Goverdhan Singh Shekhawat Vs ITO (ITAT Jaipur)
In a significant judgment, the Income Tax Appellate Tribunal (ITAT) Jaipur Bench has ruled in favor of Goverdhan Singh Shekhawat, a farmer, in his appeal against the order of the CIT(A)-II, Jaipur, for Assessment Year 2009-10. The Tribunal deleted the major addition of ₹3,42,31,397/- made on account of Long Term Capital Gain (LTCG) by denying exemption under Section 54F of the Income Tax Act, 1961. The ITAT’s decision considered the assessee’s genuine efforts to comply with the law, the bank’s misrepresentation, and the impact of a departmental attachment on his ability to complete house construction.
Case Genesis:
The case originated from the compulsory acquisition of the assessee’s land by RIICO, for which he received compensation. In his income tax return, Mr. Shekhawat offered these receipts as long-term capital gains and claimed exemption under Section 54F by depositing the sale consideration into what he believed was a Capital Gain Account Scheme (CGAS) account.
During assessment proceedings, the Assessing Officer (AO) discovered that the account in which the funds were deposited was not a designated CGAS account. Consequently, the AO denied the Section 54F exemption, bringing the entire LTCG to tax. This denial was subsequently upheld by the CIT(A).
Assessee’s Core Arguments Before ITAT:
Mr. Shekhawat’s legal counsel presented several arguments before the ITAT, emphasizing the assessee’s bona fide intent and the circumstances beyond his control.
1. Bank’s Misrepresentation and Assessee’s Bona Fide Belief: The assessee contended that he was explicitly assured by the bank, including a certificate issued by a HDFC Bank Branch Manager dated November 11, 2009, that the account opened was a Capital Gain Account Scheme (CGAS) account. Being a layman and filing his first return of income of this nature, he relied on the bank’s representation. He further highlighted that he even deposited the substantial TDS refund from RIICO into the same account, indicating his genuine belief that it was a valid CGAS account for tax compliance.
2. Substantial Compliance with Section 54F: The assessee argued that the legislative intent behind Section 54F is to encourage investment in a new residential house within a stipulated period. He claimed that he had substantially complied with this intent by not utilizing the deposited amount for any other purpose than acquiring a plot and undertaking construction thereon. Bank statements confirmed withdrawals solely for this purpose, totaling ₹79,08,495/- for the new residential house. The assessee had also expressed readiness to transfer the funds to a proper CGAS account if so directed by the AO.
Judicial Precedents Cited for Substantial Compliance:
- Kishore H. Galaiya v/s ITO (2012) 150 TTJ 444 (Mumbai): This case held that non-deposit of the balance amount in a capital gains account scheme was a “technical default” when the assessee had spent more than the capital gains within three years on the construction of a new residential house, thereby remaining eligible for exemption under Section 54.
- Shri Jagtar Singh Chawla vs. ACIT (ITA No. 4923/Del./2010): In a factually similar case where a branch manager misled the assessee into depositing a cheque in a flexi deposit scheme instead of a notified capital gain account, the Tribunal held that the assessee was under a bona fide belief and intended to reinvest, thus qualifying for deduction under Section 54F. This specific aspect of the ruling was not challenged by the Revenue before the Punjab and Haryana High Court.
- Jagan Nath Singh Lodha v/s ITO (2004) 85 TTJ 173 (Jd): This case supported the idea that if the assessee’s intention from the beginning was to purchase a residential house and they did so within the stipulated period, they are entitled to exemption under Section 54F, even if there was a technical failure to deposit in a CGAS account.
- DI vs Agrim Charan Foundation (2002) 253 ITR 593 (Del.): This precedent, though related to Section 11, underscored that where an investment was made under a bona fide belief due to misrepresentation, the benefit should not be denied if there were no mala fides.
3. Nature of New Property (Residential vs. Commercial): The AO had questioned whether the newly constructed property was residential, pointing to an “incomplete commercial structure” based on a valuer’s statement. The assessee strongly rebutted this, asserting that:
- The plot was in a residential colony (Jaishree Nagar) and purchased with the clear intention of constructing a residence, as he had no other residential house.
- The land use was never converted to commercial, making commercial construction prohibited.
- The property was incomplete when inspected, and initial plans supported a residential layout, including a large drawing room and future bedrooms/kitchen on upper floors.
- Its temporary leasing out from October 15, 2011, was due to frustration over the inability to complete construction, not an original commercial intent.
Judicial Precedents Cited for Residential Property Interpretation:
- B.B. Sarkar v/s CIT, West Bengal-IV (1981) 132 ITR 150 (Cal): This case suggested that the main purpose is relief for a new residential house, and it doesn’t matter if it’s partly constructed or purchased.
- Prem Prakash Bhutani v/s ACIT (2007) 110 TTJ 440 (Del): This ruling indicated that Section 54 does not require a specific construction manner, only that it be used for residential purposes, and multiple units for a family can qualify.
4. Doctrine of Impossibility of Performance: A crucial argument was that the assessee was prevented from completing the construction within the statutory three-year period (by July 16, 2011) due to the Income Tax Department’s own action. The HDFC bank account, where the entire sale consideration was deposited, was attached under Section 281B from December 1, 2010. Despite repeated requests from the assessee for its release to complete construction, the attachment was extended multiple times, effectively blocking access to funds.
Judicial Precedents Cited for Doctrine of Impossibility:
- National Aviation Co. of India v/s Deputy Commissioner of Income Tax (2011) 137 TTJ 662 (Mumbai): While this case dealt with TDS on payments to non-residents, it recognized the principle that if “issues were not within the assessee’s control” and they had “bona fide made all possible efforts to comply,” the assessee cannot be held liable for non-performance. This supports the general legal maxim impossibilium nulla obligatio est (the law does not compel doing impossibilities).
5. Denial of Cross-Examination: The assessee also contended that the AO heavily relied on the valuer’s statement recorded on November 24, 2011, without providing the assessee an opportunity for cross-examination, as the assessment was completed on December 5, 2011. This, he argued, violated principles of natural justice.
Judicial Precedents Cited for Cross-Examination:
- Vimal Chandra Golecha v/s ITO & Anr. (1982) 134 ITR 119 (Raj.): This and similar cases emphasize that statements collected without providing an opportunity for cross-examination cannot be used against the assessee.
ITAT’s Decision:
