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Income Tax Appellate Tribunal, “H” Bench, Mumbai
IN THE INCOME TAX APPELLATE TRIBUNAL “H” Bench, Mumbai Before S/Shri B.R.Baskaran (AM) & Amarjit Singh (JM)
I.T.A. No. 1017/Mum/2016 (Assessment Year 2012-13)
Shri Hemendra K. Shah DCIT 4(1)(1) 540, Rotunda Building Vs. Mumbai. B.S. Marg, Fort Mumbai-400001.
PAN :ABDPS8172P (Appellant) (Respondent)
Assessee by Shri Nishit Gandhi Department by Shri Manoj Kumar Singh Date of Hearing 24.10.2018 Date of Pronouncement 24.10.2018
O R D E R Per B.R. Baskaran (AM) :-
The assessee has filed this appeal challenging the order dated 27-01- 2016 passed by Ld CIT(A)-9, Mumbai and it relates to the assessment year 2012-13. The assessee is aggrieved by the decision rendered by Ld CIT(A) on the following issues:- (a) Rejection of claim for deduction u/s 54 of the Act. (b) Disallowance u/s 14A of the Act. (c) Adhoc disallowance of expenses. 2. The assessee is an individual and is engaged in share broking and is also dealing in shares and securities. The first issue relates to the rejection of claim for deduction u/s 54 of the Act. The assessee sold a residential flat for a consideration of Rs.233.10 lakhs on 28-02-2012. The assessee computed long term capital gain thereon at Rs.102.00 lakhs. The assessee claimed set off of long term capital loss of Rs.7,12,351/- against the long term capital gain cited above. Besides, the assessee also claimed deduction u/s 54EC of Rs.50.00 lakhs and deduction u/s 54 of the Act of Rs.45.00 lakhs. The AO accepted the
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claim for set off of loss as well as deduction u/s 54EC of the Act. The dispute is with regard to the claim for deduction u/s 54 of the Act.
The assessee submitted that he has booked a residential flat with M/s Westin Developers P Ltd and paid Rs.45.00 lakhs before the due date for filing return of income. The assessee claimed the same as deduction u/s 54 of the Act. The AO noticed that the assessee has not entered into any sale agreement with the builder and the assessee is claiming deduction on the basis of allotment letter dated 14.7.2012 issued by the Builder. Further the AO noticed that the construction has not been completed by the builder till the date of passing of assessment order on 13.2.2015, while the construction has to be completed within 3 years from the date of transfer as per the provisions of sec. 54 of the Act. The AO took support of the decision rendered by the Mumbai bench of Tribunal in the case of Pankaj Wadhwani (18 taxmann.com 33), wherein the ITAT had taken the view that the construction should be real one and mere purchase of plot without undertaking any construction will not entitle the assessee to claim deduction u/s 54F of the Act. Accordingly the AO rejected the claim for deduction u/s 54 of the Act. The Ld CIT(A) also confirmed the same.
We heard the parties and perused the record. We notice that the assessee has deposited Rs.45.00 lakhs with the builder by booking a flat No.1204 admeasuring 700 Sq.ft. on the 13th floor of the building known as “Ravikiran” at Azad Nagar, Village Ambivali, off J.P Road, Andheri (west), Mumbai. The builder M/s Westin Developers P Ltd has issued an allotment letter dated 04-07-2012 to the assessee and also issued two receipts acknowledging the receipt of money, i.e., Rs.42.00 lakhs was paid by the assessee by cheque no.003809 drawn on Bank of India on 26-06-2012 and the balance amount of Rs.3.00 lakhs was paid by cheque no.003816 drawn on Bank of India on 18-09-2012. The allotment letter as well as the receipts issued by the builder proves the payments made by the assessee and further the above said payments have been made by way of cheque only. These
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evidences have not been proved wrong by the AO. Hence we are unable to agree with the observation of the AO that the assessee has failed to prove that the assessee has paid the amount of Rs.45.00 lakhs within the due date prescribed for filing return of income. The AO has also taken the view that the assessee has not shown that the above said advance was paid out of sale consideration received by the assessee. We notice that the assessee has paid the above said advance subsequent to the receipt of sale consideration and hence there is no reason to doubt the same. In any case, there is no stipulation in sec.54 of the Act that the very same consideration should be used to purchase/construct a new residential house.
