T. SHIVAKUMAR,BANGALORE vs. ITO, BANGALORE

PER SHRI ABRAHAM P GEORGE, AM;

In this appeal filed by the assessee it has altogether raised six grounds of

which ground no.6 is general in nature and ground no.4 & 5 are consequential.

Main grievance of the assessee raised through its grounds 1 to 3 is regarding an

addition of Rs.40,50,000/- made under long term capital gain denying the claim

u/s 54 of the IT Act, 1961 and also not considering the cost of acquisition of

Rs.23.80 lakhs claimed by the assessee.

assessee in the affidavit filed is that he was pursuing a proceeding before the

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Central Administrative Tribunal (CAT) and was also pre-occupied due to a

serious illness of his daughter. Assessee has also filed evidence in this regard.

Learned DR submitted that the department had no objection in condoning the

delay. The delay is condoned and the appeal is admitted.

return of income for the assessment year : 2009-10 declaring an income of

Rs.2,98,718/-. During the course of assessment proceedings, the AO noted that

the assessee had sold a property bearing plot no.506, situated at Hosur Sarjapur

Road Layout, Bangalore alongwith semi finished building therein for a sum of

Rs.66,50,000/-. The conveyance deed was executed on 15-04-2008. However,

assessee did not show any capital gains in his return of income. Explanation of

the assessee was sought. Reply of the assessee was that the entire sum of

Rs.66,50,000/-realized on sale was given by him to his brother Shri

T.Vijayakumar for acquiring a house bearing No.199, 12th Main , 4th Block,

Koramangala, Bangalore-560 034. The payments to his brother Shri

T.Vijayakumar, were through a cheque dated 19-04-2008 for Rs.64,18,225/- and

balance sum of Rs.5,21,775/- in cash. Submission of the assessee was that the

transaction did not go through since his brother was reluctant to go through the

deal as his family members were objecting to the sale. Thus, as per the assessee

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the amount was refunded by him to his brother on 02-03-2010. Out of the

refunded amount submission of the assessee was that a sum of Rs.40.00 lakhs

was deposited with SBI, Austin Town Branch, Bangalore in a capital gains

deposit scheme. As per the assessee the said sum was later paid to one Mrs.

Mary Susan for acquiring a residence owned by the latter at No.828, 2nd Block,

4th Stage, BTM Layout, Bangalore based on an agreement entered with her on

10-03-2010. The consideration agreed as per the agreement was Rs.70.00 lakhs

which was re-negotiated down to Rs.45.00 lakhs through an addendum

agreement entered on 30-03-2011. Nevertheless, it seems the said transaction

also did not eventually materialize.

assessee with his brother Shri T.Vijayakumar, could not be believed since the

money was returned by Shri T.Vijayakumar after 23 months. It is to be noted

that Shri T.Vijayakumar, was summoned by the AO and examined and the said

person had confirmed the oral agreement he had entered with the assessee for

selling his house to the assessee. Nevertheless, as per the AO the version of the

having an agreement with Shri T.Vijayakumar, was only an afterthought. In

sofaras the deposit of Rs.40.00 lakhs refunded by Shri T.Vijayakumar in capital

gains deposit account was concerned, learned AO made enquiries with the bank

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and as per the learned AO, the bank had confirmed that there was no such

deposit made by the assessee.

with Mrs Mary Susan on 10-03-2010 for acquiring property at No.828, 2nd Block,

4th Stage, BTM Layout, Bangalore, learned AO was of the opinion that the

schedule of the agreement mentioned the property to be a semi-finished building.

As per the AO the addendum dated 30-03-2011 was only for overcoming this

lacunae. In any case, according to learned AO, even the last mentioned property

was never registered in the name of assessee. He therefore, denied the

exemption claimed u/s 54 of the Act, 1961.

acquisition of the property sold by the assessee claimed at Rs.23.80 lakhs.

