ITO, VIRUDHUNAGAR vs. M/S. P.R. VENKETARAMA RAJA (HUF), RAJAPALAYAM

आदेश / O R D E R

PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:

This is an appeal filed by the Revenue against the Order dated

29.03.2016 of Commissioner of Income Tax (Appeals)-3, Chennai, in ITA

No.0044/2014-15 for the AY 2011-12.

2.0 All the grounds of the appeal are related to the deduction u/s.54 F of

Income Tax Act. The assessee filed the return of income declaring total

income of Rs.48,288/- and agricultural income of Rs.23,39,762/- on

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13.07.2011. the assessment was completed u/s.143(3) on total income of

Rs.3,26,41,570/-. In the Assessment Order made u/s.143(3) dated

26.02.2014, the AO disallowed the deduction claimed by the assessee

u/s.54F of IT Act.

3.0 During the assessment year, the assessee sold properties for a

consideration of Rs.3,26,94,600/- as per the details given below:

Sl. Name of the Description of the properties sold Date of sale Sale value No. purchaser M/s.P.A.C. Residential properties at Door ramasamy Raja Nos.32, 33 & 34, Jawahar Maidan 1 Centenary Trust Street, Rajapalayam, Door No.504 23.09.2010 Rs.64,26,000 & 505, Tenkasi Road, Rajapalayam M/s.Rajapalayam Residential properties at Doors 2 Mills Ltd. Nos.43A & 44, Samsikapuram, 23.09.2010 Rs.2,63,68,600 Andalpuram, Rajapalayam Total Rs.3,27,94,600

The entire long term capital gains relating to sale consideration on

account of sale of properties was claimed as exempt u/s.54F of the

Income Tax Act. The AO disallowed the claim of the assessee on two

reasons as follows:

(i) The receipt of capital gains on sale of properties mentioned above

were residential houses and the deduction u/s.54 F is not permissible on

sale of the residential properties.

(ii) The assessee owns more than one residential house as on the date

of transfer of the asset and 54F restricts the deduction if the assessee’s

owns more than one residential house other than new asset.

4.0 Aggrieved by the order of the AO, the assessee went on appeal

before the CIT(A) and the Ld.CIT(A) called for the Remand Report from

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the AO. The AO submitted the Remand report stating that the properties

sold were commercial as well as residential units and the assessee is not

eligible for deduction u/s.54 F of the Income Tax Act. The Ld. CIT(A)

verified the facts of the case and allowed the assessee’s appeal and has

given the following findings/observations:

12.4. Firstly on a perusal of the records of the case and of the Income Tax and Wealth Tax returns (IT & WT Returns) of the appellant for the AY's 2008-09 till 2010 -11 (Till the date of sale of the said properties), t is seen that in both the IT & WT Returns of the appellant, the properties sold have been mentioned as commercial properties .

12.5 The Assessing Officer has not properly verified the IT & WT Returns of the appellant for the previous years. The AC has erroneously presumed that the properties sold by the appellant are residential in nature.

12.6. Secondly, the Assessing Officer has erroneously presumed that the appellant has neither purchased any property nor invested in any new asset. He has presumed that the appellant has purchased the property "In his Individual and not 'In the capacity of his HUF" as the PAN reference given in the sale deed is AAYPV5127H which is the PAN for "Individual status". He therefore presumed that the entity who has sold the properties is the appellant "In the capacity of his HUF" and the entity that has purchased the new property is the appellant "In his Individual capacity".

12.7. The AO has held that as per the purchase deed the appellant has purchased the property "In his Individual capacity" since the name of the appellant appearing in the purchase deed is that of the individual namely P.R. Venketrama Raja bearing the PAN No AAYPV5127H which relates to the appellant 'In his Individual capacity" while the claim under section 54F is related to the appellant 'In the capacity of his HUF".

12.8. Further the AO held that the appellant entered into an agreement for construction of the new residential property with M/s Ramcons in the name of P.R. Venketrama Raja (Individual).

