IN THE HIGH COURT OF KERALA AT ERNAKULAM
ITA.No. 188 of 2009()
1. THE COMMISSIONER OF INCOME TAX,TRICHUR
... Petitioner
Vs
1. SHRI.THOMY .P.CHAKOLA,TRICHUR
... Respondent
For Petitioner :SRI.JOSE JOSEPH, SC, FOR INCOME TAX
For Respondent :SRI.JOSEPH KODIANTHARA
The Hon'ble MR. Justice C.N.RAMACHANDRAN NAIR
The Hon'ble MR. Justice B.P.RAY
Dated :12/11/2010
O R D E R
C.R.
C .N. RAMACHANDRAN NAIR, &
BHABANI PRASAD RAY, JJ.
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I.T.A. Nos. 188, 347 & 471 of 2009
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Dated this the 12th day of November, 2010
JUDGMENT
Ramachandran Nair, J.
Under the relevant instruction issued by the Board of Direct
Taxes, these appeals filed by the Revenue in February, 2004 are not
maintainable for the reason that tax effect is much below the minimum
required for the revenue to file appeal, that is Rs. 2 lakhs. We therefore
dismiss all the appeals as not maintainable.
2. However, standing counsel for the revenue submitted that both
the issues raised in the appeals are likely to arise in the case of other
assessees and so much so department seeks a decision by this Court on
the questions raised. We therefore proceed to consider the questions
raised by the revenue which are substantial questions of law.
3. The assessees who were owners of agricultural land within the
municipal limits sold the same in the year relevant for the assessment
year 1991-92. However, assessees did not pay any tax on capital gain
but claimed exemption under Section 54B(2) of the I.T. Act, which
ITA 188/2009 and connected cases. 2
provides for exemption from payment of tax on capital gains, if the
same is deposited in specified Bank Account before the due date and
utilised within two years from the date of transfer for purchase of a new
asset which again has to be agricultural land. Assessments of all the
assessees were completed for the assessment year 1991-92 granting
exemption. However, assessees did not purchase agricultural land
within the period of two years utilising the capital gain in terms of the
declaration furnished for the assessment year 1991-92 and therefore
they became liable to pay tax on such capital gains under Section 54B
(2)(i) of the Act for the assessment year 1993-94. This position was
conceded by all the assessees in the returns filed by each of them for
the assessment year 1993-94. However, for payment of tax on capital
gains for the assessment year 1993-94, the assessees once again
computed capital gains on the same transaction by applying the
amended provisions of Section 48 which provides for deduction of
indexed cost of acquisition and indexed cost of improvement in the
computation of long-term capital gain. The amendment to Section 48
introducing the above method of computation of capital gains came
into force only from 1.4.1993 onwards. The assessing officer rejected
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the assessees’ claim and processed the returns by just demanding tax on
the capital gain that was carried over to the assessment year 1993-94,
but not utilised for the purchase of agricultural land in terms of Section
54B (2) of the Act. While in the case of two assessees tax demands
were raised by processing returns under Section 143(1)(a), in the case
of other assessee the proceedings issued by the assessing officer under
Section 143 (1)(a) was rectified under Section 154 of the Act and the
capital gain held by the assessee was brought to tax for the assessment
year 1993-94.
4. In the appeals filed before the CIT (Appeals), assessees raised
two issues, namely, (1) the assessment of tax on capital gains in the
case of one set of assessees by way of prima facie adjustments in the
returns under Section 143(1)(a) is illegal and (2) the rectification of
order issued in the case of the other set of assessees to levy tax is also
not permissible as it is not an apparent mistake that could be corrected
under Section 154 of the Act. Besides jurisdictional issue, the other
question raised is on merits, that is, whether the assessees are entitled
to the benefit of amended provisions of Section 48 which came into
force from 1.4.1993 onwards in the computation of capital gain.
ITA 188/2009 and connected cases. 4
5. Standing counsel appearing for the revenue relied on the
decision of this Court in CIT V. KERALA SOLVENT
EXTRACTIONS LTD., (2008) 217 CTR (Ker.) 311 and contended that
assessment of capital gain under clause (i) of the proviso to Section
54B(2) is permissible in the course of processing of returns under
Section 143(1)(a) as it is a case of prima facie adjustment, which is
only demand of tax on taxable income. On the merits, standing counsel
submitted that Tribunal held against the assessees. However, senior
counsel Sri. Joseph Markose appearing for the legal heirs of the
deceased assessees contended that assessment of capital gain cannot be
made through prima facie adjustment in the course of processing
returns under Section 143(1)(a) of the Act and the Tribunal’s finding
against the assessees that the amended provisions of Section 48 which
came into force with effect from 1.4.1993 are not applicable is also not
correct. In other words, according to him, even though capital gain on
sale of agricultural land is assessable in the assessment year 1993-94 on
account of non-utilisation of capital gain within two years from the date
of sale, still the assessees are entitled to recomputation of capital gains
by deducting indexed cost of acquisition and indexed cost of
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improvement in terms of the amended provisions of Section 48 which
came into force in the year 1993-94 onwards.
