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Case Number

IT APPEAL NOS. 508 & 514 (JODH.) OF 1999

Attorney(S)

Smt. Prerana Sharma

Judges

N.K. SainiHARI OM MARATHA

Acts

section 143(3) r/w section 147 of the IT Act, 1961 (hereinafter referred to as 'the Act').
FINANCE ACT 1982
FINANCE ACT 1987

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Smart Summary

Tribunal Opinion Summary — Assessment Year 1995-96 (Common Appellate Order)

Factual and Procedural Background

These are cross-appeals arising from a common appellate order concerning assessment year 1995-96. The assessment order was passed under section 143(3) read with section 147 of the Income Tax Act, 1961.

The assessee (an employee of the Public Health Engineering Department) sold a plot at Jaipur on 4-1-1995 for Rs. 5,00,000. He entered into an agreement on 16-4-1995 to purchase a residential house at Vivek Vihar, Jaipur and paid earnest money of Rs. 2,00,000; that agreement failed because the flat was occupied by a tenant and the earnest money was returned on 17-12-1995. Subsequently the assessee entered into an agreement to buy another house at Lodha Tower, Jodhpur on 6-1-1996 for Rs. 4,01,000, paid earnest money of Rs. 21,000 on 6-1-1996 and paid the balance price on 30-3-1996.

The Assessing Officer disallowed the assessee's claim of exemption under section 54F on the ground that the unutilised sale consideration had not been deposited in the Capital Gains Account Scheme before filing the return, and made an addition of Rs. 4,34,847. The learned Commissioner of Income Tax (Appeals) granted relief to the assessee in part — allowing exemption to the extent of Rs. 2,00,000 (amount invested in the earlier attempted purchase before filing the return) but rejecting the claim in respect of the house actually purchased later. Both parties appealed to the Tribunal.

Legal Issues Presented

Whether the assessee is entitled to exemption under section 54F for the amounts ultimately invested in the purchase of a residential house (specifically, whether Rs. 4,01,000 invested by 30-3-1996 qualifies for exemption despite non-deposit in the Capital Gains Account Scheme before filing the return).
Whether the deletion by the CIT(A) of an addition of Rs. 2,00,000 (alleged unexplained deposit in Vijaya Bank) was correct.
Consequentially, whether interest under sections 234A and 234B is chargeable having regard to the tribunal's findings on reinvestment and additions.

Arguments of the Parties

Assessee's (Appellant's) Arguments

The assessee contended that the sale proceeds from the plot sold on 4-1-1995 were reinvested in the purchase of a residential house within the time permitted by section 54F(1) — specifically that the final purchase was completed by 30-3-1996 (within one year of sale) and thus qualified for exemption.
The assessee's authorised representative argued that section 54F was introduced to permit reinvestment to avoid capital gains tax and should be construed in a manner that gives effect to that legislative intention; the proviso and related circulars support rectification only when reinvestment fails to occur.
Although the assessee did not deposit unutilised funds in the Capital Gains Account Scheme before filing the return, this omission was a technical default and not evidence of intent to utilise the funds for other purposes; the intent from the beginning was bona fide purchase of a residential house.
The assessee relied on precedent decisions (listed elsewhere in the opinion) to support a liberal, purposive construction permitting exemption where the funds were ultimately utilised for purchase within the statutory period.

Department / Assessing Officer's Arguments

The Assessing Officer maintained that under section 54F an assessee must deposit unutilised sale consideration in the Capital Gains Account Scheme if it is not invested before filing the return; failure to do so disentitles the assessee from exemption — hence the addition of Rs. 4,34,847.
In relation to the alleged unexplained deposit of Rs. 2,00,000 in Vijaya Bank, the Department initially treated it as unexplained, leading to an addition which was deleted by CIT(A) and contested on appeal.
The Department advanced an appeal against the CIT(A)'s partial allowance, arguing that some amounts claimed as exempt should be taxable (specific grounds are reflected in the appeal numbers noted in the record). One departmental ground (No. (iii)) was later withdrawn.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188 (SC)	That provisions in taxing statutes which grant incentives for promoting growth and development should be construed liberally.	The Tribunal relied on this authority to support a liberal construction of section 54F in favour of the assessee's claim for exemption where funds were ultimately reinvested for a residential house.
CIT, Bombay v. M/s Gwalior Rayon Silk Manufacturing Co. Ltd. [1992] 196 ITR 149 (SC)	That expressions in taxing statutes should be understood in a sense harmonious with the object of the statute to effectuate legislative intention.	The Tribunal invoked this principle to interpret section 54F purposively — giving weight to the objective of enabling reinvestment for home purchase rather than unduly strict formality.
M.A.C. Khaleeli v. Dy. CIT [1994] 48 ITD 191 (Mad)	Held that utilisation of funds for construction/purchase (even where unutilised funds were not deposited in the specified bank account but were applied within business/housing division for construction) amounted to utilisation within section 54F(1); sub-section (4) requiring deposit was for assessment-rectification purposes rather than to deprive exemption where funds were genuinely utilised.	The Tribunal relied on this Madras Bench decision to hold that the assessee's Rs. 4,01,000 invested in the Lodha Tower flat was to be treated as exempt under section 54F despite failure to deposit unutilised funds in the Capital Gains Account Scheme before filing the return.

