An Interaction With CA.S.Krishnan 1. 1. WHAT IS CAPITAL GAIN? Capital gain is the difference between...

An Interaction

With

CA.S.Krishnan 1

2

1. WHAT IS CAPITAL GAIN?

Capital gain is the difference between the selling price

(total consideration) and total sum up of indexed cost of

acquisition and indexed cost of improvement in respect of a

capital asset(residential property and/or land). Any

expenditure incurred wholly and exclusively in connection

with transfer of such capital asset can be added to the total

figure of indexed cost of acquisition and indexed cost of

improvement to arrive at the total cost.

3

Capital Gain Cont… The nature of expenditure that can be claimed includes brokerage paid,

travelling, if any, advocate fees (paid for obtaining legal opinion, drafting

of deeds etc) and court expenses like in the case of obtaining probate of

WILL etc.

The indexed cost of acquisition is ascertained by multiplying

purchase/construction cost on the date of acquisition or market value of

the property as on 01-04-1981[if acquired prior to 01-04-1981] whichever

is later, with cost inflation index pertaining to the year of sale and divide

it by cost inflation index pertaining to the year of purchase/construction

or if the purchase/construction is made prior to 01-04-1981 by 100.

If there had been any improvement to the property then indexed cost of

improvement can be calculated likewise and added to original indexed

cost of acquisition / purchase to arrive at the total indexed cost of

acquisition.

4

Relevant Sections Sec 2(47)(v) - Dealing with transfer in relation to Capital asset Sec 45(1) - Dealing with capital gains Secs 2(29A),29B,2(42A) and 2(42B) –Dealing with definition of what is a short-term asset,

long-term asset, short-term capital gains and long-term capital gains -

Sec 48 - Dealing with mode of Computation of Capital Gains Sec 49 - Dealing with cost with reference to certain modes of acquisition Sec 54 - Dealing with profit on sale of Property used for residence Sec 54F- Dealing with capital gain on transfer of certain capital assets not to

be charged in case of investment in residential house Sec 54EC - Dealing with Capital gain not to be charged on investment in certain bonds Sec 50C - Dealing with Special provision for full value of consideration in

certain cases Sec 56(2)(b) - Dealing with Gift from Other than Relatives – Immovable Property Sec 112(1) (a) - Dealing with Tax on Long term capital gains Sec 195 - Dealing with Payment to NRIs and PIOs Sec 197 - Dealing with Certificate for Deduction at Lower rate Sec 27 & 64(1) - Dealing with transfer of Asset for Inadequate Consideration Sec.194-IA - Dealing with deduction of tax @ 1% on transfer of

immovable property other than agricultural land whose transfer value is more than Rs. 50 Lakhs.

6

Analysis of Relevant Provisions

(A) As per the provisions of section 2(47) (v) “transfer” in relation to a capital asset includes-

Any transaction involving the allowing the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act,1882.

This section assumes importance as it deals with the definition of the word “transfer” and not sale. All actions have relevance with regard to date of transfer.

This point ( the relevant date for computing/calculating capital gains is the date of handing over of possession) has been reiterated by the Madras High Court in the case of Madathil Brothers vs. Deputy CIT (2008)-301-ITR-345(Mad).

7

Analysis Cont… The Supreme Court in the case of Rambhau Namdeo Gajre vs. Narayan Bapuji Dhotra

(dead) through Lrs. – 2004 (8) SCC 614 referred to the background with regard to introduction of Section 53A enacted in 1929 by the Transfer of Property (Amendment) Act 1929 by importing into India in a modified form the equity of part performance as it developed in England over the years and observed that doctrine of part performance as stated in Section 53A of the Transfer of Property Act is an equitable doctrine which creates a bar of estoppel in favour of the transferee against the transferor. The Supreme Court in this case extracted at paragraph 8 of its order, from its earlier decision in the case of Shrimant Shamrao Suryavanshi and another vs. Pralhad Bhairoba Suryavanshi, 2002 (3) SCC 676, the essential conditions which are required to be fulfilled if a transferee wants to defend or protect his possession under section 53A of the Transfer of Property Act in the following words.

There must be a contract to transfer for consideration of any immovable property;

the contract must be in writing, signed by the transferor, or by someone on his behalf;

the writing must be in such words from which the terms necessary to construe the transfer can be ascertained:

the transferee must in part performance of the contract take possession of the property, or of any part thereof;

the transferee must have done some act in furtherance of the contract; and

the transferee must have performed or be willing to perform his part of the contract."

8

Analysis Cont… The Supreme Court also made the following observations at paragraph 9 of its order-

“If these conditions are fulfilled then in a given case there is equity in favour of the proposed transferee who can protect his possession against the proposed transferor even though a registered deed conveying the title is not executed by the proposed transferor. In such a situation equitable doctrine of part performance provided under Section 53-A comes into play and provides that 'the transferor or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract."

Therefore it is obligatory on the part of the transferee – the developer in the case of JDA – to do some act in furtherance of the contract. This further act starts with applying to various authorities after possession is taken by the transferee and so unless this further act is done it cannot be stated that provisions of section 2(47)(v) of the Income Tax Act apply so as to cover situation contemplated under section 53A of the Transfer of Property Act 1882. Mere signing of Memorandum of Understanding between the owner and the developer does not result in transfer of property and therefore it could legally be argued based on the decisions of the Supreme Court referred to above that unless the planning permit is sanctioned by the Appropriate Authorities permitting construction subject to fulfilment of certain conditions, it could not be said that some act in furtherance of the contract has been done by the transferee so as to cover situations contemplated under section 53A of the Transfer of Property Act read with 2(47)(v) of the Income Tax Act.

9

Analysis Cont… Though the decisions referred to above have been rendered in

defining the rights of the transferee under section 53A of the Transfer of Property Act 1882 the general principle emanating out of these decisions, that unless some further act is done by the transferee he cannot be said to have done some act in furtherance of the contract resulting in part performance of the contract, can be taken advantage of. So if adequate care is taken in drafting the development agreement at the time when the owner executes General Power of Attorney authorizing the developer to apply to Appropriate Authorities for sanctioning of plan etc., then it is possible to postpone the capital gains liability to a later year if the sanctioning authority takes a longer time in according permission.

The Hyderabad Bench of ITAT in the case of Ms. K. Radhika v. Dy. CIT [2011] 13 taxmann.com 92 through a detailed and well-reasoned order has held that unless provisions of section 53A of the Transfer of Property Act are satisfied transaction relating to Development Agreement of a property cannot fall within the scope of deemed transfer under section 2(47)(v) of the Income-tax Act.

10

Analysis Cont… The Hyderabad Bench of ITAT in a subsequent case in the case of

S.Ranjith Reddy vs.Deputy CIT [2013] 35 taxmann.com 415 (Hyd) through a detailed and well-reasoned order has held that where nothing happened in relevant previous year other than execution of agreement, whereby assessee assigned his landed property in favour of joint venture between assessee and developer, there was no transfer under section 2(47) as there was no extinguishment of rights or receipt of consideration and where no progress or construction had taken place in said landed property since date of signing development agreement, it could not be held that developer had performed its obligations as envisaged in section 53A of Transfer of Property Act, and therefore, there was no transfer as per section 2(47) of the Income-tax Act.

If it is possible for the assessee to part with possession of the property in piece meal falling in different assessment years, then capital gains tax gets distributed accordingly. The Madras High Court in the case of Commissioner of Income Tax vs. K. Jeelani Basha (2002) 256 – ITR – 282,following the decision of the Delhi High Court in the case of Commissioner of Income Tax vs. Shakuntala Rajeshwar (1986) 160 – ITR – 840 (Delhi.) has held that if the assessee parts with possession of one third of property on receiving part payment then the capital gains will have to be calculated only on the basis of such part consideration received and not on total consideration agreed upon.

11

Analysis Cont… The Madhya Pradesh High Court in the case of Avtar Singh Vs.

Income-tax Officer [2004] 270 ITR 0092 has held that mere execution of general power of attorney by the owner does not result in deliverance to the purchaser if there is nothing in the agreement to indicate that possession was delivered to the purchaser. The matter was remitted to the Tribunal for fresh adjudication with regard to the factum of delivery of possession or enjoyment of property by the purchaser by any other means.

Recently arguments are put forth by certain legal luminaries that if a clause is added in the Joint Development Agreement (JDA) stating that the possession of the property still lies with the owner and not handed over to the builder for development purposes and the same shall be handed over to the developer only after the flats are allotted to the owner and therefore the property does not get transferred on mere signing of the JDA. This argument is put forth to get over the definition of section 2(47)(v) of the Income Tax Act which defines the important term “transfer”. But such a stand taken by such legal luminaries is against law and the following decisions clearly explain the situation with regard to transfer

12

Analysis Cont… G. Sreenivasan vs. Deputy CIT [2013] 140 ITD 235(Cochin)-The

Cochin Bench has observed that the substance shall prevail over the form. The Bench also observed that “though it is mentioned in the agreement that the possession of land shall be handed over only after handing over of the assessee's portion of constructed area, yet the builder, under practical circumstances, cannot start construction unless the physical possession of land is handed over to him.” The Bench went on to observe that “ the impugned agreement, being a development agreement, a mere mentioning in one of the clauses of the agreement to the effect that there is no handing over of possession, shall not take away the actual fact that the physical possession was handed over to the builder.”

Ravinder Singh Arora vs. Assistant Commissioner of Income-tax, Circle-10(1), Hyderabad [2012] 24 taxmann.com 346 (Hyd.) –The Hyderabad Bench in this case has held that “where a land owner has entered into an agreement for development of property and certain rights were assigned to developer who in turn has made substantial payment and, consequently, has entered into property and, thereafter, if transferee (developer) has taken steps in relation to construction of flats, then it is to be considered as transfer under section 2(47)(v) attracting provisions of section 45; and the fact that legal ownership continued with owner, which is to be transferred to developer at a future distant date does not affect applicability of section 2(47)(v)”

13

Analysis Cont… An interesting situation arose before the ITAT Hyderabad Bench in the case of

Smt. P. Prathima Reddy vs. ITO [2012] 25 taxmann.com 264 (Hyd.) wherein though the joint development agreement was entered into during the assessment year 2006-07 a Supplementary Agreement was entered into during the assessment year 2007-08 and the consideration receivable by the assessee was specifically determined/fixed by such Supplementary Agreement. Under the above circumstances the Tribunal held that liability to capital gains tax arose only for the assessment year 2007-08 and not earlier as ‘willingness to perform' being the crux of section 53A of the Transfer of Property Act need to be satisfied for a transaction to fall within the scope of deemed transfer under section 2(47)(v) of the Income-tax Act and the same was satisfied only during the assessment year 2007-08. It is to be noted that in this case the assessee contended that provisions of section 2(47)(v) of the Income-tax Act, could not be applied because deemed transfer as contemplated thereat applied only to cases where possession was given in connection with a contract to transfer for consideration as envisaged in section 53A of the Transfer of Property Act and not otherwise.

