The issue under consideration is whether the deduction u/s 54F for reinvestment against Capital gain in the name of wife and son will be allowed or not?
As per the judgement of the Hon’ble Bombay High Court in the case of Kamal Wahal (supra):
“It also noted that a purposive construction is to be preferred as against a literal construction, more so when even applying the literal construction, there is nothing in the section to show that the house should be purchased in the name of the assessee only. As a matter of fact, Section 54F in terms does not require that the new residential property shall be purchased in the name of the assessee; it merely says that the assessee should have purchased/constructed “a residential house”.
“It is moreover to be noted that the assessee in the present case has not purchased the new house in the name of a stranger or somebody who is unconnected with him. He has purchased it only in the name of his wife. There is also no dispute that the entire investment has come out of the sale proceeds and that there was no contribution from the assessee’s wife.”
The above judgement is in favour of the fact that the reinvestment in the name of wife but not in the name of sons.
Hence, having regard to the rule of purposive construction and the object which Section 54F seeks to achieve and respectfully agreeing with the judgment of this Court, ITAT state that the appeal is partially allowed and the reinvestment in the name of wife will be allowed but not in the name of sons.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal is filed by the assessee against the order of the CIT(A)-6, Pune dated 11.03.2019 for the assessment year 2007-08.
2. In this appeal, the assessee raised the following grounds :-
“1. The Learned CIT(A) has erred in confirming the disallowance of deduction claimed u/s 54B of Rs. 3.25 lakhs + 3.25 Lakhs + 6.90 lakhs & 18 lakhs, inappropriately considering the issue of the land being non-agricultural land, which was never brought by the AO on record &The CIT(A) has erred in not making any enquiries for the status of the land with the appellant& has thus arbitrarily confirmed the addition. The CIT(A) has only relied on the Bombay High Court Judgment – Prakash vs. ITO & has ignored & failed to consider other Judgments favoring the appellant, of various High Courts & Supreme Court.
1.1. The Learned CIT(A) has erred in treating the un-registered Agreement/VisarPavti as not valid & has erred in holding the same not being in compliance with the Transfer of Property Act & has also erred in considering the possession being not given & has failed to consider the Affidavit filed by the legal heirs/family members of the deceased Seller ITA No.951/PUN/2019 stating possession been already given, further the Learned CIT(A) has erred & failed by holding that once the seller is dead the land cannot be transferred& has also erred & failed to hold that the re-investments made for purchase of new assets can be considered to be part of the HUF funds as received from sale of ancestral Land.
2. The learned CIT(A) has erred in confirming the disallowance of Rs. 11.50 lakhs on account of payments made to father’s sisters & daughter’s. The learned CIT(A) has erred & failed to appreciate the delicate balance of relationship with father’s sisters & daughters, the learned CIT(A) has failed to understand that these relations cannot be strictly viewed with legal perspective alone & the element of preponderances of probabilities is always required to be weighted in such relations.
2.1. The learned CIT(A) has erred in understanding the proposition of the rights of the appellant’s daughter & his father’s sisters & has failed to agree that the same are inherent embedded as per Hindu Succession Act.
2.2. The learned CIT(A) has erred in understanding the factual matrix involved in such Joint families, irrespective of the rights being released by appellant’s father’s sisters & there being no mention of their names in the Development Agreement, the father’s sisters though had no legal rights but by sending the legal notice wanted to create litigation & nuisance value & were potential threat to the deal.
2.3. The learned CIT(A) has erred by overlooking the legal course available to the father’s sisters who carried the intention of harassing the appellant by sending a legal notice & has erred in being Judgmental in deciding the procedure of law which was not before him.
2.4. The learned CIT(A) has erred in appreciating the facts of payments made to daughters of the appellant who were legally entitled & were part & parcel of the agreements.
2.5. The learned CIT(A) has erred in understanding the provision of u/s 48(i) & the concept of expenditure being incurred Wholly & exclusively in connection with the transfer of the property.
3. The learned CIT(A) has erred by not considering the appropriate & Jurisdictional rulings of ITAT, Pune & Supreme Court, which were binding upon him as he has applied the Bombay High Court Judgment of Prakash vs. ITO & disallowed the deduction claimed u/s 54B stating the same to be binding on him in the same manner the rulings of ITAT, Pune & Supreme
Court are binding on him.”