Court's Reasoning and Analysis

The Tribunal reviewed the chronological facts and documentary evidence: sale of the plot on 4-1-1995; attempted purchase at Vivek Vihar with earnest money Rs. 2,00,000 on 16-4-1995 that later failed and the earnest money was returned on 17-12-1995; subsequent agreement for Lodha Tower on 6-1-1996 with earnest of Rs. 21,000 and final payment on 30-3-1996.

The Assessing Officer's sole legal basis for disallowance was that the unutilised sale proceeds had not been deposited in the Capital Gains Account Scheme before filing the return under section 139, a requirement under section 54F(4). The Tribunal considered whether the failure to deposit was fatal to claim of exemption when the funds were ultimately utilised for purchase within the statutory period.

Applying a purposive construction (supported by the cited Supreme Court authorities), the Tribunal emphasised the legislative object behind section 54F — to permit reinvestment to avoid capital gains taxation where a residential house is purchased or constructed within the prescribed time. The Tribunal regarded the assessee's initial attempt to buy a house (with earnest paid), the return of earnest, and the later purchase completed within one year as evidence of bona fide intention and ultimate utilisation for residential purpose.

The Tribunal treated the omission to deposit unutilised funds in the Capital Gains Account Scheme before filing the return as a technical default rather than proof that funds were used for other purposes. It relied particularly on M.A.C. Khaleeli (Mad) to support the proposition that where funds are genuinely utilised within the statutory period, the purpose of sub-section (4) (deposit requirement) is to permit rectification and not to deny exemption in all circumstances.

On the unexplained bank deposit issue (Rs. 2,00,000 in Vijaya Bank), the Tribunal accepted the CIT(A)'s factual finding that the deposit was explained by withdrawals from SBBJ, Jodhpur and that the assessee had no Jaipur account earlier and had transferred funds to Jaipur following his transfer in December 1994. As such, the Tribunal found no infirmity in the deletion of that addition.

The Tribunal noted that one departmental ground was withdrawn. The interest issues under sections 234A and 234B were treated as consequential and to operate in accordance with the Tribunal's substantive findings on reinvestment and additions.

Holding and Implications

Final Disposition:

DISPOSED OF: The Tribunal held that the amount of Rs. 4,01,000 (out of the Rs. 5,00,000 sale consideration) which was ultimately invested in the Lodha Tower flat within the stipulated period is exempt under section 54F despite the assessee's failure to deposit the unutilised amount in the Capital Gains Account Scheme before filing the return. Consequently, the Tribunal deleted the addition of Rs. 4,01,000 and sustained the remaining addition (as per the record). The Tribunal also upheld the CIT(A)'s deletion of the Rs. 2,00,000 addition relating to the bank deposit. The Department's appeal is dismissed and the assessee's appeal is partly allowed.

Implications:

The direct effect is that Rs. 4,01,000 of the sale proceeds was held exempt under section 54F and the corresponding addition made by the Assessing Officer was deleted.
The deletion of the Rs. 2,00,000 addition (Vijaya Bank deposit) was affirmed on the basis that deposits were explained by prior withdrawals from another bank account.
Interest under sections 234A and 234B was to be determined consequentially in light of these substantive findings.

The opinion does not purport to lay down a new legal precedent; it applies existing authorities and a purposive interpretation of section 54F to the facts of this case.

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Jagan Nath Singh Lodha v. Income-tax Officer

Hari Om Maratha, Judicial Member - Both these appeals arise out of common appellate order and are cross appeals which pertain to assessment year 1995-96. So these are being disposed of by this common order for the sake of convenience and brevity.

