Case Law Details
ORDER Vimal Gandhi, Judicial Member
1. This appeal, by the assessee for the assessment year 1990-91, is directed against order of CIT (Appeals). The main issue relates to computation of chargeable capital gain arising on sale of house situated in 54, Panchsheel Park, New Delhi. The assessee is also aggrieved on disallowance of loss rT Rs. 12,07,010 on sales of shares.
2. The assessee sold his house property on 5-1-1990, for a total sum of Rs.1.18 crores. The assessee claimed that it had invested Rs. 8 lakhs in purchase of house property at Kailash Hills, New Delhi and spent another sum of Rs. 14 lakhs in the construction of house at NOIDA. The capital gain accruing on the sale of the aforesaid property, according to the assessee, was chargeable to tax as per the following calculations:
A. Income from Long Term Capital Gains:
On sale of House property situated at Rs.
No. 34, Panchsheel Park, New Delhi 1,18,00,000
Total sales consideration
Less: Expenses on sale 2,46,000
Net sales consideration 1,15,54,000
Less: Market value of the house
on 1-4-1974 2,45,000
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Capital gains 1,13,09,000
Less : Exempted capital gains under Section 48(2)
First 10,000 100% 10,000
Balance 1,12,99,000 50% 5,64,900 56,59,500
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56,49,500
Less exemption under section 53(b)
1,13,09,000 x 2,00,000 1,91,677
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11,80,000 54,57,823
Less : Exempted under section 54E
Investment in IDBI Rs. 20,00,000
20,00,000 x 1,13,09,000 19,57,590
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1,15,54,000 35,00,233
Less: Exempted under Section 54F
- cost price of plot situated at
75, Block 'D' Sector XXVI, Noida, 14,00,500
Amount invested in
Canara Bank in
Account 'A' 10,00,000
--------
24,00,500
24,00,500 x 1,13,09,000
----------------------
1,15,54,000 23,49,598
---------
11,50,635
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3. The Assessing Officer examined the case of the assessee with reference to requirement of Sections 54,54(e) and 54(f) of the Income-tax Act. According to the Assessing Officer, under section 54F, the house property in order to take benefit of above section should have been constructed within three years of sale of property. As per the report obtained through his Inspector, the assessee had just started construction in January 1993 and therefore there was no question of construction being complete by 31-1-1993. Even otherwise, deduction under section 54F was not available on capital gain arising on sale of residential house property. The Assessing Officer, therefore, rejected the claim under Sections 54 and 54F in respect of the NOIDA property. He however, allowed exemption of Rs. 8 lakhs invested in purchase of flat at Kailash Hills New Delhi and worked out the taxable capital gain at Rs. 27,17,197 as per calculation given in the assessment order.
4. Aggrieved by the above computation, the assessee carried the matter in appeal before the CIT (Appeals) and reiterated his claim. The learned CIT (Appeals) enhanced the assessment by Rs. 14,20,400 by recomputing the capital gain, with reference to the period of construction of new asset, the learned CIT (Appeals) referred to commentary on’Income-tax’1991 edition by Chaturvedi and Pithisaria wherein it is mentioned that new residential house must be constructed within three years after the transfer of original assets. The learned CIT (Appeals), also drew support from the decision of Gujarat High Court in the case of Smt. Shantaben P.Gandhiv. OT[1981] 129 ITR 218, Karnataka High Court in the case of CIT v. J.R.Subramanya Bhat[1987] 165 ITR571 and of Andhra Pradesh High Court in the case of CIT v. Mrs. Shahzada Begum[l988] 173 ITR 397. As construction of NOIDA property was not complete within the period of 3 years after the date of transfer of original assets. It was held that the assessee was not entitled to exemption under Section 54 in relation to a sum of Rs. 24 lakhs claimed to have been invested in the NOIDA property. The learned CIT (Appeals), however, upheld the action of the Assessing Officer in allowing deduction of Rs. 8 lakhs for investment in the Flat at Kailash Hills.
5. After looking at the computation of taxable capital gains furnished by the assessee and allowed by the Assessing Officer, the learned CIT (Appeals) held that the mistake was committed in allowing exemption at Rs. 56,59,500 under Section 48(2) of the Income-tax Act. The computation under Section 48(2) in the view of the learned CIT (Appeals) should have been worked out after taking into account, the deductions allowed under Section 53 B, 54 and 54F of the Income-tax Act. The learned CIT (Appeals) Worked out deduction under Section 48(2) at Rs. 41,93,350 as against Rs. 56,49,500 allowed by the Assessing Officer as per the following calculations:
Rs.
