Case Law Details

Case Name : Asha Bhausaheb Thube Vs ITO (ITAT Pune)
Appeal Number : ITA No.270/PUN/2017
Date of Judgement/Order : 11/05/2022
Related Assessment Year : 2013-14

Asha Bhausaheb Thube Vs ITO (ITAT Pune)

Section 54F of the Act requires assessee to purchase new residential house within a period of Two years after the date of Sale or construct within a period of Three years. In this case, it is a fact that assessee has neither purchased nor constructed a residential house within a period mentioned in the Section. The impugned property was sold vide registered sale deed dated 31/08/2012. As per the clause 6 of the said registered sale deed, the impugned property was kept mortgaged with State Bank of India ,the State Bank of India vide registered release document of mortgaged property dated 29/06/2012 , released the impugned property due to repayment of loan. Thus , it is an admitted position, that State Bank of India by registered document released the mortgaged property on 29/06/2012. It is also mentioned in clause 9 of the Registered Sale deed dated 31/8/2012, that possession of the impugned property was handed over to the buyer of the property. It means on the date of transfer of the impugned property there was no bar on the assessee. The SBI has filed petition before Debt Recovery Tribunal -II Mumbai, in the said petition on page 15, the SBI has stated that property at survey no.63/1A, 63/1B have been subsequently released from the mortgage charge. Thus even SBI has admitted the fact. The assessee claimed that amount was blocked by the Bank. However, it is an independent transaction of the assessee that assessee allowed the Private Limited Company i.e. Prathamesh Ceramics Pvt. Ltd., to obtain the loan against the impugned property which was sold during the year. The transaction of the Prathamesh Ceramics Pvt. Ltd., has nothing to do with assessee’s transaction. These are independent transactions. On the date of sale the impugned property was not mortgaged, rather SBI released it much early on 29/6/2012. Thus, on the date of sale (31/8/2012) when the assessee received the sale consideration, the assessee was free to utilise it as per his own free will. As per Section 54F of the Act, it was mandatory for the assessee either to purchase or construct the new residential house within the stipulated period. The assessee failed to do so. Therefore, the disallowance has to be made in the year of sale of impugned property, on which Long Term Capital Gain has been calculated i.e. during the A.Y. 2013-14. The assessee’s claim that disallowance under section 54F should be in A.Y. 2016-17 does not have any merit. Therefore, the AO has rightly disallowed the assessee’s claim of Section 54F of the Act in the A.Y. 2013-14.

Section 54F exemption not allowable if no property purchased or constructed within stipulated period

FULL TEXT OF THE ORDER OF ITAT PUNE

This is an appeal filed by the Assessee directed against the order of ld.Commissioner of Income Tax(Appeals)-1, Nashik, Appeal No.Nsk/CIT(A)-1/748/2015-16dated 21.11.2016 for the Assessment Year 2013-14.The Assessee raised following grounds of appeal:

“1. The learned CIT(A)-1, Nashik, erred in law and on facts in affirming disallowance of Rs. 55 Lakhs out of total disallowance of Rs. 1.10 Crores made by the learned AO for cost of leveling incurred by the appellant, on the analogy that, the expenses incurred appears to be on higher side. The learned CIT(A)-1, ought to have appreciated that, all the expenses incurred are genuine and bonafide.

2. The learned CIT(A)-1, Nashik, erred in law and on facts in affirming the action of the learned AO for not granting exemption of Rs. 2,36,87,557/- claimed u/s 54F of the ITA, 1961 on the analogy that, conditions of section 54F of the ITA, 1961 is not fulfilled. The learned CIT(A)-1, ought to have appreciated that, the funds received on sale of land were blocked by SBI for recovery & repayment of loans of M/s. Prathmesh Ceramics Pvt. Ltd. and were not released in-spite of several requests made by the appellant, so that residential house property can be purchased.

3. Alternatively and without prejudice to Ground No. 2, the learned CIT(A)-1, Nashik erred in law and on facts in taxing Rs. 2,36,87,557/-in AY 2013-14 instead of AY 2016-17. The learned CIT(A)-1, ought to have appreciated that SBI has appropriated the funds against the loan of M/s. Prathmesh Ceramics Pvt. Ltd. only on 30/04/2015.

4. Alternatively and without prejudice to Ground No. 1 to 3, appellant contends, if at all, any disallowance u/s 54F of the ITA, 1961 is to be sustained, the disallowance of Rs. 2,36,87,557/- should be made in AY 2016-17 (i.e. FY 2015-16), on the analogy that, condition as to period of construction of residential house gets over three (3) years after the date of transfer, i.e. in AY 2016-17 and not in AY 2013-14.

