IN THE ITAT CHENNAI BENCH ‘C’
Joint Commissioner of Income-tax (OSD)
IT APPEAL NO. 589 (MDS.) OF 2012
C.O. NO. 66 (MDS.) OF 2012
[ASSESSMENT YEAR 2006-07]
OCTOBER 11, 2012
Abraham P. George, Accountant Member
These are appeal and Cross Objection of the Revenue and assessee respectively directed against an order dated 20.12.2011 of Commissioner of Income Tax (Appeals)-III, Chennai for the impugned Assessment Year.
2. Grievance raised by the Revenue is that CIT(A) allowed the exemption to assessee under section 54F of the Income Tax Act, 1961 (in short ‘the Act’), which was denied by the Assessing Officer. As per Revenue, investments made in the Capital Gains Accounts Scheme were immediately withdrawn by the assessee and no withdrawals were effected for construction of any residential building. Further, as per Revenue, only investment made by the assessee was in land during the relevant previous year and on such land, it was not possible to construct a residential house without getting it converted to residential area. Again as per Revenue, failure to comply with the conditions specified in Sec.54F had happened in the previous year relevant to the impugned Assessment Year itself and therefore, assessee could not have deferred the long term capital gains tax to Assessment Year 2009-10.
3. Short facts apropos are that assessee had filed return for impugned Assessment Year declaring an income of Rs. 6,32,71,995/-. During the relevant previous year, assessee had sold shares held in one M/s. Alpump Limited, which gave rise to capital gains of Rs. 11.13 crores. Against such capital gains, deduction of Rs. 1.80 crores was claimed for investments made under section 54EC of the Act and deduction for Rs. 3.47 crores was claimed for investment under section 54F of the Act. There is no dispute regarding the claim of deduction under section 54EC of the Act, on which both parties are one. Dispute between the assessee and the Revenue is limited to the deduction claimed under section 54F of the Act. On the latter claim, Assessing Officer noted that assessee had acquired 8 acres 40 cents of land for a sum of Rs. 2.41 crores. As per Assessing Officer, this land was agricultural in nature and assessee could not show any evidence for filing any application for conversion of such land to a residential area. In addition to Rs. 2.41 crores invested for purchasing the land, assessee had also invested Rs. 1.06 crores in a Capital Gain Account Scheme. It seems there were certain withdrawal made from the deposits in the said Capital Gain Account Scheme. As per the Assessing Officer for claiming deduction under section 54F of the Act, it was necessary for the assessee to invest the consideration received on transfer of long term capital asset within a period of two years from the date of transfer, for the purpose of acquiring a residential house or otherwise assessee had to construct a residential house within a period of three years. As per the Assessing Officer the sum of Rs. 2.41 crores invested in purchase of agricultural land could not be considered as an investment, which satisfied the conditions set out in section 54F of the Act. Relying on a sworn statement taken from assessee, Assessing Officer came to a conclusion that assessee had not made the investment in the land in accordance with Sec.54F of the Act. Further as per Assessing Officer, there were withdrawals from the deposits in Capital Gain Account Scheme as well. Assessing Officer further noted that assessee had made deposits in Capital Gain Account Scheme only was 30.10.2006 whereas the due date for filing return for the impugned Assessment Year on 31.07.2006. For these reasons, he denied the claim of deduction under section 54F of the Act and brought to tax a sum of Rs. 3,47,01,162/- as long term capital gains of the impugned assessment year.
4. In its appeal before the CIT(A), argument of the assessee was that the land acquired was not 8.01 acres but only one acre and in support of this argument, a copy of sale deed was produced. As per assessee, it had prepared a plan of construction of residential house through an Architect, and also made necessary application to the competent authority for approval thereof. Further as per the assessee, he had also applied and got power connection in the site for construction work and had utilized power for doing construction. As per the assessee, he had attempted to do construction, but could not proceed, since approval for the plan was not received due to Coastal Zone Regulations. Since approval was not received within a period three years on the end of the third year, he had offered the amount as capital gains and paid taxes. As for the withdrawal made from Capital Gain Account Scheme, assessee submitted that he was not aware that such withdrawals were required to be made under any particular forms and that there was any non-compliance with such procedure.