2. The facts, in brief, which are relevant for the disposal of these appeals are that the assessment order was passed under section 143(3) r/w section 147 of the IT Act, 1961 (hereinafter referred to as 'the Act'). In appeal, the learned CIT(A) granted certain reliefs to the assessee. So, both the parties are in appeal against the same appellate order.

3. Ground No. 1 of assessee's appeal and ground Nos. (i) and (ia) of the Department's appeal relate to an addition on account of denial of exemption under section 54F.

4. The appellant is employed in the Public Health Engineering Department (PHED). He had sold a plot at Jaipur on 4-1-1995, relevant to assessment year 1995-96 for a total consideration of Rs. 5 lakhs. A copy of the agreement is placed at pp. 13 to 19 of the paper book. The assessee entered into an agreement to purchase a residential house situated at Vivek Vihar, Jaipur, and paid earnest money of Rs. 2 lakh to Shri P.K. Singhvi. This agreement did not materialize because the flat was occupied by a tenant who did not vacate it. Eventually, the agreement was cancelled and earnest money was returned back to the assessee on 17-12-1995. After cancellation of the earlier agreement, the assessee again entered into an agreement to purchase another house at Lodha Tower, Jodhpur on 6-1-1996 for a sum of Rs. 4,01,000 and paid an earnest money of Rs. 21,000 on 6-1-1996 and balance price was paid on 30-3-1996. The assessee's case is that the money received as consideration of sale of plot on 4-1-1995 was further invested in the purchase of flat by 30-3-1996, i.e., within two years from the date of sale of plot. So, according to the assessee, he was entitled to the claim of exemption under section 54F of the Act.

5. The Assessing Officer refused to accept the claim of the assessee on the reason that as per the provisions of section 54F, in case the entire consideration is not invested by the assessee before the filing of the return for the relevant year, then the unutilised amount had to be deposited in the Capital Gains Account Scheme. Since the assessee had not deposited the sale consideration in any such account, the Assessing Officer disallowed the claim to the assessee and made addition of entire amount of Rs. 4,34,847.

6. The learned CIT(A) accepted the intention of the assessee and reinvested the same in residential house as bona fide and allowed the claim for exemption under section 54F to the extent of Rs. 2 lakhs only being the amount invested by the assessee to purchase the flat at Jaipur on 16-4-1995 i.e., before filing of the return under section 139. The learned CIT(A) accepted the claim in respect of the flat which was ultimately not purchased, but rejected the claim in respect of the flat wherein actual investment was finally made by the assessee. Both the parties are aggrieved and have filed respective appeals.

7. We have heard the rival submissions and have perused the evidence on record.

8. The learned Authorised Representative has submitted that section 54F was introduced by the Finance Act, 1982, which permitted reinvestment of the proceeds received on transfer of a capital asset in the purchase within a year or construction within three years of a residential house to avoid payment of capital gain tax. This provision was introduced with the sole intention to purchase or construct a house. Proviso 4 to this section was introduced by the Finance Act, 1987, which reads as under :

"Under the existing provisions of sections 54, 54B, 54D and 54F, long term capital gains arising from the transfer of any immovable property used for residence, land used for agriculture.... and other capital assets are exempt from income-tax, if such gains are reinvested in new assets within the time allowed for the purpose. The original assessment needs rectification whenever the taxpayer fails to acquire the corresponding new assets."

[The above is not the fourth proviso but portion of Circular No. 495, dt. 22-9-1987-Ed.]

9. The assessee had sold plot on 4-1-1995 (asst. yr. 1995-96) and invested the sale consideration by 30-3-1996 (asst. yr. 1996-97), i.e. one year from the sale of the plot, as provided under section 54F(1). The assessee had made an attempt to purchase a house at Vivek Vihar, Jaipur immediately on 16-4-1995 after sale of plot on 4-1-1995. This agreement could not materialize due to the inability of the seller to handover the vacant plot. The earnest money of Rs. 2 lakhs was received on 17-12-1995 and the same was immediately invested in the purchase of flat in Lodha Tower, Jodhpur on 6-1-1996. Thus the assessee invested the amount within the stipulated time. The only fault committed by the assessee in this case seems to be that the assessee failed to deposit the unutilised amount meant for reinvestment in the capital gain account scheme before filing of the return under section 139 of the Act. The learned Authorised Representative has relied on the following various decisions at p. 4 of the paper book :

1. Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188 (SC) wherein it has held by the Hon'ble Supreme Court that a provision in taxing statute granting incentives for promoting growth and development should be construed liberally.