Since, in terms of joint development agreement and supplementary agreement no event resulting in transfer of property took place in the previous year relevant to assessment year 2007-08, capital gain so assessed was to be deleted. It seems that the assessee tried to escape capital gain liability by preparing two agreements in successive assessment years the first one without mentioning consideration and the second one mentioning consideration. The Tribunal repelled all these contentions raised on behalf of the assessee.

14

Other cases of Relevance (i) In the case which arose before ITAT Hyderabad Bench in Mali Florex

Ltd. vs. Deputy Commissioner of Income-tax [2013] 32 taxmann.com 373 (Hyderabad - Trib.) the assessee entered into agreement for sale of land for consideration of Rs. 2.24 crore out of which it received Rs. 8 lakh and had not parted with possession of same. Under the above circumstances the Tribunal held that such transaction could not be treated as transfer within meaning of section 2(47) of the Income-tax Act.

(ii) The Delhi High Court in the case of CIT vs. Delhi Apartments (P) Ltd.[2013] 352 ITR 322 has held that where assessee received advance in the year under consideration for sale of land and conditions of execution of written agreement and handing over of possession had not taken place in that year then there was no transfer and, thus, nothing could be brought to tax in assessment year under consideration.

(iii) In the case of Sowcar Janaki vs. Income-tax Officer [2013] 27ITR (Trib) 226(Chennai) ground number 6 (para.3-page 229) raised by the assessee before the Tribunal was as under-

“The CIT erred in confirming the stand of the Assessing Officer that section 50C is applicable and that the sale consideration for the land foregone to the developer is the guideline value of the property as on 1.4.1981 instead of taking the cost of construction of 9 flats allotted to the appellant as the sale consideration.”

15

Other cases of Relevance Cont…

This issue was decided in favour of the assessee by the Tribunal at para.14 (page 237) by observing as under-

“As far as ground of appeal no.6 is concerned i.e. invoking the provisions of section 50C and considering the guideline value of registration department for the purpose of computing capital gains, we are unable to endorse the view of the Commissioner of Income Tax (Appeals) in accepting the decision of the Assessing Officer in invoking the provisions of section 50C of the Act. The Jodhpur Bench of the Tribunal in the case of Navneet Kumar Thakkar Vs. ITO (110 ITD 525) held that unless the property transferred has been registered by sale deed and for that purpose value has been assessed and stamp duty has been paid by the parties section 50C inserted by Finance Act, 2002 with effect from 1.4.2003 cannot come into operation. Similar view has been taken by the co-ordinate Bench of this Tribunal in the case of ITO Vs. Kumudhini Venugopal (5 ITR (Trib) 145), wherein the Tribunal held that when the agreement is not registered, the provisions of section 50C have no application. A similar view has been expressed by the Lucknow Bench of the Tribunal in the case of Carlton Hotel (122 TTJ 515) and Jaipur Bench of the Tribunal in the case of Vijayalakshmi Dhadia (20 DTR365). Respectfully following the above decisions, we reverse the order of the Commissioner of Income Tax (Appeals) on this issue and allow the ground of appeal no.6 raised by the assessee.”

16

Other cases of Relevance Cont… (iv) However 2 judicial decisions-one rendered by the Andhra Pradesh

High Court in the case of Potla Nageswara Rao vs. Deputy CIT. ITTA No. 245 OF 2014 (Order dated 09-04-2014) and the other rendered by the Cochin Bench of ITAT in the case of Smt. Jayasree Gopakumar Saranya v. ITO [IT Appeal No. 505/Coch/2009, dated 9-5-2012] have to be got over in the following manner-

(a) The Andhra Pradesh High Court in the case of Potla Nageswara Rao (supra) held that “ in case of development agreements transfer completes on handing over possession despite non receipt of payment” This observation was based on the factual situation which was obtaining in that case to the following effect-( copied from the order of the High Court)

“In the instant case, on 07.03.2003 an agreement was entered into by the assessee with M/s. Bhavya Constructions Pvt., Ltd., and the plan of the building was approved on 31-.03.2003. These dates fall in the previous year 2002-03, relevant to assessment year 2003-04. Thus, in this case, the land being capital asset was transferred by the assessee to the developer during the assessment year under consideration, viz., 2003-04, for construction and it is enough if the assessee has received the right to receive consideration on a later date, so as to attract eligibility to tax on capital gains during the year under appeal.”

17


(b) The Cochin Bench in the case of Smt. Jayasree Gopakumar Saranya v. ITO [IT Appeal No. 505/Coch/2009, dated 9-5-2012] held that granting of permission would relate back to the date of agreement and as the possession of the property was given to the builder on 16-09-2004 transfer took place during the previous year, pertaining to the assessment year 2005-06 and not as contended by the assessee.

In this case it was contended by the assessee that as the permit was sanctioned after 31st March 2005 in the financial year 2005-06 the transfer did not take place during the financial year 2004-05 and reliance was placed by the assessee on the decisions of the Hyderabad Bench of the ITAT in the case of Ms. K. Radhika v. Dy. CIT [2011] 47 SOT 180 (URO)/13 taxmann.com 92 and of the Delhi Bench of the ITAT in the case of ITO v. Finian Estates Developers (P.) Ltd. [2012] 23 taxmann.com 360 for the proposition that till such time, permission was granted by the appropriate authority, transfer of property would not take place, even though the property had been put in possession of the developer on an earlier date. But the Cochin Bench held against the assessee by observing that in the case which arose before the Hyderabad Bench of the ITAT in Ms. K. Radhika (supra), the Bench had no occasion to consider clause (vi) of section 2(47) of the Act and in the case which arose before the Delhi Bench of the ITAT in Finian Estates Developers (P.) Ltd. (supra) no permission was obtained/received for construction of the building.

http://www.taxmann.com/fileopen.aspx?id=101010000000070133&source=link


18


The Cochin Bench of the ITAT in this case extracted the provisions of section 2(47) of the Act and placed reliance on clause (vi) of section 2(47) of the Act which states 'any transaction which has the effect of transferring or enabling the enjoyment of any immovable property would come within the meaning of transfer’. It is submitted, with respect, that the conclusion arrived at by the Cochin of ITAT in this case, is faulty for the following reasons-

(1)The Cochin Bench has overlooked the concept of “part performance” as explained by the Supreme Court in a catena cases decided by the Supreme Court starting with Sheth Maneklal Mansukhbhai v. Hormusji Jamshedji Ginwalla & Sons AIR 1950 SC 1(all these cases extracted earlier in this write-up)

(2)Moreover, if the time gap between the handing over possession of property and granting of permission by the appropriate authorities is so large for whatever reason and these two fall in two different assessment years separated say more than 2/3 years how can the assessee file his return for the assessment year in which property is put in possession of the developer treating it (handing over possession of property) as transfer within the meaning of section 2(47) of the Act without knowing about the outcome of the application made to appropriate authorities for planning/building permit?

19

Other cases of Relevance Cont… What would happen if the assessment had been completed for the

assessment year in which the assessee had filed his return in the year of handing over of possession of property treating it as transfer and the planning/building permit is refused in a later year?

(3) Moreover both the clauses (v) and (vi) of section 2(47) were inserted for different reasons, as explained by Circular No. 495, dated 22nd September, 1987. The relevant clause runs as under:

"Definition of 'transfer' widened to include certain transactions:

11.1 The existing definition of the word 'transfer' in section 2(47) does not include transfer of certain rights accruing to a purchaser, by way of becoming a member of or acquiring shares in a co-operative society, company, or association of persons or by way of any agreement or any arrangement whereby such person acquires any right in any building which is either being constructed or which is to be constructed. Transactions of the nature referred to above are not required to be registered under the Registration Act, 1908. Such arrangements confer the privileges of ownership without transfer of title in the building and are a common mode of acquiring flats particularly in multi-storeyed constructions in big cities.

20

Other cases of Relevance Cont… The definition also does not cover cases where possession is allowed to

be taken or retained in part performance of a contract, of the nature referred to in section 53A of the Transfer of Property Act, 1882. New sub-clauses (v) & (vi) have been inserted in section 2(47) to prevent avoidance of capital gains liability by recourse to transfer of rights in the manner referred to above.

11.2 The newly inserted sub-clause (vi) of section 2(47) has brought into the ambit of 'transfer', the practice of enjoyment of property rights through what is commonly known as Power of Attorney arrangements. The practice in such cases is adopted normally where transfer of ownership is legally not permitted. A person holding the power of attorney is authorised the powers of owner, including that of making construction. The legal ownership in such cases continues to be with the transferor.

11.3 These amendments shall come into force with effect from 1-4-1988 and will, accordingly apply to the assessment year 1988-89 and subsequent years.“

21

Other cases of Relevance Cont… (4) Moreover, provisions of section 2(47)(vi) –on which reliance was

placed by the Cochin Bench in the case of Smt. Jayasree Gopakumar Saranya(supra)- usually come into play whenever transfer of property takes place on account of dissolution of a firm and one of the erstwhile partners takes over one of the properties - refer to CIT v. Southern Tubes [2008] 171 Taxman 254 (Ker.)

(v) The Hyderabad Benches of ITAT in the cases of M/s. Fibars Infratech Pvt. Ltd. vs. ITO in ITA NO.477/Hyd./2013-Assessment Year 2007-08-Order dated 03-01-2014 and Binjusaria Properties (P.) Ltd. vs. Assistant Commissioner of Income-tax, Hyderabad [2014] 45 taxmann.com 115 (Hyderabad - Trib.) have reiterated that where assessee entered into a development agreement of land with a developer in terms of which developer had to develop property according to approved plan and deliver a part of constructed area to assessee, in view of fact that developer had not done anything to discharge obligations cast on it, capital gains could not be brought to tax in year under appeal merely on basis of signing of development agreement



22

Other cases of Relevance Cont… (B) Section 48 speaks of expenditure which can be deducted from the

value of full consideration to arrive at capital gains. One such

expenditure could be the sum paid by the assessee for discharge of

mortgage on the property inherited by him where the mortgage was

created by the previous owner from whom the property devolved on

the assessee. In this regard the decision of the Supreme Court in the

case of Arunachalam (Rm.) vs.CIT [1997] 227 ITR 222 may be referred

to.

23


This is what the Supreme Court observed in this case-

“We are unable to endorse the view of the Kerala High Court in Ambat Echukutty Menon v. CIT [1978] 111 ITR 880 to which reference has been made by the High Court in the impugned judgment. In that case, the assessee, as one of the heirs, had inherited property from the previous owner who had mortgaged the same during his lifetime and after his death the heirs, including the assessee, had discharged the mortgage created by the deceased. The said property was subsequently acquired under the Land Acquisition Act and for the purpose of capital gains the assessee sought deduction of the amount spent to clear the mortgage. The High Court held that the capital asset had become the property of the assessee by succession or inheritance on the death of the previous owner under section 49(1) of the Act and the cost of acquisition of the asset is to be deemed to be the cost for which the previous owner acquired it, as increased by the cost of any improvement of the assets incurred or borne either by the previous owner or by the assessee. According to the High Court, having regard to the definition of the expression “cost of improvement” contained in section 55(1)(b) of the Act, in order to entitle the assessee to claim a deduction in respect of the cost of any improvement, the expenditure should have been incurred in making any additions or alterations to the capital asset that was originally acquired by the previous owner and if the previous owner had mortgaged the property and the assessee his co-owners cleared off the mortgage so created, it could not be said that they incurred any expenditure by way of effecting any improvement to the capital asset that was originally purchased by the previous owner.