3. Before me, explaining the above extracted grounds, ld. Counsel for the assessee submitted that there are two core issues for adjudication. They are (1) the allowability of deduction u/s 54B of the Act in respect of re-investment of Rs.3.25 lakh + Rs.3.25 lakh + Rs.6.90 lakh + Rs.18 lakh in non-agricultural land/residential house/agricultural land. It is the claim of the assessee that the Hon’ble Bombay High Court in the case of Prakash vs. ITO, 173 Taxman 311 (Bom.-HC) does not apply to the facts of the present case; and (2) the allowability of the claim of deduction of Rs.11.50 lakhs on account of capital gains. It is the claim of the assessee that this amount is paid to father’s sisters and father’s daughters and the same constitutes the expenses incurred to perfect the title and incurred wholly and exclusively in connection with the transfer of the asset.
4. The background facts of the above issues are narrated in the order of the CIT(A) in para 4.1 and the same is as follows. The fact of the sale and the sale consideration are not disputed. The assessee executed a Development Agreement along with his family members in favour of M/s Rishi Constructions & Others dated 07.09.2006 on their ancestral agricultural land at Sl. No.40, Ravet, admeasuring about 72 aar. The total consideration is Rs.96 lacs. The assessee was holding 50% share in his ancestral property along with his uncle, Mr. Biku Namdev Bondhve & other family members. Thereafter, the assessee executed sale deed for the same property for the same agreed consideration as per Development Agreement & registered the same dated 21.04.2008. The assessee had 50% share and accordingly, he received 50% of the sale consideration being Rs.48 lacs. This was adopted as the gross sale consideration by the Assessing Officer as well as the assessee. It is an undisputed fact that the transfer of land took place in the present assessment year through a Development Agreement dated 07.09.2006, which was subsequently registered as a sale deed on 21.04.2008. An examination of the development agreement registered on 07.09.2006 i.e. in present assessment year and the sale deed registered on 21.04.2008 i.e. A.Y. 2009-10, Assessing Officer found that the total consideration of Rs.96,00,000/- was paid in instalments i.e. Rs.48,00,000/- in F.Y. 2006-07, Rs.5,00,000/- in F.Y. 2007-08 and the balance of Rs.43,00,000/- in F.Y. 2008-09. In the return of income, assessee adjusted his share of consideration and reduced the sum of Rs.11.50 lakhs out of Rs.48 lakhs. This amount of Rs.11.50 lakhs was paid to the daughters and sisters of the father of the assessee. Assessee claims that the said payments was needed to reduce the likely litigation from the said relatives. The Assessing Officer disallowed the same and adopted the net sale consideration at Rs.48 lakhs instead of Rs.36,50,000/- (Rs.48 lakhs – Rs.11.50 lakhs) claimed by the assessee.
5. Further, the assessee claimed a deduction u/s 54F of the Act. The Assessing Officer disallowed the claim u/s 54B of the Act. Thus, the Assessing Officer disallowed the claim of deduction from the sale consideration of Rs.48 lakhs and restricted the claim of deduction u/s 54F of the Act to the extent of Rs.5,44,184/- on account of re-invested in his residential house. In fact, the reinvestment claimed in the names of both the sons, wife are not in accordance with the law. Another reinvestment of Rs.18 lakhs being only an advance was also denied.
6. The CIT(A) confirmed the order of the Assessing Officer and dismissed the appeal of the assessee. Against the same, the assessee is in appeal before the Tribunal with the grounds extracted above.
