SMT. S.M.SHOBA,BENGALURU vs. INCOME TAX OFFICER, WARD - 7(2)(1), BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No. 1955/Bang/2019 Assessment Year : 2016-17 Smt. S.M. Shoba, No. 1489, First Floor, The Income Tax 40th Cross, 4th T Block, Officer, Jayanagar, Ward 7 (2)(1), Bangalore – 560 041. Bangalore. Vs. PAN: CXKPS1454H APPELLANT RESPONDENT Assessee by : Shri Ramasubramanian, CA : Shri Priyadarshi Mishra, Addl. Revenue by CIT (DR) Date of Hearing : 09-02-2022 Date of Pronouncement : 30-03-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal has been filed by assessee against the order dated 05.07.2019 passed by the Ld.CIT(A)-7, Bangalore for Assessment Year 2016-17 on following grounds of appeal. “1. That the order of the learned Commissioner of Income- Tax (Appeals) in so far it is prejudicial to the interests of the appellant is bad and erroneous in law and against the facts and circumstances of the case. 2. That the learned Commissioner of Income-Tax (Appeals) erred in law and on facts in denying the cost of the land for claiming exemption u/s. 54F of the Act on the ground that such land was purchased four years prior to the date of sale of original asset. 3. That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in making an enhancing the assessment by making a of disallowance from Rs.

Page 2 of 14 ITA No. 1955/Bang/2019 3,27,03,509/- against the disallowance of Rs.14,90,260 made by the learned assessing officer in the assessm order. 4. That the learned Commissioner of Income-tax (Appeals) erred in law and on facts in enhancing the disallowance to Rs.3,27,03,509 even though the learned assessing officer allowed the exemption after considering the documents available on record. 5. That the learned Commissioner of Income-tax (Appeals) erred in law and on facts in disallowing the entire claim of exemption u/s. 54F of the Act Rs. 3,27,03,509/- on the ground that the land is jointly held by appellant and her spouse. 6. That the learned Commissioner of Income-tax (Appeals) erred in law and on facts in disallowing the exemption u/s. 54F of the Act even though it is an undisputed fact that the appellant has invested the whole amount for construction of house. 7. Without prejudice to the above submissions, that the learned Commissioner of Income-tax (Appeals) ought to have allowed the exemption u/s. 54F of the Act in the hands of the appellant and her spouse equally. Each of the above grounds is without prejudice to one another, the appellant seeks the leave of the Hon'ble Income Tax Appellate Tribunal, Bangalore to add, delete, amend or otherwise modify each or any of the grounds of appeal either before or at the time of hearing this appeal.” 2. Brief facts of the case are as under: The assessee is an individual and filed her return of income for year under consideration on 05.08.2016 declaring total income of Rs. 8,66,860/-. The said return was selected for scrutiny and statutory notices were issued to assessee. In response to statutory notices, representative of assessee appeared before the Ld.AO and filed requisite details called for. From the assessment order, the Ld.AO noted that assessee had declared income from other sources of Rs. 8,66,860/- and long term capital gains of Rs. Nil. We observe that assessee claimed deduction u/s. 54F of

Page 3 of 14 ITA No. 1955/Bang/2019 Rs.4,64,16,154/- being cost of acquisition of residential property on Site No. 839/21, 37th F Cross, 4th T Block, Jayanagar, Bangalore – 560 011 on 10.2.2011 for an amount of Rs. 1,52,02,905/- and construction of residential house on the same property value of Rs. 3,12,13,249/-. 2.1 The Ld.AO observed that assessee also constructed a residential house on the same property. As per valuation report, the construction cost was Rs.3,12,13,249/-. Therefore, the deduction u/s. 54F was restricted to Rs. 3,12,13,249/-. The difference between the total Capital Gains and Cost of construction Rs. 14,90,260/- (Rs. 3,27,03,509-Rs. 3,12,13,249) was brought to tax and the Long Term Capital Gains was computed at Rs.14,90,260/-. The Ld.AO was of the opinion that the property acquired by assessee on 10.02.2011 was before the transfer of original asset and accordingly the claim u/s. 54F was denied. Aggrieved by the order of Ld.AO, assessee preferred appeal before Ld.CIT(A). 2.2 Before the Ld.CIT(A), the assessee submitted that, she along with her father, her sister and her brother disposed off a vacant land situated at Ekarajapura Village, Hosakote Taluk and the share of the assessee in the long term capital gain was Rs.3,27,03,509/-. The deed of sale was executed by the assessee, her father, her sister and her brother on 22.08.2015. The assessee had claimed the benefits under Section 54F of the Income tax Act, in view the acquisition of the residential house property and re-construction of the residential house property. It is submitted before the Ld.CIT(A), that the assessee has not submitted the details of Sale Deed dated 29.01.2015. The assessee submitted that no Sale Deed executed on 29.01.2015 by