5. Alternatively and without prejudice to Ground No. 1 to 3 and Ground No. 5, appellant contends that, forced appropriation of the proceeds of Rs. 3 Crs. from the transaction of land sale towards overdue loan availed by M/s. Prathamesh Ceramics Pvt. Ltd. (i.e. PCPL) by State Bank of India (i.e. SBI); resulted into a creation of a right (i.e. CAPITAL ASSET) of appellant to recover the sale proceeds from PCPL. Appellant further contends that the said right (i.e. CAPITAL ASSET) got extinguished immediately thereafter, considering the deep losses of PCPL, which amounts to TRANSFER u/s 2(47) of the ITA, 1961. Appellant therefore contends that set-off of capital loss arising from the said extinguishment ought to be granted against alleged Long Term Capital Gain worked out by the learned AO.”

Additional Grounds of Appeal:

7. Appellant contends that, merely due to non-release of funds of Rs.3 Cr by State Bank of India, Nashik; Appellant could not fulfill condition u/s 54F of the ITA, 1961 w.r.t. acquisition of new residential house. Appellant further contends that, since, non-acquisition of a new house was not attributable to the Appellant, interest u/s 234B and u/s 234C of the ITA, 1961 is not chargeable in this case.

2. Brief facts of the case, as emanating from the order of the Assessing Officer(AO)&Ld.CIT(A), are that the assessee with five others have entered into the transaction of sale of immovable property at Survey no.63 Anandwali for the Total consideration of Rs.12,50,00,000/- on 31/08/2012. Appellant filed copy of registered sale deed for the said transaction. Out of the said amount assessee received Rs.9,62,00,000/-. The said land was purchased by Assessee& others for Rs.2,70,000/- on 24/12/1987.Before the AO the assessee claimed cost of improvement which was denied by the AO.The AO calculated LTCG. AO denied assessee’s claim of deduction u/s54Fof the Act. Assessee filed an appeal before CIT(A). The Ld.CIT(A) passed the appeal order on 21/11/2016. The Ld.CIT(A) allowed 50% of cost of improvement on the ground that assessee had only submitted bills without any other corroborative evidence. The relevant apart of the CIT(A) is in par 5.3 of the order which is reproduced as under :

“5.3 I have considered the facts of the case, assessment order and submission of the appellant. The purchase deed of the land shows that the land is Potkharba land. Therefore, for any construction to be undertaken the land needs to be levelled. For levelling the land expenses needs to be incurred. Such expenses need to be allowed towards cost of improvement. The issue in consideration is the quantum of expenses incurred. The appellant has stated that it has incurred expenses of Rs.1.10 crores. It has produced bills for the same. He is not a position to produce any of the parties or any other corroborative evidences in support of the bills. The bills are on letter heads and some on plain paper. The appellant has himself admitted that the parties are not available and he is not able to contact them as the matter is very old. He has further submitted that two of the parties Mr. K.N.Shinde and Mr. R.V.Singh proprietor Pavitra construction has already expired. Thus, there is no way the expenses claimed to have been incurred by teh appellant for levelling the ground can be verified. However, this is also a fact that before commencement of construction land had to be levelled. Thus, it will not be fair to disallow the entire expenditure claimed by the appellant. However, in absence of any credible documentary and corroborative evidences available the expenses incurred in levelling of land needs to be estimated. In my view the cost of levelling claimed by appellant of Rs.1.10 crore appears to be on higher side. To meet the ends of justice, in my considered opinion, 50% of the expenses claimed that is Rs.55,00,000/-should be allowed towards cost of improvement of land.”

2.1 Regarding the Claim of 54F facts mentioned in the order of CIT(A) are as under :

6.2 In appeal, it is submitted:

I am holding 54.55% shares in Prathamesh Ceramics Pvt. Ltd. The company had taken a loan from SBI. Due to continuous loss incurred by the company, the loan account became an NPA Account. In order to pay the loan amount, I Said the Wagaskar House, Gangapur Road, Nashik for a total consideration of Rs.12.50 Crore and the whole consideration was deposited in Loan account of the company.

I had made an FDR of Rs.3 crore, which was going to be utilized towards purchase of new residential property. The letter issued by SBI in this regard dated 05/05/2012 and again confirmed on 01/10/2013.

I made several request to SBI for release of funds to purchase the residential property and the copies of communication with the bank are submitted herewith. But unfortunately without informing me, the bank forcefully on 30/04/2015 apportioned the above FDR against the NPA Account.

Here, I would like to clarify that my intention was to purchase the residential house as is evident from above and as of today I don’t own any residential property.