Sale consideration 1,18,00,000
Less: Expenses on sale 2,46,000
1,15,54,000
Less: Market value of the
property as on 1 -4-1974 2,45,000
Capital Gains 1,13,09,000
Less: Exempt under Section 53(b) as Rs.
claimed & allowed 1,91,677
Exempt under Section 54E as
claimed & allowed 19,57,590
Exempt under Section 54 in r/o
Flat purchased at Kailash
Hills as computed in the order
and confirmed by this
order 7,83,036 29,32,303
83,76,700
Less: Deduction under Section 48(2)
of the IT Act
on first Rs. 10,000 10,000
on balance 83,66,700
@ 50% 41,83,350
41,93,350
The learned CIT (Appeals) accordingly enhanced the assessment by Rs. 14,66,150. The assessee has brought the issue in further appeal before the Appellate Tribunal.
6. We have heard both the parties at great length and on several days. The parties have further placed written submissions on record. The principal submission advanced by Shri R. Ganesan, the learned counsel appearing for the assessee, relating to the assessability of capital gain are summarised as under:
(i) That the Assessing Officer had rightly computed the deduction under Section 48(2) at Rs. 56,59,000 without taking into account the amount deductable under Sections 53(b) 54E and 54 of the Income-tax Act.
(ii) That the assessee was entitled to deduction of Rs. 24 lakhs on account of investment in construction of property at NOIDA apart from deduction of Rs. 7,83,036 allowed by the learned revenue authority for investment in house property at Kailash Hills under Section 54 of the Income-tax Act. In other words, the assessee was entitled to deduction for investment in both the properties.
7. Shri Ganeshan, elaborated the above points. He drew our attention to the provisions of Section 45,48(1)(b)/48(2), 53,54 and 54E of the Income-tax Act. He submitted that the capital gain is to be computed in a commercial sense. Above provisions and certain other provisions like 80T and 115 of the Income-tax Act were introduced by legislature from time to time to reduce the tax burden of assessee on account of on capital gain. Shri Ganeshan submitted that for determining income chargeable to capital gain, one has to apply Sub-sections (1) and (2) of Section 48 and compute capital gain as provided. He, accordingly, contended that merely because income from capital gain is not charged at all, it does not follow that it is not to be computed. Shri Ganeshan relied upon the decision of Hon’ble Madras High Court in the case of CIT v. Venkatachalam [1979] 120 ITR 688, confirmed on appeal by Hon’ble Supreme Court in CIT v. V. Venkatachalam [1993] 201 ITR 737. Shri Ganeshan also submitted that the decision in the case of Mrs. Pushpa B. Sheth v. Asstt. CIT (Bom.) 50 ITD 314 was erroneous as in that case the Bench did not properly consider merits of Section 53 which was overriding. Same is the situation in Section 54 as same phraseology has been used. Shri Ganesan also relied upon the decision of the Hon’ble Bombay High Court in KaramchandPremchandLtd.v. CIT[1956]30 ITR 849 and submitted that provisions of a statute relating to exemption of income are on the same footing as provision making certain items not liable to tax.
8. In support of claim under Section 54 in respect of house property constructed at NOID A, Shri Ganeshan pointed out that the ten lakhs were deposited in the specified account with Canara Bank Kailash Hills on 14-5-1990 to be utilised in construction. Up to 4-1 -1993, the assessee had spent on construction by withdrawing from the above amount. The balance amount of Rs. 5 lakhs was withdrawn on 4th and 30th January. It was accordingly claimed that substantial part of the provision was complied with and the property was constructed within three years of sale made on 5-1-1990. It was explained that the reasons for delay in construction of residential house was due to abandoning of work on 16-2-1991 by the contractor. The assessee had to file a suit against the contractor and settlement was arrived at only on 28-2-1992. Thereafter the assessee engaged a new contractor and completed the house construction. It was submitted that the above provision extending benef ii to the assessee are entitled to liberal construction. The delay had occurred on account of reasons beyond the control of the assessee and was liable to be condoned. The assessee relied upon the following case laws :
(1) Presidential Election, In re AIR 1974 SC 1682.
(2) CIT v. J.H. Gotla [1985] 156 ITR 323 (SC).
(3) CIT v. (S.) K&nnan [1994] 210 ITR 585 (Kar.).
(4) Govind Lal Chaggan Lal Patel v. Agricultural Produce Market Committee AIR 1976 SC 263.
(5) State of UP v. Manbodhan Lal Srivastava AIR 1958 SC 533.
(6) Smt. Shantaben P. Gandhi’s case (supra).
(7) J.R. Subawayya Bhatt ?
(8) Mrs. Shahzada Begum s case (supra) (9) K.C. Kaushikv. P.B. Rane, Fifth ITO [1990] 185 ITR 499 (Bom.).
9. Shri Ganeshan further argued in the alternative that at least the amounts spent on purchase of land and Rs. 7 lakhs utilised in construction within the stipulated period should be considered for exemption under Section 54 of the Income-tax Act.