Submission before the CIT(A) was that on cancellation of agreement entered by

the assessee with Mrs. Mary Susan, he had utilized the refund received from

Mrs. Mary Susan for purchasing a flat in Sobha Garrison Project, Yeshwanthpur

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Hobli, Bangalore North through agreement dated 24-03-2011 from M/s Sobha

Builders. Argument of the assessee was that even this investment would qualify

for claim of exemption u/s 54F of the Act. However, the CIT(A) was not

impressed by the above argument. According to him, the original agreement

stated to have been entered with Shri T.Vijayakumar did not create enforceable

right in favour of the assessee. According to learned CIT(A), assessee had given

the money to his brother for helping the latter to acquire a BDA site. When the

site was sold by Shri T.Vijayakumar, after two years, he had returned the money.

Further, as per the learned CIT(A), the documents produced in support of the

transaction with Mrs Mary Susan were also not reliable. As per the learned

CIT(A) the condition in the said agreement that cheque given by the assessee

could be encashed only after completion of the residential building appeared

contrary to vendors assertion that she selling due to paucity of funds. Even the

agreement entered by the assessee with M/s. Shobha Developers would not

qualify for deduction u/s 54, as per the learned CIT(A). Further according to

him, assessee had not deposited the capital gains under the capital gains

account scheme as stipulated under section 54(2) of the Act. He held that the

assessee did not satisfy the essential conditions required for making a claim u/s

54 of the IT Act, 1961. Assessee could not show that he purchased a house

within two years within the date of transfer of the original asset nor could he

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show that he had constructed a residential house within three years of such

transfer. He therefore, upheld the order of the AO.

authorities submitted that the intention of the assessee to invest in a residential

house building was clear from the very beginning. According to him, assessee

believed his brother and paid money to him for acquiring a house from him.

When his brother was reluctant to transfer the house he got a refund from his

brother. Such refunded money was deposited by him in the capital gains

account scheme and later used for paying advance to Mrs.Mary Susan for

acquiring a residential house from her. It might be true that residential house

was not fully completed when the assessee paid the money to Mrs Mary Susan.

However, there was still time left for completing the construction. In any case,

according to him, assessee had entered into a construction agreement with M/s

Shobha Developers Ltd on 24-03-2011. Assessee had on 30-11-2010 paid a

sum of Rs.7,80,000/- and on 12-10-2011 paid a sum of Rs.11,76,600/- to M/s

Shobha Developers Ltd. Thus, according to him, the failure of the persons to

whom assessee had in good faith paid money for acquiring a residential premise

to honour their commitments, could not fastened on the assessee as a reason for

denying a legitimate claim made u/s 54 of the IT Act, 1961.

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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. (2) The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in

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this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset : Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,— (i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and (ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid”.

the date of transfer is two years and if it is a construction it is three

years. Thus, if the intention was to construct a residential house the

period is three years, the outer limit of three years for constructing a

house in the given case before us was 14-04-2011. Vide sub-sec.2 of

section 54 a deposit under capital gains scheme, if the capital gain is

not appropriated for such construction has to be done before the

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due date for furnishing the return of income u/s (1) of sec.139 of the IT

Act, 1961. Hon’ble Punjab & Haryana High Court in the case of CIT Vs

Ms Jagriti Aggarwal 339 ITR 610 has held that sub-sec.(4) of sec.139 can

only be construed to as a proviso to sub-sec.(1) and thus, the due date

furnishing the return mentioned in sec.139(1) is subject to the extended

period provided under section 139(4) of the IT Act, 1961. The impugned

assessment year before us is assessment year : 2009-10, and the

extended time period u/s 139(4) is before expiry of one year from the end

of the relevant assessment year or before completion of assessment

whichever is earlier. One year from the end of the impugned assessment

year would expire only on 31-03-2011. The assessment for the impugned

assessment year having been completed only on 29-12-2011 the date to

be reckoned for the purpose of application of sub-sec.2 of sec.54 in the

case before us is 31-03-2011. Thus, it is clear that the assessee by virtue

of above judgment of the Hon’ble P&H High Court which view was also

taken by the jurisdictional High Court in the case of Fathima Bai Vs ITO

(2009) 32 DTR 43, assessee had time upto 31-03-2011 to deposit the

capital gains in capital gains account scheme, if he could not utilise it for

acquiring or constructing a residence.

