SH. JAGMOHAN SINGH,LUDHIANA vs. DCIT, CC-1, LUDHIANA

This is an appeal filed by the Assessee against the order of the Ld. CIT(A)-5, Ludhiana dt. 05/04/2023 pertaining to Assessment Year 2009-10 whereby the assessee has challenged the action of the ld CIT(A) in confirming the levy of penalty of Rs. 13,13,910/- u/s 271(1)(C) of the Act.

Briefly the facts of the case are that the assessee filed his return of income declared total income of Rs. 6,24,782/- on 31/03/2010. The case of the assessee was selected for scrutiny and notice under section 143(2) and 142(1) were issued. During the course of assessment proceedings, the AO, on perusal of the schedule relating to “Capital Gain” in the return of income so furnished by the assessee, found that the assessee has declared Long Term Capital Gain (LTCG) of Rs. 37,22,387/- which has been claimed as deduction under Section 54 of the Act. The AO further observed that the assessee has shown full value of consideration at Rs. 50,00,000/- and cost of acquisition has been shown at Rs.

The AO reworked the LTCG at Rs. 38,65,580/-, as against capital gain of Rs. 37,22,387/- declared by the assessee, by disallowing certain cost of construction claimed by the assessee in absence of supporting evidence. Regarding claim of deduction under Section 54 of the Act, the AO stated that no supporting evidence has been furnished in support of such claim nor any explanation has been furnished justifying the claim of deduction under section 54 and accordingly the said claim was disallowed and an amount of Rs. 38,65,580/- was brought to tax under the head “long term capital gains”. Separately, penalty proceedings under section 271(1)(c) were initiated for furnishing inaccurate particulars of income resulting in concealment of income by the assessee.

The assessee carried the matter in appeal before the Ld. CIT(A) who vide order dt. 22/01/2013 has confirmed the action of the AO whereby amount of Rs. 38,65,580/- was determined under the head “long term capital gains”. Regarding the claim of deduction under Section 54, the Ld. CIT(A) stated that the claim has to be substantiated by the assessee by bringing on record the evidence of construction of residential house which has not been done despite sufficient opportunity being granted to the assessee.

As per record, the assessee has not filed any further appeal against the order so passed by the Ld. CIT(A) therefore as far as the quantum proceedings are concerned, the same has attained finality and the claim of deduction under Section 54 stood disallowed.

Thereafter, during the course of penalty proceedings, notices were again issued to the assessee and the assessee filed the necessary submission which were considered but not found acceptable to the AO. As per the AO, the assessee has willfully disclosed inaccurate particulars of income by claiming deduction under section 54 without sufficient supporting material to substantiate his claim and therefore it was held that it is a fit case for imposition of penalty and penalty @ 100% of tax sought to be evaded amounting to Rs. 13,13,910/- was imposed on the assessee after seeking necessary approval from the competent authority.

Against the levy of penalty, the assessee again carried the matter in appeal before the Ld. CIT(A) who vide his order dt. 16/02/2016 has confirmed the levy of penalty under section 271(1)(c) of the Act.

Against the said order, the assessee moved in appeal before the Tribunal whereby certain additional ground of appeal

It was further submitted that the assessee, vide another submission dt. 09/11/2011 filed during the course of assessment proceedings, which is available at assessee’s paper book at pages 3 & 4, has submitted that he has purchased a plot of land to construct a residential house away from the city. He had full intention to construction the house and layout was done and the construction was started, however due to compelling circumstances, he could not complete the construction of the house and he submitted that he would pay tax on LTCG during the A.Y. 2012-13 and the submissions so filed by the assessee read as under:

It was accordingly submitted that all the relevant information and documentation were submitted during the course of assessment proceedings and the assessee had made a bonafide claim under section 54 wherein the residential plot of land was purchased by the assessee and payment has been made and registered deed duly executed well before the date of filing of the return of income and in fact he has planned the lay out and also started construction and which for certain unavoidable reasons could not continued due to personal exigencies. It was submitted that making of a claim which has been disallowed by the AO cannot be held to be furnishing inaccurate particulars of income and made the basis for levy of penalty under section 271(1)(c) of the Act and in support, reliance was placed on the decision of Hon’ble Supreme Court in case of CIT Vs. Reliance Petroproducts (P) Ltd. reported in 322 ITR 158, decisions of Hon’ble Punjab & Haryana High Court in case of CIT Vs. Rubber Udyog Vikas (P) Ltd. 335 ITR 558, CIT Vs. Amar Nath reported in 173 Taxmann 395 (P&H), CIT Vs. Shahabad Co-op. Sugar Mills Ltd. 322 ITR 73 (P&H), and decision of Hon’ble Madras High Court in case of R. Vasudevan Vs. DCIT 447 ITR 672 . It was accordingly submitted that the penalty so levied and confirmed by the Ld. CIT(A) be directed to be set aside and necessary relief be provided to the assessee.

Per contra, the Ld. DR submitted that the assessee’s claim of deduction under section 54 has to be substantiated by bringing on record, the evidence of construction of residential house which has not been done despite sufficient opportunity granted by the AO. It was submitted that at the time of filing of return of income, the assessee was aware that the condition under section 54(2) are not fulfilled as the assessee has neither purchased/constructed the new asset nor deposited the amount under the scheme notified by the Central Government. Under these circumstances, it was submitted that the penalty has been rightly levied by the AO and confirmed by the Ld. CIT(A). It was accordingly submitted that no interference is called for in the order so passed by the Ld. CIT(A). 13. I have heard the rival contentions and purused the material available on record. The issue under consideration relates to levy of penalty u/s 271(1)(C) whereby the assessee has claimed deduction u/s 54 which has been denied by the AO during the course of assessment proceedings. More specifically, the charge on the assessee is that he has furnished inaccurate particulars of income by claiming deduction under Section 54 which he is not otherwise eligible and therefore, the penalty is leviable for furnishing inaccurate particulars of income u/s 271(1)(c) of the Act. 14. In this regard, it would be relevant to refer to the provisions of Section 54 of the Act. Section 54(1) provides that where the assessee has constructed a residential house in India within a period of three years after the date of the transfer of the original asset as so defined, the assessee shall be eligible for deduction as per quantum so specified under clause (i) and (ii) of section 54(1). Section 54(2) provides that where the amount of capital gains is not utilized by him before the date of furnishing the return of income under section 139, the same shall be deposited by him in an account in such bank and as per scheme so notified and the amount, if any, already utilized for the construction of the new asset along with the amount so deposited in the specified scheme shall be deemed to be cost of the new asset for the purposes of determining the quantum of deduction as per section 54(1) of the Act. 15. It has been further provided in section 54(2) that where the amount deposited under this sub-section is not utilised wholly or partly for the construction of the new asset within the period specified in sub-section (1), then, 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 secondly, the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid. It has been held by various Benches of the Tribunal that where the assessee satisfies the primary condition of completion of construction of the residential house within the period of three years, and even where the amount is not initially deposited in the specified scheme, the assessee shall be eligible for deduction under Section 54 of the Act. The necessary corollary to the same is that the scheme so specified is for the purposes of monitoring the compliances in terms of earmarking and setting aside the funds and utilization thereof within the specified time period towards construction of the residential house and even where the amount is not deposited in the specified scheme, the bonafide of the claim of deduction in the year of transfer of the original asset can be tested and examined and where the same is found to be in order, no adverse consequences shall follow; and in the year when the three years period expires, it needs to be finally verified whether the construction has been completed or not and the necessary consequences in terms of non-completion and not utilization of the funds and liability towards payment of taxes shall finally be determined. Therefore, irrespective of whether the amount is deposited in the specified scheme or not, the construction and utilization of funds within period of three years has to be seen and in both scenarios, the necessary consequences shall follow.