I deposited the sale consideration on 31/08/2012 with Bank and the Bank apportioned the FDR to my NPA account on 30/04/2015. Almost 3 years, the amount was with the bank only. If the utilization of consideration would have been in my hands, I would either purchased the new residential house and claimed the deduction u/s 54F or would have deposited the amount in bonds to claim deduction u/s 54EC, wherein the lock in period is of 3 years only.

Instead on claiming exemption u/s 54F, I would have claim deduction u/s 54GB which says that the capital gain on transfer of property not be charged if the consideration is utilized for purchase of new assets. And my investment in the company is much higher of new assets. And my investment in the company is much higher than Rs.3 crores. Considering the case of Assistant Commissioner of Income Tax vs. Asha Ashok Boob, Pune, Tribunal (2015) 69 ITR 0321 (Pune), which held that merely because the assessee has made a wrong claim u/s 54 the same cannot be ground to deny the benefit of deduction u/s 54F to which the assessee is otherwise eligible.

6.3 I have considered the facts of the case, assessment order and submission of the appellant. I agree with the findings of the Assessing Officer that the stipulations under section 54F is not met by the appellant. The argument that Rs.3 crores was with SBI so deduction should be allowed as money was in the bank cannot be accepted as the sale proceeds mandatorily had to be deposited in capital gain account scheme which has not been done in the instant case. Further, no proof has been submitted by the appellant that the net consideration has been utilized for purchase of equity shares of eligible company. Therefore, the deduction claimed by the appellant neither u/s 54F, nor u/s 54EC, nor u/s 54GB can be allowed. The action of the Assessing Officer is upheld.”

3. Ground Number 1 :This ground is regarding confirming the disallowance of 50% of cost of improvement claimed by the appellant assessee. The Ld.Authorised Representative(ld.AR) submitted that the assessee had claimed Rs.1.10crores under the head cost of improvement. He explained that the land was “Potkharab”. The land was required to be levelled before doing any activity on it. The Assessee submitted bills for the same. Ld.AR invited our attention to paper book page number 101 to 115 which were bills for the cost of improvements. It is a fact that bills have been filed before the lower authorities. The AO has not discussed these bills. The CIT(A) has merely mentioned that the Assessee has not produced those persons to whom payments were made. The assessee had submitted before the CIT(A) that two of these persons have died. Assessee further submitted that since the matter was very old the assessee was unable to produce other persons. We have gone through the bills submitted by the assessee which pertain to period 1995 to 2002. Some of the bills mentions about labour charges for construction of farm house, material for farm house. Other bills mentions about Labour charges, material for compound wall. Some of the bills are for levelling and filling up a deep-water canal, material for the same. In the sale deed dated 31/08/2012 there is mention of a Bungalow of 1353 sq. meters. The said bungalow had been constructed after obtaining permission from the Nasik Municipal Corporation. The Municipal corporation has also grantedcompletion certificate to the said bungalow. Municipal corporation has charged municipal taxes accordingly. The land has been sold along with the bungalow. The Assessing Officer(AO) failed to look into the Sale Deed based on which the Capital Gain has been calculated. The assessee claimed that since the matter is very old, it is difficult for him to produce the persons from whom he has purchased the material. However, all the bills contain address of the persons, if the Department doubted the genuineness of these bills, nothing prevented the Department from conducting enquiries. On identical fact, in the case of Nitin P.Wagaskar in ITA No.369/PUN/2017 for the A.Y. 2013-14, the Hon’ble ITAT held that “90% of the entire cost of construction/improvement while remaining 10% is disallowed. Accordingly, the Assessing Officer should provide appeal effect. Therefore, this ground in both Revenue and assessee’s appeal is partly allowed.”. Therefore, after considering the facts of the case, we are of the opinion that the assessee had incurred expenditure for improvement of the impugned property, therefore, respectfully following the decision of ITAT (supra) the AO is directed to re­calculate the Long Term Capital Gain after taking into consideration cost of improvement as 90% of Rs.1.10 crores i.e. Rs.99,00,000/-. Thus, the appeal of the assessee is Partly Allowed.

4. The ld. Authorised Representative(ld.AR) of the assessee submitted that he do not wish to press the Ground No.2 and 3. Accordingly, the Ground No.2 and 3 are dismissed as not pressed.