5. Ld. CIT(A) after considering the above submissions of assessee, was of the opinion benefit of Sec.54F would be available to him since CBDT Circular No.667 dated 18.10.1993 had clarified that cost of plot acquired by assessee would be eligible for exemption along with the cost of construction. As per Ld. CIT(A), when assessee was unable to use the net consideration before the due date of filing the return, he was entitled to deposit such sum in an account opened under Capital Gains Scheme. The amounts, which assessee was unable to use, were deposited in an account under Capital Gain Account Scheme. If the amounts so deposited were not used for the purpose of construction or purchase of a residential house, it would be charged to tax as capital gains at the end of the specified period. As per Ld. CIT(A) sub-section (4), which dealt with withdrawal of exemption under section 54F of the Act clearly brought out that amounts not utilized could be brought to tax only after the end of the three years period. Ld. CIT(A) further noted that the assessee had applied for approval of construction vide his letter dated 07.01.2007 to the President, Kanathur Reddykuppan Panchayat Union and also furnished site plan of the land, building plan showing plan for each floor elevation, specifications for the work. Power connection was also received. As per the Ld. CIT(A), assessee could not start construction due to restrictions imposed by Coastal Zone Regulations and accordingly, the gains were offered to tax by the assessee after three years period. CIT(A) also noted that withdrawal of money from the account for Capital Gain Account Scheme would not dis-entitle the assessee from claiming exemption under section.54F of the Act in the impugned Assessment Year. Since assessee was a person subject to tax audit, his due date for filing return fell on 31.10.06 and not 31.07.06 as noted by the Assessing Officer. In this view of the matter, he directed the Assessing Officer to allow the claim of deduction under section 54F of the Act.
6. Now before us, Ld. Departmental Representative assailing the order of CIT(A) submitted that nature of the land purchased by the assessee, at the time of purchase was agricultural. Assessee was aware that no construction was possible in agricultural land unless approval for conversion was received. Thus, assessee had no intention for starting any construction of residential building at all. Therefore, according to him, action of the assessee in depositing balance sums in a deposit under Capital Gain Account Scheme had no relevance whatsoever. Even the deposits in Capital Gain Account Scheme were withdrawn by the assessee later for purposes other than construction and this went to show that assessee had no intention to construct residential building. The scheme of deduction under section 54F on long term capital gains envisaged purchase of property for the purpose of construction of a residential building and exemption could not be given when at the outset itself, assessee had no intention to do so. According to him, assessee could not be given benefit of Sec 54F, just for a reason that deposits were made in a deposit account opened under Capital Gain Account Scheme. Assessee was unable to start any construction activity in the said land, and had offered the entire amount after the end of the three year period for tax just as a delaying techinque. Just because, assessee had received electricity connection or had sent plan for approval would not be a reason to construe that assessee had any intention to construct a house, when no such construction was possible in an agricultural land.
7. Per contra Ld. Authorised Representative of assessee supporting the order of CIT(A) submitted that in the first place there was no restriction for construction of at least a farm house in an agricultural land. According to him, the land acquired was only one acre and not 8.04 acres as mentioned by Assessing Officer. Since for construction of a farm house also approval from local authority was necessary, assessee had prepared a plan and moved for this purpose. Assessee had received electricity connection in the premise for pursuing the construction activity. Unfortunately due to restrictions imposed by Coastal Zone Regulations, permission for construction was not forthcoming and without such approval, assessee could not lawfully go ahead with the construction work. Assessee had with an intention to construct building duly deposited the balance sum of consideration in a deposit under Capital Gain Account Scheme. When it was found that construction was not possible, assessee had returned the capital gains for Assessment Year 2009-10. In support of his argument that intention of assessee for claiming deduction under section 54F of the Act alone was material, Ld. A.R. relied on the decision of a Co-ordinate Bench of this Tribunal in the case of Smt V.A. Tharabai v. Dy. CIT  50 SOT 537.