Page 4 of 14 ITA No. 1955/Bang/2019 or in favour of the assessee and that there has been a Gift of the property given out of natural love and affection by the assessee's father to the assessee and her husband under a document titled as Release Deed executed by the father on 03.12.2014. The assessee submits that by virtue of the Gift Deed termed as Release Deed dated 03.12.2014 the assessee's father gifted and renounced his undivided rights, interest in the property in favor of his daughter i.e., the assessee. 2.3 The Ld.CIT(A) relying on the decision of Hon’ble Supreme Court in case of Dilip Kumar & Company reported in 95 taxmann.com 327 held that the provision giving benefit to assessee needs to be interpreted strictly and in case there is an ambiguity in the provision, the same is subject to strict interpretation. He thus upheld that disallowance of the claim by the Ld.AO. Aggrieved by the order of Ld.CIT(A), the assessee is in appeal before this Tribunal. 3. The Ld.AR contended that all the issues alleged in the present appeal relates to disallowance of claim u/s. 54F of the Act. He submitted that the land in which the investment was made is jointly held by assessee and her husband and the total cost of construction was incurred by assessee alone. He thus relied on following decisions in support of the claim that assessee is entitled to deduction u/s. 54F even though she is a co-owner. Since the entire investment in the construction of the property is made by assessee alone; i) Hon’ble Bombay High Court in case of Prakash vs. ITO reported in [2008] 173 Taxman 311 (Bombay)

Page 5 of 14 ITA No. 1955/Bang/2019 ii) Hon’ble Karnataka High Court in case of CIT vs. K.Ramachandra Rao reported in (2015) 277 CTR 522 iii) Hon’ble Karnataka High Court in case of CIT vs. Subramanya Bhat reported in (1987) 165 ITR 571 iv) Hon’ble Madras High Court in case of C. Aryama Sundaram vs. CIT reported in [2018] 407 ITR 1. 4. On the contrary, the Ld.Sr.DR submitted that assessee has claimed u/s. 54F toward purchase of land 4 years prior to sale of original asset along with cost of construction of residential house. He also submitted that the disallowance is justified as assessee is co-owner of the said new asset along with her husband. The Ld.Sr.DR vehemently supported the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 5. Assessee purchased a property in 2011 along with her father and husband being a land located at BDA Site No. 839/21, 37th F Cross, 4th T Block, Jayanagar, Bangalore – 560 011. Subsequently, assessee’s father released his rights in favour of assessee with respect to his 1/3rd share vide release deed dated 03.12.2014. Thus from December 2014, the property was jointly owned by assessee and her husband Shri K.C. Narayanaswamy. 6. From the records it is clear that during Financial Year 2015-16, relevant to Assessment Year under consideration, assessee sold land situated at 34/1, Ekkarajapura Village, Sulibele Hobli, Hoskote Taluk wherein, assessee was 1/3rd co- owner of the property. The other co-owners were their family