10. In support of the claim under Section 54 of the Income-tax Act, Shri Ganeshan submitted that the assessee was entitled to exemption on the amount invested in the purchase/construction of houses and the claim could not be restricted to one house. In other words, according to Shri Ganeshan, the assessee was entitled to exemption on amount spent in purchase of large scale of properties and also construction of NOIDA House. The assessee was eligible for exemption in respect of both the houses. It was argued that the object of Section 54 was to encourage investment or sale proceeds of house for building of more residential houses. The above object was implemented by the assessee. In this connection Shri Ganesan drew our attention to Section 13 of the General Clauses Act, 1987 under which residential house’ should mean and include ‘residential houses’ as there was nothing repugnant in the above construction. Shri Ganeshan also drew our attention to provisions of 54F of Income-tax Act and Section 2(m)(ii) of the Wealth-tax Act. Strong reliance was placed on the decision of Hon’ble Madras High Court in CWT v. C.H. Satish[l982] 133 ITR 834.
11. In support of claim of loss on sale of shares, the assessee relied upon the following facts and evidences :
(i) Purchase of 500 shares of AMF International Ltd. (AMF) on 21-10-1989.
(ii) The assessee became a registered shareholder for such 500 shares – distinctive Nos. 49621 to 50120. AMF issued fresh share capital. The assessee became entitled to 2,000 shares (4 x 500).
The assessee applied and paid Rs. 20,00,000 by cheque. It was credited to AMF’s a/c with New Bank of India in January 1990. Summary of collection of fresh capital by AMF is on record.
(iii) AMF allotted two lakh shares of Rs. 10 each for Rs. 20 lakhs to the assessee.
(iv) Share scrips were issued on 10-2-1990 and the assessee became registered shareholder for two lakh shares. The distinctive Nos. are 874501 to 1074500 (two lakh shares).
(v) Allotment register of AMF shows allotment of two lakh shares to the assessee.
(vi) AMF confirmed to Assessing Officer for allotment of two lakh shares. Sale of shares of AMF – the entire lot – 2,00,500 on 23-3-1990 for Rs. 7,99,995.
(vii) Market quotations of AMF on 12-3-1990, 13-3-1990, 14-3-1990, 16-3-1990 and 26-3-1990 of Delhi Stock Exchange on record.
(viii) Assessing Officer verified the rate and stated the same to be Rs. 4 per share at that time.
(ix) Cheque for Rs. 7,99,995 deposited in assessee’s account with Canara Bank, Kalkaji.
From the above, it is established that:
(a) the assessee had become the owner, registered shareholder, paid for the cost of 2,00,500 shares of AMF;
(b) the shares were admittedly held by the assessee between the date of purchase and allotment and until sold.
After the sale has been effected by the assessee, the Assessing Officer recorded that they were transferred to the ultimate vendees. The assessee’s purchase, allotment and sale are evidenced by documents, payments by cheques and receipts by cheques. The assessee had no interest or connection with AMF. In view of the above, it is submitted that the transaction in shares were genuine. The loss being short term capital loss be allowed. The Assessing Officer relied on McDowell’s & Co. Ltd. v. CTO [ 1985] 154 ITR 148. This case is not applicable. There is no device thought of much less implemented by the assessee. The assessee has parted with over Rs. 28 lakhs. It had realised only Rs. 8 lakhs. The assessee had permanently lost the difference in the two sums. The Hon’ble Supreme Court had held in CWT v. Arvind Narottam [1988] 173 ITR 479 that the principle in McDowell’s case cannot be applied to all types of transactions and it must be applied with great caution and responsibility. The short term capital loss may kindly be allowed.
12. The learned Departmental Representative vehemently opposed the above submissions. According to the learned DR, the construction of house property at NOIDA was not completed within the stipulated period of three years. The contention of the assessee that the same could not be completed for reasons beyond the control of the assessee cannot be accepted. In addition to the reasons given by the Assessing Officer and learned CIT (Appeals), the learned Departmental Representative further asked us to consider the following reasons:
(a) That the assessee’s application for admission of additional evidence was liable to be rejected for following reasons :
(i) The conditions of rule 29 of IT AT Rules, 1963 were not shown to be fulfilled as no material was filed to establish that sufficient opportunity to adduce evidence was not provided by the lower authorities.
(b) There is no provision in Section 54 of the Act authorising the appellate authority to extend the period beyond three years in which property will be required to be constructed.
(c) That the requirement under Section 54(1) is to construct a residential house which, as per the decision of the jurisdictional High Court in Sir Shadilal Sugar & General Milk Ltd. [1981] 132 ITR 666 (All.) means “independent residential unit”. That admittedly no independent residential unit came into existence and therefore amount spent on construction of residential property within the period of 3 years will also not be entitled to any benefit provided under Section 54.