There is no dispute that the amount of capital gain arising on sale of a residential house can be invested in the new residential house for getting deduction u/s 54 of the Act. The above said evidences would show that the assessee has utilised the capital gains amount to the extent of Rs.45.00 lakhs in construction of a new residential house flat and the utilisation has taken place before the due date for filing return of income. The case of the assessing officer is that the allotment letter does not give any legal title to the flat, which has also not been completed till date and hence the assessee is not entitled for deduction u/s 54 of the Act. However, a perusal of the allotment letter would show that the assessee and the builder has understood the terms and conditions of sale as per the draft Agreement for sale shown to the assessee, meaning thereby the allotment was made upon acceptance of terms and condition. The Ld A.R also submitted that the builder could not complete construction due to some problems at his end and the construction of apartment has already reached 15th slab. Accordingly he submitted that it cannot be considered to be a case of altogether non-construction by the builder, but it is only a case of delayed construction on the part of the builder and the assessee does not have any control over the same. Accordingly he submitted that the assessee could not be penalised for the fault of the builder.
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The Ld A.R further submitted that the assessee is eligible for deduction u/s 54 of the Act even if the assessee has utilised the amount of capital gain by paying advance for booking a flat and in lieu thereof , the builder has issued an allotment letter specifying the flat number and the consideration for purchase of flat. In this regard, he placed his reliance on the following case laws:- (a) CIT vs. Shriram Gopal (ITA 70 of 2015 dated 09-02-2015)(Delhi) (b) Hasmukh N Gala (ITA No.7512/Mum/2013 dated 19-08-15) (c) Khemchand Phagwani vs. ITO (ITA No.7876/Mum/2010) (d) Sudeshkumar Nagdev (ITA No.3199/Mum/2011) (e) Sanjeev Sinha (ITA No.1131/Mum/2014)
We notice that an identical issue was considered by the co-ordinate bench in the case of Shri Hasmukh N Gala (supra) and the issue has been decided in favour of the assessee by following judicial precedents. For the sake of convenience, we extract below the operative portion of the order passed by the co-ordinate bench in this case:- 7. We have carefully considered the rival submissions. The crux of the controversy before us relates to the understanding of the expression ‘purchase’ contained in section 54 of the Act. Notably, an assessee is entitled to the benefits of section 54 of the Act, if he has purchased the new property within a period of one year before the date of transfer of the old property or within two years from the date on which the transfer of old property took-place. The exemption under section 54 of the Act is also allowed in a situation where a new residential house is constructed within three years from the date of transfer of the old property. In the present case, the appellant has sold the old property on 8/12/2009 and according to the Assessing Officer, assessee was required to purchase the new property within a period of one year before 8/12/2009 or within two years from such date, which the assessee was found not to have complied with. The Assessing Officer also noted that assessee had not constructed a new residential house within a period of three years from 8/12/2009. On the other hand, the claim of the assessee is that it has fulfilled the requirements of section 54 of the Act because he has paid Rs.1.00 crore to the builder for acquisition of flat and the builder has issued an allotment letter in respect of the specific Flat being, Flat Nos. 1 & 2 on 4th Floor in C-Wing, Ramniwas Building, Malad (E).
7.1 The controversy is as to whether under these facts assessee can be said to have purchased the new property so as to entitle him for exemption in relation to the amount spent towards the new property
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under section 54 of the Act. It is not disputed by the Revenue that the sum of Rs.1.00 crore has been invested by the assessee towards acquiring new property. Of course, the legal title in the said property has not passed or transferred to the assessee within the specified period and it is also quite apparent that the new property was still under construction. So however, the allotment letter by the builder mentions the flat number and gives specific details of the property.
7.2 In this context, the Hon’ble Delhi High Court in the case of Kuldeep Singh (supra) has explained the meaning of the expression ‘ purchased’ in the context of section 54 of the Act in following words:-
“8.The word 'purchase' can be given both restrictive and wider meaning. A restrictive meaning would mean transactions by which legal title is finally transferred, like execution of the sale deed or any other document of title. 'Purchase' can also refer to payment of consideration or part consideration alongwith transfer of possession under Section 53A of the Transfer of Property Act, 1882. Supreme Court way back in 1979 in CIT v. T.N Aravinda Reddy [1979] 120 ITR 46/2 Taxman 541, however, gave it a wider meaning and it was held that the payment made for execution of release deed by the brother thereby joint ownership became separate ownership for price paid would be covered by the word 'purchase'. It was observed that the word 'purchase' used in Section 54 of the Act should be interpreted pragmatically. In a practical manner and legalism shall not be allowed to play and create confusion or linguistic distortion. The argument that ‘purchase’ primarily meant acquisition for money paid and not adjustment, was rejected observing that it need not be restricted to conveyance of land for a price consisting wholly or partly of money’s worth. The word 'purchase', it was observed was of a plural semantic shades and would include buying for a price or equivalent of price by payment of kind or adjustment of old debt or other monetary considerations. It was observed that if you sell a house and make profit, pay Caesar (State) but if you buy a house or build another and thereby satisfy the conditions of Section 54, you were exempt. The purpose was plain; the symmetry was simple; the language was plain.