Reinvestment in the names of sons/wife
7. Before me, in connection with the first issue relating to the claim of reinvestment in agricultural lands in the name of sons and wife, the ld. Counsel for the assessee submitted that the Assessing Officer and the CIT(A) relied heavily on the Hon’ble Madras High Court’s judgement in the case of CIT vs. Devarajalu (GK), 191 ITR 211 (Madras-HC). It is the stand of the Assessing Officer that investment made in the name of the assessee alone is eligible for claim of deduction. Improving the case of the Assessing Officer, the CIT(A) relied upon the Jurisdictional High Court in the case of Prakash vs. ITO, 173 Taxman 311 (Bom.-HC) which is relevant for the legal proposition that the ‘reinvestment made in the name of the assessee’ alone is eligible for deduction u/s 54F of the Act. Accordingly, the CIT(A) held that the reinvestment of Rs.3,25,000/- in the name of son i.e. Shri Rahul Sakaram Bhondve, another sum of Rs.3,25,000/- invested in agricultural land in the name of another son i.e. Shri Tarachand Sakaram Bhondve and investment of Rs.6,90,000/- against the agricultural land in the name of wife i.e. Smt. Kalinda Sakaram Bhondve are found ineligible for claim of deduction. Further, advance payment of Rs.18,00,000/- reinvested in the agricultural land was also found ineligible. It is the finding of the CIT(A) on this advance payment that the reinvestment is incomplete from that payment is only advanced and the agreement of purchase is not registered. The transaction is found suspicious considering the transaction of cash payments.
A. Reinvestment in wife’s name
8. Before me, with respect to the investment in the name of wife namely Smt. Kalinda Sakaram Bhondve (Rs.6,90,000/-), ld. Counsel for the assessee relied on the Hon’ble Bombay High Court’s judgement in the case of CIT vs. Kamal Wahal, 351 ITR 4 and submitted that the reinvestment in the name of spouse is eligible for deduction u/s 54F of the Act and considered the purposive construction of the provisions. Further, ld. Counsel relied on the Hon’ble Delhi High Court’s judgement in the case of CIT vs. Ravinder Kumar Arora, 342 ITR 38 (Delhi-HC) in support of the case of the assessee.
9. On hearing both the sides on this issue of investment of capital gains in the assessee’s wife, I find the judgement of the Hon’ble Bombay High Court in the case of Kamal Wahal (supra) and the judgement of the Hon’ble Delhi High Court in the case of Ravinder Kumar Arora (supra) helps the assessee. In these cases also, the reinvestment was made by the assessee in the residential house in the name of his wife. The purposive construction of the provisions preferred as against the literal construction of the same. For the sake of completeness, the relevant para 7 to 10 of the judgement of the Hon’ble Bombay High Court in the case of Kamal Wahal (supra) are extracted hereunder :-
“7. We have no hesitation in agreeing with the view taken by the Tribunal. Apart from the fact that the judgments of the Madras and Karnataka High Courts (supra) are in favour of the assessee, the revenue fairly brought to our notice a similar view of this Court in CIT Vs. Ravinder Kumar Arora : (2012) 342 ITR 38 (Del.). That was also a case which arose under Section 54F of the Act. The new residential property was acquired in the joint names of the assessee and his wife. The income tax authorities restricted the deduction under Section 54F to 50% on the footing that the deduction was not available on the portion of the investment which stands in the name of the assessee’s wife. This view was disapproved by this Court. It noted that the entire purchase consideration was paid only by the assessee and not a single penny was contributed by the assessee’s wife. It also noted that a purposive construction is to be preferred as against a literal construction, more so when even applying the literal construction, there is nothing in the section to show that the house should be purchased in the name of the assessee only. As a matter of fact, Section 54F in terms does not require that the new residential property shall be purchased in the name of the assessee; it merely says that the assessee should have purchased/constructed “a residential house”.
8. This Court in the decision cited alone also noticed the judgment of the Madras High Court (supra) and agreed with the same, observing that though the Madras case was decided in relation to Section 54 of the Act, that Section was in pari materia with Section 54F. The judgment of the Punjab and Haryana High Court in the case of CIT Vs. Gurnam Singh : (2014) 327 ITR 278 in which the same view was taken with reference to Section 54F was also noticed by this Court.
9. It thus appears to us that the predominant judicial view, including that of this Court, is that for the purposes of Section 54F, the new residential house need not be purchased by the assessee in his own name nor is it necessary that it should be purchased exclusively in his name. It is moreover to be noted that the assessee in the present case has not purchased the new house in the name of a stranger or somebody who is unconnected with him. He has purchased it only in the name of his wife. There is also no dispute that the entire investment has come out of the sale proceeds and that there was no constribution from the assessee’s wife.