(d) That provisions of Section 54 granting benefit to the assessee under a fiscal statute are required to be construed and complied with strictly.
(e) That the assessee has failed to show, through any cogent evidence; that the delay in completion of construction of the house was beyond the control of the assessee.
(f) That the claim of the assessee that he be given exemption in respect of two properties under Section 54 is beyond the grounds of appeal raised. Even otherwise, the claim is untenable.
(g) Assessee’s claim that the computation of capital gain under Section 48(2) may be made after allowing exemptions under Sections 53 and 54 of the Income-tax Act is untenable. The learned DR in this connection relied upon the decision of Hon’ble Bombay Bench of the Tribunal in Mrs. Pushpa B. Sheth s case (supra).
13. In respect of claim regarding loss on sale of shares, the learned DR submitted as under: In this ground the assessee has disputed the findings of the lower authorities that the capital loss on the sale of shares amounting to Rs. 12,07,010 was not a genuine loss and that burden of proof which lays on the department to prove the same has not been discharged by the department. In addition to the discussion made by the Assessing Officer 2 to 5 of the order and discussion made by learned CIT (A) in para 8-9 of his order, it was requested that following points may also be considered before deciding this case :
(a) It has been specifically mentioned by the AO in pages 3 and 4 of the order that in shareholder’s register of M/s AMF International Ltd., the assessee was not shown as a shareholder prior to allotment of right’s share to him by the company.
(b) The assessee in paper book at page 13 has filed photo copy of shares held by him as on 8-11-1989 and has also filed photo copy of letter of offer for right issue. From this it is clear that person is entitled to apply for right shares only when he is a registered holder of the equity share of company as on 8-11-1989. Though, in the photo copy of share the transfer has been shown as on 8-11-1989, the same is not born out from the register of share holder which is a statutory register. Thus, the claim of the assessee that he was registered shareholder as 8-11-1989 is totally unfounded.
(c) Enquiries were made from M/s AMF International Ltd., by the AO and the balance sheet and profit and loss account of the company is available on record, copies of which are submitted herewith. From this it could be seen that net profit carried forward as on 31-3-1990 is Rs. 83,114-52. Thus from the accounts, it is clear that actual value of share of the assessee-company could not have been below the issue price of Rs. 10 per share as on the date of sale of shares by the assessee to the sister concerns of M/s AMF International Ltd. It is, therefore, clear that quoted value of shares namely, Rs. 4 per share of M/s AMF International Ltd. does not reflect the actual value of share and merely a rigged figure. In these circumstances, it is prayed that the findings by lower authorities that share loss incurred by assessee is non-genuine may please be upheld.
(d) It is brought to the Tribunal’s notice that a colourable device would consist of a set of apparent transactions which if taken individually would give the appearance that there is nothing wrong with the transactions but if all the transactions are seen in the prospective of the facts and circumstances of the case, it would show that the real intention of parties was to defraud the revenue or to violate certain provisions of law. In this case the real intention of parties involved in the transaction were following :
(i) The assessee’s intention was to obtain fictitious short term capital loss which could be set off against his other income so as to reduce tax liability.
(ii) The company’s (M/s AMF Ltd.) intention was to hold substantial No. of snares of this company by its sister concern at a fractional cost of the actual value of shares. By going through above, fictitious transaction the parties have been able to obtain above benefits even though there was no real fall in the value of shares of M/s AMF International Ltd.
(e) That in the above facts the lower authorities were correct in holding that this is a colourable device and is further supported by the decision of the Hon’ble Supreme Court in McDowell & Co. Lid’s case (supra) and Indian Express Newspapers (Bombay) P. Ltd. v. Union of India [1986] 159 ITR 856 (SC).
14. We have given careful thought to the rival submission of the parties. The first question to be considered is whether the computation of capital gains suggested by CIT(A) is correct. There is no dispute that the above computation is quite in line with the view expressed by ITAT ‘D’ Bench, Bombay in case of Mrs. Pushpa B. Sheth (supra). The Bench in that case as per the head note has held as follows :
The Department’s contention was that deductions should be allowed under Sections 53 and 54 first and, on the balance, deduction under Section 48(2) should be quantified and allowed. Since both these types of deductions found place under the same Chapter, viz., Chapter IV-E relating to capital gains, there could have been some doubt about the sequence to be followed. However, the explanation below Section 53 sets at rest all such doubts. It was obvious that in Sections 53 and 54, etc., the figure of capital gains from which deductions envisaged in Sections 53 and 54 were to be made would be the figure of capital gains prior to the deduction envisaged in Section 48(1)(b). Viewed in this light, it was obvious that the computation attached to the return was contrary to the specific provision of the law and the computation made by the Assessing Officer was in accordance with law.
