M/S FABSUN ENGINEERING PVT. LTD.,,BANGALORE vs. ITO, BANGALORE

The Assessee is a company. During the previous year relevant to AY 98-99, i.e., on 26.9.1997, the Assessee sold property at 47E, Bommasandra Industrial Area, Anekal, Bangalore for a sale consideration of Rs.90 lacs. There is no dispute that on such transfer there was a short term capital gain of Rs.85,11,648. The Assessee claimed that the capital gain is not chargeable to tax and is exempt u/s.54G of the Act. Section 54G, was inserted by the Finance Act, 1987 w.e.f. 1st April, 1988.The relevant provisions of Sec.54G of the Act reads as follows:

The intention for enacting section 54G was to promote decongestion of urban areas as also balanced regional growth. With that intent, section 54G exempted capital gains on transfer of plant, machinery, land, building, etc. used for the purposes of the business of industrial undertaking. It envisages transfer in the course of, or in consequence of, shifting of industrial undertaking from an urban area to a non-urban area. Capital gains would be exempt to the extent it is utilised within a period of one year before or three years after the date of transfer in (i) acquiring new plant, machinery, land, building, etc. for the purpose of the business of the undertaking in the area to which it is shifted, (ii) incurred expenses in the purchase of new plant and machinery, etc. and in shifting of the establishment of the undertaking; and (iii) incurring other expenses as would be specified in a scheme to be drawn up by the Central Government. It may be noted that no such scheme had been notified by the Government as on the date of transfer of capital asset by the Assessee.

The Assessee claimed before the AO that it proposed to set up another industrial unit in a non-urban area at Anathapur District of AP for which it had advanced substantial amounts to M/S.APSFC and M/S.APIDC for the purchase of land in non-urban area in Anathapur District, State of Andhra Pradesh.

The first question which the AO took up for consideration was as to whether the property transferred by the Assessee was a capital asset, being machinery or plant or building or land or any rights in building or land used for the purposes of the business of an industrial undertaking situate in an urban area. The AO noticed that as per Explanation to Sec.54G(1)

Before the AO, the Assessee had placed reliance on the decision of the ITAT Bangalore Bench in dated 20.11.1995 in the case of M/S.Fibre Boards wherein the tribunal held that since no area had been notified as an urban area, the Assessee could not be denied the benefit of a benevolent section. The Tribunal further held that the definition of “Urban Land” as per the other provisions of the Act and the general understanding should be applied, in the absence of any notification. The AO held that the aforesaid decision was rendered different circumstances and hence not applicable to the facts of the Assessee’s case. The order of the AO is dated 16.8.2004.

In exercise of powers conferred u/s.54G of the Act, the Central Government by notification dated 27.4.2006 notified “Anekal” where the Assessee’s property was situate as urban area for the purpose of Sec.54G of the Act.

On appeal by the Assessee the CIT(A) confirmed the order of the AO by his order dated 25.8.2006. The CIT(A) noticed that the decision of the Tribunal rendered in the case of M/S.Fibre Board (supra) had since been reversed by the Hon’ble Karnataka High Court in ITRC No.26/1997 dated 26.5.2005 whereby the Hon’ble Karnataka High Court after noticing the notification of Urban Areas in and around Bangalore by notification dated 27.4.2006 referred to in the earlier paragraph, held that such notification cannot have any retrospective effect.

On further appeal by the Assessee the ITAT in order dated 26.10.2006 set aside the order of the CIT(A) and remanded the issue to the AO on the representation of the Assessee that the Assessee has moved the CBDT to make the notification dated 27.4.2006 retrospective from 1.4.1988.

As per the directions of the ITAT the AO passed an order giving effect to order of ITAT on 31.12.2008 holding that no notification giving retrospective effect to notification dated 27.4.2006 was passed. The CIT(A) by his order dated 26.8.2010 confirmed the order of the AO. On further appeal by the Assessee, the ITAT in dated 31.10.2011 restored the issue to the AO for fresh consideration to afford opportunity to the Assessee and adjudicate the issue.

On 24.12.2012 the AO passed an order giving effect to the directions of the tribunal dated 31.10.2010 holding that no notification giving retrospective effect to notification dated 27.4.2006 was passed. On further appeal, the CIT(A) by his order dated 30.8.2013 confirmed the order of the AO. The Assessee has filed the present appeal before the Tribunal against the order of the CIT(A).

We have heard the rival submissions. Explanation to section 54G(1) of the Act expressly provides that having regard to the population, concentration of industries, need for proper planning of the area and the other factors, the Central Government by general or special order declared to be an urban area for the purpose of sub-section(1) of section 54G of the Act. The CBDT has issued notification dated 27/04/2006 for the purpose of exemption of capital gains u/s 54G in conformity to the Explanation above, declaring Bangalore as urban area. Such notification as we have already seen has been held by the Hon’ble Karnataka High Court as applicable from the date of notification and has no retrospective effect. In view of the legal position mentioned above, the assessee’s contention is not tenable.

The assessee raised another issue that under section 280ZA of the Act, which was a section providing for relief to Assessees who relocate their industries to Backward area, Bangalore was notified as urban area for the purpose of giving relief for shifting the industry from Bangalore to other backward area. Section 280ZA of the Act was introduced by the Finance Act 1965 with effect from 01/04/1965 and omitted by the Finance Act 1987 with effect from 01/04/1988. Section-280Z provided for relief by way of reduction of a fraction of tax on capital gains arising from the sale of the assets at the old place from where an industrial undertaking is shifted in terms of the scheme of the Central Government announced for this purpose. In order to be eligible for the concession specified conditions have to be fulfilled. Though the expression industrial ‘undertaking’ has not been defined in this chapter, it should bear the meaning assigned to it in section 80J of the Act formerly section 84 of the Act.

CBDT has issued notification urban areas u/s 280Y(d) vide Notification No.S.O.3419 dated 22/09/1967 thereby Bangalore Corporation is declared as “urban areas” for the purpose of XXIIB of the Act. Moreover, this notification is applicable for tax credit certificates for shifting of industrial undertaking from urban areas u/s 280Y(d) r.w.s. 280ZA of the Act and same cannot be held to be applicable for exemption u/s 54G of the Act.

It is also seen that the Hon’ble High Court of Karnataka has held that Notification dated 27.10.2006 cannot apply retrospectively. In such circumstances, we are of the view that the ld. CIT(Appeals) was justified in upholding the order of the Assessing Officer denying the benefit of section 54G to the assessee.

The ld. counsel for the assessee filed before us Notification No.9447 dated 6.1.1994. The said Notification was issued by the Central Govt. notifying areas which have to be regarded as urban areas for the purpose of section 2(1A) & 2(14) of the Act, which defines agricultural income and capital assets respectively. It was pointed out by him that municipal area of Bangalore and area upto a distance of 8 Kms. from municipal limits of Bangalore in all directions have been notified as urban areas. According to him, definition of urban area cannot be different for the purpose of section 54G.

We are unable to accept the aforesaid argument of the ld. counsel for the assessee. The benefit conferred u/s. 54G of the Act is a specific benefit. Explanation below section 54G(1) of the Act contemplates notification by the Central Government for the purpose of allowing deduction u/s. 54G of the Act. The Notification issued under a different provision of the Act which is meant for different purpose cannot be applied while dealing with the provision of section 54G of the Act. We therefore reject the argument of the ld. counsel for the assessee.

We do not find any merit in this appeal by the assessee. Consequently the same is dismissed.