24


This decision has been followed in subsequent decisions of the High Court in Salay Mohamad Ibrahim Sait v. ITO [1994] 210 ITR 700 (Ker) and K. V. Idiculla v. CIT [1995] 214 ITR 386. A contrary view has been taken by the Gujarat High Court in CIT v. Daksha Ramanlal [1992] 197 ITR 123. In taking the view that in a case where the property has been mortgaged by the previous owner during his lifetime and the assessee, after inheriting the same, has discharged the mortgage debt, the amount paid by him for the purpose of clearing off the mortgage is not deductible for the purpose of computation of capital gains, the Kerala High Court has failed to note that in a mortgage there is transfer of an interest in the property by the mortgagor in favour of the mortgagee and where the previous owner has mortgaged the property during his lifetime, which is subsisting at the time of his death, then after his death his heir only inherits the mortgagor’s interest in the property. By discharging the mortgage debt his heir who has inherited the property acquires the interest of the mortgagee in the property. As a result of such payment made for the purpose of clearing off the mortgage the interest of the mortgagee in the property has been acquired by the heir. The said payment has, therefore, to be regarded as “cost of acquisition” under section 48 read with section 55 (2) of the Act. The position is, however, different where the mortgage is created by the owner after he has acquired the property. The clearing off of the mortgage debt by him prior to transfer of the property would not entitle him to claim deduction under section 48 of the Act because in such a case he did not acquire any interest in the property subsequent to his acquiring the same.

25


In CIT v. Daksha Ramanlal [1992] 197 ITR 123, the Gujarat High Court has rightly held that the payment made by a person for the purpose of clearing off the mortgage created by the previous owner is to be treated as cost of acquisition of the interest of the mortgagee in the property and is deductible under section 48 of the Act”.

However if the mortgage was created by the assessee himself then he cannot claim it as an expenditure at the time of transfer. The Madras High Court in the case of CIT vs. Bradford Trading Co. (P.) Ltd. [2003] 261 ITR 0222 had explained the decision of the Supreme Court in the case of Arunachalam (Rm) in the following words-

“The distinction pointed by the Supreme Court in R.M. Arunachalam’s case (supra) is that where the assessee acquired property subject to mortgage and later on it was discharged at the time of transfer by vendee, then, it would become an expenditure incurred in connection with the transfer, and where the assessee himself created the mortgage after acquisition of capital asset, the amount would not go to reduce the full value of consideration received by the assessee”

It is to be noted that any expenditure incurred by the assessee to evict the tenants at the time of transfer of property can be claimed as an expenditure under section 48(i) of the Act as was held by the Delhi High Court in the case of CIT vs. Eagle Theatres [2012] 205 Taxmann 449. The Delhi High Court while arriving at a decision favourable to the assessee relied on number of precedents on this issue.

26


However when there was no obligation on the part of the assessee to settle claims of tenants for getting vacant possession but the assessee pays compensation to such tenants for delivering vacant possession then such payment would partake the character of “cost of improvement” under section 48(ii) of the Act and not merely expenses on transfer under section 48(i) of the Act thus enabling the assessee to claim indexation as provided under section 48(ii) of the Act [ see CIT vs. Spencers and Co.Ltd. (2013) 359 ITR 644(Mad)]

(C) Section 49 is an important and interesting section and it deals with cost of acquisition with regard to certain modes acquisition. In case of property acquired through will, inheritance, settlement or gift the indexation relates back to the year of acquisition of the property by the first owner. This view is supported by the decision of the Bombay High Court in the case of CIT vs. Manjula J. Shah (2012) 204 Taxman 691 (Bom) which while approving the decision of the Mumbai Special Bench of ITAT in the case of Deputy Commissioner of Income Tax vs. Manjula J. Shah (2010) 35 SOT 105 (Mum) has held that indexation relates back to the year of acquisition of the property by the first owner. The High Court of Bombay has followed the decision in the case of Manjula J. Shah (Supra) in a subsequent decision in the case of CIT vs. Raman Kumar Suri (2013) 29 taxman.com 231 (Bom) with regard to relating indexation back to the year of acquisition of the property by the first owner.

27


The High Court of Bombay in the case of Commissioner of Income-tax-18, Mumbai vs. Ms. Janhavi S. Desai [2012] 24 taxmann.com 314 (Bom.) has held that previous owner of property for purpose of sections 2(42A) and 49(1) does not include a person who acquired property by a mode of acquisition referred to in sub-clauses (i) to (iv) of section 49(1).In other words it refers to the first owner. In fact the Punjab & Haryana High Court in the case of CIT vs. Sathish Kumar Arora in ITA No.633 of 2009(Date of decision 20-09-2010) was the first High Court to hold that in case of inheritance the date of acquisition by the present owner relates back to the date of acquisition by the first owner. The Delhi High Court in the case of Arun Shungloo Trust vs.CIT [2012] 205 Taxman 456 (Del) following the decision of the Bombay High Court in the case of Manjula J. Shah(supra) has held in favour of assessee by observing that benefit of indexed cost of inflation is given to ensure that tax payer pays capital gains tax on ‘real’ or actual ‘gain’ and not on increase in capital value of property due to inflation; this is the object or purpose in allowing benefit of indexed cost of improvement, even if the improvement was made by previous owner in cases covered by section 49 of the Income-tax Act. The ITAT, Chennai Bench in the case of Assistant Commissioner of Income-tax v. Syed Maqbul Hussain [2010] 004 ITR (Trib) 0044 has also adopted the same view. The first favourable view in favour of the assessee in this direction was expressed by Chandigarh Bench of the Income-tax Appellate Tribunal in the case of Mrs. Pushpa Sofat v. ITO [2002] 81 ITD 1 (Chd.) (SMC).

28


The Gujarat High Court in the case of CIT vs. Rajesh Vitthalbhai Patel [2013] 37 taxmann.com 439(Guj) has held that where assessee's brother acquired a property prior to 1-4-1981 and he had gifted said property to assessee on 23-5-1995 and subsequently the assessee had sold property on 7-2-2006, while computing capital gain indexed cost of acquisition was to be worked out with reference to 1-4-1981 and not with reference to date on which assessee acquired property by gift, i.e., 23-5-1995. The Gujarat High Court in a subsequent decision in the case of CIT vs. Gautam Manubhai Amin[2013] 38 taxmann.com42 (Guj) following the decision of the Bombay High Court in the case of Manjula J.Shah(supra) has reiterated the same principle by holding that period of holding of inherited property would include duration of possession of asset by previous owner. The Chennai Bench of ITAT in the case of Assistant Commissioner of Income-tax vs. M.Sankar Trading and Consultancy Private Ltd. in ITA No.2103/Mds/2012(order dated 26th March,2013) following precedents has held that for the purpose of computation of long term capital gains arising from the transfer of a capital asset which had become property of the assessee under gift, the first year in which the capital asset was held by the assessee had to be determined to work out the indexed cost of acquisition, as envisaged in the Explanation (iii) of Sec. 48 after taking into account the period for which the said capital asset was held by the previous owner.

29


(D) The three basic differences between the provisions of section 54 and 54F are-

(i) In order to claim exemption under section 54 it is sufficient if only the capital gains are invested in purchase of residential property( capital asset) and/or investment in capital gain bonds whereas under section 54F the entire net sale consideration (which, in effect, is a higher amount) has to be invested in purchase of capital asset.

(ii) As per provisions of section 54F the assessee who has transferred the asset (property other than the residential property) should not own more than one residential house property on the date of transfer of the property whereas there is no such restriction under section 54.

(iii) As per provisions of section 54F the assessee loses exemption under this section if he 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 constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; There is no such restriction in section 54 of the Act.

So when a residential building with an extensive piece of land is sold the advantage would be plenty if the transfer of property falls under section 54.

30


In fact section 54 opens with the following-

“Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head “Income from house property” (hereafter in this section referred to as the original asset)”.

The decision of the Andhra Pradesh High Court in the case of Commissioner of Income-tax vs. Zaibunnisa Begum [1985] 151 ITR 0320(A.P.) may be referred to in this regard. The Cochin Bench of ITAT in the case of Tony J. Pulikal [2013] 37 taxmann.com 221 (Cochin), after referring to number of case laws cited at the time of hearing including that of Zaibunnisa Begum(supra), has held that for allowing deduction under section 54/54F, extent of land appurtenant to residential house has to be determined with regard to locality where residential house is situated, social status and profession of individual and other factors for proper and convenient enjoyment of residential house

31

Other cases of Relevance Cont… PLEASE NOTE

Where, however, before entering into development agreement and handing over residential property, assessee himself demolished the same, he could not claim benefit of deduction under section 54 as has been held by the High Court of Karnataka in the case of Commissioner of Income-tax, Central Circle vs. Ved Prakash Rakhra [2012] 26 taxmann.com 166 (Kar.)

32

INTEREST PAID ON AMOUNT BORROWED FOR THE PURPOSE OF INVESTMENT

INTEREST PAID ON AMOUNT BORROWED FOR THE PURPOSE OF INVESTMENT IN CAPITAL ASSET CAN ALSO BE ADDED TO THE COST OF SUCH CAPITAL ASSET AND THIS TOTAL SUM CAN BE SET OFF AGAINST SALE (TRANSFER) PRICE OF CAPITAL ASSET

The following discussion buttresses this point

(a). Interest paid during the period of holding, if the liability had been incurred for acquiring the property or holding on to the same has to be included in the cost of acquisition as was held in CIT v. Mithlesh Kumari [1973] 92 ITR 9 (Delhi) ; Addl. CIT v. K. S. Gupta [1979] 119 ITR 372 (AP) and CIT v. Maithreyi Pai [1985] 152 ITR 247 (Kar).