12.9. Since both the entities are different, he has held that the appellant will not be eligible for exemption u/s 54F of the IT Act.

12.10 Thirdly, the AO has given another finding that the appellant has received capital gains from the sale of residential properties, and hence the appellant will not be eligible for exemption u/s 54F of the IT Act

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12.11. This finding of the AO is also erroneous, because on a perusal of the IT & WT Returns of the appellant for the previous years .till the date of sale of the properties, it is seen that the properties sold have been mentioned as commercial properties.

12.12. Fourthly the AO has given another finding that since the appellant owns more than one residential house as on the day of transfer of the asset, the appellant will not be eligible for exemption u/s 54F of the IT Act.

12.13. This finding of the AO is also erroneous, because on a perusal of the IT & WT Returns of the appellant for the previous years till the date of sale of the properties, there is no mention of ownership of any residential property in the name of the appellant In the capacity of his HUF. The appellant has confused the ownership of residential property in the name of the appellant "In his individual capacity" with that of the "HUF”.

12.14. From the records, it is seen that the funds for the purchase of the new property have come from the hank account of the appellant "In the capacity of his HUF and not from "His individual capacity".

12.15 Even though the purchase deed for the property states the name of the appellant as P.R. Venketrama Raja bearing the PAN No AAYPV5127H which relates to the appellant In his Individual capacity" and the agreement for construction of the new residential property with M/s Ramcons dated 12.12.2008 is also in the name of P.R. Venketrarna Raja, the legal position is that the appellant can enter into the purchase and sale of any property of the HUF, in his capacity as the Kartha of the HUF". In fact the Kartha of the HUF can represent the HUF in the sale or purchase of any property of the HUF or enter into any transaction on behalf of the HUF and this is legal as per the provisions of the HUF Act or the IT Act.

5.0 Aggrieved by the order of the Ld.CIT(A), the Revenue is on appeal

before us.

Appearing for the Revenue, the Ld. DR argued that the assessee had

sold the residential property which is evidenced by the Wealth Tax return,

electricity connections and municipal records. The assessee also owns

more than one residential property which is also evident from the Wealth

Tax assessment records and electricity connections. The Ld. DR further

argued that deduction u/s.54 F of Income Tax Act is allowed subject to the

following conditions:

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(i) The capital gains should be for sale the asset other than the residential house. (ii) The assessee should not own more than one residential house other than new house as on the date of transfer of the asset.

The Ld. DR further submitted that in the instant case property sold by

the assessee was residential house and the assessee owns the residential

house as on the date of transfer of the asset, hence the assessee has not

satisfied the conditions laid down in section 54F for granting relief u/s 54F.

Further, the Ld. DR also submitted that the new property was purchased

in the name of the assessee by quoting individual PAN and the properties

sold were related HUF. Since the properties were not acquired in the

name of HUF, the owner of the properties who transferred the capital

assets, the deduction is not allowable u/s.54 F of Income Tax Act. On the

other hand, the Ld.AR argued that as per the existing laws HUF cannot

enter into contract with another person and the properties cannot be

registered in the name of the HUF and the property is always purchased

by the HUF represented by Karta of HUF. The assessee has got registered

the properties quoting the individual PAN, since the registration authorities

do not register the property without photo identity of PAN. The sale

proceeds were credited in to HUF account and from the funds of the HUF

account, the properties were acquired and accounted in the HUF accounts.

Therefore, the Ld. A.R argued that department’s contention that the

property was acquired in the third party’s name is incorrect and the

property was acquired by the HUF and the same was accounted in HUF

account. The Ld.AR further argued that the properties in question sold

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were not residential properties but commercial properties. The three

properties mentioned by the AO were used for the purpose of hospital

and the godown and hence, the A.R contended that the properties in

question should not be treated as residential properties. Mere payment of

electricity charges or usage of electricity charges as residential units

cannot be conclusive evidence to prove the commercial properties or

residential properties. The Ld.A.R further submitted that the properties

held in the name of the assessee on the date of sale were commercial

buildings but not the residential properties. Therefore, the Ld.AR

contended that the assessee has satisfied all the conditions for granting

relief under section 54F of IT act and the Ld.CIT(A) has rightly allowed

the deduction u/s.54 F of Income Tax Act and no interference is called for.

