IN THE ITAT CHANDIGARH BENCH ‘B’
IT APPEAL NO. 655 (CHD.) OF 2011
[ASSESSMENT YEAR 2008-09]
NOVEMBER 27, 2012
T.R. Sood, Accountant Member
This appeal is directed against the order passed by the CIT(A)-II, Ludhiana, dated 30.5.2011.
2. In this appeal the assessee has raised following grounds:
“1. That the ld. CIT(A)-II has erred in rejecting the claim of the appellant without appreciating the facts of the case and without application of mind.
2. That the ld. CIT(A)-II acted with great enthusiasm in rejecting the appeal of appellant.
3. That he ld. CIT(A)-II has erred in holding that the capital gains claimed exempt u/s 54F is to assessed in the year the claim is made and not in the year when the time for completion of house expires i.e. period allowed for making the investment in construction of residential house on account of non fulfillment of the provisions of law.”
3. Brief facts of the case are that he assessee had sold a property during the year for a sum of Rs. 21 lakhs which was purchased on 12.12.1974. After reducing the indexed cost of Rs. 13,77,500/- capital gain from the sale of said property was worked at Rs. 7,22,500/-. The assessee invested a sum of Rs. 15,46,898/- in the purchase of plot on which residential house was to be constructed. On the basis of this investment proportionate deduction u/s 54F was claimed. However, the house could not be constructed. During assessment proceedings the AO observed that as per provisions of section 54F the assessee was required either to purchase within a period of one year before or two years after the date on which the transfer took place or complete the construction of residential house within a period of three years. Though the assessee purchased the plot the assessee was also required to complete the construction of a new house till 31.3.2010 and since admittedly no construction had taken place, the deduction u/s 54F could not be allowed. Accordingly he disallowed deduction u/s 54F.
4. On appeal before the ld. CIT(A) it was mainly submitted that the assessee had purchased plot on which construction was to be done. Only proportionate deduction amounting to Rs. 5,32,207/- out of the total capital gain of Rs. 7,22,500/- was claimed and tax was paid on balance of the capital gain. Since the assessee could not complete the construction, therefore, the addition can be made only after the period of three years expired and period of three years expired in AY 2011-2012. It was further submitted that it was a matter of common sense that whether the property has been constructed or not, would be known only in the year when the time is to expire. Reliance was also placed on the decision of Hon’ble Allahabad High Court in case of Ranjit Narang v. CIT  317 ITR 332.
5. The ld. CIT(A) after considering the submissions observed that the assessee has not started the work of construction on the said plot, therefore, the claim of deduction u/s 54F was not acceptable. Accordingly he upheld the action of the AO.
6. Before us, the ld. counsel of the assessee submitted that after the sale of the property on which some capital gain arose and the assessee purchased a plot of land and wanted to construct the house. After the purchase of plot the assessee was not left with any money to be deposited in the specified account with the bank. Later on when the house could not be constructed the assessee voluntarily filed a return by surrendering deduction u/s 54F and paid taxes in AY 2011-2012. In this regard he filed a copy of return for AY 2011-2012. He mainly contended that once the house could not be constructed the same would be known to the assessee only after a period of three years and therefore, if the construction could not be completed, the said capital gain could be taxed only after a lapse of period of three years. Since the assessee has filed return declaring capital gain in AY 2011-2012, the same could not be taxed again in AY 2008-2009.He vehemently contended that in view of the provision to Section 54F if the assessee was not able to do any construction then the capital gain can be subjected to charge u/s 45 only in the previous year in which period of three years from the date of transfer of original assets expire. He strongly relied on the following case laws – (i) Ranjit Narang’s case (supra) (ii) Smt. V.A. Tharabai v. Dy. CIT  50 SOT 537 (iii) Smt. Ranjit Sandhu v. Dy. CIT [IT Appeal No. 392/Chd/2010] (copy of order enclosed) and (iv) Asstt. CIT v. Gagandeep Kaur [ITA No. 655/Chd/2005] (copy of order enclosed). On a specific query by the Bench whether the assessee had taken any steps to construct the house for example, sanction of plan, the ld. counsel of the assessee admitted that plans were not prepared and sanction could not be obtained and he does not have any evidence to show that the assessee really wanted to start construction. The ld. counsel of the assessee submitted that in any case suitable direction may be issued for adjustment of taxes paid in AY 2011-12 in the current year because no income can be taxed twice.
7. On the other hand, the ld. DR for the revenue strongly supported the orders of AO and the ld. CIT(A). He further submitted that admittedly the construction of the house never commenced and therefore, the assessee was not entitled to deduction u/s 54F. The decisions relied on by the ld. counsel of the assessee are distinguishable on the facts of the case involved in those cases. He also submitted that the Tribunal had no power to give direction in respect of any other year in view of the decision of Hon’ble Supreme Court in case of ITO v. Murlidhar Bhagwandas  52 ITR 335.