(b)(i) CIT v. K. Raja Gopala Rao (2001) 252 ITR 459 (Mad)

“4. Here, there can be no doubt that the cost of acquisition to the assessee was not merely the amount that he had paid to the vendors but also the cost of the borrowing made by him for the purpose of paying the vendor and obtaining the sale deed… Without the money borrowed, the assessee would not have been in a position to buy the property... Payment of consideration for the sale indisputably having been made with the borrowed funds, the borrowing directly related to the acquisition and, interest paid thereon would form part of the cost of acquisition.” (emphasis supplied)”

33

The head note of this case –as taken out from ITR-runs as under-

“The assessee purchased immovable property for Rs. 5,45,349 on December 6, 1970. On the same day he mortgaged the property to secure a loan of Rs. 4 lakhs and this loan was raised solely for the purpose of paying his vendor and for meeting the cost of the stamp duty on the sale deed. He sold the property partly in the assessment year 1973-74 and partly in the assessment year 1974-75. He claimed that for computing the capital gains the cost of execution of the mortgage and the amount of interest paid to the mortgagee till the date of sale of the property would require to be added to the purchase price for arriving at the cost of acquisition. This claim was disallowed by the Assessing Officer and the first appellate authority, but was allowed by the Appellate Tribunal. On a reference:

Held, that the cost of acquisition to the assessee was not merely the amount that he had paid to the vendor, but also the cost of the borrowing made by him for the purpose of paying the vendor and obtaining the sale deed. The fact that the mortgage was executed after the sale deed was obtained even though both the documents were signed and registered on the same day did not render the mortgage and the borrowing made thereunder irrelevant to the task of determining the cost of acquisition. As the assessee had not made the purchase with his own funds he was required to pay interest for the borrowed fund and secure the borrowing by creating a mortgage.

34

Such a mortgage could not have been created earlier as he had to first acquire title before encumbering the same. Payment of consideration for the sale having been made with the borrowed funds, the borrowing directly related to the acquisition and the interest paid thereon would form part of the cost of acquisition.

Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC) relied on.”

(ii) CIT and ITO v Hariram Hotels (P) Ltd. (2010) 229 CTR 455 (Kar)/(2010) 325 ITR 136(Kar)

“The Tribunal is justified in granting the relief to the assessee since the property has been purchased out of the loan borrowed from the Directors and any interest paid thereon is to be included while calculating the cost of acquisition of the asset..”

The head note of this case –as taken out from ITR-runs as under-

The assessee borrowed loans from some of its directors and purchased an immovable property in order to put up a hotel building but it could not materialize on account of various reasons. Ultimately, the assessee sold the property and while filing the return for computation of the capital gain, it claimed a sum of Rs. 37,45,042 towards interest paid to the directors on the loan borrowed from them in order to purchase the property. The Assessing Officer disallowed the claim made by the assessee, but the Tribunal allowed it. On appeal to the High Court:

35

Held, dismissing the appeal that since the property had been purchased out of the loans borrowed from the directors any interest paid thereon was to be included while calculating the cost of acquisition of the asset.

CIT v. Maithreyi Pai [1985] 152 ITR 247 (Karn) relied on.

(c) The ITAT Pune Bench in the case of S. Balan alias Shanmugam vs. Deputy Commissioner of Income-tax, Circle 3, Pune[2009] 120 ITD 469 (PUNE) has held that interest paid on acquisition of capital asset can be added to the cost of the capital asset.

(d). The ITAT Chennai Bench in the case of Assistant Commissioner of Income-tax, Business Circle – IV vs. C. Ramabrahmam[2012] 27 taxmann.com 104 (Chennai - Trib.) has gone to the extent of holding that an assessee can include interest paid on housing loan for computation under section 48 even though said amount has already been deducted under section 24(b) while computing income from 'house property‘

(e).The ITAT, Ahmedabad Bench in the case of INCOME-TAX OFFICER vs. Smt.PUSHPABEN B. WADHWANI[1986] 16 ITD 704 (AHD.) has held that interest paid on loan taken for construction of a flat, would form part of cost of acquisition of flat for purposes of computation of capital gains

36

CAN COMMENCEMENT OF CONSTRUCTION PRECEDE SALE OF CAPITAL ASSET?

The issue for discussion now is whether commencement of construction of new building can be made before sale. The Karnataka High Court in the case of CIT vs. Subramanya Bhat [1987] 165 ITR 571 has held that where commencement of construction of new building was started before sale of old building but completed after sale of old building the assessee is entitled to claim exemption under section 54 of the Income-tax Act. Following this decision of the Karnataka High Court, the Allahabad High Court in the case of CIT vs. Kapoor(H.K) (Deceased) [1998] 234 ITR 753 held that assessee is entitled to exemption under section 54 of the Act and commencement of construction of new building before sale of old building is immaterial. The Ahmedabad Bench of ITAT in the case of in the case of Asstt.CIT vs. Subhash Sevaram Bhavnani,[2012] 23 taxmann.94 (Ahd.) following the ratio of the decision in the case of Subramaniya Bhat (supra) has held that where construction commenced before transfer of old house and completed after transfer within the three year time-limit the assessee is entitled to benefit of deduction under section 54 of the Act. The Ahmedabad Bench allowed the entire amount invested in construction without making a distinction between amount spent before sale of the house and after the sale of the house.

37

However the Hyderabad Bench of ITAT in the case of Smt. Nimmagadda Sridevi vs. Deputy Commissioner of Income-tax , Circle-3(3), Hyderabad [2013] 33 taxmann.com 306 (Hyderabad - Trib.) has held that investment in new residential property made by assessee is not entitled to deduction under section 54F to extent the same is made before sale of existing residential property following the decision of the Tribunal in the case of Chandru L. Raheja v. ITO [1988] 27 ITD 551 (Bom.). It is to be stated at this juncture that the decision of Chandru L. Raheja(supra) which was rendered on 15th February 1988 ( relied by the Hyderabad Bench in Smt. Nimmagadda Sridevi) did not refer to the decision of the Karnataka High Court in the case of CIT vs Subramanya Bhat(supra) which was rendered on 9th June 1986.It is further to be noted that the decision of the Ahmedabad Bench of ITAT in the case of Subhash Sevaram Bhavnani,(supra) was not brought to the notice of the members of the Hyderabad Bench who decided this case.

However it is to be noted that when the construction of new house is complete before transfer of old house then the assessee is not entitled to deduction under section 54 of the Act as was held by the Gujarat High Court in the case of Smt. Shantaben P. Gandhi v. CIT 129 ITR 218.

38

In the case which arose the Delhi High Court in the case of CIT vs. Ashok Kumar Ralhan [2014] 46 taxmann.com 416 (Delhi) the assessee had sold a property in Oct. 2006 and declared capital gains of Rs. 51, 71,994.He had purchased a property in December 2004 on construction of which he claimed to have spent Rs. 59,98,451 and claimed benefit under section 54F.

The Assessing Officer denied benefit under section 54F to assessee on ground that there was no need for the assessee either to reconstruct or to renovate the purchased property as it was already fully constructed. The Commissioner (Appeals), relying on certificate issued by the architect who had stated that the earlier structure was demolished and thereafter, new construction was made on the plot, held that it was a case of new construction after demolition and, therefore, the assessee was entitled to exemption under section 54F.When the issue ultimately reached the Delhi High Court made the following observations at para.7 of its judgment-

“The word "construction" in Blacks' Law Dictionary, 6th Edition at page 312 has been defined to mean to build; erect; put together; make ready for use. The word "construct" is distinguishable from maintenance, which means to keep up, to keep from change, to preserve. The word "construction" for the purpose of the section has to be given realistic, practical and a pragmatic meaning keeping in mind the object and purpose of the provision. Section 54F is a beneficial provision as an earlier capital asset, which is sold, is replaced by a new capital asset in the form of a residential house, which should be purchased or constructed within the time period stipulated.”

39

The Delhi High Court ultimately held in favour of the assessee by dismissing the appeal preferred by the Revenue.

However the Mumbai Bench of ITAT in the case of Farida A Dungerpurwala vs. ITO in I.T.A. No.5169/Mum/2010-order dated 12th September, 2014[2014] 35 ITR (Trib.) 205(Mumbai) has held that “ booking of a flat which is going to be constructed by a builder is to be considered as a case of “construction of flat” and deduction under section 54 is available to only if the assessee constructs a new house within three years after the date of transfer”

The Mumbai Bench relied on the observations rendered by a Co-ordinate Bench in the case of CIT(Asst.) vs. Sunder Kaur Sujan Singh [2005] 3 SOT 206(Mum) for arriving at distinction between construction and purchase. However neither the decision rendered by the Delhi High Court on 22-11-2013 in the case of Ashok Kumar Ralhan(supra) nor other decisions rendered by other High Courts were brought to the notice of the members who decided this case.

One redeeming feature is that another Mumbai Bench in the case of Income-tax Officer- 21(2)(4), Mumbai vs. Saroja S. Mekal[2014] 49 taxmann.com 270 (Mumbai - Trib.)(decision dated 21st May 2014) has held that “investment made for purchase of new residential house within a year even prior to sale of capital asset raising LTCG would be entitled to section 54F exemption.”

40

LAND MAY BELONG TO ONE PERSON AND THE BUILDING TO ANOTHER PERSON

It is to be noted that land may belong to one person and building to another person. The Madras High Court as early as 01-05-1934 vide its decision in CIT v. The Madras Cricket Club [1934] 2 ITR 209(Mad) held that that in order that a person may be assessed as the owner of a building under section 9 of the Indian Income-tax Act, 1922, it is not necessary that he should also be the owner of the land on which the building stands. There are number of case laws available on this issue.

Land and building are 2 separate assets. This splitting of land and building into long-term capital asset and short-term capital asset based on the period of holding of the respective assets was recognized by the Madras High Court in the case of CIT v. Dr. D. L. Ramachandra Rao [1999] 236 ITR 51 (Mad) following the decision of the Rajasthan High Court in the case of CIT v. Vimal Chand Golecha [1993] 201 ITR 442 (Raj).The same view has been taken in a subsequent decision by the Madras High Court in the case of CIT v. T. C. Itty Ipe [2001] 249 ITR 591 (Mad).

41

The Supreme Court as early as 1967 in the case of CIT v. Alps Theatres [1967] 65 ITR 377 has held that superstructure has to be treated distinctly from the land, even where such superstructure is married to the land. The decision of the Karnataka High Court in the case of CIT v. C. R. Subramanian [2000] 242 ITR 342 (Kar) has also fallen in tune with the decision of other High Courts.

The need for treatment of land and superstructure as distinct assets was also recognized in CIT v. Citibank N. A. [2003] 261 ITR 570 (Bom) following the decision of the Madras High Court in CIT v. Dr. D. L. Ramachandra Rao [1999] 236 ITR 51 (Mad)

The Bombay High Court in the case of CIT Vs Hindustan Hotels Ltd. and ITAT(2010)-TMI-78206(Bombay High Court) has held at para.11 of its order as under-

“It is well settled by now that, unlike in England, in India, the concept of dual ownership is recognised in the sense that the land may belong to one person and the building standing thereon may belong to another. Reference may be made in that connection to the decision of the Supreme Court in Dr. K. A. Dhairyawan V/s J. R. Thakur, AIR 1958 SC 789 and a decision of the Division Bench of this Court in CIT V/s Fazalbhoy Investment Co. Pvt. Ltd. (1977) 109 ITR 802.”