The Ld.AR further argued that the assessee has made an alternate claim

for deduction u/s.54 of Income Tax before the Ld.CIT(A) in the event of

being held not eligible for deduction u/s.54F and and the same was

allowed by the Ld.CIT(A). Responding to the alternate claim made by the

assessee for deduction u/s54 the Ld.DR argued that the alternate claim is

not permissible in the absence of any such claim made in the return of

income. The Ld.AR argued that there is no error in the Ld.CIT(A) order

and no interference is called for.

6.0 We heard the rival submissions and perused the material placed

before us.

The first objection of Revenue is purchase of new property in the

name of Shri P.R. Venkata Ramaraja, individual quoting the own PAN

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number for claiming the deduction u/s 54F. The assessee has sold the

properties (long term capital assets) of HUF and invested in acquiring new

property and claimed the deduction. The new property was registered in

the name Shri P.R. Venkata Ramaraja, Karta of HUF quoting individual

PAN but not HUF PAN number. During the appeal, it was argued by the

Ld.AR that the properties cannot be acquired in the name of HUF and

always acquired by the karta of HUF in his representative capacity. In the

registration documents, the assessee has quoted his PAN number since it

contains the photograph. It was further submitted by the A.R that

registration authorities does not accept the PAN without the photograph.

The funds were belonging to the corpse of HUF and the property was

thrown into the common hotchpotch of HUF and accounted in the HUF

accounts. The Ld.DR or the AO did not bring any evidence to prove that

the property was not acquired by the HUF. Now, it is well settled issue

that HUF cannot enter into contract or agreement with another person.

The Ld.CIT(A) while allowing the appeal of the assessee relied on the

following decisions: • CIT vs. Kalu Babu Lal reported in 37 ITR 123 (SC) • CIT vs. Dhanwatey reported in 68 ITR 365 (SC) • CIT vs. Mathura Prasad reported in 60 ITR 428 (SC) • CIT vs. PN Krishna Iyer reported in 73 ITR 539 (SC)

6.1 The assessee has purchased the properties from the funds of the

HUF, purchased in the capacity of HUF as Karta and thrown the property

into the common stock of HUF properties. The Karta of HUF has quoted

his individual PAN number in the registration document since the

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registration authorities insist the PAN card with photograph. The AO has

not brought on record any evidence to prove that the property was not

acquired by the HUF and not for the benefit of the HUF. The ratio of the

Hon’ble Supreme Court in [1959] 37 ITR 123 (SC), Commissioner of

Income-tax.v.Kalu Babu Lal Chand is that -

“It is now well settled that an HUF cannot as such enter into a contract of partnership with another person or persons. The karta of the HUF, however, may and frequently does enter into partnership with outsiders on behalf and for the benefit of his joint family. But when he does so, the other members of the family do not, vis-à-vis the outsiders, become partners in the firm. They cannot interfere in the management of the firm or claim any account of the partnership business or exercise any of the rights of a partner. So far as the outsiders are concerned, it is the karta who alone is, and is in law recognised as, the partner. Whether in entering into a partnership with outsiders, the karta acted in his individual capacity and for his own benefit or he did so as representing his joint family and for its benefit is a question of fact. If for the purpose of contribution of this share of the capital in the firm the karta brought in monies out of the till of the HUF, then he must be regarded as having entered into the partnership for the benefit of the HUF and as between him and the other members of his family he would be accountable for all profits received by him as his share out of the partnership profits and such profits would be assessable as income in the hands of the HUF.”

