IN THE HIGH COURT OF KERALA AT ERNAKULAM
ITA.No. 235 of 2009()
1. THE COMMISSIONER OF INCOME TAX,
... Petitioner
Vs
1. SHRI. V.R. DESAI,
... Respondent
For Petitioner :SRI.JOSE JOSEPH, SC, FOR INCOME TAX
For Respondent :SRI.P.BALAKRISHNAN (E)
The Hon'ble MR. Justice C.N.RAMACHANDRAN NAIR
The Hon'ble MR. Justice V.K.MOHANAN
Dated :26/11/2009
O R D E R
(C.R)
C.N. RAMACHANDRAN NAIR &
V.K.MOHANAN, JJ.
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ITA. No.235 OF 2009
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Dated, the 26th day of November, 2009
JUDGMENT
Ramachandran Nair, J.
This appeal is filed by the Revenue under section
260A of the Income Tax Act challenging the order of the
Income Tax appellate Tribunal granting exemption under
Section 54 F of the Income Tax Act to the respondent-
assessee from paying tax on long term capital gains. The
assessee was the Managing Partner of the firm namely
M/s.Desai Nirman which was engaged, among other things,
in real estate business including construction and sale of
flats. During the previous year relevant for the
assessment year 1995-96, the assessee transferred 12.876
cents of land to the said Partnership firm treating it as his
contribution to the capital of the firm. The firm in turn
credited capital account of the respondent-assessee with
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Rs.38,62,800/- ,the full value of the land brought to the firm
by the respondent-assessee as capital contribution. The
assesssee, thereafter availed loan from HDFC bank for the
construction of the house and within three years from the
date of transfer of land to the firm, he got new house
constructed by another firm M/s. Desai Home in which also
the assessee was a partner. In the income tax return filed
for the assessment year 1995-96, the assessee made a
claim for exemption on the capital gains arising from transfer
of the land under section 54 F of the Act. The Assessing
Officer noticed that the assessee had not invested the sale
consideration in full or part in any of the specified
accounts prior to the date of filing return in terms of section
54F(4) of the Act. He therefore, completed the assessment
and issued intimation under section 143(1)(a) of the Act
holding that the assessee is not entitled to exemption under
Section 54F of the Act. The assessment so issued in the
form of intimation under section 143(1)(a) was challenged
by the assessee before the first appellate authority, who
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dismissed the appeal. In the second appeal filed by the
assessee, the assessee took the contention that
disallowance of exemption under section 54F cannot be
made while issuing intimation under section 143(1)(a) of the
Act and in the alternative, the assessee contended that facts
establish construction of a new house within three years
from the date of sale of land, and so much so, the
assessee is entitled to exemption in terms of Section 54 F
of the Act. The Tribunal upheld the claims of the
respondent-assessee on both grounds raised and therefore
they cancelled the assessment proceedings issued under
section 143(1) (a) of the Act. It is against this order of the
Tribunal the Revenue has filed this appeal and we have
heard the Senior Standing Counsel appearing for the
Revenue and Sri P.Balakrishnan appearing for the
respondent-assessee.
2. There is no dispute that the transfer of the land by
the assessee to the partnership firm towards his capital
contribution to the firm is a transfer within the meaning of
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Section 2(47) of the IT Act which is subject to long term
capital gains under section 45(3) of the Act. In the return
filed for the assessment year 1995-96, the assessee had in
fact offered tax on capital gains on the very same transaction
of contribution of the above land towards his capital
contribution as managing partner. However, since
assessee had availed loan from HDFC bank and
constructed house within three years from the date of
transfer of the land to the firm, the assessee claimed
exemption of capital gains on investment made in the
construction of the new building under section 54F of the
Act. The contention raised by the senior counsel
appearing for the Revenue is that, in order to qualify for
exemption under section 54F, the asseseee should have
purchased house within one year or should have
constructed residential house within a period of three
years from the date of transfer in either case by utilising the
sale proceeds of land. Further, for qualifying for exemption,
the assessee should have, before the date of filing return,
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deposited the net sale consideration received in a
nationalised bank in terms of the Section 54 F(4) and the
receipts should have been produced along with the return
filed. The counsel for the assessee on the other hand,
contended that in order to qualify for exemption, there is no
need to utilise the sale consideration towards the
construction cost of the house and it is enough during the
period of three years, equivalent amount is invested in
the construction of the house. According to the assessee’s
counsel, the assessee admittedly had constructed new
house within three years from the date of transfer of the
property and therefore is eligible for exemption.
3. On going through Section 54F, particularly sub-
section 4, we are of the view that in order to qualify for
exemption on capital gains, before the last date for filing
return, the net sale consideration should have been
deposited in any bank account specified by the government
for this purpose. In fact, the requirement of sub-section 4 of
Section 54F is that the assessee should produce along with
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the return, proof of deposit of the amount under the
specified scheme in a Nationalised Bank. Admittedly, the
assessee allowed the firm to which the property was
transferred to retain and use it as a business asset and
towards consideration he got only credit of land value in his
capital account. In other words, sale consideration was not
received by the assessee in cash or deposited the same in
terms of clause 4 of Section 54F with any Nationalised Bank
or institution. Consequently the assessee did not have the
sale proceeds available for investment in terms of scheme
under section 54F(3) of the Act. In our view, in order to
qualify for exemption under section 54F(3), the assessee
should have first deposited the sale proceeds of the
property in any bank account and the construction of the
house to qualify for exemption under Section 54F should
have been completed by utilising the sale proceeds also
available with the assessee. In this case, though the
assessee constructed new building within the period of three
years from the date of sale, it was with funds borrowed
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from HDFC. In our view, the assessee is not entitled to
exemption under section 54F because the assessee neither
deposited the sale proceeds for construction of the
building in the bank in terms of sub -section (4) before the
date of filing returns nor was the sale proceeds utilised
for construction in terms of Section 54F(3) of the Act. So
much so, the assessee was not entitled to claim
exemption on capital gains under section 54F of the Act
which the assessing officer rightly declined.
4. The next question to be considered is whether
claim of exemption under Section 54F could be disallowed in
the course of proceedings under section 143(1)(a) of the
Act. It is settled position that the section authorises the
assessing officer to make disallowance of items which are
prima facie inadmissible. The assessee who claims
exemption should prove the ingredients of section with
facts. The assessee has no case that he received any
sale proceeds for the sale of the land to the the firm of which
he is a partner. The firm was allowed to purchase the
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property from the managing partner of the firm, towards his
capital contribution at a very low cost and the firm developed
the property and sold the same. It was the duty of the
assessee to establish the eligibility for exemption from
payment of tax on capital gains by production of
documents in terms of the statutory provisions. According to
the relevant provisions stated above in the first place, it
was the duty of the assessee to deposit the net sale
proceeds in the bank before due date for filing return and
furnish proof of the same along with the return filed which
was admittedly not done. Secondly, by allowing credit of
value of transferred property in the capital account of the
assessee in the firm, the assessee concedes that the sale
proceeds was neither received nor going to be utilised for
construction or purchase of house. So much so, in our
view, exemption claimed under Section 54 F was prima
facie inadmissible and, therefore, the officer was justified in
making disallowance in the proceedings under section 143
(1)(a) of the Act. Consequently, the appeal is allowed
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vacating the order of the Tribunal and by restoring the
assessment confirmed by the first appellate authority.
C.N.RAMACHANDRAN NAIR
JUDGE
V.K.MOHANAN,
JUDGE
kvm/-
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