42

From the order of ITAT Chennai in the case of Assistant CIT v. V. Ram Mohan [2013] 24 ITR (Trib.) 50 (Chennai)

The assessee entered into a Joint Development Agreement with a builder and was entitled to 42.5% of built-up area and transferred 57.5% of the area to the builder. It was agreed between them that the buildings would be sold at an agreed rate at the end of the construction period by the builder and the amount due to the assessee-owner would be paid after adjusting advance paid to him. The assessee claimed that gains from transfer/sale of land which was done in 2 instalments-once at the time of entering into the Joint Development Agreement and second time when building constructed by the builder was sold on behalf of the assessee- should be assessed as long-term capital gains and profits from sale of super structure should be assessed as short-term capital gains. The assessee submitted detailed workings before the authorities and the same was approved by the Tribunal. The assessee had adopted guideline valuation in respect of land transferred at the second stage with indexation benefits and the same was accepted by the Tribunal. With regard to value of superstructure the value as per the agreement was adopted as the cost of acquisition. In other words the Tribunal agreed with all the contentions of the assessee with regard to capital gain issues and held in his favour.

43

EXPENSES ON PROVIDING BASIC FACILITIES CAN BE CLAIMED AS PART OF

COST IN THE CASE OF JDA/ WHEN AN OLD HOUSE IS PURCHASED

(i) It is to be noted that in the case of JDA any expenditure incurred on providing basic facilities such as fitting of air-conditioners and electrical items, carpentry work, modular kitchen etc. can be treated as part of cost of investment in new capital asset as the house only on providing these facilities becomes (in)habitable-see Saleem Fazelbhoy vs. Deputy Commissioner of Income-tax [2007] 291 ITR (A.T.) 0169/ (2007)-106-ITD-167(Mum).

(ii) The ITAT Mumbai Bench in the case of Meher R. Surti v. ITO [2013] 27 ITR-Trib.340 (Mum) has observed that residential house means proper habitable house and not mere structure. The Tribunal in this case thereafter went on to hold that when an assessee purchases an old house and incurs expenditure on its renovation then he is entitled to exemption for expenditure made for making old house habitable under section 54 of the Income-tax Act.

(iii) The Chennai ITAT Bench in the case of S. P. Balasubramaniyam v. ITO [2013] 24 ITR (Trib.) 47 (Chennai) has held that while computing capital gains alterations to buildings has to be added as cost of improvement when assessee purchased semi-finished building and made alterations by paying to contractors deducting tax at source.

(iv) To the same effect is the decision of the ITAT Ahmedabad Bench in the case of Shrinivas R. Desai vs. Assistant Commissioner of Income-tax (OSD) [2013] 35 taxmann.com 170 (Ahmedabad - Trib.) wherein it has been held that where assessee incurred bona fide construction expenditure after purchasing new house property, additional expenses so incurred would be eligible for qualifying investment under section 54 after due verification.

44

WHETHER THE SAME FUNDS SHOULD BE USED WHILE PURCHASING NEW PROPERTY?

The next issue which normally arises is whether same funds received on sale of old capital asset (whether be residential property or other capital asset) should be utilized in purchase of new residential property. There are decisions taking stand on either way. Some of these decisions are-

(A) Those taking a favourable view are

(i) Bombay Housing Corporation vs. Assistant Commissioner of Income Tax (2002) 81 – ITD – 545 (Mum) (14.02.2001)

(ii) Prema P. Shah vs. Income Tax Officer (2006) 100 – ITD – 60 (Mum) (29.11.2005)

(iii) Nipun Mehrotra vs. Assistant Commissioner of Income Tax (2008) 110 – ITD – 520 (Bang.) (29.03.2007)

(iv) Assistant Commissioner of Income Tax vs. Dr. P.S. Pasricha (2008) 20 – SOT – 468 (Mum) (11.01.2008)

(v) Lalit Marda vs. Assistant Commissioner of Income Tax (2008) 23 – SOT – 250 (Kol) (29.02.2008)

(vi) Ishar Singh Chawla vs. Deputy Commissioner of Income Tax – 2010 – 130 – TTJ – 108 (Mum) (UO) (04.03.2010).

(vii) P. Thirumoorthy vs. Income-tax Officer [2011] 007 ITR (Trib) 0010 (Chennai) - (14-10-2010)

(viii) J.V. Krishna Rao vs. Deputy Commissioner of Income-tax, Circle 3(3), Hyderabad [2012] 24 taxmann.com 104 (Hyd.)

Those cases where a contrary view was expressed-

(i) Smt. Shasikala Rajkumar Kabra vs. Income Tax Officer (1999) 64 – TTJ – 754 (Nag.) (SMC) (31.08.1998)

(ii) Milan Sharad Ruparel vs. Assistant Commissioner of Income Tax (2009) 27 – SOT – 61 (Mum) (16.10.2008)

45

OTHER CASES OF RELEVANCE

The decision of the Madras High Court in the case of Commissioner of Income-tax vs. R.Srinivasan (2010)-235-CTR (Mad) 588(12-04-2010) is worth noticing.

The assessee, in this case, sold goodwill for a price of Rs.56 lakhs during the assessment year 2000-01 to a company in which he was a director but no consideration in cash was received by him as book adjustment was made through a journal entry by crediting the director’s account with a corresponding debit to goodwill account for the aforesaid sum of Rs.56 lakhs in the books of the company. The assessee thereafter purchased a property for a sum of Rs.56,23,740 and the registration of the property was done 18th August,2000 and therefore made a claim under section 54F of the Act.

The High Court, on appeal by Revenue, after referring to the observation of the assessing officer that “as the property has been purchased by the assessee not out of consideration received on account of transfer of the capital asset deduction under section 54F is not allowed” noted that “no such pre-condition to that effect is imposed by the provision. Only the Assessing Officer assumed that there is a pre-condition which is not contemplated by the provision. Section 54F is clear, unambiguous and plain. It is only a mere presumption and assumption of the Revenue”.

46

The High Court then referred to the oft quoted famous observations of Rowlatt J. in the case of Cape Brandy Syndicate vs.IRC(1921) 1KB 64 (at page 71) which were to the following effect-

“In a taxing statute one has to look mainly at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.”

and held at para.10 as follows-

“Section 54F encourages investment in residential house and the same is required to be interpreted in such a manner as not to nullify the object. Therefore, we are of the view that the assessee is entitled to the relief under section 54F and confirm the concurrent findings given by both the appellate authorities. The learned counsel appearing for the Revenue is also unable to furnish any material or evidence or case law or compelling reason to take a contrary view of the Tribunal”

However the Kerala High Court in the case of Commissioner of Income Tax vs.V.R.Desai (2011) 197 Taxman 52 (Ker) (26.11.2009) struck a different note.

The assessee was the managing partner of a firm which was engaged, among other things, in real estate business including construction and sale of flats. During the assessment year 1995-96, the assessee transferred certain land to the partnership firm treating it as his contribution to the capital of the firm. The firm, in turn, credited capital account of the assessee with the full value of the land. Thereafter, the assessee availed loan from bank for the construction of a house and within three years from the date of transfer of land to the firm got the new house constructed.

47

In the return filed for the relevant assessment year, the assessee claimed exemption on the capital gains arising from transfer of the land under section 54F of the Act. The assessee succeeded in the second appeal filed before the Tribunal

The Revenue filed an appeal before the High Court. This is what the High Court held at para. 3 of its judgment

“3. On going through section 54F, particularly sub-section (4), we are of the view that in order to qualify for exemption on capital gains, before the last date for filing return, the net sale consideration should have been deposited in any bank account specified by the Government for this purpose. In fact, the requirement of sub-section (4) of section 54F is that the assessee should produce along with the return, proof of deposit of the amount under the specified scheme in a Nationalised Bank. Admittedly, the assessee allowed the firm to which the property was transferred to retain and use it as a business asset and towards consideration he got only credit of land value in his capital account. In other words, sale consideration was not received by the assessee in cash or deposited the same in terms of clause 4 of section 54F with any Nationalised Bank or institution. Consequently the assessee did not have the sale proceeds available for investment in terms of scheme under section 54F(3) of the Act. In our view, in order to qualify for exemption under section 54F(3), the assessee should have first deposited the sale proceeds of the property in any bank account and the construction of the house to qualify for exemption under section 54F should have been completed by utilising the sale proceeds also available with the assessee. In this case, though the assessee constructed new building within the period of three years from the date of sale, it was with funds borrowed from HDFC. In our view, the assessee is not entitled to exemption under section 54F because the assessee neither deposited the sale proceeds for construction of the building in the bank in terms of sub-section (4) before the date of filing returns nor was the sale proceeds utilised for construction in terms of section 54F(3) of the Act. So much so, the assessee was not entitled to claim exemption on capital gains under section 54F of the Act which the Assessing Officer rightly declined.”

48

The High Court also held that as the exemption claimed under section 54F of the Act was prima facie inadmissible the assessing officer was justified in making disallowance under section 143(1) (a) of the Income-tax Act.

POINTS TO BE NOTED

(i) It is therefore clear that barring two Tribunal decisions and one High Court decision there is a positive view in favour of the tax payer as the object of introduction of beneficial provisions like sections 54 and 54F of the Act is to aid the tax payer. However there is no straight jacket formula to be adopted in each case. The peculiarities of each case have to be studied in the light of the facts obtaining in such case and they to be properly analyzed before applying case laws. In other words the facts of the case obtaining in a given situation should be compared with the facts that arose in earlier decisions and the case should be properly presented with full facts before the Assessing Officer as it will help the assessee either at the first appellate stage or before the Tribunal when the issue comes up for hearing, in case the assessing officer does not agree with the views projected in that case.

49

(ii) The fact that sections 54 and 54 F of the Act are beneficial provisions has also been recognized by the Punjab &Haryana High Court in the case of Commissioner of Income-tax-II, Chandigarh vs. Ms. Jagriti Aggarwal [2011] 15 taxmann.com 146 (Punjab and Haryana) where following the decision of the Karnataka High Court in the case of Fathima Bai vs. ITO [2009] 32 DTR 243(Kar.) and CIT vs. Rajesh Kumar Jalan [2006] 286 ITR 274/157 Taxman 398 (Gau.) the Court has held that for purposes of section 54 of the Act due date for furnishing return of income as provided under section 139(1) of the Act is subject to extended period as provided under sub-section (4) of section 139 of the Act. The Tribunal Benches following these decisions have also held in favour of the assessees on this issue.

(iii) Following the decision of the Madras High Court in the case of CIT vs. Sardarmal Kothari reported in [2008] 302 ITR 286(Mad) [which has been affirmed by the Supreme Court vide preliminary hearing in CC Nos.3953-3954/2009 decided on 6.4.2009] the Karnataka High Court in the case of Commissioner of Income-tax vs. Sambandam Udaykumar by judgment dated 15th February 2012 and reported in [2012] 19 taxmann.com 17 (Karnataka) has held that if assessee has invested money in constructing a residential house, benefit under section 54F cannot be denied merely because construction is not complete in all respects or house was not fit to be occupied within stipulated period of 3 years.