We therefore find that for construction of a new house, the legislature has provided a time period of three years from the date of transfer of the original asset and it is not necessary that such construction should be commenced and/or completed before the due date of filing of the return of income. Where the construction is finally completed within the specified time window, the assessee has been held eligible for claim of deduction to the extent of amount actually spent and utilized and in a scenario, where the construction is not completed within the specified time window, the assessee has been held liable for payment of taxes in the year in which such time period of three years expires and it shall be deemed to be income of that year in which period of three years expires.

In the instant case, the assessee has sold the residential house on 16/04/2008 and he therefore has a time period of three years from the date of such transfer to construct the new residential house i.e, till April 2011. For the purposes of construction of new residential house, the assessee has purchased a residential plot of land vide registered deed dated 29/04/2008 measuring 1292 sq yards in village Jhande and has spent an amount of Rs 17.28 lacs. The said amount has been spent well before the due date of filing of return of income for the impugned assessment year. As far as remaining amount is concerned, the assessee has a time period till April 2011 to spent the amount and carry out the necessary construction and where the assessee is unable to complete the construction within specified period, the consequences as so specified are that the amount not spent shall be deemed to be income of the assessee in the year the period of three years expires, that is, the income for the assessment year 2012-13. The cause for the action for the Revenue therefore lies in A.Y 2012-13 and not in the impugned assessment year 2009-10. In this regard, during the course of assessment proceedings, the assessee has been asked for necessary explanation by the AO and he has given his explanation as to the status of construction and has stated that he has infact got the layout plan drawn and the construction was started and thereafter, due to health and other family exigencies as his wife had expired and his sons were settled abroad, the construction could not be completed within the specified time window and he offered to pay taxes during the assessment year 2012-13. We find that there has been no finding recorded by the AO either in the quantum proceedings or even during the course of penalty proceedings disputing the bonafide of the said explanation and as to why the said explanation cannot be accepted and inspite of that, the claim of deduction has been denied besides levy of penalty u/s 271(1)(C).

It is also a matter of record that the assessee has not deposited the remaining amount, other than the amount spent on purchase of residential plot of land, in the specified scheme before the due date of filing of return of income. To our mind, where the assessee has a time period of three years to construct the residential house and necessary efforts have been made and shown to have been made towards such construction where the residential plot of land has been purchased, the layout plan has been drawn and the construction has been started and amount has been spent thereon well before the date of filing of the return of income, mere non-deposit of the remaining amount in the specified scheme (and utilization amount therefrom) is more of a technical breach and bonafide of the assessee in carrying out the construction and claiming the deduction cannot be doubted merely basis the same.

We therefore find that all the necessary information, documentation has been furnished by the assessee and necessary explanations has been given during the course of assessment proceedings, in such circumstances, the assessee has made a bonafide claim u/s 54 of the Act and it cannot be held that there is furnishing of inaccurate particulars of income on part of the assessee.

Further, even where it is held that the assessee has made an incorrect claim and such claim has been found not acceptable to the AO, the various authorities quoted at Bar such as decision of the Hon’ble Supreme Court in case of Reliance Petroproducts (Supra) wherein it was held that mere making a claim which is not sustainable in law by itself will not tantamount to furnishing inaccurate particulars of income, following the same, the Hon’ble Punjab and Haryana High Court in case of CIT vs Rubber Udyog Vikas (P) Ltd (Supra), has held that making an incorrect claim would not tantamount to furnishing inaccurate particulars of income unless it is established that the assessee has acted with a malafide intention or had claimed deduction being aware of the settled legal position, support the case of the assessee.

In light of the aforesaid discussion and in the entirety of facts and circumstances of the case, we are of the considered opinion that there is no legal and justifiable basis for levy of penalty u/s 271(1)(c) and the same is hereby directed to be deleted.

In the result, the appeal of the assessee is allowed.