6.2 Similarly in the case of CIT vs. Dhanwatey reported in 68 ITR

365 (SC), Hon’ble Apex court held that the the general doctrine of Hindu

law is that property acquired by a karta or a coparcener with the aid or

assistance of joint family assets is impressed with the character of joint

family property. To put it differently, it is an essential feature of self-

acquired property that it should have been acquired without assistance or

aid of the joint family property. The test of self-acquisition by the karta or

coparcener is that it should be without detriment to the ancestral estate.

Therefore, before an acquisition could be claimed to be a separate

property, it must be shown that it was made without any aid or assistance

from the ancestral or joint family property.

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6.3 In the instant case the property sold was HUF property, though the

assessee registered the new asset in the name of individual, quoting his

own PAN number, he happens to be karta of HUF and the property was

thrown into the common hotchpotch of HUF. Therefore the Revenue’s

objection for registering the property in individual’s name for denying the

deduction under section 54F is baseless and accordingly rejected and the

revenue’s ground in this issue in ground NO.4 is dismissed.

7.0 Ground Nos.2 & 3 are related to the deduction u/s.54 F of the

Income Tax Act:

The assessee has sold the long term capital asset and claimed the

deduction u/s.54 F. During the first appeal proceedings, the assessee also

made alternate claim for deduction u/s.54. The Ld.CIT(A) allowed the

claim of the assessee u/s.54 F as well as 54 which is being agitated by the

Revenue. The assessee has sold the long term asset as per the schedule

given above. The assessee claimed that the properties were non-

residential and long term capital assets. Further, the assessee also owns

other residential assets. The assessee’s claim was the properties sold

were commercial properties and the properties in possession after the

transfer of long term capital assets were also commercial properties,

hence entitled for deduction u/s.54F. The assessee has filed copies of

Wealth Tax returns for the AYs 2008-09 & 2009-10. In the returns, the

assessee has admitted that Dr.No.32, 33, 34 Jawahar Maidan Street, Sold

for a consideration of Rs.64,26,000/- as residential property. Similarly, the

assessee has shown residential property in Wealth Tax returns bearing

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No.s 494, 495 and 505, Tenkasi Road, which was owned by the assessee.

From the Wealth Tax returns, which was filed by the assessee, it is an

irrefutable fact that the assessee owns three residential units with

Dr.No.494, 495 and 505. As per the provisions of Sec.54F of the income

tax that , if the assessee owns more than one residential house at the

time of acquiring a new asset or at the time of sale of the property, the

assessee is not entitled for deduction u/s.54F. For ready reference, we

extract the relevant part of Sec.54 F of Income Tax Act as under:

[Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house. 83 54F. (1) 84[Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family], the capital gain arises from the transfer of any long- term capital asset, not being a 85residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or 86[two years] after the date on which the transfer took place 85purchased, or has within a period of three years after that date 87[constructed, one residential house in India] (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,— (a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45 ; (b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45: [Provided that nothing contained in this sub-section shall apply where— (a) the assessee,— owns89 more than one residential house, other than the new asset, on the date (i) of transfer of the original asset; or (ii) purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or 90constructs any residential house, other than the new asset, within a period of (iii) three years after the date of transfer of the original asset; and (b) the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head "Income from house property".]

From the plain reading of Sec.54F, it is apparently clear that the

deduction u/s.54 F is available only in case of the assessee who sold the

long term capital assets does not own more than one residential asset on

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the date of transfer, the income of which is chargeable to tax under the

head income from property. In the instant case, the assessee sold

residential properties at Dr.No.32, 33 & 34 which is evidenced from the

Wealth Tax returns and also owns more than one residential house on

which the income is chargeable under the head income from house

property as per Page No.26 of the Paper Book. Therefore, we hold that

the assessee is not entitled for deduction u/s.54 F and the order of the

Ld.CIT(A) is set-aside on this issue. The revenue’s appeal on this ground

is allowed.

