MOHAMEDALI H CHARANIA,MUMBAI vs. ITO 12(1)(2), MUMBAI

The assessee has raised the following Grounds of Appeal:

Briefly put, the relevant facts are that the assessee, an individual, filed his return of income on 31-10-2007, declaring total income of Rs.4,37,910/- and the same was processed u/s.143(1) of the Act. The case was selected for scrutiny and the assessment was completed at Rs.30,01,740/- by primarily scaling down the exemption claimed u/s.54EC of the Act.

In the course of assessment proceedings, it was noted that the assessee had sold two flats during the year and earned capital gains on the same. In respect of Flat No.8, the assessee received a sale consideration of Rs.40,00,000/- whereas the stamp duty valuation in respect of the same was Rs.50,85,000/-. Similarly, in respect of Flat No.301, sale proceeds as per agreement was Rs.5,00,000/- whereas the stamp duty valuation was Rs.96,67,300/-. After considering the indexed cost of acquisition, investments in purchase of new house property and bonds u/s.54EC of the Act, while the assessee did not have any taxable capital gains based on actual sale consideration; but the Assessing Officer invoked Section 50C of the Act and took the stamp duty valuation as the full value of consideration received and computed capital gain of Rs.1,27,09,634/-. After considering the investments in purchase of house property and bonds u/s.54EC of the Act, the taxable capital gains was worked out by the Assessing Officer at Rs.25,63,834/-. Accordingly, the assessment was completed by the Assessing Officer by determining the Long

Although the assessee has raised multiple Grounds of appeal, but in sum and substance, the dispute revolves around invoking of Section 50C of the Act by the Assessing Officer while examining the claim of the assessee for exemption u/s.54EC of the Act, with respect to the Long Term Capital Gains earned on sale of residential property. In the course of assessment proceedings, the Assessing Officer noted that while computing the Long Term Capital Gains, assessee was entitled for exemption u/s.54EC of the Act on account of re-investment in a new property, but the assessee had adopted the actual sale proceeds as against the amount of stamp valuation prescribed under section 50C of the Act. The stand of the assessee was that the deeming provision of Section 50C of the Act requiring the adoption of the market value in terms of the stamp duty valuation as the full value of

We may refer to section 54EC which is an exemption of provision. Sub Section (1) of section 54EC provides that where the capital gain arising from the transfer of a long term 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) and (b) of subsection (1). As per clause (a) if the cost of the long term 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 long term 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 sub-section (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.

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 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

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 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”.

However, the Ld.Representative pointed out that before the lower authorities, assessee has been all along canvassing the inapplicability of Section 50C of the Act under the present circumstances. However, even if one is to apply Section 50C of the Act in order to compute the Long Term Capital Gain for the purpose of Section 54EC of the Act, yet, in terms of Section 50C(2) of the Act, the reference to the Departmental Valuation Officer (DVO) is required wherever, assessee seeks to challenge the value determined by the stamp valuation authorities. For the said limited purpose, the Ld. Representative prayed that the matter be sent back to the file of the Assessing Officer.

With respect to the latter prayer of the assessee, Ld.DR did not raise a serious objection.

Considering the aforesaid discussion, in our view, it has to be held that the deductions u/s.54 of the Act and/or 54EC of the Act have also to be computed considering the sale consideration in terms of Section 50C of the Act, wherever the same is found applicable. Thus, in principle, the action of the Assessing Officer is required to be upheld in view of the judgment of the Hon'ble Bombay High Court in the case of Jagdish C. Dhabalia (supra). So, however, Section 50C(2) of the Act prescribes that - where the value adopted by the stamp valuation authority is disputed in as much as the said value exceeds the fair market value of the property, the Assessing Officer may refer the valuation of such asset to a DVO. It is also prescribed that where the value so arrived at by the DVO is less than the value adopted by the stamp valuation authority, then, the value so estimated by the DVO shall be adopted as the sale consideration in terms of Section 50C of the Act. In other words, assessee seeks to point out that the issue regarding the quantification of the full value of consideration for the purpose of Section 50C is required to be examined because hitherto before the lower authorities, assessee was objecting to the invocation of Section 50C of the Act itself. Of course, in view of the decision rendered by the Hon'ble Bombay High Court in the case of Jagdish C. Dhabalia (supra), invoking of Section 50C of the Act has been held to be in order and therefore, in our view it would be in the fitness of things that the plea of the assessee before us for remitting the matter back to the file of Assessing Officer to re-work the Long Term Capital Gain, after applying the provisions of Sub- Section 2 of Section 50C of the Act is merited. We hold so.

Before parting, we may observe that in the ensuing remand proceedings, the Assessing Officer shall allow the assessee a reasonable opportunity of being heard and thereafter pass an order afresh in accordance with law on the issue of quantification of deduction allowable u/s.54EC of the Act.

In the result, the appeal of assessee is partly allowed, as above.