6. Since our decision on the issues raised will depend upon the
scope and meaning of Section 54B, we extract hereunder the said
Section for easy reference:
54B. Capital gain on transfer of land used for
agricultural purposes not to be charged in certain cases.(1) Subject to the provision of sub-section (2), where
the capital gain arises from the transfer of a capital asset
being land which, in the two years immediately preceding
the date on which the transfer took place, was being used
by the assessee or a parent of his for agricultural purposes
(hereinafter referred to as the original asset) and the
assessee has, within a period of two years after that date,
purchased any other land for being used for agricultural
purposes, 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 gain is greater than the
cost of the land so purchased (hereinafter 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, 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 purposeITA 188/2009 and connected cases. 6
of computing in respect of the new asset any capital
gain arising from its transfer within a period of three
years of its purchase, the cost shall be reduced by the
amount of the capital gain.(2) The amount of the capital gain which is not utilised by
the assessee for the purchase 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 institution 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
purpose of sub-section (1), the amount, if any, already
utilised by the assessee for the purchase 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 sub-
section is not utilised wholly or partly for the purchase 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 two 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.
What is clear from sub-section (2) above is that an assessee who wishes
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to avail exemption under the said provision should deposit the capital
gain arising on sale of agricultural land in deposits with such Banks or
institutions as prescribed by the Central Government. Admittedly
assessees have done this and so much so, if the deposits were utilised
within two years for the acquisition of agricultural land, they would not
have been liable to pay any tax. However, the admitted position is that
assessees did not utilise the deposited capital gains on which exemption
was claimed and allowed in the year in which it was assessable, that is
the assessment year 1991-92, within two years for acquisition of
agricultural land. So much so by virtue of clause (i) of the proviso to
Section 54B(2), the unutilised capital gain shall be deemed to be
income chargeable to tax under Section 45 as the income of the
previous year in which the period of two years from the date of transfer
of original asset expires. The contention raised on behalf of the legal
heirs of the deceased assessees that assessees are entitled to
computation of capital gain by availing deduction of indexed cost of
acquisition and indexed cost of improvement introduced by amendment
to Section 48 with effect from 1.4.1993 cannot be accepted because
what is provided in clause (i) of the proviso to Section 54B(2) is to
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treat the capital gain retained in deposit, and in respect of which
exemption was claimed, as income chargeable under Section 45 of the
relevant year in which the assessee failed to utilise the fund for
acquisition of agricultural land. In fact, the scheme of the Act is to
compute the capital gain on sale of agricultural land in the assessment
for the assessment year relevant to the previous year in which the sale
took place. If the assessee claims exemption from payment of tax in
that year, then assessee has to deposit capital gain in specified Bank
accounts in terms of sub-section (2) of Section 54B . In other words,
assessee need not deposit the full consideration or net consideration
obtained on sale of agricultural land, but what is required to be
deposited is only capital gain arising for the assessee on the sale of
agricultural land. However, what is provided in clause (i) of the
proviso to Section 54B(2) is that if the assessee does not utilise the
capital gain so deposited in respect of which exemption was claimed in
the assessment year in which the amount was assessable, but for the
claim of exemption made in that year, the same will be treated as
income chargeable to tax under Section 45 of the Act. In other words,
no computation or recomputation of capital gain is required to be made
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in the year in which capital gain obtained on sale of agricultural land is
assessable by virtue of the proviso to Section 54B(2) of the Act. So
much so an assessee who claims exemption by deposit of capital gain
for two years will automatically be liable to pay tax in the assessment
year immediately following the expiry of the period of two years, if the
capital gain deposited and in respect of which exemption was claimed,
was not utilised for acquisition of agricultural land. Therefore, what is
required is only to assess and demand tax on the deposited capital gain
which the assessee failed to utilise for acquisition of agricultural land.
Since no computation of capital gain is required to be made in the year
1993-94, in our view, the assessing officer rightly treated the capital
gain as income assessable under Section 45 of the Act in terms of
specific provision contained in clause (i) of the proviso to Section 54B
(2) of the Act. Therefore recomputation of capital gain based on the
amended provisions does not arise at all. Since computation or
recomputation of capital gain was not required, and the capital gain
deposited by the assessees was not utilised by them for purchase of
agricultural land, the assessing officer rightly processed the returns for
the year 1993-94 demanding tax on the same under Section 143(1)(a)
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of the Act. So much so in principle we declare that assessing officer
was competent to demand tax on capital gain in terms of clause (i) of
proviso to Section 54B(2) through prima facie adjustment in the
processing of return under Section 143(1)(a) of the Act. If the
assessing officer fails to do so while issuing proceedings under Section
143(1)(a), he is free to rectify it through proceedings under Section
154 and demand tax as the mistake is patent on account of non-
application of mandatory provisions of clause (i) of the proviso to
Section 54B(2) of the Act.
We therefore answer both the questions raised in favour of the
revenue and against the assessees.
(C.N.RAMACHANDRAN NAIR)
Judge.
(BHABANI PRASAD RAY)
Judge.
kk
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