8. We have heard the rival submissions carefully in the light of material on record as well as the decision cited by the parties. Section 54F reads as under:
“54F. (1) [Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family], the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or [two years] after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,-
(a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45 ;
(b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45:
[Provided that nothing contained in this sub-section shall apply where-
(a) the assessee,-
(i) owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or
(ii) 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
(iii) constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and
(b) the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head “Income from house property”.]
Explanation.-For the purposes of this section,-
[***] “net consideration”, in relation to the transfer of a capital asset, means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.
(2) Where the assessee purchases, within the period of [two years] after the date of the transfer of the original asset, or constructs, within the period of three years after such date, any residential house, the income from which is chargeable under the head “Income from house property”, other than the new asset, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a), or, as the case may be, clause (b), of sub-section (1), shall be deemed to be income chargeable under the head “Capital gains” relating to long-term capital assets of the previous year in which such residential house is purchased or constructed.
(3) Where the new asset is transferred within a period of three years from the date of its purchase or, as the case may be, its construction, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a) or, as the case may be, clause (b), of sub-section (1) shall be deemed to be income chargeable under the head “Capital gains” relating to long-term capital assets of the previous year in which such new asset is transferred.]
[(4) The amount of the net consideration which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit ; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset :
Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,-
(i) the amount by which-
(a) the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of the new asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1), exceeds
(b) the amount that would not have been so charged had the amount actually utilised by the assessee for the purchase or construction of the new asset within the period specified in sub-section (1) been the cost of the new asset,
shall be charged under section 45 as income of the previous year in which the period of three years from the date of the transfer of the original asset expires ; and
(ii) the assessee shall be entitled to withdraw the unutilised amount in accordance with the scheme aforesaid.
Explanation.- [Omitted by the Finance Act, 1992, w.e.f. 1-4-1993.] “
Plain reading of the above section clearly shows that deduction under this section is allowable only in case where the assessee within a period of one year before or two years after the date on which the transfer took place purchases, or has within a period of three years after that date constructed the residential house. Therefore, if the assessee has not purchased or constructed the house within the specified period the deduction is not available. No doubt the proviso to sub-section provides that in case the amount of capital gain has been deposited in the specified account as provided in sub-section (4) and the same could not be used for construction then such capital gain would be charged in the previous year in which the period of three years expires from the date of transfer of original asset. It is a settled position of law that proviso provide exception to the rule. In case before us the proviso carves out an exception only in those cases where the amount had been deposited in the specified account and could not be used for the purpose of construction. This exception can not be made part of the rule where the assessee fails to purchase or construct within specified period. It is further noticed that the proviso has been placed under sub-section (4) which means it would control interpretation only of sub-section (4). In any case the proviso makes it clear that this is applicable where the amount has been deposited in the bank under this sub-section. This means it cannot change the situations under other parts of the section.
8 (1) Coming to the case law cited by the ld. counsel of the assessee, the facts in first case of Ranjit Narang (supra), were that the assessee had sold certain shares in AY 1990-91 and wanted to available benefit of Section 54F and in terms of sub-section (4) of Section 54F deposited net consideration in the bank. However, later the assessee failed to utilize the amount for the purchase or construction of new asset and capital gain became liable to be charged u/s 45 of the Act. The same was chargeable in AY 1993-94 because of the proviso. In the return of income filed by the assessee for AY 1993-94 while computing the capital gain the assessee claimed basic exemption of Rs. 10,000/- and further deduction of 60% of the amount of capitalgain in excess of Rs. 10,000/- as per provisions of section 48(1) (b) r.w.s. 48(2) of the Act which were applicable in AY 1990-91 i.e. the year in which the sale of share took place. The AO took a view that since Section 48 of Act has been amended w.e.f. April 1, 1993, the basic exemption of Rs. 10,000/- and further deduction of 60% of the balance capital gain, was not available in that year. On appeal the ld. CIT(A) held that since the capital gain was chargeable in AY 1993-94, therefore, law as it stood in AY 1990-91 could not be applied. However, the benefit of indexation was allowed. The Tribunal confirmed the decision of the first appellate authority. On appeal the Hon’ble High Court held that the transfer of shares was chargeable to tax u/s 54F because assessee could not use the funds for construction of the house within specified period. It was further held that even the statute provides as to when the capital gain is to be charged. It is a case of postponement of capital gain. In this background the appeal of the assessee was dismissed. From this case it is clear that the Court was merely interpreting whether for the chargeability of capital gain the law prevailing in AY 1990-91 was applicable or law prevailing in 1993-94 in which the capital gain became chargeable because of the proviso would be applicable. Thus the facts are totally distinguishable. In any case it is to be noticed that in this case the assessee had deposited the money in the specified account that is why the proviso to Section 54F was applicable. In case before us, the money has not been deposited in the specified account, therefore, there is no question of application of the proviso.