8. Ad libitum Ld. D.R. submitted that decision of Co-ordinate Bench was given in an entirely different situation where due to litigation in the land purchased, assessee was unable to pursue a construction. Co-ordinate Bench held that jurisprudence of law never dictated a person to perform a duty that was impossible to perform. Here, on the other hand, according to Ld. Departmental Representative construction of residential house in the given land was impossible from very beginning. Assessee was aware that such construction was not possible but still wanted to claim deduction under section 54F of the Act.
9. We have heard the rival contentions and also carefully gone through the orders of authorities below. Revenue has not denied the observation of the CIT(A) that land acquired was one acre and not 8.40 acres. Cost of the land was Rs. 2.41 crores and the amount deposited by the assessee in Capital Gain Account Scheme was Rs. 1.06 crores. Total deduction claimed under section 54F was Rs. 3.47 crores. Argument of Revenue is that assessee had no intention to construct a house in the one acre property. Land was agricultural in nature and assessee would have been aware that a residential construction was not possible in an agricultural property. In our opinion, this contention itself is a pure presumption. As stated by Ld. Authorised Representative of assessee, at least a farm house could be constructed, if not a full fledged residence in an agricultural property. There is no case for the Revenue that land was not dry in nature. Assessee had moved the local authority, namely Kanathur Reddykuppan Panchayat Union for getting approval for construction of a house and also submitted plan of the building, which gave floor-wise elevation and specification of work, and lay-out of the house through a letter dated 07.01.2007. These facts have not been disputed by the Revenue at all. There is also no dispute that he had obtained power connection. In the face of these facts to say that assessee had no intention to construct residential house is not correct. In our opinion, if the assessee had no intention to construct a house, he would not have got a plan prepared by an architect and submitted it to the local authority for approval along with a site plan. May be it true that due to Coastal Zone Regulations, no construction was possible in the said land. But we cannot say that assessee, when purchasing the land, was aware that on account of the Coastal Zone Regulation, he could not construct a residential house therein. Even Coastal Zone Regulations by itself does not deny the right of construction, but places a number of constraints for such construction. Having not obtained approval for the plan within three years, assessee had offered the same to Capital Gain Account Scheme in Assessment Year 2009-10. A Look at Section 54F at this juncture is very much necessary.
“Section 54F. Capital Gain on Transfer of Certain Capital Assets Not to be Charged in Case of Investment in Residential House.
(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 the assessee owns on the date of the transfer of the original asset, or purchases, within the period of one year after such date, 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.
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.”
Last proviso clearly mentions that when amounts deposited under Capital Gains Account Scheme were not utilised wholly or partly for the purchase or construction within the period specified, then such amount would be charged as income of the previous year in which the period of three years, starting from the date of the transfer of the asset expired. The term used is ‘shall’. Section 54F does not say that the amount shall be taxed in the year of withdrawal, if such withdrawal are not utilized for the purpose of construction. Even if the amount deposited in a Capital Gain Account, is utilized for any other purpose, in our opinion the result would be very same. He will have to pay tax for such amount in the previous year after expiry of the three years time period. Here, assessee had suo motu offered the sum in Assessment Year 2009-10 as capital gains. As already mentioned, the circumstances do not warrant a conclusion can be drawn that assessee had no intention to construct a residential house from the very beginning. In the case of Smt V.A. Tharabai (supra), Co-ordinate Bench held that without purchasing land, house cannot be constructed . First step was purchase of land. If the next step could not be put forward, thereafter, on account of a reason, which was beyond control of assessee, then the amount spent by the assessee in purchasing the land had to be considered as amount invested for purchase /construction of residential house. Assessee here, having offered capital gains for tax in Assessment Year 2009-10 as stipulated in proviso-1 of section 54F of the Act, could not be saddled with the same liability for the impugned Assessment Year as well. Ld. CIT(A) was justified in directing the Assessing Officer to grant the assessee deduction under section 54F of the Act for impugned Assessment Year. No interference is required in the order of CIT(A).
10. When Cross objection were taken up, Ld. Counsel for assessee submitted that he was not pressing it.
11. In the result, both the appeal of the Revenue and Cross Objection of assessee are dismissed.