To appreciate the rival contentions advances by the parties, we are to see Chapter IV-E of the Act starting from sections 45 to 55 of Income-tax Act relating to chargeability and taxability of capital gain. Relevant provisions to be considered are as under :
45(1).Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 53, 54, 54B, 54D, 54E, 54F and 54G be chargeable to income-tax under the head “Capital gains” and shall be deemed to be the income of the previous year in which the transfer took place.
48(1). The income chargeable under the head “Capital gains” shall be computed,
(a) by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the asset and the cost of any improvement thereto.
** ** **
(b) where the capital gain arises from the transfer of a long-term capital asset (hereafter in this section referred to, respectively, as long-term capital gain and long-term capital asset) by making the further deductions specified in Sub -section (2).
(2) The deductions referred to in Clause (b) of Sub -section (1) are the following, namely:
(a) where the amount of long-term capital gain arrived at after making the deductions under Clause (a) of Sub -section (1) does not exceed ten thousand rupees, the whole of such amount;
(b) in any other case, ten thousand rupees as increased by a sum equal to:
(i) in respect of long-term capital gain so arrived at relating to capital assets, being buildings or lands or any rights in buildings or lands or gold, bullion or jewellery, (A) in the case of a company, ten per cent of the amount of such gain in excess of ten thousand rupees;
(B) in the case of any other assessee, fifty per cent of the amount of such gain in excess of ten thousand rupees.
53. Notwithstanding anything contained in Section 45, where in the case of an assessee being an individual (or a Hindu undivided family), the capital gain arises from the transfer of (long-term capital asset) being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head “Income from house property”, the capital gain arising from such transfer shall be dealt with in accordance with the following provisions of this section, that is to say,
(a) in a case where the full value of the consideration received or accruing as a result of the transfer of such capital asset does not exceed two hundred thousand rupees the whole of the capital gain shall not be charged under Section 45;
(b) in a case where the full value of such consideration exceeds two hundred thousand rupees, so much of the capital gain as bears to the whole of the capital gain the same proportion as the amount of two hundred thousand rupees bears to such consideration shall not be charged under Section 45:
Provided that nothing contained in this section shall apply to a case where the assessee owns on the date of such transfer any other residential house.
Explanation: In this section and in Sections 54, 54B, 54D, 54E, 54F and 54G, references to capital gains shall be construed as references to the amount of capital gain as computed under Clause (a) of Sub -section (1) of Section 48.
54 (1) Subject to the provisions of Sub -section (2) where in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head “Income from house property” (hereafter in this.section referred to as the original asset), and the assessee has within a period of (one year before or 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, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,-
(i) if the amount of the capital gains is greater than the cost of the residential house so purchased or constructed (hereafter in this section referred to as the new asset) the difference between the amount of the capital gain and the cost of the new asset shall be charged under Section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or
(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under Section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain.
(2) The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase of construction of the new asset before the date of furnishing the return of income under Section 139, shall be deposited by him before furnishing such return such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under Sub -section (1) of Section 139 in an account in any such bank or institutions as may be specified in, and utilised in accordance with any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and for the purposes of subsection (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset:
Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in Sub -section (1), then,
(i) the amount not so utilised shall be charged under Section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and
(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.
Explanation : Where any amount becomes chargeable under Section 45 in accordance with the proviso to this sub-section, then,
(a) for the purposes of the deductions to be made under Clause (b) of Sub -section (1) of Section 48, the initial deduction of ten thousand rupees under Sub -section (2) of that section shall not be admissible; and
(b) nothing contained in Section 53 shall apply in relation to such amount.
14.1 It is clear from the above provision that in Sub -section (1) of Section 45 capital gain arising from the transfer of a capital asset effected in the previous year is brought to tax as income of the year in which transfer takes place. However, certain specified provisions like 54, etc., are saved. If this provision is taken into account, it can reasonably be argued that there is no necessity to compute capital gain arising in situations mentioned in any of the sections specifically saved. It is settled law that under the Income-tax Act, charging provisions are integral part of computing provision and if certain income or gain are not to be charged to tax then there is no question of computing it. Therefore, in that sense, there is no question of computing capital gains in respect of provisions specifically saved under Section 45(1) of the Income-tax Act. However, when specific reference is made to Sections 53 and 54 it is seen that under Section 53(b) proportionate amount of capital gains with reference to full value of consideration is not charged to tax. Likewise, under Section 54, where the investment in the residential house is less than the amount of capital gains, only proportionate amount is exempted and not full. Therefore, in spite of saving in Section 45( 1) of Income-tax Act, the capital gain is to be computed to apply above-mentioned provision, the computation of capital gain, without a doubt, has to be under section’48 of the Income-tax Act.
15. The said Section 48 as it existed at the relevant time, comprised of two portions divided into two parts, i.e., Sub -section (1) and Sub -section (2). Sub-section (1) of Section 48 has to be applied in all cases as capital gain is not “full value of consideration” but is to be arrived at after deducting
(i) expenditure incurred wholly and exclusively in connection with transfer; and
(ii) cost of acquisition of assets and cost of improvement thereto.
