SONIA PATHAK KHANNA,MUMBAI vs. INCOME TAX OFFICER-25(1)(2), MUMBAI

The brief fact of the case shows that the assessee is a Fashion Designer earning income from manufacturing of garments and interest income. The assessee filed return of income on 17thJuly 2014, at a total income of ₹1,84,310/-. This return was picked up for scrutiny by issue of notice under Section 143(2) of the Act on 28thAugust 2015.

The fact shows that the assessee has sold an industrial gala on which assessee has claimed depreciation in earlier years, the capital gain arising on sale of depreciable asset was utilized by the assessee in purchase of a house property and claimed exemption under Section 54/54F of the Act, same was denied.

The assessee has sold one-office premises at Industrial Unit no.6, ground floor, A wing, Oshiwara Industrial Centre, Plot No. D/11, Survey No.161, Goregaon West, Mumbai on 13thMay 2013 for Rs 57 lakhs to Mrs Ratna Pathak Shah. This property was purchases on 9thMarch 2010, From Mr. 07. Dilip Chimanlal Solanki for Rs 20,00,000/-. Depreciation on the same was claimed upto 31stMarch 2012.

Assessee states that she has made investment in a new Residential House property 34,42215/- at Flat no T 21- 201, 2nd Floor, Blue Ridge Township, Hinjewadi, Pune and claimed the deduction thereof from capital gain based on letter of allotment dated 12/08/2017. 09. Capital gain computed by the assessee was sales consideration of Rs 57 lakhs, less indexed cost of acquisition of Rs 32,01663/-, resulting into capital gain of s 24,98,337/-. From this it claimed deduction of Rs 3442,215/- for new house and did not offer any capital

Against this, the learned Assessing Officer has computed the short term capital gain of ₹40,28,824/- and thus, did not grant exemption under Section 54/ 54F of the Act as it is computed as short term capital gain.

Alternatively, he held that net sale consideration is ₹57 lacs and only ₹44,31,840/- were invested for purchase of new house property by the assessee before due date of filing of the return, thus, ₹12,68,186/- was required to be deposited in capital gain account scheme which is not been deposited and therefore, the only proportionate exemption of capital gain is allowable to the assessee.

Further, the claim of the learned Assessing Officer is that as assessee has not shown any capital gain in the return of income and further has not claimed such exemption in the return, the deduction is not allowable. In view of the decision of Hon'ble Supreme Court in case of Goetze (India) Ltd. vs CIT 284 ITR 323.

Consequently, the assessment order under Section 143(3) of the Act was passed on 9thNovember 2016, determining the total income of the assessee at ₹42,13,130/-.

On appeal before the first appellate authority, detailed submissions were made. The learned CIT (A) held that

On appeal before us, the brief facts of the case are reiterated and submitted that though assessee has sold her office on which depreciation is claimed, the capital gain arising there from is a short term capital gain in view of provisions of Section 50, however, the assessee is entitled to deduction under Section 54F of the Act or Section 54 of the Act as the original property sold was held for more than 36 months and is a long term capital asset. He relied on the decision of the Hon'ble Bombay High Court in the case of CIT vs. Ace Builders Pvt. Ltd. 281 ITR 210 Bombay, decision of the Hon'ble Supreme Court in case of CIT vs. Dempo Company Ltd. 387 ITR 354. On the issue of the decision relied upon by the learned CIT (A) in case of Sakthi Metal Depot (supra) of Hon'ble Kerala High Court 333 ITR 492, he submits that in that judgment the deduction for section 54/54F of the Act

The learned Departmental Representative vehemently supported the order of the learned lower authorities. He submitted that if the assessee has earned short term capital gain on sale of property which is chargeable to tax as short term capital gain under Section 50 of the Income- tax Act, 1961 (the Act), the assessee is not entitled to deduction under Section 54F of the Act. It was further submitted that when the assessee has not claimed deduction in the original return of income but has claimed deduction merely by way of computation such claim is rightly denied by lower authorities. Thus, the order of the learned lower authorities is in accordance with the law.

We have carefully considered the rival contentions and perused the orders of the lower authorities. It is a fact that on sale of property, assessee did not disclose deemed capital gain in Schedule DEP of the return of income under capital gain was also not disclosed in the ITR filed by the assessee on 17thJuly 2014. As sale deed

According to Section 50, excess realized by the assessee against Written-down value of the block of asset shall be deemed to be the capital gain arising from the short term capital asset. Thus, the benefit of indexation is not allowable to the assessee. Further, the assessee is allowed deduction only to the extent of Written-down value of the asset transferred.

In this case the learned Assessing Officer has held that assessee has the Written-down value of the asset as on 1stApril 2013, of only ₹ 16,70,176/-. Therefore, only this sum is allowable to the assessee as deduction. Thus, the assessee has income which is chargeable to tax as business income as well as short-term capital gain.

Thus, the assessee has two components of income chargeable to tax in this case, (1) as business income under section 41 (2) of the act and (2) short-term capital gain under section 50 of the act.

Now, the question arises is that though the capital gain shall be deemed to be the capital gain arising from the transfer of short term capital gain asset, but still can assessee claim exemption under Section 54F of the Act on such capital gain. According to Section 54F of the Act, wherein the case of the assessee capital gain arises from the transfer of any long term capital asset other than a residential house and if assessee purchase or construct a

This aspect has been considered by the honourable Bombay High Court in case of CIT versus Ace builders private limited 281 ITR 210 with respect to exemptions under section 54E and decision of the honourable Supreme Court in case of CIT versus V S Dempo Co Ltd in 387 ITR 354.

Reliance by the learned CIT – A on the decision of honourable Kerala High Court in case of CIT Shakthi Metal Depot 333 ITR 492 deals with the fact that when a depreciable asset is sold, the gain arising to the assessee shall be chargeable to tax as short-term capital gain as deeming fiction of section 50 C applies to the transaction.

No doubt, the assessee is precluded in making the about them without making any claim in the return of income or revised return of income before the assessing officer however the appellate authorities are not barred from considering the claim of the assessee. This is so because of the reason that decision of the honourable Supreme Court in case of Goetze India limited (supra) restricts the power of the AO but not the power of appellate authorities. Therefore, the learned CIT – A should have granted the claim of the assessee under section 54F of the act.

Accordingly we restore the whole issue back to the file of the learned assessing officer to compute the income of the assessee considering the provisions of section 41 (2) of the act and section 50 C of the act, and thereafter from the capital gain, allow the claim of the assessee under section 54F of the act, if the other conditions are satisfied. Accordingly ground number 2 – 7 of the appeal of the assessee are restored back to the file of the learned AO to give the fact accordingly. Those grounds are allowed with above directions.

In the result, appeal of the assessee is partly allowed for statistical purposes.