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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI JASON P. BOAZ
Per N.V. Vasudevan, Judicial Member This appeal by the Revenue is against the order dated 13.5.2014 of the CIT(Appeals)-II, Bangalore relating to assessment year 2005-06,
The only issue that arises for consideration in this appeal is as to whether the CIT(Appeals) was justified in allowing the claim of assessee for
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exemption u/s. 54EC of the Income-tax Act, 1961 [“the Act”]. The facts and circumstances under which the appeal arises are as follows.
The Assessee is a HUF by name T.N.N. Shetty (HUF). The
Department had information that one of the member of the HUF, Shri T.N. Nanjunda Shetty had deposited money in REC Bonds during the previous
year ending 31.3.2005. This is because while making the said deposit, T.N. Nanjunda Shetty had given his individual PAN: AASPN 9963. In the
course of individual assessment of Shri T.N. Nanjunda Shetty, he explained that he had not made the investment in REC Bonds in his individual
capacity. He submitted that T.N.N. Shetty (HUF) owned a property and on
sale of that property, they derived long term capital gains, the proceeds of long term capital gains had been deposited in the capital account of the
HUF with a firm, M/s Tallam Textiles. A sum of Rs.75,60,000 was withdrawn by the HUF from its capital account and deposited in NHB
Bonds worth Rs.9,10,000 and Rs.66,50,000 in REC Bonds. The
explanation was accepted in the assessment of the individual who was the member of the HUF. To verify the correctness of the claim made by the
member of the HUF, assessment of HUF was reopened by issue of notice u/s. 148 of the Act.
In the reassessment proceedings, the question whether the
assessee should be allowed exemption u/s. 54EC of the Act came up for consideration before the AO. According to the AO, the sale proceeds of
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the property from the HUF were credited in the partner’s capital account in M/s. Tallam Textiles and HUF obtained a loan from the firm and out of the said loan, the Bonds of NHB and REC were purchased. Since the sale proceeds of the capital asset were not invested in REC/NHB Bonds and what was invested was only loan taken from the partnership firm, M/s. Tallam Textiles, the claim of exemption u/s. 54EC was not to be allowed. In this regard, the AO had relied on the letter dated 21.8.2007 given by Tallam Textiles wherein they have stated as follows:-
“Reg: Loan given to Sri T.N. Nanjunda Setty (HUF) This is to confirm that we have advanced loan o fRs.3,66,48,200/- for investment in bonds. Sri T.N. Nanjunda Setty has his credit balance of Rs.2,61,68,466.65 as on 31-03-05 in his current account.”
Before the CIT(Appeals), the assessee filed an affidavit which reads in which the Assessee affirmed that he had withdrawn monies from his current account with the partnership, wherein he had enough credit balance and the withdrawal from the firm Tallam Textiles, was not as a loan but a withdrawal from his current account in the firm in which he had sufficient credit balance. The affidavit filed in this regard reads as follows:-
“AFFIDAVIT I, Sri Tallam Nanjunda Setty aged about 87 years, son of Tallam Pedanaryan setty residing at Bangalore do hereby state on oath that I had sold two residential flats at Kumara Park for the sale consideration of Rs.6527000/- and the proceeds I had deposited with M/s. Tallam Textiles during the year 03/04 (Ass 04/05). I
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had withdrawn the amount from M/s. Tallam Textiles and invested in Bonds with in six months and the proof was filed with the Income Tax Department. I had Credit balance in my account on 1/4/2003 Rs.2.25 Crs and as on 31/3/2004 Rs.2.18 crores and had Credit balance more than 2 Crs throughout the period and I have not borrowed any amount to invest in the Bonds. I had not given any declaration to the effect that I have borrowed and invested and in fact the firm M/s. Tallam Textiles had made error in their letter Dt. 21/8/2007, for which details furnished with the Income Tax Officer Ward 3(4) Bangalore. I should not be made victim for the mistake of the firm who had given wrong information. I have legitimately claimed the exemption and the assessment completed is in order and therefore no revision of the order is required. To this effect, I am swearing this day of 13th March 2013 and state that what is stated is true and correct to the best of my information and facts, which are in my possession.”