Recently Supreme Court in Civil Appeal Nos. 5899-5900/2014 titled Sanjeev Lal v. CIT [2014] 46 taxmann.com 300 again examined Section 54 in a case where the assessee had entered into an agreement to sell a house to a third party on 27th December, 2002 and had received RS.15 lacs by way of earnest money and subsequently received the balance sale consideration of Rs.l.17 crores (total being Rs.1.32 crores) when the sale deed was executed on 24th September, 2004. In the meanwhile, the
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assessee had purchased another house on 30th April, 2003. Benefit under Section 54 was denied] by the High Court observing that the new house had been purchased prior to execution of the sale and not within one year prior to sale of original asset i.e. new house has been purchased on 30th April, 2003 whereas the earlier asset was sold only on 24th September, 2004. The Supreme Court allowing the appeal noticed that the agreement to sell was executed on 27th December, 2002 but the sale deed could not be executed because of inter-se litigation between the legal heirs, as one of them had challenged the will under which the assessee had inherited the property. The agreement to sell, it was held had given some rights to the vendor and reduced or extinguished rights of the assessee. This, it was observed was sufficient the purpose of Section 2(47), which defines the term transfer in relation to a capital asset. In the light of the factual matrix, it was observed that the intention behind Section 54 was to give relief to a person who had transferred his residential house and had purchased another residential house within two years of transfer or had purchased a residential house one year before transfer. It was only the excess amount not used for making purchase or construction of the property within the stipulated period, which was taxable as long term capital gain while on the amount spent, relief should be granted. Principle of purposive interpretation should be applied to subserve the object and more particularly when one was concerned with exemption from payment of tax. The assessee, therefore, succeeded. The observations made in the said decision are also relevant on the question whether the payments made by the assessee to the person with whom he had entered.into.an earlier agreement to sell should be allowed to be set off as expenses incurred in relation to the sale deed which was executed.”
The Hon’ble Delhi High Court further referred to the decision o Hon’ble Madhya Pradesh High Court in the case of Smt. Shashi Varma vs. CIT, 224 ITR 106(M.P) and that of the Hon’ble Calcutta High Court in the case of CIT vs. Smt. Bharati C. Kothari (Cal) 244 ITR 352 and opined that when substantial investment was made in the new property, it should be deemed that sufficient steps had been taken and it would satisfy the requirements of section 54 of the Act. As per the Hon’ble High Court, the basic purpose behind section 54 of the Act is to ensure that the assessee is not taxed on the capital gain, if he replaces his house and spend money earned on the capital gain within the stipulated period. The parity of reasoning explained by the Hon’ble Delhi High Court in the case of Kuldeep Singh (supra) squarely covers the controversy in the present case in favour of the assertions made by the assessee. Therefore, we are inclined to uphold the plea of the assessee
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for exemption under section 54 of the Act qua the impugned investment in acquisition of the new residential house.
7.3 The plea of the Revenue is that no purchase deed was executed by the builder and that there was only an allotment letter issued. As per the Revenue the advance could be returned at any time and, therefore, the assessee may lose the exemption under section 54 of the Act. In our considered opinion, the aforesaid does not militate against assessee’s claim for exemption in the instant assessment year, as there is no evidence that the advance has been returned. In case, if it is found that the advance has been returned, it would certainly call for forfeiture of the assessee’s claim under section 54 of the Act. In such a situation, the proviso below section 54(2) of the Act would apply whereby it is prescribed that such amount shall be charged under section 45 as income of the previous year, in which the period of three years from the date of the transfer of the original asset expires. The aforesaid provisions also does not justify the action of the Assessing Officer in denying the claim of exemption under section 54 in the instant assessment year.
7.4 In view of the aforesaid discussion and on the basis of material and evidence on record, we find that the assessee can be said to have complied with the requirement of section 54 of the Act; and, the exemption has been incorrectly denied by the lower authorities. As a matter of passing, we may also mention here the reliance placed by Ld. Representative of the assessee on the decision of our Coordinate Bench in the case of Shri Khemchand Fagwani vs. ITO, ITA No.7876/M/10 order dated 10/09/2014, wherein also claim of exemption under section 54 of the Act was allowed under similar circumstances. In the light of the precedent, we find no reason to deny the claim under section 54 of the Act. We direct accordingly.
In the case under consideration also, the total consideration payable is Rs.107.62 lakhs and the assessee has paid the amount of Rs.45.00 lakhs as per the terms prescribed in the allotment letter. The balance amount is payable subsequently depending upon the progress of the construction of apartment. Thus we notice that the assessee has made substantial payment as per the terms entered with the builder and accordingly, the decision rendered by the co-ordinate bench would squarely apply to the facts of the present case.
