COMMISSIONER OF INCOME TAX Vs. DESAI

JUDGEMENT

(1.) 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 54F 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 Rs. 38,62,800 the full value of the land brought to the firm by the Respondent-Assessee as capital contribution. The Assessee, 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 54F 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 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 54F 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 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 Assessee 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, deposited the net sale consideration received in a nationalised bank in terms of the Section 54F(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 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 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.