ITAT MUMBAI BENCH ‘D’
Assistant Commissioner of Income-tax-21(3)
Versus
Dilip Manhar Parekh
IT Appeal No. 6596 (Mum.) of 2011
C.O. No. 37 (Mum.) of 2012
[ASSESSMENT YEAR 2007-08]
JANUARY 30, 2013
ORDER
D. Manmohan, Vice-President
These cross appeals pertain to A.Y. 2007-08 and they are directed against the order dated 4.7.2011 passed by learned CIT(A)-32, Mumbai. Denial of exemption u/s. 54F of the Act in respect of investment made by the assessee, co-owner in the Juhu Bungalow, is the subject matter of dispute before us.
2. Facts necessary for disposal of the appeal are stated in brief. Shop No. 6 and Garage No. 6A in the building ‘Tirupati Shopping Complex’ were owned by the assessee jointly with Mrs. Chhaya B. Parekh. Though the aforementioned property was known by the name ‘M/s. Parekh Brothers’, it is not in dispute that the said property was held jointly as co-owners, each of them having half share in the said property. During the previous year relevant to A.Y. 2007-08 the property was sold for total consideration of Rs. 5,40,00,000/- and the share of the assessee herein was Rs. 2,70,00,000/-. While computing long term capital gains, arising in the hands of the assessee, it was shown that the assessee alongwith co-owner Mrs. Chhaya B. Parekh purchased Juhu Bungalow (new asset) on which both of them were entitled to claim deduction u/s. 54F of the Act.
3. Case of the Assessing Officer was that the old asset was held in the name of M/s. Parekh Brothers whereas agreement for purchase of Juhu Bungalow does not mention the name of M/s. Parekh Brothers and hence deduction u/s. 54F is not eligible to the assessees. The Assessing Officer further observed that during the course of assessment proceedings, in the case of another co-owner Mrs. Chhaya B. Parekh, spot inquiries were conducted which revealed that the said new asset was demolished within two years from the date of sale/purchase of the property and hence assessee is not entitled to claim exemption u/s. 54F on the so called new asset since residential house was demolished. According to the Assessing Officer section 54F(3) mandates that new asset should not be transferred within three years whereas, in this case, demolition of the new asset within two years would amount to violation of section 54F(3) of the Income Tax Act, 1961. Placing reliance upon the decision of Hon’ble Bombay High Court (Nagpur Bench), wherein the Court held that the investment made in the name of adopted son would not qualify for deduction u/s. 54F, the Assessing Officer concluded that the investment made in the name of the individual co-owners cannot be considered for claiming deduction u/s. 54F of the Act.
4. Aggrieved, the assessee contended before the learned CIT(A) that he alongwith Mrs. Chhaya Parekh jointly purchased the shop and garage in ‘Tirupati Shopping Complex’ under the name ‘M/s. Parekh Brothers’ but the fact remains that they are holding property as co-owners and not as AOP. Reliance was placed upon the decision of ITAT Mumbai Bench in ITA No. 1530 & 1531/Bom/93 to submit that it was a co-ownership property and rental income from the said shops were taxed in the hands of the co-owners only. In fact property income was assessed in the hands of the assessee in individual capacity for all earlier years. Under the circumstances, upon sale of the said property and investment of the consideration in a new residential building, assessee is entitled to claim deduction u/s. 54F of the Act to the extent of investment. What has to be seen is the fact as to whether assessees purchased a residential building or not. Once that test is satisfied, merely because it was demolished within two years after the date of purchase, to enable the co-owners to construct a new building, would not disentitle the assessees to claim deduction u/s. 54F of the Act. Demolition cannot be treated as ‘transfer’ within the meaning of section 54F(3) of the Act.
5. Learned CIT(A) observed that in the case of co-owner i.e. Mrs. Chhaya Parekh, ITAT already held that the income from the property in Tirupati Complex was assessable to tax in the hands of the co-owners only. The Tribunal further held that each co-owner is assessable to tax under the head ‘long term capital gains’. Having regard to the circumstances, learned CIT(A) observed that there is no reason to deny the claim of deduction u/s. 54F of the Act in respect of the investment made in the property in the name of the appellant. The Assessing Officer was directed accordingly. Though learned CIT(A) observed that the demolition of bungalow took place in subsequent year and hence claim of deduction u/s. 54F cannot be denied in this year, learned CIT(A) set aside the matter to the file of the Assessing Officer based on the presumption that if superstructure of the house is demolished and the house does not exist at all, the assessee may not be entitled to claim deduction u/s. 54F of the Act. Since the assessee got a relief in principle, he did not prefer an appeal. However, the revenue filed an appeal by raising following grounds :-
“(1) On the facts and circumstances of the case and in law, learned CIT(A) has erred in directing the Assessing Officer to allow deduction u/s. 54F against the long term capital gain computed in the hands of the assessee.