Page 6 of 14 ITA No. 1955/Bang/2019 members. Assessee’s share of capital gains on sale of such 1/3rd share was Rs. 3,27,03,500/-. Out of the said capital gains earned by the assessee, she spent sum of Rs.3,12,13,249/- towards construction of new house in the Jayanagar property being BDA Site No. 839/21, 37th F Cross, 4th T Block, Jayanagar, Bangalore – 560 011. 7. We note that assessee claimed the cost of land of Jayanagar property and cost of construction incurred by her u/s. 54F being the subject matter of the present appeal. From the above, it is clear that assessee invested the capital gains earned from sale of her 1/3rd share in 34/1, Ekkarajapura property for the purpose of construction of residential house on the land jointly owned by her and her husband at BDA Site No. 839/21, 37th F Cross, 4th T Block, Jayanagar, Bangalore – 560 011. 8. The authorities below alleges that, deduction under section 54F will be available to assessee only if the assessee has within a period of one year before or two year after the date on which transfer took place or, has within a period of three years after the date of transfer constructed a residential house. The revenue contends that as the assessee acquired the property with respect to which the deduction under section 54 F was claimed was acquired on 10/02/2011, i.e., 4 years prior to the transfer of original asset and that the assessee constructed the residential house on the same property which is valued at Rs.3,12,13,249/-, the Capital gain was restricted to Rs.14,90,260/-. 9. In the present facts of the case, there is no dispute that assessee is the owner of the property, in respect of which the

Page 7 of 14 ITA No. 1955/Bang/2019 deduction is claimed. The assessee started construction on the land owned by the assessee and he husband in the year 2015. The original asset was sold in which assessee had 1/3rd share in the financial year relevant to assessment year under consideration i.e, August 2015. 10. In decision relied by Hon’ble Madras High Court in case of Ms.Moturi Luxmi vs ITO in ITA No.181 of 2019 by order dated 17/08/2020, decisions referred by Ld.CIT(A) was considered. The substantial question of law that arose before Hon’ble Madras High Court was as under: “Whether, for purpose of section 54 of the Income tax Act, the advance payment made by assessee for the purchase of residential flat would constitute a part of purchase or not, when such advance is made to the seller of flat prior to the date of sale of capital asset in question?” 11. While considering above question, by Hon’ble Court, we note that decisions relied by Ld.CIT(A) has been referred as under :- 7. In fact, the argument of the Revenue in the said case is identical to that of the argument made by Mrs.R.Hemalatha, learned Standing Counsel appearing for the Revenue in the case on hand. She ha5 argued that the language of Section 54(1) of the Act is very clear and that this being a benefit given to the assessee, it requires a strict interpretation. In this regard, she has referred to the decision in the case of Commissioner of Customs (Import), Mumbai Vs. Dilip Kumar & Co. and Ors [reported in (2018) 9 SCC 1] The Hon'ble First Bench considered the said argument in the said judgment and held in favour of the assessee. The relevant portions of the decision of the Hon'ble First Bench of this Court in the case of C.Aryama Sundaram are as hereunder : "14. Under Section 54(1) of the said Act, the capital gain arising from transfer of a residential house is not to be charged to income tax as income of the previous year, if the assessee has within a period of one year before or two years after the date of transfer of that residential house purchased another residential house in India or has within a period of three years after the date of transfer constructed a residential

Page 8 of 14 ITA No. 1955/Bang/2019 house in India and if the amount of the cost of the residential house so purchased or constructed is equal to or less than the amount of capital gain. 15. It is a well settled principle of construction and interpretation of statutes that statutory provisions should, to the extent feasible, be interpreted and/or construed in accordance with plain meaning of the language used in those provision. 16. On a plain reading of Section 54W of the said Act, the transfer of a long term asset, which would include a residential house, would be chargeable to income tax as a capital gain, except in circumstances specified in the said section. 17. It is not necessary for this Court to go into the question of mode and method of computation of capital gain as there is no dispute in this regard, which requires adjudication in this appeal. 18. The question is, whether any part of the capital gain from transfer of the residential house is exempt from the capital gain tax and if so to what extent? 19. The conditions precedent for exemption of capital gain from being charged to income tax are: (i)The assessee should have purchased a residential house in India either one year before or two years after the date of transfer of the residential house which resulted in capital gain or alternatively constructed a new residential house in India within a period of three years from the date of the transfer of the residential property which resulted in the capital gain. (ii)If the amount of capital gain is greater than the cost of the residential house so purchased or constructed, the difference between the amount of the capital gain and the cost of the new asset is to be charged under Section 45 as the income of the previous year. (iii)If the amount of the capital gain is equal to or less than the cost of the new residential house, the capital gain shall not be charged under Section 45. 20. What has to be adjusted and/or set off against the capital gain is, the cost of the residential house that is purchased or constructed.