The figure arrived at, after above deductions from full value of consideration is capital gain. Sub-Clause (b) of Section 48( 1) is applicable to long term capital gains and permits certain further deductions in cases stipulated in the said sub-clause.
16. With reference to deductions specified in Sub -section (2), the deductions referred to in Clause (b) of Sub -section (1) are also to be deducted from the “full value of consideration received or accrued”. It may not, therefore, be unreasonable to argue that capital gain can be arrived at only after making deductions specified in Sub -section (2). Although the first clause, i.e., Clause (a) of Sub -section (2) talks of longterm capital gain arrived at by making deductions under Clause (a) and suggests that capital gain has already been arrived at and further deductions are being provided, to put an end to the above controversy and to clarify the position beyond any doubt the Legislature added the following explanation to Section 53 of Income-tax Act w.e.f. 1-4-1988 :
Explanation In this section and in Sections 54, 54B, 54D, 54E, 54F and 54G, references to capital gain shall be construed as references to the amount of capital gain as computed under Clause (a) of Sub -section (1) of Section 48.
Having regard to the text, context and clear language of the provision, there is no scope to argue that capital gain for the purposes of Section 53 or other sections specified in the explanation can have reference to capital gain other than one computed under Clause (a) of Sub -section (1) of Section 48. Sub-section (2) of Section 48 is nowhere mentioned and is clearly excluded. There is, therefore, no scope to find any fault with the computation made by CIT(A). The first ground urged by Shri Ganesan is,
17. The claim of the assessee for deduction under Section 54F is totally untenable as the said provision is applicable where capital asset other than residential house is sold. In the present case, the deduction is being claimed on account of capital gain having accrued on sale of a residential house. There was, therefore, no scope to apply the provisions of Section 54F. This claim is rejected.
18. The next important question required to be considered is application of Section 54 of the Income-tax Act. The relevant portion of said section has already been extracted earlier. There is no dispute that the assessee sold a residential house and therefore to claim relief of Section 54 the assessee was to satisfy the conditions prescribed in the said section. To avail benefit of above section and as per Sub -section (1), the assessee has to purchase one year before or two years after date on which the transfer took place a residential house. The assessee could also within a period of three years after the sale, construct a residential house. In the above situations the amount of capital gain accruing on transfer is to be dealt with as provided in Clause (1) or (2). It is agreed position that Clause (1) is applicable in this case.
19. The assessee claimed deduction for investment in construction of house at NOIDA. There is not much dispute as the assessee did invest Rs. 14,00,500 in the purchase of the land within the specified period. The revenue did not allow exemption to the assessee on the ground that residential house was not constructed within three years of sale of house property as stipulated in Sub -section (1) of Section 54. Even at the end of stipulated period of 3 years, the house was incomplete.
20. In order to appreciate the above raised objection of the revenue, we have to read Sub -section (1) of Section 54 along with Sub -section (2) of the said section. As per the said Sub -section (2), the amount of capital gain which is not appropriated or utilised by the assessee for the purchase or construction of a new asset is required to be deposited by him before the due date of filing of return in bank account as notified by the Central Government. The amount deposited is to be added to the amount already utilised by the assessee for the purchase or construction of a new asset and both the amounts together “shall be deemed to be cost of the new asset”.
20.1 The proviso to the sub-section takes care of the amount which is deposited in the bank account, but is not utilised wholly or partly for purchase or construction of new asset within the period specified in subsection (1). Thus when both the sub-sections are read together it is seen that the section takes care of both the situations when amount is utilised or it remains unutilised within the period specified in Sub -section (1). The emphasis of the provision is on the utilisation of long-term capital gain in purchase or construction of a residential house. The Sub -section (2) specifically requires that unutilised amount should be deposited in a notified bank account. Capital gain is to be computed with reference to the assessment year in which the transfer of the capital asset takes place. The construction of a new asset can be made within a period of three years after the date of transfer. Thus the house required to be constructed can be constructed two years after the end of the previous year and due date of filing of the return. Therefore, when the question of allowance ,of benefit of Section 54 is required to be considered, it is envisaged in the statutory provision that the house to be constructed at that stage might be under construction and capital gain at that time not wholly appropriated or utilised. It is, therefore, not correct to insist that the assessee should establish that residential house is complete and then ask for benefit under Section 54 of the Income-tax Act. What is required under the section is that the assessee should take steps to make investment in a residential house. Alternatively, the assessee should deposit capital gain in the notified account. In case the whole amount of the capital gain is deposited in the bank account, the assessee would be entitled to the benefit of Section 54 of the whole deposited amount without construction of residential house. Only at the end of period specified in Sub -section (1), i.e., three years from the sale of the house, the position of amount deposited in Bank account and remaining wholly or partly unutilised for purposes of purchase or construction is to be seen. Such unutilised amount is to be dealt with as provided in the proviso to Section 54(2). Thus the emphasis is on utilisation or investment of capital gain in the construction of a residential house. If the entire amount deposited in the bank account is utilised in the process of construction of the house, as provided in Sub -section (2) of Section 54, there is no provision to withhold or withdraw the deduction on the ground that the residential house sought to be constructed is not complete. As already noted, the proviso to Sub -section (2) is attracted only in a case where the amount deposited is not utilised. Thus for these reasons, we hold that emphasis is on utilisation of the amount of capital gain by withdrawing from the notified bank deposit or otherwise and not on completion of residential house.