(2) The learned CIT(A) failed to appreciate the decision of the Hon’ble High Court Nagpur Bench in the case of Prakash v. ITO Ward 1(5), 312 ITR 40.“
6. On receipt of the notice of appeal filed by the revenue the assessee filed cross objection wherein it was contended that in order to claim deduction u/s. 54F of the Act the date of purchase has to be taken into consideration. Since it was a residential bungalow at the time of purchase the assessee is entitled to claim deduction u/s. 54F of the Act and mere demolition of superstructure at a later stage would not be sufficient to deny deduction u/s. 54F, since demolition of superstructure cannot be equated to transfer.
7. We have heard learned Departmental Representative whose main contention was that section 54F is a beneficial provision which has to be considered strictly. The object was to encourage assessees to utilise funds for construction of a new residential house whereas, in the instant case, though residential bungalow was purchased it was demolished within two years which does not serve the purpose.
8. On the other hand learned counsel appearing on behalf of the assessee submitted that the assessee purchased residential bungalow and hence benefit of deduction u/s. 54F is permissible in the facts and circumstances of the case. Merely because it was demolished at a later stage it cannot alter the character of purchase of residential house. Learned counsel for the assessee strongly relied upon the order of ITAT in the case of Mrs. Chhaya B. Parekh (ITA No. 4954/M/2010 dated 16.5.2012). Learned counsel for the assessee submitted that the assessee fulfilled the conditions u/s.54F of the Act on the date when it purchased a new bungalow and only in the event of transfer of such bungalow section 54F(3) comes into operation whereas, in the instant case, it was mere demolition of superstructure of the bungalow with the intention to reconstruct a residential house and thus demolition of superstructure cannot be considered to be at par with transfer of residential house within three years. He strongly relied upon the order of ITAT “B” Bench, Mumbai (supra).
9. After hearing the matter the Bench noticed that the decision of Hon’ble Apex Court in the case of Vania Silk Mills (P) Ltd. v. CIT[1991] 191 ITR 647/59 Taxman 3 was over ruled by the Three member Bench of Hon’ble Apex Court in the case of CIT v. Grace Collis[2001] 248 ITR 323/115 Taxman 326, whereas, in the case of co-owner, the Tribunal followed the decision in the case of Vania Silk Mills (P.) Ltd. (supra) to hold that extinguishment of right on account of destruction or loss of asset does not amount to transfer. Therefore, case was refixed for clarification.
10. Learned counsel appearing on behalf of the assessee submitted that the later decision of Hon’ble Apex Court in the case of Grace Collis (supra) was explained by Hon’ble Madras High Court in the case of Neelamalai Agro Industries Ltd. v. CIT[2003] 259 ITR 651/[2002] 125 Taxman 582, wherein the Court observed as under :-
“Learned counsel for the Revenue, however, contended that the law declared by the apex court in the case of Vania Silk Mills Pvt. Ltd. [1991] 191 ITR 647, is no longer good law, and that that decision has been both expressly and impliedly been overruled by a three-Judge Bench in the case of CIT v. Mrs. Grace Collis [2001] 248 ITR 323 (SC). In the case of Mrs. Grace Collis [2001] 248 ITR 323 (SC), the court was concerned with the question as to whether there is a transfer of the shares when the amalgamation of the company whose shares are held by the assessee is ordered by the court with another company. The court held that the rights of the assessee in the capital asset, viz., the shares in the amalgamating company stood extinguished upon the amalgamation of the amalgamating company with the amalgamated company and that, (page 331) :
“There was, therefore, a transfer of the shares in the amalgamating company within the meaning of section 2(47). It was, therefore, a transaction to which section 47(vii) applied and, consequently, the cost to the assessees of the acquisition of the shares of the amalgamated company had to be determined in accordance with the provision of section 49(2), that is to say, the cost was deemed to be the cost of the acquisition by the assessees on their shares in the amalgamating company.”