5. The Ground No.4 and 5 are related to 54F of the Act. The ld.AR submitted that the appellant assessee was holding 54.5% shares of Prathamesh Ceramics Pvt. Ltd. Ld AR submitted that the Prathamesh Ceramics Pvt. Ltd., had taken a loan from State Bank of India(SBI), the Bank had made the charge on the impugned property consisting of Bungalow and Land at Survey No.63, Anand Valli. The company Prathamesh Ceramics Pvt. Ltd., had substantial losses and could not repay the loan. As a result, vide letter dated 05.05.2012, the State Bank of India entered into an arrangement with Prathamesh Ceramics Pvt.Ltd.,as per the said arrangement, Bank kept Rs.3 Crores received from the Sale Proceeds of impugned property as Term Deposits and marked Lien. Bank was to release the lien after submission of the appropriate papers and confirmation of purchase of new house which was to be mortgaged by the Bank. The ld.AR further submitted that the Bank never released Rs.3 Crores, as a result, the assessee could not purchase a new house. Though, the assessee identified a new house, but due to failure of the Bank to release Rupees 3 Crores, assessee could not be able to purchase the said new house.

5.1 On the other hand, the ld.Departmental Representative(ld.DR) for the Revenue relied upon the orders of AO and ld.CIT(A).

6. We have heard both the parties, perused the material available on record and gone through the orders of the Lower Authorities. For convenience Section 54F of the Act is reproduced here as under:

Section 54 of the Income Tax Act:

54F. (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 65[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:

7. Section 54F of the Act requires assessee to purchase new residential house within a period of Two years after the date of Sale or construct within a period of Three years. In this case, it is a fact that assessee has neither purchased nor constructed a residential house within a period mentioned in the Section. The impugned property was sold vide registered sale deed dated 31/08/2012. As per the clause 6 of the said registered sale deed, the impugned property was kept mortgaged with State Bank of India ,the State Bank of India vide registered release document of mortgaged property dated 29/06/2012 , released the impugned property due to repayment of loan. Thus , it is an admitted position, that State Bank of India by registered document released the mortgaged property on 29/06/2012. It is also mentioned in clause 9 of the Registered Sale deed dated 31/8/2012, that possession of the impugned property was handed over to the buyer of the property. It means on the date of transfer of the impugned property there was no bar on the assessee. The SBI has filed petition before Debt Recovery Tribunal -II Mumbai, in the said petition on page 15, the SBI has stated that property at survey no.63/1A, 63/1B have been subsequently released from the mortgage charge. Thus even SBI has admitted the fact. The assessee claimed that amount was blocked by the Bank. However, it is an independent transaction of the assessee that assessee allowed the Private Limited Company i.e. Prathamesh Ceramics Pvt. Ltd., to obtain the loan against the impugned property which was sold during the year. The transaction of the Prathamesh Ceramics Pvt. Ltd., has nothing to do with assessee’s transaction. These are independent transactions. On the date of sale the impugned property was not mortgaged, rather SBI released it much early on 29/6/2012. Thus, on the date of sale (31/8/2012) when the assessee received the sale consideration, the assessee was free to utilise it as per his own free will. As per Section 54F of the Act, it was mandatory for the assessee either to purchase or construct the new residential house within the stipulated period. The assessee failed to do so. Therefore, the disallowance has to be made in the year of sale of impugned property, on which Long Term Capital Gain has been calculated i.e. during the A.Y. 2013-14. The assessee’s claim that disallowance under section 54F should be in A.Y. 2016-17 does not have any merit. Therefore, the AO has rightly disallowed the assessee’s claim of Section 54F of the Act in the A.Y. 2013-14. Hence, the Ground No.4 of the assessee is dismissed.

7.1 Alternatively, the assessee raised a plea that forced appropriation of Rs.3 Crores towards loan by State Bank of India resulted into creation of a Capital Asset. The assessee’s claim is farfetched. The loan was taken by Prathamesh Ceramics Pvt. Ltd., from State Bank of India. On the date of sale, the impugned property was not mortgaged, rather SBI released it much early on 29/6/2012. Thus, on the date of sale (31/8/202) when the assessee received the sale consideration , the assessee was free to utilise it as per his own free will. The Fixed Deposit receipt referred by the Assessee of Rs.3 crores was dated 28/12/2012 and it is in the name of Prathamesh Ceramics Pvt Ltd (page 116 of paper book). The assessee voluntarily agreed to offer its property for mortgage for the loan taken by Prathamesh Ceramics Pvt. Ltd. There is no agreement between the assessee and Prathamesh Ceramics Pvt. Ltd. It is not a Loan given by assessee to Prathamesh Ceramics Pvt. Ltd. Therefore, no Capital Asset has been created. Hence, the Ground No.5 of the assessee is dismissed.

8. As regards the Additional Ground of Appeal raised by the assessee relates to interest u/s.234B and u/s.234C of the I.T.Act, which is consequential in nature, hence, needs no specific adjudication. Accordingly, the Additional Grounds of Appeal No.7 raised by the assessee is dismissed.

9. In the result, appeal of the assessee is Partly Allowed.

Order pronounced in the open Court on 11th May, 2022.

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