50

So it can beneficially be said that if proper care is taken in analyzing the facts of the case on hand and proper advice is tendered before occurrence of any event such as sale or transfer of house property or any other capital asset lot of litigations could be avoided and in case of litigation the required benefit can be achieved at the second appeal stage itself [(i.e.) before the Income Tax Appellate Tribunal].

(iv) The Pune Bench of ITAT in the case of Chetan Vithal Tupe vs. Assistant Commissioner of Income Tax (2011) 12 taxmann.com 125 (Pune) [31-05-2011] has held that when there is adjustment by way of book entries without physical receipt of sale consideration –i.e. in cases of exchange of property- beneficial provisions of 54F read with section 54 would be applicable.

51

THE FOLLOWING CASES OF IMPORTANCE MAY BE GONE THROUGH IN DETAIL

(i) Where long-term capital gain arose from sale of two distinct and separate assets, viz., residential house and plot of land, and assessee had invested entire capital gain in purchase of a new residential house, he was entitled to claim exemption under sections 54 and 54F of the Income-tax Act. It was so held in Venkata Ramana Umareddy vs. Deputy Commissioner of Income-tax, Circle-3(3), Hyderabad [2013] 32 taxmann.com 157 (Hyderabad - Trib.)

(ii) Where two flats were sold in two different years and capital gain arising from sale of both flats was invested in one residential house, exemption under section 54 would be available. It was so held in the case of Deputy Commissioner of Income-tax, Central Circle-32 vs. Ranjit Vithaldas [2012] 23 taxmann.com 226 (Mum.)

(iii) The issue which arose before ITAT,Chennai Bench in the case of Ifthiqar Ashiq vs.ITO-in ITA No.232/MDS/2013-Order dated 11th June 2013 was whether the assessee was entitled to claim exemption under section 54F of the Act if he was owner of a residential as well as commercial property on the date of transfer of landed property. It was argued on behalf of the assessee that though the income was returned under the head income from house property it was still a commercial property and in support of this submission placed reliance on the rental agreement entered into with the tenant, water supply bills, planning permit issued by the Madras Metropolitan Development Authority etc.

52

It was also submitted before the Tribunal that rental income from both residential and commercial properties have to be declared only under the same head “Income from house property” and both the lower authorities were of the opinion that as income from both the properties was returned under the same head the other property could not be considered as a commercial property. The Tribunal referred to the provisions of section 22 of the Act and observed that no distinction has been provided between rental income from house property and rental income from commercial property. The Tribunal after observing that the term ‘building’ used in section 22 is not qualified by the word “commercial” and after referring to the decision of the Supreme Court in the case of Shambhu Investment P. Ltd. v. Commissioner of Income-tax [2003] 263 ITR 0143 for the proposition that income from letting out of commercial buildings/warehouses/factory premises is assessable under section 22 of the Act, held in favour of the assessee

(iv) The Hyderabad Bench of ITAT in the case of Sri Prasad Nimmagadda vs. Deputy Commissioner of Income-tax, (International Taxation)-II, Hyderabad [2013] 32 taxmann.com 5 (Hyderabad.) has held that where amount of capital gain claimed as exempt under section 54 is not utilised in construction of residential house within 3 years, it will be charged to capital gain in year in which period of 3 years expires; however, exemption already granted shall not be denied.

53

However while calculating cost inflation index the indexation point pertaining to the year in which capital gains arose should be adopted and not in the later year in which the exemption is withdrawn as was decided by the Kerala High Court in the case of CIT vs. Thomy P.Chakola [2011] 200 Taxman 74. The Chennai Bench in the case of Joint Commissioner of Income-tax (OSD), Company Circle-I(1), Chennai vs. B. Shivkumar[2012] 27 taxmann.com 305 (Chennai) echoed the same views.

(v) The Mumbai Bench of ITAT in the case of Kishore H. Galaiya vs. Income-tax Officer, Ward 8(2)(3) [2012] 24 taxmann.com 11 (Mum.) has held that booking of flat with a builder, is a case of 'construction' for purpose of claiming exemption under section 54; if construction is complete within 3 years. Section 54 exemption would be available even if possession was not taken within three years. It is to be noted that the Delhi High Court in the case of CIT v. Smt. Brinda Kumari [2002] 253 ITR 343/[2001] 114 Taxman 266 has held that when amount was advanced to builder for specific purpose of construction of flats in new building and the Tribunal had also held that construction could be treated as construction by the assessee that finding of fact was binding on the Court and the Tribunal was right in holding that the assessee was entitled to exemption under section 54(1).

54

(vi) The assessee had claimed abatement of capital gains for reinvestment in a residential house property under section 54F but could not complete construction within the time limit because of the restraint order from the court. The assessee had however purchased the plot well within the time but the construction was impossible in view of the court order. In fact, the entire sale consideration was utilised by the assessee in purchase of the land itself. The condition that the assessee has not completed construction because of the impossibility of compliance, it was held by the Tribunal, should not stand in the way of relief in the circumstances of the case as was decided by the Tribunal in Smt. V. A. Tharabai v. Deputy CIT [2012] 14 ITR (Trib) 15 (Chennai).

(vii) Where assessee purchased old residential house and demolished it within 2 years, deduction under section 54F would be withdrawn- Assistant Commissioner of Income-tax-21(3) vs. Dilip Manhar Parekh [2013] 31 taxmann.com 386 (Mumbai - Trib.)

(viii) The ITAT Chennai Bench in the case of Asstt. CIT v. Ms. Sultana Nazir [2012] 21 taxmann.com 385 (Chennai - Trib.) has held that when an assessee has availed of exemption under section 54F by acquiring a residential house and, subsequently, transfers the same within three years and acquires another residential house, the forfeiture of exemption for the sale can be nullified by the subsequent investment in the second residential house.

55

(ix) The Jaipur Bench of ITAT in the case of Assistant Commissioner of Income-tax, Circle-2, Ajmer vs. Om Prakash Goyal [2012] 24 taxmann.com 67 (JP.) has held that residential house constructed on agricultural land would be eligible for exemption under section 54F

(x) The Kolkata Bench of ITAT in the case of Deputy Commissioner of Income-tax, Circle-8, Kolkata vs. Rajeev Goyal [2012] 22 taxmann.com 34 (Kol.) has held that in case of clubbing of income of minor child, deduction under section 54EC is to be allowed on minors' income from LTCG separately and only net income is to be clubbed.

(xi) The Kerala High Court in the case of Pushpa vs. Income tax Officer [2013] 31 taxmann.com 33 (Kerala) has held that section 54F does not provide for exemption in case of renovation or modification of an existing house and what gains exemption is only construction of a new house. The decision of the Madras High Court in the case of CIT vs.Pradeep Kumar [2007] 290 ITR 90 was followed.

(xii) The ITAT Mumbai Bench in the case of Jatinder Kumar Madan vs. Income-tax Officer, Ward 19(1)(3) [2012] 21 taxmann.com 316(Mum)has held that acquisition of new flat under a development agreement in exchange of old flat amounts to construction of new flat for purpose of claiming deduction under section 54 of the Income-tax Act.

56

(xiii) The Mumbai Bench of ITAT in the case of Assistant Commissioner of Income-tax-19(2) vs. Jaimal K. Shah [2012] 24 taxmann.com 91 (Mum.) has categorically held that where assessee land owner, under a development agreement, received some flats as consideration and later on sold same, period of holding of such flats is to be considered taking into account date of possession of flats and not date of development agreement. Though this decision runs counter to the decision of the Kolkata Bench in the case of Income-tax Officer vs.Vikash Behal and reported in (2010)-36-DTR (Kol) (Trib) 385, it is submitted with respect, that this decision of the Kolkata Bench requires reconsideration by a Special Bench. The Kolkata Bench in this case held that while calculating period of holding in respect of sale of flats which were allotted by the builder as a result of JDA the period of holding in respect of such flats should be reckoned from the (earlier) date of handing of land for development. The Kolkata Bench had no occasion to consider an earlier decision given by a co-ordinate bench in the case of Statesman Ltd v. Assistant Commissioner of Income-tax, Circle-1, Kolkata [2008] 114 ITD 595 as it was not cited at the time of hearing nor was it noticed by the Bench. In the earlier case capital gain was split up into long term for land and short-term for building depending upon the period of holding.

(xiv) The Chennai Bench of ITAT in the case of Asstt. CIT Vs. Dr. S. Balasundaram (ITAT – Chennai), ITA No. 1832/Mds/2012,( Date of pronouncement: 27.05.2013 ) has held that benefit under 54B of the Act can be claimed even if new agricultural land is purchased prior to transfer of previously owned agricultural land.

57

(xv) With regard to dates which are relevant the catchwords from the decision of the Punjab & Haryana High Court in the case of Smt. Shail Moti Lal vs. Commissioner of Income-tax, Chandigarh [2013] 35 taxmann.com 46 (Punjab & Haryana) may be gone through-

Section 54, read with section 2(47), of the Income-tax Act, 1961 - Capital gains - Profit on Sale of Property Used for Residence - Assessment year 2005-06 - Appellant entered into agreement to transfer rights in property 'A' on 27-12-2002 after receipt of earnest money of Rs. 15 lakhs - Sale deed was executed on 24-9-2004 when entire sale consideration of Rs. 1.32 crores was received - Appellant purchased property 'B' on 30-4-2003 and claimed deduction under section 54 - Whether since there was delivery of possession and receipt of entire sale consideration was on date of execution of sale deed on 24-9-2004, it was date of transfer of property A and date of agreement to sell on 27-12-2002 could not be treated as date of transfer of this property - Held, yes - Whether, resultantly, date of purchase of property B being prior to one year of transfer of right in property A, assessee was not entitled to deduction under section 54 - Held, yes

58

(xvi) The Mumbai Bench of the ITAT in the case of Rajesh Keshav Pillai vs.ITO (2011)-44-SOT-617(Mum) has held that if there are sales of more than one residential house, exemption has to be computed with reference to each set of sale of residential house and the corresponding investment in one residential house. The Tribunal went on to hold that aggregation is not permitted and the principle of one to one has to be followed meaning thereby that surplus (difference between investment in new house property and capital gains), if any, arising out of sale of one residential property cannot be adjusted against deficit (difference between capital gains and investment in new house property) arising out of sale of other property.

(E) If provisions of section 54EC are analyzed then investment in capital gain bonds has to be made within a period of 6 months from the date of receipt. However the Kolkata Bench of ITAT in the case of Chanchal Kumar Sircar vs. ITO (2012) 18 taxmann.com 304 (Kol) has held that in case of receipt of sale consideration in instalments, period of six months for claiming deduction under section 54EC has to be calculated from date of actual receipt of amount. The Pune Bench of ITAT in the case of Mahesh Nemichandra Ganeshwade vs. Income-tax Officer [2012] 21 taxmann.com 136 (Pune) has also echoed the same views.

