MRS ROMITA MATHUR,GURGAON vs. DCIT, NEW DELHI

This is an appeal filed by the assessee against the order of the ld CIT(A)-37, New Delhi dated 16.03.2015 for the Assessment Year 2012-13 wherein the claim of the assessee under section 54 of the income tax act disallowed by the learned assessing officer is confirmed for the reason that the assessee did not utilize the same money received on sale of the property for acquisition of the new property but acquired the new property out of bank loan.

The assessee has raised the following grounds of appeal:- “1. The Learned CIT (Appeals) 37, New Delhi and the A.O. has erred in law and in facts in sustaining the disallowance of exemption of Rs. 66,57,730.00 from capital gains by applying wrong provisions of law as applicable in this regard which act of the authorities below are arbitrary and unjust.

Brief facts of the case shows that the assessee is an individual who filed her return of income on 27/4/2013 declaring income at Rs. 1578762/–. During the course of the assessment proceedings it was observed that the assessee has claimed deduction u/s 54 of the Income Tax Act on the sale of property on 14/6/2011 being Flat No. 1402, Tower No 1, Gurgaon on 14/06/2011 at the sale price of Rs. 40,000,000/-. The assessee was owner of the said property along with her husband, 50% of the capital gain was shown in the hands of her husband. The assessee computed capital gain considering the sale consideration of Rs. 20,000,000/- against which the indexed cost of acquisition of Rs. 13342270/- was claimed and the 50% share of the capital gain was offered at Rs. 6657730/–. The assessee also claimed exempt u/s 54 of the Act by purchasing the new property on 02/12/2011 at Flat No. B- 2, Gurgaon for Rs. 40,000,000/- by taking a loan of Rs. 40,000,000/- from Kotak Mahindra Bank Ltd. New flat was also purchased in joint ownership with her husband. As for the purchase of the said residential flat assessee applied for a loan from Kotak Mahindra Bank, the demand draft was issued by that bank in favour of the seller of Rs. 40,000,000/- and therefore entirely the amount of housing loan was utilised for the purchase of residential flat. Assessee claimed that exemption u/s 54 of the act and offered Nil Capital gain.

The learned Assessing Officer denied the exemption u/s 54 of the act stating that as assessee has not utilised the sale consideration of the property, but has acquired the new property through different source of funds i.e. bank loan, she has violated the provisions of section 54F of the Act and therefore he denied the deduction under that section to the assessee. Accordingly he computed the capital gain of Rs 6657730/– and did not allow the exemption to the assessee. Accordingly, the assessment u/s 143(3) of the Act was passed on 13/03/2015 determining total income of the assessee at Rs. 8236492/- against the returned income of Rs. 1578762/-. 5. On appeal before the ld CIT(A), he upheld the order of the learned AO relying upon the decision of the Hon’ble jurisdictional High Court in 330 ITR 309. Therefore, assessee aggrieved with the order of the learned CIT(A) before us.

Despite notice, none appeared on behalf of the assessee and therefore the issue is decided on the merits of the case as per information available on record.

The learned departmental representative vehemently supported the order of the lower authorities and stating that the issue has been squarely covered by the decision of the Hon’ble Delhi High Court in 330 ITR 309 (2011) (Delhi) wherein it has been held that there has to be direct linkage of the funds of the sale of the property and the funds utilized for acquisition of the new asset. 8. We have carefully considered the rival contention and perused the orders of the lower authorities. Admittedly there is no dispute on the computation of the capital gain on the sale of the assets from which capital gain has arose. The only dispute is that assessee has purchased the new house property by obtaining the loan from the bank. The total cost of the house property is funded by the bank loan. Therefore the revenue says that as the net consideration arising out of the sale of the capital asset has not been utilized for acquisition of the new asset and therefore the assessee is not entitled to deduction u/s 54F of the Income Tax Act. The claim of the assessee was under section 54 of the Income Tax Act. According to the provisions of section 54 if assessee within one year before or 2 years after the date on which the transfer took place purchased or has within a period of 3 years after that date constructed, one residential house in India, then instead of the capital gain been charged to income tax as income of the previous year in which the transfer took place, then if the amount of the capital gain is greater than the cost of the residential house so purchase the difference between the amount of capital gain and the cost of new asset shall be charged u/s 45 of the income tax act. If the amount of capital gain is less than the cost of the new asset, no capital gain shall be charged u/s 45 of the act. Therefore assessee has earned in the present case capital gain of Rs. 6657730/–. She has invested Rs. 20,000,000/- being 50% of the total cost of Rs. 40,000,000/- in purchase of the new house. But the only issue is that the purchase of the new house was financed by a bank loan of Rs. 40,000,000/- which was directly credited to the bank account of the seller of the new house. On careful reading of the provisions of section 54 of the income tax act there is no requirement of Nexus to be proved of the fund realized on sale of existing asset with the funds utilized for purchase of new asset. However there is a requirement that if the capital gain is not utilized in the date of the due date of the filing of the return of income, then such capital gain is required to be locked in into a designated bank account. The funds so locked-in can be utilized for acquisition of the new property within specified time. Thus the above provision cannot be said to be laying down any law or rule that only the amount of capital gain earned is required to be invested i.e. there has to be a nexus between the fund of the capital gain with the amount invested in the property. If a view is taken that to claim the deduction u/s 54 there has to be a nexus of the funds of the property sold with the funds of the new property acquired, then benefit would never be available to a person who acquired new property one year before the date of sale of the capital asset whose consideration is received at the time of the sale of capital asset. Certain times it may also happen that sale consideration may be received in the form other than cash or bank. Therefore, even in such circumstances also the assessee may not get the benefit of section 54 of the income tax act, if the Nexus is required to be proved. We do not read any condition of showing such nexus in the provisions of section 54 of the income tax act. Therefore, if the assessee acquires a new property on sale of a capital asset in terms of the provisions of section 54 of the act then irrespective of the Nexus of the fund, mathematical formulae required to be applied for purpose of computation of the chargeability of the balance capital gain. Therefore, in the present case we do not find any infirmity in the claim of the assessee of deduction u/s 54 of the act. Reliance on the decision of the Hon’ble Delhi High Court in 330 ITR 309 is completely misplaced because in that case the claim of benefit u/s 54F was denied as the agricultural land which was sold was in the name of HUF whereas the new property was purchased in the name of joint names of individual and his mother. It was related the basic condition of exemption/deduction under section 54F of the act. Further with respect to the acquisition of the new property and its fund it was noted by the honourable High Court that most of the payment was already made before one year of the sale of the agricultural land. Therefore, in that particular