10. Having regard to the rule of purposive construction and the object which Section 54F seeks to achieve and respectfully agreeing with the judgment of this Court, we answer the substantial question of law framed by us in the affirmative, in favour of the assessee and against the revenue.”
B. Reinvestment in the names of sons
10. Regarding the investment in the hands of the sons, it is the submission of the ld. Counsel for the assessee that the said decision (supra) applies to the investment in the names of the sons also.
11. Per contra, the ld. DR for the Revenue submitted that the investment in the hands of the wife and daughters cannot be compared with that of the investment in the hands of the sons. In the present case, the assessee’s investment made in the names of Shri Rahul Sakaram Bhondve (son), Shri Tarachand Sakaram Bhondve (son). The above cited decisions are relevant for the case of spouse only not to the son’s cases. Considering the same, I am of the opinion that the discussion given by the CIT(A) and the Assessing Officer in their respective orders is fair and reasonable and it does not call for any interference.
C. Reinvestment by way of Advances by assessee and the sons
12. Regarding the investment of Rs.18,00,000/- as advanced against the total consideration of Rs.30,00,000/- based on the agreement to purchase, I perused the order of the CIT(A), in general and the contention of para 4.6, in particular. It is the case of the CIT(A) and the Assessing Officer that the total consideration for purchase of land is Rs.30,00,000/-. The assessee paid Rs.18,00,000/- to D. N. Choudhary. The said payment is said to have been paid not only by the assessee but also by his two sons. Remaining Rs.12,00,000/- is payable only on completion of the performance of certain pending works. It is the case of the CIT(A) that the amount paid is only advance but also the transaction is incomplete. Relying on the express provisions of section 54B of the Act, the CIT(A) held that considering the incompleteness of the transactions and part payments by the sons, the claim of the assessee was not allowed on this investment. The Assessing Officer and the CIT(A) did not consider the transaction as a case of investment in purchase of land. On this fact, the ld. Counsel submitted that the entire sum of Rs.18,00,000/- was reinvested in cash by the assessee only.
13. On hearing both the sides, I am of the opinion that there is paucity of facts with regard to the ownership of Rs.18,00,000/- paid to D.N. Chaudhary deceased. Notwithstanding the incompleteness of the transaction, the requirement for claim of deduction in the investment of capital gains, I am of the opinion that the assessee is entitled for deduction to that extent the contribution belongs to the assessee out of the said Rs.18,00,000/-. The Assessing Officer is directed to examine the same and the claim of the assessee indicated above. Thus, this part of grounds is allowed for statistical purposes.
D. Allowability of expenses out of Rs.48 lakhs
14. Regarding the issue relating to the claim of deduction of Rs.11,50,000/- out of his share of the total consideration of Rs. 48,00,000/-, I find, it is the case of the assessee that the share consideration received by the assessee should be reduced to the extent of the amounts are paid to the father’s sisters and father’s daughters. It is the case of the assessee that these relatives still have some right in the said property though the property actually stands in the name of the assessee at the time of sale of the land. I find there is no dispute about an ancestral nature of the lands in question. The lands were partly owned by the assessee and his uncle 50% each. Father’s sisters and daughters are not the owners of the property. There are details furnished by the assessee which are discussed in para 5 of the order of the CIT(A) as to the extent of amounts paid by the assessee to the father’s sisters and father’s daughters. The bonafide of the payments is not in dispute. The question is why the said payments are allowable as deduction in the computation of the capital gains. I find it is undisputed fact that the names of the father’s sisters and father’s daughters are not borne on the records of the revenue orders. The title of the property is not in dispute and the names of the assessee and his uncle appeared in 7/12 extracts. Therefore, whatever is paid by the assessee to his uncle is not as a matter of right but only aims at to keep him happy. Therefore, it is not the case that the title needs to be perfected before property is transferred. However, the assessee’s argument that such payment is required to keep the transactions free from likely litigation is not sustainable. I have also considered the fact that the assessee could not demonstrate that there exists and demands of share in gains from the sisters and daughters of his father. Further, it is also informed that no such payments were made by his uncle who has having other 50% shares in the said property. I perused the contents of para 5.2 and 5.3 of the order of the CIT(A) in this regard. For the sake of completeness, the said para 5.2 and 5.3 of the order of the CIT(A) are extracted hereunder :-
