Case Law Details

Case Name : Grandhi Nageswara Rao (HUF) Vs ACIT (ITAT Visakhapatnam)
Appeal Number : I.T.A.No.142/Vizag/2017
Date of Judgement/Order : 09/02/2018
Related Assessment Year : 2012-13
Courts : All ITAT (5463) ITAT Visakhapatnam (53)

Grandhi Nageswara Rao (HUF) Vs ACIT (ITAT Visakhapatnam)

As regards the investment made in the individual capacity, even though HUF is an independent assessable unit under Income Tax Act, under the common law, HUF cannot be considered to be a legal entity. The HUF has to be represented through any one of the coparceners. Therefore, when the assessee HUF invested the funds in the name of any one of the coparcener, it has to be construed that the investment was made in the name of HUF. When the nucleus of the HUF fund was used for purchase of a property in the name of any one of the coparcener, the property belongs to the HUF, even though the property was registered in the individual name of one of the coparcener. The property belongs to all the coparceners in equal shares as members of HUF. Therefore, the assessing officer is not justified in rejecting the claim of the assessee especially, when the investment was made in the name of Karta of HUF.

Deduction U/s. 54F cannot be disallowed merely because  the borrowed funds were used when the property was purchased before the date of the sale of asset

Now coming to second reason for disallowance of claim of the assessee, the assessing officer found that only the borrowed funds are used for purchase of new asset. As rightly submitted by the learned representative for the assessee, provisions of section 54F of the Act, requires the assessee to purchase a property one year before the date of the sale or two years after the date of the sale of asset. If the assessee could not invest within the time frame provided in the Act, the same has to be deposited in any one of the capital gain account within the due date provided for filing the return of income under section 139(1) of the Act. No one could expect the assessee to utilize the sale proceeds of the capital asset or the capital gain arising from such sale before the date of the sale of the capital asset. The assessee cannot have any sale proceeds before the date of the sale. Therefore, this Tribunal is of the considered opinion, when the assessee borrowed the funds and utilized in purchasing the capital asset and thereafter uses the sale proceeds or capital gain for repaying the loan borrowed, that would amount to sufficient compliance of the requirement of section 54F of the Act. Therefore, merely because  the borrowed funds were used when the property was purchased before the date of the sale of asset, this Tribunal is of the considered opinion, this cannot be a reason for disallowing the claim of the assessee.

FULL TEXT OF THE ITAT JUDGMENT

This appeal filed by the assessee is directed against order of the Commissioner of Income Tax-3 {CIT(A)}, Visakhapatnam vide ITA No.71/2015-16/CIT(A)-3/VSP/2016-17 dated 12.12.2016 for the assessment year 2012-13.

2. In this case, the assessee filed the return of income admitting total income of ` 98,820/-. A search u/s 132 of the Income Tax Act, 1961 (hereinafter called as ‘the Act’) was carried out in the case of M/s. A.S. Steel Traders on 11.10.2012 and in the course of search, the document No.5019 of 2011 of SRO, Anakapalli was found and seized vide Annexure- AJ/O1, which revealed that the assessee had sold the land admeasuring 6 acres in survey No.1632/8 of Anakapalle along with 5 others in the capacity of HUF to the individuals Shri A. Jagadish and others. The assessee along with others have received the sale consideration of ` 1.20 crores against the market value adopted by the SRO at ` 2.10 crores for stamp duty purpose. However, the assessee did not disclose the sale consideration as capital gains. Hence, the assessing officer reopened the assessment by issue of notice u/s 148 of the Act and brought to tax the assessee’s share of capital gains. The assessee is 1/6th share holder of 6 acres of land sold to Mr. A Jagadish and others of M/s. A.S. Steel Traders and received a sum of ` 20,00,000/- as sale consideration and claimed deduction u/s 54F of the Act. The A.O. rejected the deduction claimed by the assessee u/s 54F of the Act, since the impugned property was purchased in the name of Sri Ramana Murthy Setty, co-parcener of the HUF. The assessee contended that Sri G. R. Setty, one of the co-parcener of the HUF has purchased the property for which the funds were given from the HUF and the balance amount was taken as a loan from LIC (HFL) and the property was transferred to HUF by a memorandum of understanding. However, the Ld. A.O. was not impressed with the explanation of the assessee, hence disallowed the exemption claimed by the assessee u/s 54F of the Act holding that, since the property of the HUF was transferred, the new property required to be acquired by the HUF but not the individual. According to the assessing officer, HUF and individual are two separate entities and if individual co-parcener acquires the property the same cannot be treated as HUF property, hence, the assessee is not entitled for exemption u/s 54F of the Act. Further, the A.O. also assessed the capital gains as per the SRO value.

3. Aggrieved by the order of the A.O., the assessee went on appeal before the CIT(A) and the Ld. CIT(A) confirmed the order of the A.O.