Page 9 of 14 ITA No. 1955/Bang/2019 Section 54(1) of the said Act is specific and clear. It is the cost of the new residential house and not just the cost of construction of the new residential house, which is to be adjusted. The cost of the new residential house would necessarily include the cost of the land, the cost of materials used in the construction, the cost of labour and any other cost relatable to the acquisition and/or construction of the residential house. 21. A reading of Section 54(1) makes it amply clear that capital gain is to be adjusted against the cost of new residential house. The condition precedent for such adjustment is that the new residential house should have been purchased within one year before or two years after the transfer of the residential house, which resulted in the capital gain or alternatively, a new residential house has been constructed in India, within three years from the date of the transfer, which resulted in the capital gain. The said section does not exclude the cost of land from the cost of residential house. 22. It is axiomatic that Section 54(1) of the said Act does not contemplate that the same money received from the sale of a residential house should be used in the acquisition of new residential house. Had it been the intention of the Legislature that the very same money that had been received as consideration for transfer of a residential house should be used for acquisition of the new asset, Section 54(i) would not have allowed adjustment and/or exemption in respect of property purchased one year prior to the transfer, which gave rise to the capital gain or may be in the alternative have expressly made the exemption in case of prior purchase, subject to purchase from any advance that might have been received for the transfer of the residential house which resulted in the capital gain. 23. At the cost of repetition, it reiterated that exemption of capital gain from being charged to income tax as income of the previous year is attracted when another residential house has been purchased within a period of one year before or two years after the date of transfer or has been constructed within a period of three years after the date of transfer of the residential house. It is not in dispute that the new residential house has been constructed within the time stipulated in

Page 10 of 14 ITA No. 1955/Bang/2019 Section 54(1) of the said Act. It is not a requisite of Section 54 that construction could not have commenced prior to the date of transfer of the asset resulting in capital gain. If the amount of capital gain is greater than the cost of the new house, the difference between the amount of capital gain and the cost of the new asset is to be charged under Section 45 as the income of the previous year. If the amount of capital gain is equal to or less than the cost of the new residential house, including the land on which the residential house is constructed, the capital gain is not to be charged under Section 45 of the said Act." “16. From the above, it is dear that the intention of the Legislature was to either purchase before or after the date of sale and the word 'purchased or 'constructed' used in the Notes on Clauses amply makes the intention clear. In the light of the above discussions, we hold that the substantial question of law is required to be answered in favour of the assessee.” 12. We also refer to Full Bench decision of Hon’ble Supreme Court in case of Commissioner of Customs (Import) Vs. M/s Dilip Kumar & Sons & Ors. (Supra). This decision was relied by Ld. CIT(A) to deny exemption claimed by assessee u/s 54F. On careful study of decision by Hon’ble Supeme Court we note that, ratio has been expressly mentioned in para 27 as under: “27. Now coming to the other aspect, as we presently discuss, even with regard to exemption clauses or exemption notifications issued under a taxing statute, this Court in some cases has taken the view that the ambiguity in an exemption notification should be construed in favour of the subject. In subsequent cases, this Court diluted the principle saying that mandatory requirements of exemption clause should be interpreted strictly and the directory conditions of such exemption notification can be condoned if there is sufficient compliance with the main requirements. This, however, did not in any manner tinker with the view that an ambiguous exemption clause should be interpreted favouring the revenue. Here again this Court applied different tests when considering the ambiguity of the exemption notification which requires strict construction and after doing so at the stage of applying the notification, it came to the conclusion that one has to consider liberally.”