21. In the present case, there is ample evidence to show that superstructure was built by the assessee in the period under consideration within the stipulated period of 3 years but the house needed finishing on which a sum of Rs. 4 lakhs was spent after the stipulated period of 3 years. It was not correct to interpret beneficial provision of Section 54 in the manner as done by the revenue authorities. The claim cannot be denied on the ground that construction of the house started by the assessee was not complete within the stipulated period of 3 years and some work was carried out thereafter. In our considered view and in terms of Sub -section (2) of Section 54 of Income-tax Act, the assessee was entitled to the amount appropriated by him, out of the capital gain for construction of residential house at NOIDA till the due date of filing of return for the assessment year 1990-91. To the above amount a sum of Rs. 10 lakhs, i.e., the amount admittedly deposited in the notified bank account, was to be added and the said total sum allowed as deduction under Section 54 of the Income-tax Act. The proviso to Sub -section (2) of Section 54 was to be applied in the previous year in which the period of 3 years from the date of transfer of original asset expired to the amount deposited in the bank account and not utilised for construction of the new asset. The question of application of proviso does not arise in the year before us. We, therefore, direct the Assessing Officer to re-compute and allow deduction under Section 54 as directed above.
22. The assessee’s claim that he was entitled to deduction both for investment in construction of NOIDA house property as also in purchase of flat at Kailash Hills is totally untenable. Deductions for purchase or construction to be allowed from the capital gain arising on transfer of residential house. The alternative benefits provided are separated by word “or” and therefore cannot be simultaneously allowed. However, benefit is to be allowed on transfer of each residential house. As in that assessment year, assessee sold one house, the deduction could be allowed in respect of purchase or construction of a house. As we are allowing benefit in relation to construction of house at NOIDA there is no question of allowing benefit for purchase of flat at Kailash Hills. The AO shall re-compute capital gain taking into account these directions.
23. The assessee is also aggrieved on account of non-deductability of short-term loss of Rs. 12,07,010 claimed to have suffered on sale and purchase of shares. This loss rose on account of sale of two lakh shares of M/s AMF International Ltd. purchased on 10-2-1990 and sold on March 16,1990. As per the detail available on record, 500 shares of above company were purchased by the assessee on 13-10-1989 at the rate of Rs. 14.01 per share. The said company brought out right issue and the assessee claimed to have purchased two lakhs right shares for a total consideration of Rs. 20 lakhs. These shares were allotted to assessee on 10-2-1990 by the company as per the allotment papers and share certificates. All the above shares, numbering 2,00,500 were sold by the assessee on 16-3-1990 at the rate of Rs. 3.99 per share for a total consideration of Rs. 7,79,995. The assessee, thus claimed short-term capital loss of Rs. 12,07,010.
24. In order to verify the genuineness of the above claim, the revenue carried out a survey operation under Section 133A on the business premises of M/s AMF International Ltd. and statements of Directors/ Managing Directors were recorded. From the above statements and other enquiries conducted, the AO reached the following conclusions :
(a) that the assessee was entitled to 2,000 right shares but was allotted 2 lakh shares against norms set by the company ;
(b) in the course of survey operation no entry regarding shares purchased and sold prior to allotment of right share was found in the share issue register of the company although allotment of 2 lakh shares was recorded; no satisfactory explanation could be given;
(c) no despatch register indicating despatch of shares to shareholders was found during the course of survey nor any was produced later by the company. This proved that the assessee was allotted shares in excess of entitlement through the backdoor ;
(d) there was no underwriter to the issue of shares as admitted by the brokers of the company.
25. From the detail it was seen that 9,90,000 right shares were allotted by the company to 33 allottees. Out of these allottees, 11 were individual and 22 were companies. No individual was allotted more than 6000 shares. Hind Developers Ltd. received 60,000 shares in allotment. Only the assessee was allotted 2 lakh shares beyond the norms of allotment.
26. On 16-3-1990, i.e., after about one month of purchase the assessee sold all shares at the rate of Rs. 3.99 per share which were purchased by the sister-concern of AMF International Ltd., and family members.