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considered to have constructed or acquired a residence before 31-03-

2011. Leaving apart, the transaction the assessee claimed to have made

with his brother Shri T.Vijayakumar, undisputedly, on 10-03-2010, he

had entered into an agreement with one Mrs Mary Susan. He had also

paid a post dated cheque pursuant to such agreement. The agreement

dated 30-03-2011 through which consideration originally agreed by the

assessee with Mrs. Mary Susan was reduced from Rs.70.00 lakhs to

Rs.40.00 lakhs has been placed on record. It is clearly mentioned

therein that assessee had issued a cheque dated 02-12-2010 to Mrs

Mary Susan for Rs.40.00 lakhs. The bank account of the assessee

placed at paper book page no.47 show that the above cheque was

encashed by Mrs.Mary Susan on 18-12-2010. The agreement clearly

mentions the intention of the seller to sell a building situated at site

no.828, 2nd block, 4th stage, BTM layout, Bangalore. It is also mentioned

therein that the reduction in the consideration was due to vendors

inability to complete the work of the residence before the agreed date.

The agreement also mentions that the vendor had delivered to the

assessee the original documents of title and the vacant possession of the

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scheduled property. How the term purchase has to be construed in

relation to interpretation of sec.54 of the IT Act, 1961 had come up

before the Hon’ble Delhi High Court in the case of CIT Vs Kuldeep Singh

in ITA No.117/2014. Their Lordship held at paras 8 to 10 of judgment

dated 12-08-2014…

“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 along with transfer of possession under Section 53A of the Transfer of Property Act, 1882. Supreme Court way back in 1979 in CIT Andhra Pradesh vs. T.N. Aravinda Reddy (1979) 4 SCC 721, 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 inSection 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

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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.

9.Recently Supreme Court in Civil Appeal Nos. 5899-5900/2014 titled Sh. Sanjeev Lal Etc.Etc. vs. CIT, Chandigarh & Anr., decided on 01/07/2014, 2014 (8) SCALE 432 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.1.17 crores (total being Rs.1.32 crores) when the sale deed was executed on 24th September, 2004. In the meanwhile, the assessee had purchased another house on 30th April, 2003. Benefit under Section 54 was denied by

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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 for 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

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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.

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Noticing that it was not easy to construct a house within the time limit of three years and under the Government schemes, construction takes years. When substantial investment was made in the construction and it should be deemed that sufficient steps had been taken and it satisfied requirement of Section”.

appear in section 54 has to be given also to the term ‘constructs’ appearing

therein, in conjunction to the former. Even the Hon’ble jurisdictional High

Court in the case of CIT Vs Smt B.S.Shanthakumari 233 Taxman.com 347

held that completion of construction within three years period was not

mandatory and what was necessary was that the construction should have

commenced. There cannot be any dispute with the construction in the

property for which agreement was entered by the assessee with Mrs Mary

Susan had already began. In our view, the question whether the above

agreement finally fructified is a different matter altogether. Assessee had in

our opinion for all purposes satisfied the conditions u/s 54 of the IT Act,

1961, and earnestly demonstrated his intention to invest the capital gain in

a residential house. We are therefore, of the considered opinion, that the

assessee ought not have been denied the claim u/s 54 of the IT Act, 1961.

The disallowance of such claim stands deleted. Since we have allowed the

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claim u/s 54 of the Act, the question of computation of cost of purchase of

the property sold becomes academic.

Order pronounced in the open Court on the 19th February, 2016.

Sd/- Sd/- (VIJAYPAL RAO) (ABRAHAM P GEORGE) JUDICIAL MEMER ACCOUNTANT MEMBER Bangalore: D a t e d : 19-02-2016 am* Copy to : 1 Appellant 2 Respondent 3. CIT(A), Bangalore 4. CIT, Bangalore 5. DR, ITAT, Bangalore 6. Guard File

Asst. Registrar

ITAT, Bangalore