Page 11 of 14 ITA No. 1955/Bang/2019 13. Hon’ble Court on considering catena of decisions observed as under:- “46.The above decision, which is also a decision of two Judge Bench of this Court, for the first time took a view that liberal and strict construction of exemption provisions are to be invoked at different stages of interpreting it. The question whether a subject falls in the or in the exemption clause, has to be strictly construed. When once the ambiguity or doubt is resolved by interpreting the applicability of exemption clause strictly, the Court may construe the notification by giving full play bestowing wider and liberal construction. The ratio of Parle Exports Case (supra) deduced as follows: “Do not extend or widen the ambit at stage of applicability. But once that hurdle is crossed, construe it liberally. 47. We do not find any strong and compelling reasons to differ, taking a contra view, from this. We respectfully record our concurrence to this view which has been subsequently, elaborated by the Constitution Bench in Hari Chand Case(supra). 14. Hon’ble Court thus summarised their observation as under:- “52.To sum up, we answer the reference holding as under: 1) Exemption notification should be interpreted strictly; the burden of Proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification. (2) When there is ambiguity in exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be cannot be claimed by the subject/assessee and it must be interpreted infavour of the revenue. (3) The ratio in Sun Export case (supra) is not correct and all the decisions which took similar view as in Sun Export Case (supra) stands overruled. 15. Now coming to the decision of Hon’ble Madras High Court in case of C Aryama Sundaram (Supra) relied in case of M/s Moturi Laxmi Vs. ITO (Supra). Hon’ble Court first analysed the conditions assessee fulfilled to enter exemption clause and thereafter applicability was liberally interpreted. 16. Similar is the analysis by Hon’ble Madras High Court in other decisions referred to in M/s Moturi Laxmi Vs. ITO (Supra).

Page 12 of 14 ITA No. 1955/Bang/2019 Hon’ble Delhi High Court in case of CIT Vs. Bharti Mishra reported in (2014) 41 taxmann.com 50, decisions of Hon’ble Karnataka High Court in case of CIT Vs J.R Subramnya Bhat reported in (1986) 28 Taxman 578 and CIT Vs. K Ramachandra Rao reported in (2015) 56 taxmann.com 163, all principally allowed exemption u/s 54/54F, only on substantial satisfaction of required conditions therein. Hon’ble Karnataka High Court and Hon’ble Madras High Court in decisions relied by Ld.AR widely interpreted the provision, consequent to strict satisfaction of conditions therein. 17. The passport to derive benefit under sec.54F(1) is investment in construction of property within the period required u/s 54(1)F or to invest in residential property within the stipulated time for enabling deduction under section 5 4F of the Act. Hon’ble Karnataka High Court in decision of CIT vs.Sambandam Udaykumar reported in 251 CTR 371 took the view that, under provisions of section 54F of the Act, the condition preceded is that, capital gains realised from sale of capital asset should have been parted by assessee and invested or constructed a residential house, as the case may be. Hon’ble court also observed that, the essence of the purpose of section 54F, is whether, the assessee who received the capital gain has invested in a house. Once it is demonstrated that the consideration received on transfer of capital asset has been invested in or construction of residential house, even though the construction is not complete in all respect as required under law, assessee cannot be denied benefit under section 54F. Further on a plain reading of decision of Hon’ble Karnataka High Court in case of CIT Vs. Sambandam

Page 13 of 14 ITA No. 1955/Bang/2019 (Supra) reveals that, there is no particular stage of completion of construction, that is contemplated. Ld. AR submitted that, the construction was later on completed and the sale deed was registered in favour of assessee on 05/07/2019 in respect of transfer of ownership of residential property. There is nothing placed by revenue on record to demonstrate any other violation in support of their arguments. 18. In present facts we are of the view that assessee has substantially fulfilled all necessary conditions to be entitled for liberal interpretation of sec.54F. In our view, F.B decision relied by Ld.Sr.DR and Ld.CIT(A) of Hon’ble Supreme Court in case of M/s Dilip Kumar (Supra) needs to be applied after analysing the facts in each case. In our opinion, in present facts decision by Hon’ble Supreme Court support the case of assessee. 19. Respectfully applying ration of Hon’ble Karnataka High Court in case of CIT Vs. Sambandam (Supra), we hold that assesse is eligible for exemption of Rs.65 lakhs u/s 54F. In the result, the appeal filed by assessee stands allowed. Order pronounced in the open court on 30th March, 2022.

Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 30th March, 2022. /MS /

Page 14 of 14 ITA No. 1955/Bang/2019 Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order

Assistant Registrar, ITAT, Bangalore