The assessee therefore submitted that there was no loan taken by it from M/s. Tallam Textiles, but it was drawings from the capital account. The assessee followed it up with a confirmation letter from M/s. Tallam Textiles dated 13.4.2013, which reads thus:-
“This is to clarify that there is an error in our letter dt 21-8-2007 to the extent of stating that Loan of Rs.3.56 crores was given for the investment in Bonds. It is factually wrong as the sale proceeds of flats sold by Sri. Tallam N.Nanjunda Setty is only Rs.65,27,000.00 which was deposited in our firm and the investment was made for Rs. 66,50,000.00. The account extracts were enclosed and the deposit and withdrawals are not credited to the current account and separate account was maintained and the credit balance of Sri.Tallam Nanjunda Setty, throughout the period is more than 2 Crores as per the account copies filed in your office.
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We are withdrawing the letter dt 21-8-2007 which was written wrongly and this is to request you to replace the same with this letter dt 13-3-2013 which is factually correct.”
The CIT(Appeals) on a consideration of the above evidence, came to the following conclusion:-
“3.5 I have carefully considered the appellant’s submissions and the reasons given by the AO in the assessment order. The only ground on which the AO refused to give deduction u/s 54EC to the appellant is that it had a loan from M/s Tallam Textiles for making the investment in the specified securities viz, bonds of Rural Electrification Corporation Ltd. and National Housing Bank in sums of Rs.66,50,000/- and Rs.9,10,000/- since the firm had stated in its letter to the AO that the appellant had taken loan from the firm. On the other hand, the appellant stated that it had parked the sale proceeds of the immovable property concerned in its capital account with the firm from which it had drawn the money for making the investment. The firm has certified vide letter dated 13/5/2014 filed at the time of appeal hearing that the appellant had credit balance amounting to Rs.3,21,00,000/- at the relevant time. According to the appellant, even if it had taken a loan and invested the same in the specified securities it was entitled to the deduction u/s 54EC of the Act. In the case of IAC vs. Jayantilal Chimanlal (HUF) [32 TTJ 110] relied on by the appellant, it has been clearly held by the Hon’ble ITAT, Ahmedabad that the source of funds for investment in the specified assets is irrelevant if the investment had been made within the period of six months from the date of sale of the immovable property. The relevant portion from the said judgement is reproduced below: “8. We have considered the rival submissions of the parties and we are constrained to observe that the revenue ought not to have come up in appeal in the present case in view of the fact that there is no ambiguity in understanding the provisions of section 54E of the Act. During the course of his argument, the learned counsel for the assessee has rightly pointed out that the purpose of section 54E of the Act was to arrest inflation. The
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Legislature itself has appreciated the fact that it would not always be possible to invest the sale realizations immediately after the sale transaction. Therefore, six months time is given for the investment in the Rural Bonds. It is not expected of an assessee to keep the sale realizations intact and invest the same money in the Rural Bonds within a period of six months. In this view of the matter, we entirely agree with the submissions made on the matter, we entirely agree with the submissions made on behalf of the assessee that in order to qualify for exemption u/s. 54E of the Act, it would be sufficient if investment is made in the Rural Bonds equivalent to the sale realization, irrespective of the fact from which funds such investment is made.” 3.6 The Hon’ble ITAT, Kolkata in the case of Harishchandra G.Kathpal [ITA.No.6264 of 2020 dated 21/10/2011], Hon’ble ITAT, Mumbai in ACIT v. Pasricha (20 SOT 468) and Bombay Housing Corporation v. ACIT (81 ITD 545) have also held that the assessees were entitled to exemption u/s 54EC though they had made investments in the specified securities out of money taken on overdraft. Respectfully following the said decisions, I hold that the appellant is entitled to the deduction u/s S4EC claimed by it in respect of the investment made by it out of withdrawals made from its capital account or even out of loan taken from the said firm. The appellant, at the time of appeal hearing, has furnished .evidence to show that the sale proceeds of the property had been kept by it in its capital account with the firm. In the circumstances, addition of Rs.75,10,620/- made by the A0 is deleted.”
Thus the CIT(A) did not decide the question as to whether the Assessee obtained a loan from Tallam Textiles and utilized the proceeds in making investments in Bonds to claim exemption u/s.54EC of the Act but proceeded to give relief to the Assessee on the premise that even if the amounts were borrowed, the Assessee would be entitled to the deduction u/s.54EC of the Act. Aggrieved by the order of CIT(Appeals), the Revenue has preferred the present appeal before the Tribunal.
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We have heard the submissions of the ld. DR, who reiterated the stand of the Revenue as reflected in the order of AO. He also distinguished the decision relied on by the ld. CIT(Appeals). According to him, the decision of the Tribunal in the case of Jayantilal Chimanlal
(HUF) (supra) was a case of partition amongst members of HUF, whereas
in the present case, there was sale of property by the HUF. He also brought to our notice that in the case of Bombay Housing Corporation v.
