SATISH P. MALHOTRA,MUMBAI vs. ITO 16(1)(2), MUMBAI

This is an appeal filed by the assessee against the order of CIT(A)- 27, Mumbai dated 01/10/2014 for A .Y.2009-10 in the matter of order passed u/s.143(3) r.w.s. 264 of the IT Act.

Only grievance of assessee relates to decline of claim of deduction u/s.54F of the IT Act.

Rival contentions have been heard and record perused.

Facts in brief are that assessee is an individual who is a retired public servant deriving income from House Property, Capital Gain on sale of immovable property, dividend, interest etc. Assessee filed his return of income for A.Y.2009-10 on 22.07.2009 declaring total income of Rs. 4,40,939/- and claiming refund of Rs. Shri Satish P Malhotra 27,597/-. Return was processed u/s.143(1) with assessed income of Rs. 29.48.720/- raising demand of Rs. 6,31,9307-. Assessee filed an application for revision of this order u/s.264, before the Ld. CIT-16, Mumbai and who passed order u/s.264 on 13.03.2013, Assessment u/s.143(3) r.w.s.264 of the IT. Act, 1961 was completed by the Ld. A.O. on 30.12.2013 determining total income of Rs. 19,56,220/-.

During the year under consideration, the assessee offered long term capital gains and also claimed exemption u/s.54F. Ld. A.O computed the LTCG at Rs. 13,52,276/-. The assessee had also claimed exemption u/s.54 against this LTCG and stated that his contribution in purchase of new flat was Rs. 30,40,000/-. On verification of details filed during assessment proceedings. AO observed that the assessee had not purchased new flat within stipulated time and accordingly, show cause notice was issued to the assessee. In response, assessee submitted explanation which was rejected by the Ld. A.O. and he accordingly, denied the claim of exemption u/s.54.

By the impugned order, CIT(A) confirmed the action of the AO against which assessee is in further appeal before us.

We have considered rival contentions and carefully gone through the orders of the authorities below and found from record that during the year the assessee derived long term capital gain of Rs.13,52,276/- on sale of flat. He invested Rs.30,40,000/- in purchase of a new flat within the prescribed time limit i.e. within two years from the date of sale of original assets and claimed exemption u/s.54 of the Income-tax Act, 1961. The Assessing Officer did not allow the exemption because prior to investment in flat, the assessee deposited sale proceeds of original assets in FDR account and Shri Satish P Malhotra not in capital gain account scheme as envisaged u/s.54. On plain reading of Sec.54, the following salient emerges : (a) The section is applicable to individual or HUF only. (b) The capital gain should arise from transfer of a long-term capital asset. (c) Such long term capital asset (referred to as 'original asset') should be a residential house and the income from such house should be assessable under the head 'Income from House Property'. (d) If the assessee has either purchased a residential house one year before the date of transfer of original asset or two years after the date of transfer of original asset or constructed a residential house within a period of 3 years from the date of transfer of original assets, the long term capital gain resultant from transfer of original asset shall be dealt with as follows: (1) If the long term capital gain from transfer of original asset is more than the investment in new residential house, the difference between long term capital gain and investment in new residential house shall be taxable u/s.45. (2) If the long term capital gain from transfer of original asset is less than investment in new residential house, the long term capital gain shall be NIL. (e) However, if the assessee has sold the new house within 3 years from date of its construction or purchase, in the first situation described in (1) above, the cost of new asset shall be taken as NIL for computing capital gain on transfer of new asset and in the second situation described in (2) above, the cost of new asset shall be reduced by the amount of capital gain on transfer of original asset. (f) If the capital gain on transfer of original asset is not appropriated towards purchase or construction of new asset before the due date of furnishing Return of Income u/s.139, the same shall be deposited with a scheduled bank or institution in 'Capital gain Account Scheme' before the due date of furnishing of Return of Income. For the purpose of this section, the investment made by the assessee in new house and investment made in the capital gain account scheme shall be deemed to be cost of new asset.