On the amalgamation of one company with another, the assets and liabilities of the amalgamating company are taken over by the amalgamated company. Those assets and liabilities do not cease to exist when amalgamation takes place. They continue to exist. The ownership of those assets stand transferred to the amalgamated company.
The rights of the shareholder in the shares held by him or her in the amalgamating company which had owned the assets, are replaced by the rights given to such shareholders in the shares of the amalgamated company which takes over the assets and liabilities of the amalgamating company. Shares in the amalgamated company are allotted to the shareholder of the amalgamating company, as the consideration for the transfer of the assets of the amalgamating company, the ratio being determined with reference to the value of the respective shares which is dependent upon the value of the assets and prospects of the company. Despite the extinguishment of the rights in the shares of the amalgamating company on its dissolution, the assets which gave value to those shares prior to amalgamation continue to exist, now under the owner-ship of the amalgamated company, and may provide added value to the shares of that company.
The extinguishment of rights in the capital asset referred to in the definition of “transfer” in section 2(47) of the Act, therefore, would clearly apply to a case where the rights in the shares in the amalgamating company are extinguished on amalgamation to be replaced by shares in the amalgamated company, which after amalgamation is the owner of the assets transferred to it as a consequence of the amalgamation, and which will thereafter have the ownership, use and benefit of those assets.
The case of amalgamation of companies and the extinguishment of rights of the shareholder in the amalgamating company is no way comparable to the destruction of the assets which as a consequence brings about the extinguishment of the rights of the assessee-owner in such assets.
In the case of Mrs. Grace Collis [2001] 248 ITR 323 (SC), at page 330 of the reports, the court noticed the submission made by counsel for the Revenue thus :
“Learned counsel for the Revenue submitted that having held that the payment in settlement of the insurance claim was not in consideration of the transfer to the insurer of the damaged machinery and that, therefore, there was no transfer within the meaning of section 45, it was unnecessary for this court in Vania Silk Mills Pvt. Ltd.’s case [1991] 191 ITR 647 to go on to consider the definition in section 2(47) and the meaning to be attached to the expression ‘extinguishment of any rights therein’. In his submission, the decision in Vania Silk Mills Pvt. Ltd.’s case [1991] 191 ITR 647 (SC) was to this extent obiter dicta.”
It is only to the extent of that obiter dicta, that the decision rendered in the case of Mrs. Grace Collis [2001] 248 ITR 323 (SC) can be said to be at variance with the decision rendered in the case of Vania Silk Mills Pvt. Ltd. [1991] 191 ITR 647 (SC). In the case of Mrs. Grace Collis [2001] 248 ITR 323 (SC), the court considered the terms “extinguishment of any rights therein” and the definition of “transfer” in section 2(47) of the Act. The court did not approve limiting the effect of the words “extinguishment of any rights therein” in the definition of “transfer” in section 2(47) of the Income-tax Act, to extinguishment on account of transfers. The court held, (page 330) :
“As we read it, therefore, the expression does include the extinguishment of rights in a capital asset independent of and otherwise than on account of transfer.”
In the case of Mrs. Grace Collis [2001] 248 ITR 323 (SC), the court did not have occasion to go into the question as to whether the destruction of a capital asset which as a consequence brings about the extinguishment of the rights of the assessee-owner in such asset, would amount to transfer. The court did not hold that Vania Silk Mills Pvt. Ltd.’s case [1991] 191 ITR 647 (SC) was wrongly decided, or that the definition of “transfer” in section 2(47), particularly, the use of the words “extinguishment of any rights therein” would cover cases of destruction of the capital asset. Cases such as the destruction of the capital asset in a fire, or its complete loss as in the case of sinking of a vessel in the sea, cannot be regarded as having been brought within the fold of definition of “transfer” in section 2 (47), by reason of what has been said and laid down in the case of Mrs. Grace Collis [2001] 248 ITR 323 (SC). It is well settled that the words and expression used in a judgment are not to be read as statutory provisions. Situations which did not arise for consideration and were, in fact, not considered are not to be regarded as having been considered. It is significant that the argument advanced for the Revenue before the court in the case of Mrs. Grace Collis [2001] 248 ITR 323 (SC) was not that the case of Vania Silk Mills Pvt. Ltd. [1991] 191 ITR 647 (SC) was wrongly decided. On the other hand, the argument before the court was that though that decision on facts was correct, certain observations which were not necessary for the case and which the Revenue considered to be erroneous had been made, and were required to be overruled. The law laid down in Vania Silk Mills Pvt. Ltd.’s case [1991] 191 ITR 647 (SC), that extinguishment of rights in a capital asset as a necessary consequence of destruction of the asset does not amount to transfer, has not been overruled by the apex court in the case of Mrs. Grace Collis [2001] 248 ITR 323.”