8(2) The second case relied on by the ld. counsel of the assessee is that of Smt. V.A. Tharabai’s case (supra). In that case assessee sold property in 2006 and immediately thereafter purchased a landed property to construct a house. In that case the owner of the property had purchased on the authority of POA and the owner of land had filed injunction before the Civil Court and the Civil Court granted an injunction and ordered a status quo. The house could not be constructed because of this order. The Tribunal allowed deduction u/s 54F because of these special circumstances i.e. construction was not allowed in view of the Court order despite purchase of land whereas in case before us there are no special circumstances and this case is totally distinguishable.
8(3) Third case relied on the ld. counsel of the assessee is that of Smt. Ranjit Sandhu’s case (supra). The facts of that case are that the assessee sold her agricultural land in 2006. The assessee had purchased plot in Gurgaon out of the said sale consideration and claimed deduction u/s 54F. During assessment proceedings it was noticed that the construction had not been completed and therefore, the deduction was denied. On appeal before the ld. CIT(A), action of the AO was confirmed. When the assessee came before the Tribunal it was noted that the requirement of Section 54F to be available was either purchase of residential house being a new asset with in the stipulated period or to construct a residential house within a period of three years from the date of transfer. Section does not prescribe the completion of the construction of residential house and thrust was on the investment of the net consideration received on the sale of new residential house. Accordingly claim was allowed. Thus it is very clear that in this cased that the construction had already commenced but not completed that is why deduction was allowed whereas in case before us not only construction never commenced but the assessee could not show any evidence that the assessee wanted to start the construction.
8(4) Last case relied on by the ld. counsel of the assessee is that of Smt. Gagandeep Kaur’s case (supra). We have carefully perused this judgment and find that the facts are not clearly stated. In that case the assessee purchased a plot of land for Rs. 7,02,000 (including cost of boundary wall) vide Registration Deed dated 11.10.1991. After that the assessee got the proposed plan sanctioned for the residential house and same was submitted before the Municipal Committee for approval. Since the date of filing of return was drawing nearer the cost was estimated at Rs. 8.00 lakhs approximately and was kept apart for the purpose. The assessee had earned 17,17,730/- and in view of the partial claim, exemption u/s 54F for Rs. 10,33,660/- by taking the amount to be invested for the construction of residential house at Rs. 15.00 lakh (Rs. 7.02 lakhs on plot plus Rs. 8.00 lakhs on construction). The Tribunal further mentioned that the dept had challenged the year of taxability. It is mentioned that the assessee had not denied the liability to capital gain tax. The Tribunal allowed the deduction by observing that even if it is presumed that the amount of capital gain tax was offered for wrong year the same will not make any difference because the tax slab for both years remain same. In our opinion, this decision is totally distinguishable because the plan for house never got sanctioned and it is not clear from facts whether construction had commenced or not. With due respect to this decision we are of the opinion that it is not correct position of law that tax can be offered in any year wrongly or rightly. It is settled position of law that income has to be assessed in the hands of the correct assessee in the correct AY. Further even if the tax rate may remain same if the Government is entitled to recover the tax in AY 2002-03 and if the same is paid in AY 2004-05, the Government stands to loose on interest. Therefore, this cannot be taken as a precedent particularly when full facts are not spelt out in the order.
8(5) In the case before us, admittedly no plans were made, therefore, there is no question of getting the same approved. Apart from this, the ld. counsel of the assessee admitted that assessee has no evidence to prove that assessee wanted to start construction. If the tax is allowed to be postponed merely on the basis of purchase of plot then no assessee would pay correct taxes during the year and postpone the payment of taxes by merely purchasing the plot and that cannot be intention of the provisions of section 54F. Therefore, in our opinion, the ld. CIT(A) is right in denying the deduction u/s 54F to the assessee and accordingly we uphold his order.
9. Coming to the alternative submissions, no doubt the Hon’ble Supreme Court in case of Murlidhar Bhagwandas case (supra) has held that the Tribunal has no power to give direction in respect of any other year which is not before the Tribunal. However, at the same time there is cardinal principle of taxation particularly in view of the Article 265 of the Constitution that the taxes can be collected only by process of law and therefore, no income can be taxed twice. In case before us, the assessee has voluntarily filed return declaring capital gain in AY 2011-12, therefore, the tax paid in that year would amount to double taxation if the capital gain is also taxed in AY 2008-09. We agree with the submissions that the taxes paid in 2011-12 needs to be adjusted against the capital gain liability during AY 2008-09. Accordingly we direct the AO to adjust the taxes already paid by the assessee in AY 2011-012 regarding the same capital gain after verification during the current year against the capital gain liability.
10. In the result, appeal of the assessee is partly allowed.