8.0 The assessee made alternate claim during the appeal proceedings

before the Ld.CIT(A).

As decided by the Hon’ble Supreme Court in 187 ITR 687, the

appellate authorities are permitted to allow the fresh claim during the

appeal proceedings on the merits of the case. The Ld.CIT(A) entertained

the fresh claim of the assessee and allowed the appeal. In the instant

case, the assessee has sold the long term capital assets consisting of

residential house and non-residential house. As per Sec.54, the capital

gain arising from transfer of long term capital assets being buildings, lands

or apartments are used within a period of one year before the transfer of

the capital asset or within the period of three years after the date of

transfer constructed one residential house in India then the assessee is

entitled for deduction u/s.54 of Income Tax Act. For ready reference, we

reproduce the Sec.54 of Income Tax Act which reads as under:

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Profit on sale of property used for residence. 68 54. 69[(1)] 70[71[Subject to the provisions of sub-section (2), where, in the case of an assessee72 being an individual or a Hindu undivided family], the capital gain arises from the transfer of a long-term capital asset 73[***], being buildings or 74lands appurtenant thereto, and being a residential house74, the income of which is chargeable under the head "Income from house property" (hereafter in this section referred to as the original asset), and the assessee has within a period of 75[one year before or two years after the date on which the transfer took place purchased76], or has within a period of three years after that date 77[constructed, one residential house in India], 76then], instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,— (i) if the amount of the capital gain 78[is greater than the cost of 79[the residential house] so purchased or constructed (hereafter in this section referred to as the new asset)], the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or (ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain.

In this case, there is no dispute regarding acquiring of the house

within a stipulated period by the Act. The contention of the assessee was

that the assessee has utilized the sale proceeds for construction of the

house and it was constructed within a period of three years from the date

of sale of the asset and entitled for deduction u/s.54. In the instant case,

the Ld.CIT(A) entertained the fresh claim of deduction u/s.54 also. As per

the Hon’ble Supreme Court judgment in the case of 387 ITR 688 the

appellate authorities are duty bound to accept the fresh claims made

during the appeal proceedings. The contention of the Ld. DR that the

assessee has not claimed before the AO does not hold any merit in the

light of the decision of the Hon’ble Supreme Court. The assessee has sold

the properties consisting of the residential and non-residential buildings

and argued that he is entitled for deduction u/s.54. However the AO has

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not examined the claim of the assessee with regard to satisfaction of the

conditions laid down in section 54 for allowing the deduction. The Ld.

CIT(A) also did not give any finding on satisfaction of the conditions to

allow deduction u/s 54. Therefore, we are of the considered opinion that

this issue should go back to the file of the AO to verify whether the

assessee has satisfied the conditions laid down u/s.54 for claiming

deduction u/s 54 or not. Accordingly, we set-aside the orders of the Ld.

CIT(A) and the A.O. and remit the back to the file of AO to decide the

issue afresh on merits. The appeal of the revenue is allowed for statistical

purposes.

9.0 Ground Nos.1 & 5 are general in nature, which do not require

specific adjudication.

In the result, the appeal of the revenue is partly allowed for

statistical purposes.

Order pronounced in the Open Court on 30th May, 2017, at Chennai.

Sd/- Sd/- (धु�वु� आर.एल रे�डी) (�ड.एस. सु�दर #संह) (DUVVURU RL REDDY)) (D.S.SUNDER SINGH) �या�यक सद�य/JUDICIAL MEMBER लेखा सद'य/ACCOUNTANT MEMBER चे�नई/Chennai, 7दनांक/Dated: 30th May, 2017. TLN आदेश क1 /*त#ल8प अ9े8षत/Copy to: 1. अपीलाथ./Appellant 4. आयकर आयु:त/CIT 5. 8वभागीय /*त*न�ध/DR 2. /0यथ./Respondent 3. आयकर आयु:त (अपील)/CIT(A) 6. गाड+ फाईल/GF