59

The following cases may also be noted-

(i) It is even possible to invest in capital gain bonds out of any advance/earnest deposit (to be) received from the builder even before transfer of property as specified in Section 2(47)(v) of the Income Tax Act. It has been so held by the High Court of Bombay in the case of Mrs. Parveen P. Bharucha vs. Deputy Commissioner of Income-tax, Circle 2, Pune [2012] 28 taxmann.com 274 (Bom.). In the light of this decision it can therefore be stated, that the order of the Ahmedabad Bench of ITAT in the case of Smt. Dakshaben R. Patel vs. Assistant Commissioner of Income-tax, Circle-2(1), Baroda which held that where assessee purchased REC Bonds prior to date of sale of property, exemption under section 54EC was not available, is no longer good law.

(ii) The High Court of Bombay in the case of Commissioner of Income-tax, Central III, Mumbai vs. Cello Plast[2012] 24 taxmann.com 111 (Bom.) has held that if bonds of assessee's choice are not available throughout period of six months as provided under section 54EC, time to invest in bonds would get automatically extended till bonds are available in market. In other words extension of time is available in such cases

60

(iii) When no evidence was forthcoming to show that assessee had ever applied for bonds but due to their non-availability, failed to invest within time, the assessee was not entitled to deduction under section 54EC of the Income-tax Act.-It has been held so by the Chennai Bench of ITAT in the case of Smt. Anuradha Venkatesan vs. Income-tax Officer, Business Range 1(1), Chennai [2013] 29 taxmann.com 68 (Chennai - Trib.)

(iv) Deduction under section 54EC cannot be denied on ground that assessee has availed exemption under section 54F also in respect of a part of capital gains- Assistant Commissioner of Income-tax, Cr. 23(2), Mumbai vs. Deepak S. Bheda[2012] 23 taxmann.com 159 (Mum.)

(v) The Ahmedabad Bench of ITAT in the case of Aspi Ginwala, Shree Ram Engg. & Mfg. Industries vs. Assistant Commissioner of Income tax, Circle-5, Baroda [2012] 20 taxmann.com 75 (Ahd.) has held that where investment in eligible bonds was temporarily closed and by time it was reopen time limit of six months had expired, investment made on date of reopening was eligible for exemption under section 54EC

61

(vi) The Mumbai Bench of ITAT in the case of Yahya E. Dhariwala vs. Deputy Commissioner of Income-tax, Circle-15(2) [2012] 17 taxmann.com 159 (Mum.) has held that for purpose of section 54EC, period of six months has to be reckoned from end of month in which transfer took place. The Tribunal held that in accordance with language in section 54EC six months period should be reckoned from end of month in which transfer took place. The Mumbai Bench in its order dated 19th June 2013-[2013]36 CCH 167(Mum) Trib. in the case of Aquatech Engineers vs. Additional CIT –ITA No.8029/Mum/2011 has echoed the same views.

The Special Bench of ITAT in the case of Alkaben B. Patel vs. Income-tax Officer, Ward -14(2), Ahmedabad[2014] 43 taxmann.com 333 (Ahmedabad - Trib.) (SB) adopting the reasoning which found favour with ITAT Mumbai Bench in the case of Yahya E. Dhariwala(supra) has held that time limit of 'six months' in sec 54EC means 'six British Calendar months' in view of the General Clauses Act, 1897.The Special Bench also observed that in the absence of any definition of the word 'month' in the Act, the definition of the General Clauses Act,1897 will be applicable. Legislature in its wisdom has chosen to use the word 'month' and this was done keeping in view the definition in section 3(35) of the General Clauses Act, 1897. The Special Bench rejected the Revenue's interpretation that 'month' should be understood in the ordinary sense-i.e. the month is a period from a specified date in a month to the date numerically corresponding date in the following month

62

The following observations from the above referred decision of the Special Bench are worth noticing-

“The subtle question is that whether the word "month" refers in this section a period of 30 days or it refers to the months only. Section 54EC, prescribes that an investment is required to be made within a period of six months. Whether the intention of the legislator was to compute six calendar months or to compute 180 days. To resolve this controversy, one has to be guided by a decision of Allahabad High Court pronounced in the case of CIT v. Munnalal Shrikishan [1987] 167 ITR 415 where answering the dispute in respect of law of limitation the Court has clearly held that there is nothing in the context of section 256(2) to warrant the conclusion that the word 'month' in it refers to a period of 30 days, therefore, refers to six months in section 256(2) is to six calendar months and not 180 days. [Para 6]”

(F) Capital Gains vis-à-vis sections 27 and 64 of the Act

When capital assets are transferred to spouse for inadequate consideration so as to be caught by the provisions of section 27 of the Act and the spouse transfers the capital asset the resultant capital gains will be included only in the total income of the transferor. It was so held by the Madras High Court in the case of Commissioner of Income-tax vs. Ganesan (G.S.) [1995] 215 ITR 0334.

63

The Madras High Court opined that any provision subject to another provision is understood to incorporate the other provision and to exclude matters which fall under the said provision or to expand and provide for matters in addition to what is found in the said provision and a provision subject to the other provisions of the Act or any other law necessitates a combined reading of such provisions. The High Court, reversing the decision of the Tribunal, held that proviso to section 53 (now deleted) of the Income-tax Act which placed restriction with regard to ownership of more than one property at that time, would be applicable to the donor even after transfer of property for inadequate consideration. In other words the exemption under section 53 of the Income-tax Act was denied as the assessee-transferor had one more property disentitling him to exemption even though the transferee (wife) had no property other than the property sold.

It is to be noted that the assessee-transferor is otherwise entitled to claim all deductions as are applicable in accordance with provisions of sections. 22 to 27 of the Income-tax Act as was held by the Madras High Court in the case of Siddique (S.M.A.) v.CIT (1984)-148-ITR-307

However in the following cases it has been held that where there is no transfer of property for inadequate consideration or an intention to live apart and the assessee, either being a minor or spouse, earns income by way of capital gains generated out of his /her own assets then the minor or the spouse is entitled separate deduction under section 54F or section 54 of the Income-tax Act.-

64

(a) Assistant Commissioner of Income-tax VS. Madan Lal Bassi [2004] 88 ITD 557 (CHD.)

(b) Joint Commissioner of Income-tax, S.R.44 v. Govind Rohira alias Srichand Rohra [2005] 95 ITD 77 (MUM.)

(c) Deputy Commissioner of Income-tax, Circle-8, Kolkata vs. Rajeev Goyal [2012] 22 taxmann.com 34 (Kol.)/[2012] 52 SOT 335 (Kol)

But in all these cases, as stated earlier, there was no transfer of assets. In fact in the case of Assistant Commissioner of Income-tax vs.. Madan Lal Bassi(supra) one of the points which weighed favourably with the Tribunal was that there was no transfer by the assessee-father to the minor child for inadequate consideration and the income of the minor was being added in the income of the father as a matter of policy and not on account of any evasion or avoidance of tax. This is what the Tribunal observed at para.17 of its order by distinguishing the decision of the Madras High Court in the case of CIT v. G.S. Ganesan (supra)

65

“17. The ld. D.R. also relied on the decision of Hon'ble Madras High Court in the case of CIT v. G.S. Ganesan [1995] 215 ITR 334. In that case, capital gain arising on transfer of assets which were earlier received in transfer by wife from her husband without adequate consideration was held to be taxable in the hands of the assessee husband without allowing benefit of section 53 of the Act as the husband held property worth more than Rs. 50,000 on the relevant date.”

So no attempt should be made to transfer a portion of the property by the assessee to his wife or vice versa for inadequate consideration as such a transaction would be hit by the decision of the Madras High Court in the case of Commissioner of Income-tax vs. Ganesan (G.S.)(supra) in the sense that the transferee –either husband or wife as the case may be- will not be able to claim deduction under section 54EC of the Act.

66

G.SECTIONS 195 and 197 OF THE ACT

As per provisions of section 195 any payment made to an NRI attracts tax deduction @30% unless the NRI gets a certificate under 197(1) from the Income-tax Officer, International Taxation directing the transferee (payer) to deduct tax at the appropriate tax. Though the transferee (payer) can make an application under section 195(2) of the Act to the Income-tax Officer, International Taxation if he (the payer) is of the opinion that the whole payment made to an NRI would not be chargeable to tax, this seldom happens as the payer would not like to take any chance.

Even an NRI purchaser was not spared by ITAT Bangalore Bench in the case of Syed Aslam Hashmi vs. Income-tax Officer, (International Taxation), Ward-2(1) [2012] 26 taxmann.com 6 (Bangalore - Trib.). The ITAT Bangalore Bench in this case has categorically held that if the NRI purchaser fails to take recourse to section 195(2) of the Act then he would be required under section 195(1) to deduct tax on entire sale consideration payable to the NRI seller and in the absence of such deduction he would be treated as an assessee-in-default exposing himself to interest under section 201(1A) of the Act on the amount of tax not deducted. So it is better to adopt a safe and cautious approach.

67

The ITAT (Chennai Special Bench) in the case of Income-tax Officer vs. Prasad Production Ltd. [2010] 003 ITR (Trib) 0058 has summarized the various situations that can arise for the applicability of section 195 as under-

(a) In case of a bona fide belief by the payer that no part of the payment bears income character, it is not mandatory for him to undergo the procedure of section 195(2) before making any payment to a non-resident. However, if the Department is of the view that the payer ought to have deducted tax at source, it will have recourse under section 201 of the Act. Thus, here the interest of the Revenue is protected. In the proceedings under section 201, the Assessing Officer will determine the portion chargeable to tax according to the provisions of the Act and determine the tax payable by the payer. The Assessing Officer is bound to determine the income chargeable to tax in accordance with the provisions of the Act. In any case, the liability of the payer cannot exceed that of the payee and if the payer is dissatisfied with the order under section 201, he will have recourse to appeal against the said order. Thus, the interests of both the parties are protected.

68

(b) If the payer believes that whole of the payment is chargeable to tax and if he deducts and pays the tax, no problem arises.

(c) If the payer believes that only a part of the payment is chargeable to tax, he can apply under section 195(2) for deduction at appropriate rates and act accordingly. No interest is jeopardised.

(d) If the payer believes that a part of the payment is income chargeable to tax, and does not make an application under section 195(2), he will have to deduct tax from the entire payment. Thus, the interests of the Revenue stand protected.

(e) If the payer believes that the entire payment or a part of it is income chargeable to tax and fails to deduct tax at source, he will face all the consequences under the Act. The consequences can be the raising of demand under section 201, disallowance under section 40(a)(i), penalty, prosecution etc. The interests of the Revenue stand protected.

(f) If the payee wants to receive the payment without deduction of tax, he can apply for a certificate to that effect under section 195(3) and if he gets the certificate, no one is adversely affected.

(g) If the payee fails to get the certificate, he will have to receive payment net of tax. No interest is jeopardised.