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The Ld A.R also placed reliance on the decision rendered by Hon’ble Supreme Court in the case of Fibre Boards (P) Ltd vs. CIT (2015)(376 ITR 596), wherein the Hon’ble Supreme Court was considering the dispute over deduction claimed u/s 54G of the Act. With regard to the utilisation of capital gain for the purpose of availing deduction u/s 54G of the Act, the Hon’ble Apex Court, at page 619- para 36, observed as under:- “A reading of sectin 54G makes it clear that the assessee is given a window of three years after the date on which transfer has taken place to “purchase” new machinery or plant or “acquire” building or land. We find that the High Court has completely missed the window of three years given to the assessee to purchase or acquire machinery and building or land. This is why the expression used in section 54G(2) is “which is not utilised by him for all or any of the purposes aforesaid....”. It is clear that for the assessment year in question all that is required for the assessee to avail of the exemption contained in the section is to “utilise” the amount of capital gains for purchase and acquisition of new machinery or plant and building or land. It is undisputed that the entire amount claimed in the assessment year in question has been so “utilised” for purchase and/or acquisition of new machinery or plant and land or building”
The Hon’ble Supreme Court also held as under at page 621- para 38:- ..... Advances paid for the purpose of purchase and/or acquisition of the aforesaid assets would certainly amount to utilisation by the assessee of the capital gains made by him for the purpose of purchasing and/or acquiring the aforesaid assets. We find therefore that on this ground also, the assessee is liable to succeed.”
The Ld A.R rightly pointed out that the provisions of sec.54 and 54G are identically worded with regard to the deposit of unutilised portion of the capital gain in Capital gains account scheme. Hence, in our view, the decision of Hon’ble Supreme Court supports the claim of the assessee.
We notice that the Ld CIT(A) has taken support of certain decisions rendered by the Tribunals. According to Ld A.R, there is no parity of facts between those cases and the instant case. In any case, we notice that the claim of the assessee is supported by the decisions rendered by Hon’ble High Court and Supreme Court. Accordingly we hold that the assessee is entitled to claim for deduction u/s 54 of the Act on the advance amount of Rs.45.00
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lakhs paid by the assessee on booking of flat mentioned above. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the deduction u/s 54 of the Act as claimed by the assessee.
The next issue contested by the assessee relates to the disallowance of demat charges of Rs.1,38,085/- u/s 14A of the Act. The assessing officer noticed that the assessee has received exempt dividend income of Rs.9,02,063/-. The assessee disallowed a sum of Rs.65,000/- u/s 14A of the Act. The AO noticed that the assessee claimed a sum of Rs.1,38,085/- as demat charges and accordingly took the view that the same is required to be disallowed u/s 14A of the Act as it is related to holding of shares. The ld CIT(A) also confirmed the same.
We heard the parties on this issue. The submission of the assessee is that he is a share broker and hence he has opened demat account in the name of his clients and sub-brokers by bearing the expenses on demat account. Accordingly it was submitted that these expenses have been incurred by the assessee in the course of carrying on business out of commercial expediency. We notice that the tax authorities have erroneously considered the demat charges as the expenses incurred on the opening and operation of demat account of the assessee in his personal capacity. Since the assessee has incurred the expenses out of commercial expediency, the same is allowable as deduction u/s 37(1) of the Act. Accordingly we set aside the order passed by Ld CIT(A) and direct the AO to allow the demat expenses.
The next issue relates to adhoc disallowance of all expenses @ 20% made by the AO on the ground that the possibility of personal element in these expenses cannot be ruled out. The Ld CIT(A) also confirmed the same.
We heard the parties on this issue and perused the record. The various expenses considered by the AO are Computer Maintenance, Electricity charges, General charges, Motor Car expenses, Printing & Stationery, Staff Welfare and Telephone. The Ld A.R contended that the AO has made adhoc
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disallowance only on surmises and conjectures. He submitted that all these expenses have been incurred towards business only and accordingly contended that there is no requirement of making any adhoc disallowance.
The involvement of personal element, in our view, cannot be ruled out only in the case of Motor Car expenses and Telephone expenses. Accordingly we are of the view that there is no requirement of making any disallowance out of other expenses. With regard to Motor Car and Telephone expenses, we modify the order passed by Ld CIT(A) and direct the AO to sustain disallowance @ 10% of the expenses towards personal element.
In the result, the appeal filed by the assessee is partly allowed. Order has been pronounced in the Court on 24.10.2018.
Sd/- Sd/- (AMARJIT SINGH) (B.R. BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai; Dated : 24/10/2018
Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard File. BY ORDER, //True Copy// (Senior Private Secretary) PS ITAT, Mumbai