Beri and Gadaipur on the date of purchase of the residential property from his father. Consequently, the AO declined to grant the benefit to the Assessee under Section 54F of the Act and also directed penalty proceedings under Section 271 (1) (c) of the Act.

The Assessee appealed to the Commissioner of Income Tax (Appeals) and sought to rely upon the following additional evidence in support of his contentions: “(a) The copy of the sale deed dated 13th March 1996 in favour of the Appellant to prove the fact that the portion of the property purchased by the Appellant was only a piece of agricultural land bearing Khasra Nos. 75 & 90. (b) The copy of balance sheet for the year ending 31st March 1996 which shows that the property purchased was agricultural land for a 2015:DHC:7552-DB

The CIT (A) sent the evidence at Serial Nos. (d), (e) and (f) as furnished by the Assessee by way of additional evidence under Rule 46A of the Income Tax Rules, 1963 („Rules‟) to the AO for his comments. By a remand report dated 19th July 2010 the AO objected to the admission of the additional evidence. The CIT (A), after considering objections, decided to admit the additional evidence in the interests of justice.

The CIT (A) then felt that some more evidences were required for coming to the conclusions and asked the Assessee to file the following documents: “(i) Annual returns filed with