26.1 From the above and other situations, the AO concluded that loss on sale of share was a bogus claim brought out with the connivance of M/s AMF International Ltd., to set-off income earned by the assessee by way of capital gains. The AMF International company benefited from this fake deal as shares went back in their hands and in the hands of their sister-concerns and they got the monitary benefits by purchasing shares. The AO further observed that the assessee had adopted a colourable device to avoid payment of tax through dubious means. The matter was treated as covered by the decision of Hon’ble Supreme Court in the case of Me Dowell & Co. Ltd. (supra). The AO accordingly disallowed the loss.
27. Being aggrieved the assessee impugned the above order in appeal before CIT(A) and raised detailed submissions which are noted in paras 7 and 8 of his order. It was claimed that purchase and sale of shares were supported by documentary evidence. It was further verifiable and verified from shares issue register of M/s AMF International Ltd. The payment of purchase and sale was made through account payee cheques and supported by entries in books of account. The share broker of the assessee has also supported the transactions in statement recorded under Section 131 of the Income-tax Act. The rate of purchase and sale of shares was further supported by quotations of Stock Exchange. The assessee thus claimed that the share loss was genuine and should be allowed.
28. The learned CIT(A), during the course of hearing, called for a report from the Assessing Officer in regard to value of shares shown by Stock Exchange during 12-3-1990 to 26-3-1990 when such value fell down from Rs. 7.50 to Rs. 3. The Assessing Officer was also directed to examine share brokers. The enquiry, accordingly, was undertaken to find out whether share prices reported by share brokers on these dates were real or rigged ones. As per the report dated 6-10-1993 of the AO, the sale of 2 lakh shares of M/s AMF International Ltd. on 16-3-1990 were not recorded in Delhi Stock Exchange. Only sale of 100 shares at the rate of Rs. 4 per share was recorded. M/s Shanti & Company, through whom the shares in dispute were claimed to be sold had stated before the AO that the assessee and the purchasers had contacted them for sale of shares. The enquiry further revealed that only 100 shares of M/s AMF International Ltd. were sold to M/s L.R. Munjal & Company and M/s Ram Nanda & Company. On the basis of above reported facts, the CIT(A) concluded that the transaction of sale and purchase of shares shown by the assessee were not genuine. Even sale price was a manipulated one intended purely to give a colour of genuineness to transaction of 2 lakh shares. The CIT(A) further agreed with the AO that the decision of the Hon’ble Supreme Court in the case of Me Dowell & Co. Ltd. (supra) was fully applicable. In above view of the matter, the learned CIT(A) rejected the claim of the assessee. The matter has been brought in appeal before us.
29. We have heard Shri R. Ganesan and Shri B.K. Haldhar, the learned departmental representative, and noted their submissions. It is not in dispute that the purchase and sale of shares by the assessee are supported by all relevant documentary evidence. The payments have been made and received through account payee cheques and no doubt has been raised on amounts paid or received. It is no doubt true that as a holder of 500 ordinary equity shares, the assessee could get only 2,000 shares but instead acquired 2,00,000 shares of a company which by no standard could be treated as a blue-chip company. Thus when a doubt was raised, the suspicious circumstances fully justified a deeper enquiry into the affairs of M/s AMF International Ltd. The revenue, therefore, understandably carried out the survey at the business premises of the concerned company and recorded the statement of their Directors but the above efforts did not yield any positive results except that violation in allotment of 2 lakh right shares was detected. No material could be found to show that the assessee did not purchase or sell the above shares and no loss was suffered as claimed by him. On the contrary, the Assessing Officer has specifically recorded that the shares in question ultimately went back in the hands of sister concern of the company who got monetary benefits “by purchasing back the shares on much reduced price”. Thus ‘purchase-back’ of shares is not in dispute. The order of Assessing Officer further does not show as to what explanation for allotment of 2 lakh right shares was offered by the Directors in their statement and how it was considered. It is a matter of common knowledge that companies do allot more shares than earlier announced by them. But on account of above violation the entire transaction cannot be treated as fake and ingenuine. If there are fake transactions intended solely to avoid payment of tax, it is for the revenue to establish that the disputed transactions were such transactions. Mere suspicion, conjucture or a surmise cannot discharge the obligation of establishing a fake transaction. It has to be done by leading evidences.
No such evidence in spite of survey could be produced by the revenue. As transactions are duly supported by contract notes and binding documents, we are of the view that the decision of the Hon’ble Supreme Court in the case of Arvind Narottam(supra) is applicable. The share loss is further supported by quotations from Delhi Stock Exchange. Thus, taking all the facts and circumstances we are unable to declare the claim of share loss as bogus. We direct the Assessing Officer to allow share loss as claimed.
30. In the result, the appeal is partly allowed in terms stated above.