11. In the light of the decision of Hon’ble Madras High Court, learned counsel submitted that demolition of an asset does not amount to transfer since there is no transferee and there is no consideration; It cannot be treated as “extinguishment of rights”. One cannot make loss or profit out of such transaction. It was thus contended that the decision of Hon’ble Apex Court in the case of Mrs. Grace Collis (supra) do not cover such situation in which event, decision of Co-ordinate Bench in the case of co-owner deserves to be followed.
12. On the other hand learned Departmental Representative relied upon the decision of Hon’ble Madras High Court in the case of CIT v. V. Pradeep Kumar[2006] 153 Taxman 138 (Mad). It was also contended that the principle laid down by Hon’ble Apex Court, in the case of Grace Collis (supra), squarely applies in the circumstances of the case.
13. We have carefully considered the rival submissions and perused the record. The issue hinges around the meaning of the expression “transfer”, provided in section 2(47) of the Act. The expression “extinguishment of any right therein’ was the subject matter of consideration by Hon’ble Supreme Court in the case of Grace Collis (supra) wherein, Their lordships were concerned with the expression “extinguishment” in the context of amalgamating company taking over shares of the amalgamated company by the order of the Court. From the reading of the decision of Hon’ble Apex Court in the case of Vania Silk Mills (P.) Ltd. (supra) as well as later decision of Hon’ble Madras High Court in the case of Neelamalai Agro Industries Ltd. (supra) it can be seen that any extinguishment on account of act of the assessee would amount transfer and the only exception provided therein was the extinguishment on account of act of God such as destruction of the capital asset in a fire, complete loss in the case of sinking of a vessel of the assessee etc. In the instant case, it is not in dispute that the demolition of the building took place at the behest of the assessee and it is not an act of God in which event, it has to be said that demolition of house would fall within the definition of “transfer”. This aspect was not properly analysed by the ITAT in the case of co-owner since the subsequent decision of Hon’ble Supreme Court in the case of Grace Collis (supra) was not brought to the notice of the Co-ordinate Bench. Since this aspect was not looked into by learned CIT(A), we deem it fair and reasonable to set aside the matter to the file of learned CIT(A) who is directed to reconsider the matter in accordance with law in the light of our above observations.
14. No doubt the assessee raised the ground, by way of cross objection, that subsequent transfer would not effect the eligibility to claim deduction u/s. 54F of the Act because the disallowance, if any, can only be made in the year of transfer, if it is within the period, but the fact remains that at that time, when purchase of house was made, there was a building in existence which satisfied the conditions laid down u/s.54F of the Act. It is not out of place to mention here that in the case of Pradeep Kumar (supra), Hon’ble Madras High Court observed as under:-
“………construction must be real one. It should not be a symbolic construction.”
Drawing analogy from the aforecited decision, in the case of the assessee, the deduction u/s. 54F is available to purchase of residential house and such house should be real and not symbolic. If old house is only meant for demolition, it may not satisfy the test of purchase of residential house, more particularly when it was demolished within two years. Thus it may be a symbolic purchase of bunglow which may not pass the test of ‘purchase’ u/s. 54F of the Act or if it is treated as purchased, then demolition, being a voluntary act, may amount to ‘transfer’ as per the decision of Hon’ble Supreme Court in the case of Mrs. Grace Collis (supra). Since we have already taken a decision to set aside the order of learned CIT(A) for fresh consideration, the ground urged in the cross objections filed by the assessee is also requires to be considered afresh comprehensively.
15. Accordingly, we direct the learned CIT(A) to reconsider both the issues in accordance with law. The appeal by the revenue as well as the cross objections filed by the assessee are disposed of accordingly.