“5.2 I have carefully considered the matter. I am not in agreement with the appellant on this issue. The proposition of the appellant that his daughters and his father’s sister have inherent embedded rights in the property sold, due to operation of Hindu Succession Act, cannot be accepted in view of the facts which appear to have been ignored by the appellant while making this argument. This controversy is to be dividend in two parts one being the payment of Rs.4,50,000 to Vidya Anil Mohite and Rs.3,00,000 to Sharda Suresh Shedge, who are the daughters of the appellant. The other is the payment of Rs.50,000 to Savitribai Valekar, Rs.50,000 to Shivantibai Balghere, Rs.1,50,000 to Shantabai Sawant and Rs.1,50,000 to Kasabai Bhegade, who are the sisters of the appellant’s father. The detailed facts in regard to these so called selling expenses are as under :
a. I find that the release deed dtd. 10/10/1997 which has been, duly registered with the sub registrar, the sisters of the appellant’s father viz. Kasabai Bhedge, Draupadibai Bagal, Savitribai Valekar, Panabai Sawant, Shantabax Balghare and released their right in favor of Tukaram Namdev Bhondve, Bhike N. Bhondve (uncles of the assessee} and Sakharam P Bhondve (assessee). After: registration of this deed, an entry was duly made in the mutation records ore 9/2/1998 vide entry no.4142.
b. In the development agreement did. Sept 2006 the sellers are exclusively mentioned as Bhiku N. Bhondve his wife Bhagubai B. Bhondve. his sons Vilas. Dyaneshwar, Popat Bhondve and his daughter Hirabai M. Garade along with the assessee Sakharam Bhondve. There is no mention whatsoever of the father’s sisters or his daughters in the development agreement.
c. In the sale deed registered on 21/4/2008, the sellers are mentioned as Smt. Bhagubai B. Bhondve, her sons Vilas, Dyaneshwar, Popat Bhondve and her daughter Hirabai M. Garade along with the assessee Sakharam Bhondve. The confirming parties are 14 in number being other members of the extended Bhondve family, including the son Rahul and daughters Vidya and Varsha of the appellant. These persons are merely confirming parties and not sellers.
d. The development agreement in Sept 2006, specifies that 50% of the payment is to be made to the assessee and 50% is to be made to the uncles of the assessee and their family. There is no direct payment made by the builder to either the sisters of the appellant’s father or to his daughters. The consideration has been paid only to the appellant and his uncle.
5.3 From the above set of facts, it is evident that the sellers of the property an only the assessee and his uncles. The sisters of the appellant’s father have released their rights in the ancestral property in 1997 itself and this entry being duly recorded in the mutation record on 9/2/1998 results in all the rights of the sisters of the appellant’s father being extinguished in the year 1998. Therefore as on date of development, agreement the sisters of the appellant’s father have no rights whatsoever in the property sold. On this fact alone, the argument of the appellant that the sisters of his father had rights fails. The argument of the appellant is merely a general proposition of law which would apply in a case where no such release was made by the sisters of his father. Once again to reiterate, the action of the sisters of the appellant’s father to release their rights in the property in 1997 and the mutation entry in 1998 has the effect of extinguishing their rights in the property. Therefore, there is no legal impediment in transferring the property by the appellant without concurrence of the sisters of his father. The payment, if made by the appellant therefore appears to be gratis, and is not related to the transfer of the land in Sept 2006 and therefore such expenditure is not wholly or exclusively related to the transfer of the capital asset and therefore not deductible u/s 48.”
15. From the above, it is evident that the recipients of cash of Rs.11,50,000/- are not the owners of the property at the time of property transferred. The above payments made are not required to be incurred wholly and exclusively for the transfer of property by the assessee. Considering the same, I am of the view that the above finding of the CIT(A) is fair and reasonable on this issue and it does not call for any interference. Accordingly, this part of grounds is dismissed.
16. To sum up, the grounds no.1, 1.1 and 3 are partly allowed and the grounds no.2 to 2.5 are dismissed.
17. In the result, the appeal of the assessee is partly allowed.
Order pronounced on this 06th day of January, 2020.