ACIT, 81 ITD 545, the issue was with regard to, whether full consideration
should be invested for claiming exemption u/s. 54E of the Act or not?
The ld. counsel for the assessee reiterated the submissions made before the CIT(Appeals).
We have given a very careful consideration to the rival submissions. The evidence filed by the assessee before the CIT(A), in our view, clearly demonstrates that there was no loan taken by the assessee from M/s. Tallam Textiles. It was a case where assessee deposited the sale proceeds in his capital account (current account) and withdrew monies therefrom and made investments in the Bonds. Therefore, there was no question of denying exemption to the assessee u/s. 54EC on the premise that assessee took a loan from Tallam Textiles and made investments in the Bonds and not out of sale proceeds received on sale of capital asset.
Even assuming that the assessee had taken loan and made investments in REC Bonds, that cannot be a bar to claim exemption u/s.
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54EC of the Act. In our view, the decision of the Mumbai Bench of the
Tribunal in Bombay Housing Corporation (supra) clearly supports the
claim of the assessee in this regard. In the aforesaid decision, the brief facts giving rise to the issue were that during the relevant accounting year,
the assessee, which was a partnership firm disposed of its entire business as a going concern for a price of Rs. 3.55 crores. This was as per the
balance sheet as on 26th Sept., 1991. The business was sold to M/s
Monde Consultants (P) Ltd. The sale price was received in full between 27th Sept., 1991, and 22nd Oct., 1991. A sum of Rs. 84 lakhs was received
on 27th Sept., 1991, and this was paid over to B.C. Vaswani (HUF) for the credit of different partners of the assessee-firm on the very same day. The
amount of Rs. 1.5 crores received on 10th Oct., 1991, was paid to B.C. Vaswami (HUF) and to Vaswani Trust for the credit of the partners of the
assessee-firm on the very same day. Similarly, the balance amount of Rs.
1.21 crores received on 22nd Oct., 1991, was paid to Vaswani Trust for the credit of the assessee’s partners on the same day. On 28th Oct., 1991, the
assessee borrowed a sum of Rs. 1.42 crores from M/s Vaswani Trust and the borrowed amount was invested in IDBI Bonds on 30th Oct., 1991,
which are specified assets for the purpose of s. 54E.
On the question whether deduction u/s.54E of the Act, which is identical to Sec.54EC of the Act, could be allowed on the above facts, the
Hon’ble Mumbai Bench, held as follows:-
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“9. ……What the section requires as we understand it, is that it is necessary for the assessee only to invest an amount which is arithmetically equal to the net consideration in the specified assets. It cannot be the intention of the section that the other normal transactions or activities of an assessee should be curtailed or that the sale price should be immobilised. One example which immediately comes to our mind is as to what would happen if the sale price is lost by theft and the deadline of 6 months is about to be crossed. In such a case, the assessee should not be deadline of 6 months is about to be crossed. In such a case, the assessee should not be denied the exemption if he, in a desperate attempt to avail of the exemption, resorts to borrowing and utilises the borrowed amount for investment. No distinction can be made between an assessee who is forced to borrow for the purpose of making the investment and another assessee who effects the borrowing not because of forced circumstances, but because he consciously or deliberately used the sale consideration for a different purpose. As we have already seen the object of the provision is that funds should be channelised into certain sectors and this object is achieved in both the cases. We are of the view that in giving effect to the object, we should shun a wooden approach. 10. We suppose that the requirement of the section would have been met if the assessee had first paid over the amount of Rs. 1.42 crores borrowed from Vaswani Trust to its partners and thereafter taken out an equal amount from the partners’ accounts for being invested in the bonds. In that case, it would not have been possible to say that the bonds were purchased out of borrowed monies. The amount invested would have been traceable to the sale proceeds advanced to the partners. The facts that instead of doing that, the borrowed amount was directly invested in the bonds should not, in our view, make any difference to the principle.”
In our view, therefore, the claim of the assessee in the present case for exemption u/s. 54EC ought to have been allowed and was rightly allowed by the CIT(A). The order of the CIT(Appeals), therefore, does not
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call for any interference. Consequently, the appeal by the Revenue is dismissed.
In the result, appeal by the revenue is dismissed.
Pronounced in the open court on this 10th day of July, 2015.
Sd/- Sd/-
( JASON P. BOAZ ) ( N.V. VASUDEVAN ) Accountant Member Judicial Member
Bangalore, Dated, the 10th July, 2015.
/D S/
Copy to:
Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file
By order
Assistant Registrar/ Senior Private Secretary ITAT, Bangalore.