Sec.54 is an incentive provision which has been brought to statute book to encourage the assessees to invest in house for their own residence as well as their parents' residence. The purpose of the section is to encourage investment in new residential house within specified period and not to encourage investment under 'Capital Gain Account Scheme, 1988'. As the purchase or construction of residential house is a difficult and time consuming decision, it may not be possible for the assessees to invest in new residential house before the due date of filing Shri Satish P Malhotra of Return of Income. Therefore, sub-section (2) was enacted to ensure that the proceeds of sale of original assets are available to the assessee in the intervening period for investment in residential house and are not frittered away. However, where the assessee invested the sale proceeds in FDR instead of the Capital Gain Account Scheme, 1988 and acquired the house within specified period by investing the sale proceeds, he has satisfied the spirit of Sec.54(1) and therefore, he should not be denied the benefit for technical violation as provided u/s.54(2) of the Act.

From the record, we found that the assessee sold his flat on 2nd April, 2008 for a consideration of Rs.30,40,000/-, The entire sale proceed was invested in term deposit on 07.04.2008 because he was under bonafide belief that it would meet the requirements of Sec.54 i.e. investment of sale proceeds in a bank account and its investment in a house within two years from the date of transfer of original asset. The Return of Income was filed on 22.07.2009 (Due date in terms of Sec. 139(1) and 139(4) was 31.07.2009 and 31.03.2011 respectively). He acquired a new flat on 21.11.2009 out of proceeds of term deposit and such acquisition was within two years from the date of sale of original capital asset. In other words, he satisfied the primary requirement of Sec.54(1) of the Income- tax Act, 1961. Although the failure of the assessee to deposit the sale proceeds in a Capital Gains Account Scheme, 1988 for intervening period was undoubtedly a technical default, he should not be penalized for the same because he satisfied the real intent as well as essence of the provisions by depositing the sale proceeds in FDR since beginning, not Shri Satish P Malhotra using it for any other purpose and investing the sale proceeds in acquisition of a new house within statutory period of 2 years.

As per our considered view Sec.54 is an incentive provisions and it should be interpreted and applied liberally as held by the honourable Supreme Court in the case of Bajaj Tempo Ltd. Vs. C.I.T. (196 ITR 188). The honourable Supreme Court also held in the case of C.I.T. Vs. Gwalior Rayon Silk Manufacturing Co. Ltd. (196 ITR 149) that the expression used in the taxing statutes would primarily be understood in the sense in which it is harmonious with the object of the statute to effectuate the legislative intention.

Furthermore Hon’ble Supreme Court in case of Sanjeev Lal 365 ITR 389 observed as under:- “Income-tax on the long-term Capital gain. The intention of the Legislature or the purpose with which the said provision has been incorporated in the Act is also very clear that the assessee should be given some relief. Though it has been very often said that common sense is a stranger and an incompatible partner to the Income-tax Act and it is also said that equity and tax are strangers to each other, still this court has often observed that purposive interpretation should be given to the provisions of the Act. In the case of Oxford University Press v. CIT [2001] 3 SCC 3591 this court has observed that a purposive interpretation of the provisions of the Act should be given while considering a claim for exemption from tax. It has also been said that harmonious construction of the provisions which subserve the object and purpose should also be made while construing any of the provisions of the Act and more particularly when one is concerned with exemption from payment of tax. Considering the aforestated observations and the principles with regard to the interpretation of statute pertaining to the tax laws, one can very well Shri Satish P Malhotra interpret the provisions of section 54 read with section 2(47) of the Act i.e., the definition of "transfer", which would enable the appellants to get the benefit under section 54 of the Act.”

Respectfully following the proposition of law laid down by Hon’ble High Court and Supreme Court as stated above, we do not find any merit in the action of AO for declining assessee’s claim of exemption u/s.54 of the IT Act.

In the result, appeal of the assessee is allowed.