69

WHEN NRI IS THE SELLER

You in this write-up refers to an NRI

The following can be stated as ACTION PLAN for NRI (transferor-seller) in this regard

Apply in Form No.13-the prescribed form to be signed by you and submit the same to the Income-tax Department, International Taxation Section Chennai along with the following documents.

a. Copy of all parent documents – the documents through which the property was purchased/ inherited through WILL/devolved through Settlement or Family Arrangement etc.

b. Details of any improvements / additions made in respect of the property with copies of bills etc.

c. Copy of the proposed sale agreement/Joint Development Agreement

d. Copies of returns for the last 5 years.

e. Copy of your PAN card.

70

f. Copy of your passport for the last 8 years to substantiate about your residential status-i.e.-You were a non-resident during these years.

g. Copy of the Capital Gain workings-to be prepared by your Chartered Accountant (at his end) to indicate the capital gain and as to how the capital gain tax (liability) would be discharged.

h. An authorization in favour of the Chartered Accountant to present these documents and obtain deduction certificate at an appropriate rate – certificate from the Income Tax Officer, International Taxation. In this case the certificate may be issued for withholding (deduction) of tax by the purchaser @ 20.6%. (In the absence of a certificate tax withholding would be @ 30.9%)

All these documents shall be filed by the Chartered Accountant along with an affidavit signed by you with regard to capital gain workings and his letter and the Chartered Accountant will attend to this matter of processing at the Income Tax Office, International Taxation Section and will normally obtain the certificate within 20 to 25 working days from the date of application made before the Income Tax Officer, International Taxation.

71

The Income-tax Officer, through this certificate, would issue necessary instructions to the transferee-purchaser with regard to withholding of tax on behalf of you as the transferor-seller-i.e.-at what rate tax has to be deducted and remitted on behalf of the transferor-seller by the transferee-purchaser.

The intention of obtaining a certificate from the Income Tax Department is to save withholding of tax at full rate of 30% by the purchaser (of residential property). By undertaking this exercise the final assessment in your case will be very smooth as the Income Tax Department would have gone through all the documents submitted by you before issuing the necessary certificate now.

Adhere to the following for smooth completion of the work in entirety.

(a) Chalk out a plan with meticulous care with the help of a competent professional and adhere to that schedule without any deviation.

(b) Kindly preserve all documents right from purchase of property in respect of

original asset including improvements. Documents to be preserved include

income-tax certificate (to be) obtained (now) by NRI from Income-tax Officer,

International Taxation.

72

All necessary/required documents have to be filed with the income-tax returns in the year in which the property is sold/Jointly developed and in the year in which new property is purchased if both fall in different financial years. If investment in new property is(to be) made for taking advantage of provisions of section 54 of the Income-tax Act then preserve a copy of the purchase document carefully and if any basic facilities are required to be provided preserve such bills as the cost of such basic facilities can be taken as part of cost of investment in new property. If investment in Capital Gain Bonds is required to be made kindly preserve proof for having made investment in Capital Gain Bonds.

(c) Kindly preserve all bills pertaining to transfer of property and these bills include tickets purchased by NRI on his /her trip to India to sign the sale deed in person. Brokerage slip/bill given by the broker has to be preserved as this is an expenditure which can be claimed against sale consideration. Advocate fees is an allowable deduction.

(d) Ensure filing of income-tax returns in the year of transfer of old property and subsequent years

(e) Kindly do not hesitate to take professional advice at the time of need from a Competent Professional.

73

H.TDS ON PURCHASE OF IMMOVABLE PROPERTY (SEC. 194-IA)

Section 194-IA has been inserted with effect from June 1, 2013

• Who is responsible for tax deduction – Any person (being a transferee) responsible for payment (other than the person referred to in section 194LA) to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land in rural areas in India), is liable to deduct tax at source under section 194-IA.

• Time of deduction – Tax shall be deducted at the time of payment (in cash or by issue a cheque or drafts or by any other mode) or at the time of giving credit to the transferor (in the books of account of the transferee), whichever is earlier.

• Rate of tax deduction – Tax is deductible at the rate of 1 per cent. If, however, the recipient does not furnish his PAN to the deductor, tax will be deducted (by virtue of section 206AA) at the rate of 20 per cent.

• Threshold limit – No tax is deductible where the consideration paid or payable for the transfer of an immovable property is less than Rs.50,00,000/-.

74

• Provisions of TAN not applicable – Provisions of section 203A (pertaining to TAN) shall not apply in respect of tax deducted under section 194-IA.

Other points – The following points should be noted –

1. The above provisions of section 194-IA are not applicable if a person acquires rural agricultural land in India. For this purpose, the definition of section 2(14) will apply

2. Immovable property means any land or any building or part of the building. Such property may be situated in India or may be situated outside India. If the transferor is resident in India, TDS provisions of section 194-IA will apply. However, as mentioned earlier, if a person acquires an agricultural land in a rural area in India, TDS provisions will not be applicable.

75

FURTHER POINTS TO BE NOTED

1. These provisions are not applicable in the case of sale of residential and landed properties to Non-Resident Indians who are covered under provisions of section 195 read with section 197 of the Income Tax Act. However these provisions are applicable if Non-Resident Indians sell property to Resident Indians.

2. As provisions stand today there is no way by which a certificate can be obtained from the Jurisdictional Assessing Officer with regard to less deduction or nil deduction. In other words tax deduction has to be made statutorily (compulsorily) by the purchaser of the property or a developer in the case of Joint Development of Property.

3. It is to be noted that the threshold limit of Rs.50 lakhs is applicable property wise irrespective of share of the sellers in such property.

4. Section 194LA deals with payment of compensation on acquisition of certain immovable property.

5. The tax deducted at source has to be remitted to the credit of the Central

Government before the 7th of the following month.

76

4.TIPS FOR TAX PLANNING

(a) By resorting to genuine Family Arrangement no transfer as contemplated in section 2(47)(v) is involved and there is no question of any liability to capital gains tax. A family arrangement is an agreement between members of the same family, intended to be generally and reasonably for the benefit of the family either by compromising doubtful and disputed rights or by preserving the family property or the peace and security of the family by avoiding litigation or by saving its honour (Halsbury’s Laws of England, 4th Edn. Vol 16, para 301). But where share in property is released against receipt of cash, instrument of release cannot be called a family settlement and would be covered by term 'transfer' and exigible to capital gains tax as was held by the Chandigarh Bench of ITAT in the case of Mrs. Lalitha Rathnam vs.ITO [2013] 35 taxmann.com 37(Chandigarh). However it has been held by the Punjab & High Court in the case of CIT vs. Ashwani Chopra [2013] 30 taxmann.com 299 (P& H) that amount of owelty i.e. compensation deposited to settle inequalities in partition, represents immovable property and would not attract capital gain tax.

77

(b) When property to be transferred by an assessee is very extensive with huge value then the assessee can settle the property on his family members( refer to the definition of relative appearing in section 56(2) (vii) of the Act) -may be the ultimate beneficiaries on the happening of the event- and all these beneficiaries and the assessee can jointly enter into JDA or sale agreement as the case may be for transfer of the property by which capital gains would get distributed and each one of them will be entitled to claim basic exemption and available benefits under sections 54/ 54F and 54EC of the Act

(c) Retaining Life Interest in the property by the assessee-settlor when property is settled on relatives is one way by which settlor’s interest in the property is protected in the sense that the property cannot be sold without his consent and at the same time capital gain gets distributed and when the property is ultimately sold a portion of sale consideration can be allocated to the assessee towards life interest and exemption provisions of section 54F and 54EC can be availed in respect of capital gains pertaining to life interest arising out of transfer of property. In this regard the decisions of Madras High Court in the case of CIT vs. C.V.Soundararajan [1984] 150 ITR 80(for understanding what is life interest) and that of the ITAT Pune Bench in the case of Smt. Nargis A. Irani vs.ITO[2006] 102ITD 297(for calculation of life interest) may be referred to.

78

(d) Sometimes an assessee may have to give guarantee to bank or other financial

institutions for his close friends and/or relatives for proper discharge of loan taken

by them and guarantee may be in the form of shares and securities or immovable

property. If by misfortune such persons do not repay the loans and the financial

institution disposes of the property towards satisfaction of the amounts owed to it

and no amount is received by the assessee out of such guaranteed property, then

he cannot be held liable to pay capital gains tax. The Delhi Bench of ITAT in the

case of Addl.CIT vs. Glad Investments (P) Ltd.[2006] 102 ITD 227 has held that

when no consideration is received by or accrues to the assessee on sale of assets

no liability to pay capital gains tax arises.

(e) The Kolkata Bench in the case of Chanchal Kumar Sircar vs. ITO (supra) has

held that in case of receipt of sale consideration in instalments, period of six

months for claiming deduction under section 54EC has to be calculated from date

of actual receipt of amount. Likewise tax planning done in the case of Ifthiqar

Ashiq (supra) explores the possibilities of converting residential properties into

commercial properties to get the embargo placed by explanation to section 54F

on the number of residential property that can be held by an assessee at the time

of transfer of any other capital asset.

79

5. NOTE OF CAUTION

It is important to bear in mind the following observations of the Supreme Court in

the case of CIT v. Sun Engineering Works (P.) Ltd. [1992] 198 ITR 297/64 Taxman

442 -

"It is neither desirable nor permissible to pick out a word or a sentence from the

judgment of the Supreme Court divorced from the context of the question under

consideration and treat it to be the complete law declared by the court. The

judgment must be read as a whole and the observations from the judgment have

to be considered in the light of the questions which were before the court. A

decision of the Supreme Court takes its colour from the questions involved in the

case in which it is rendered and, while applying the decision to a later case, courts

must carefully try to ascertain the true principle laid down by the decision."

80

There is no – in fact there can be no- straight jacket formula for any given (ideal

or otherwise) situation as factual happenings may differ and even one small

difference in facts may completely alter the ready made answer situation. Basic

principles taught to us indicate that before analyzing a live situation and

comparing it with an assumed situation or a decided case-law first find out as to

the facts based on which earlier case was decided and what are the facts

obtaining in the live situation and what was the point of law then and what is the

point of law now-by point of law what is meant is whether any higher authority

has decided the case other way after earlier ruling was given or a decision has

been given by a jurisdictional High Court now either way or has there been any

amendment subsequent to date of last decision or is there any change in

assessment year meaning thereby change in law? The point to be considered is –

Any change in the thinking of the persons who matter most-the judicial

authorities? Kindly note that what is being expressed in blogs is only opinion but

what is being given in real situation is what can be termed as “procedure” which

has more value than opinion as the “procedure” to be adopted in an actual live

case is normally/usually rendered after a deep study of facts presented and law

applicable to the given situation.

81

S.KRISHNAN

CHARTERED ACCOUNTANT

NO.2, C.V. RAMAN ROAD

ALWARPET, CHENNAI – 600 018

TEL. NO.044-24671175

TELEFAX.044-24671437

MOBILE 098407 01449

E-MAIL Ids: [email protected] and [email protected]

An Interaction With CA.S.Krishnan 1. 1. WHAT IS CAPITAL GAIN? Capital gain is the difference between...

Documents

Transcript of An Interaction With CA.S.Krishnan 1. 1. WHAT IS CAPITAL GAIN? Capital gain is the difference between...