4. Aggrieved by the order of the CIT(A), the assessee is in appeal before this Tribunal. Appearing for the assessee, the Ld. A.R. argued that the assessee HUF has sold the property and the coparcener had acquired the residential house for which the source was funded by the HUF partially and balance was met out of borrowed funds. One of the co-parcener had acquired the property and got registered in the name of the co-parcener Mr. G.R. Murthy Setty, S/o Nageswara Rao. Since HUF is not entitled for the loan, Mr. Rama Murthy Setty who is having salary income has taken loan from LIC of India and accordingly the asset was purchased in the name of Mr. R. Murthy Setty, one of the co-parcener and the MOU has been reached on 11.3.2014 and the property is treated as HUF property as per the MOU. The rent received was also offerred in the hands of HUF and the loan installments were repaid by the HUF and on complete repayment of the loan, the property would be transferred by registered sale deed to the hotchpotch of HUF. Since the funds were invested from HUF and the co-parceners are having equal share in the HUF property, the Ld. A.R. argued that HUF is entitled for deduction u/s 54F of the Act even though the property was purchased in the name of co-parceners. Hence, argued that the orders of the Ld. CIT(A) to be set aside and allow the appeal of the assessee. The Ld. A.R. also relied on the decision of Hon’ble ITAT, Chennai bench in the case of Puranchand & Family (HUF) Vs. ITO ,ITA No.2974 (Mds) of 2016 dated 31st January 2017

5. On the other hand, the Ld. D.R. supported the orders of the lower authorities.

6. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The HUF has sold the property and received 1/6th share of consideration amounting to ` 20,00,000/- out of which contributed ` 15 lakhs towards purchase of new property and the remaining amount of ` 25 lakhs was contributed by the co-parcener for acquiring the new property. Both the HUF and co-parcener of the property have entered into a memorandum of understanding to transfer the property in the name of HUF after complete repayment of the loan, which was granted to the individual co-parcener Mr. G. Rama Murthy Setty, S/o Nageswara Rao. The assessee also declared the rental income in its hands and the  loan is being repaid by the HUF. Co-parcener is one of equal shareholder of the HUF. Under the similar facts and circumstances, the coordinate bench of ITAT, Chennai in the case of Purnachand & Family (HUF) cited (supra) held that the property acquired in the name of Karta is entitled for the deduction u/s 54F of the Act. For ready reference, we extract para Nos.6 to 10 of the order cited (supra).

“6. We have considered the rival submissions on either side and perused the material available on record. The assessee sold a capital asset namely diamond and claims exemption on the capital gain under section 54F of the Act. The assessing officer rejected the claim of the assessee on three grounds :–

(1) First, the capital asset was purchased in the individual name of coparcener of HUF.

2) Borrowed funds were used for purchase of the new asset and not the sale proceeds of the diamond.

(3) There was no construction on the new asset.

7. As regards the investment made in the individual capacity, even though HUF is an independent assessable unit under Income Tax Act, under the common law, HUF cannot be considered to be a legal entity. The HUF has to be represented through any one of the coparceners. Therefore, when the assessee HUF invested the funds in the name of any one of the coparcener, it has to be construed that the investment was made in the name of HUF. When the nucleus of the HUF fund was used for purchase of a property in the name of any one of the coparcener, the property belongs to the HUF, even though the property was registered in the individual name of one of the coparcener. The property belongs to all the coparceners in equal shares as members of HUF. Therefore, the assessing officer is not justified in rejecting the claim of the assessee especially, when the investment was made in the name of Karta of HUF.

8. Now coming to second reason for disallowance of claim of the assessee, the assessing officer found that only the borrowed funds are used for purchase of new asset. As rightly submitted by the learned representative for the assessee, provisions of section 54F of the Act, requires the assessee to purchase a property one year before the date of the sale or two years after the date of the sale of asset. If the assessee could not invest within the time frame provided in the Act, the same has to be deposited in any one of the capital gain account within the due date provided for filing the return of income under section 139(1) of the Act. No one could expect the assessee to utilize the sale proceeds of the capital asset or the capital gain arising from such sale before the date of the sale of the capital asset. The assessee cannot have any sale proceeds before the date of the sale. Therefore, this Tribunal is of the considered opinion, when the assessee borrowed the funds and utilized in purchasing the capital asset and thereafter uses the sale proceeds or capital gain for repaying the loan borrowed, that would amount to sufficient compliance of the requirement of section 54F of the Act. Therefore, merely because  the borrowed funds were used when the property was purchased before the date of the sale of asset, this Tribunal is of the considered opinion, this cannot be a reason for disallowing the claim of the assessee.

10. In view of the above, we are unable to uphold the orders of both the lower authorities. Accordingly, the orders of both the lower authorities are set aside and the addition is deleted. The assessing officer is directed to allow the claim of exemption under section 54F of the Act, to the extent of the amount invested on or before the date of filing of return of income as provided under section 139(1) of the Act.”

8. In the result, the appeal filed by the assessee is allowed.

The above order was pronounced in the open court on 9th Feb’18.

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Category : Income Tax (28213)
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Tags : ITAT Judgments (5641) Section 54F (182)

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