2. Cit, Bombay v. M/S Gwalior Rayon Silk Manufacturing Co. Ltd. [1992] 196 ITR 149 (SC) wherein it was held by the Hon'ble Supreme Court that it is a settled law that the expressions used in the taxing statutes would ordinarily be understood in the sense in which it is harmonious with the object of the statute to effectuate the legislative intention.

3. M.A.C. Khaleeli v. Dy. CIT [1994] 48 ITD 191 (Mad). The facts were that the assessee's claim for exemption under section 54F was denied in respect of capital gains as surplus was not deposited under section 54F(4) in a specified bank account but deposited in a housing division of assessee's business to be utilised for construction of residential accommodation. The Madras Bench of the Tribunal, while answering the question in positive, held that the act of the assessee amounted to utilisation of consideration for construction of residential house within the meaning of section 54F(1). It was further held that the purpose of sub-section (4) requiring the deposit of unutilised funds in a specified account is not for depriving the assessee the use of funds; but only for avoiding rectification of assessment by bringing to tax the amount which had been earlier claimed as exempt by reason of re-investment.

10. The clear-cut of the case of the assessee is that the assessee had invested an amount of Rs. 4,01,000 lakhs. The fact that the purchase price and taking possession of the flat at Lodha Tower, Jodhpur by 30-3-1996 when the plot at Jaipur was sold on 4-1-1995 for Rs. 5 lakhs, in view of the aforesaid decision, this amount of Rs. 4,01,000 invested by the assessee in the purchase of flat is to be held exempt under section 54F. The intention of the assessee from very beginning was to purchase a flat. When due to certain unavoidable circumstances, the contract did not materialize, it cannot be said that there was any hanky panky on the part of the assessee to avoid payment of tax. The assessee ultimately purchased a flat within two years from the sale of the plot. The default committed by the assessee was a technical default that the assessee did not deposit the amount meant for reinvestment in the capital gain account scheme before filing return under section 139 of the Act. Keeping in view the totality of the facts and circumstances of the case, and the decisions relied by the learned Authorised Representative, we are of the considered opinion that the amount of Rs. 4,01,000 out of Rs. 5 lakhs which were ultimately invested within the stipulated time is to be exempt from tax although the assessee failed to technically deposit the same in the capital gain account. The intention of the Act as well as the intention of the assessee are to be considered in a right perspective. It is not the case of the department that the assessee wanted to utilise the amount for other purpose than to purchase a house within two years to the extent it has been utilised. As a result, we delete the addition of Rs. 4,01,000 out of Rs. 5 lakhs as per rules and sustain the remaining amount. Thus this ground of appeal is partly allowed.

11. Ground No. (ii) of Department's appeal is regarding deletion of addition of Rs. 2 lakhs on account of alleged unexplained deposit in Vijaya Bank.

12. It is a fact that the assessee had deposited this amount in Vijaya Bank, Jaipur, on 31-3-1995 from the money withdrawn by him from his account in SBBJ, Jodhpur. The assessee was transferred to Jaipur in December, 1994 and did not have any bank account at Jaipur at that time. The assessee transferred the requisite amount from Jodhur to his account at Jaipur. Thus the deposit made by assessee in Vijaya Bank, Jaipur stands explained form the withdrawal made from SBBJ, Jodhpur. The learned CIT(A) had rightly deleted the addition made by the Assessing Officer to the extent of Rs. 2 lakhs. The account in Vijaya Bank was opened on 2-2-1995. The assessee had made total withdrawal of Rs. 3,14,000 in SBBJ, Jodhpur from January, 1995 to March, 1995 against which he made a total deposit of Rs. 3 lakhs in Vijaya Bank, Jaipur, which included single deposit on 31-3-1995. Thus the learned CIT(A) was right in holding that the deposits made by assessee in Vijaya Bank, Jaipur stand well explained from the withdrawals made from SBBJ Bank, Jodhpur and he had rightly deleted the addition made by Assessing Officer. We do not find any infirmity in the order of the learned CIT(A). As a result, we decline to interfere with the impugned order of the learned CIT(A).

13. The Department has withdrawn ground No. (iii) of its appeal, so it dismissed as withdrawn.

14. Ground No.2 of the assessee is same as ground No. (iii) of Department appeal which relates to charging of interest under sections 234A and 234B which consequential in nature. So, these are being decided accordingly. And will have effect in view of our aforesaid finding.

15. In the result, the appeal of the Department is dismissed and the appeal of the assessee is partly allowed.

Jagan Nath Singh Lodha v. Income-tax Officer

Tribunal Opinion Summary — Assessment Year 1995-96 (Common Appellate Order)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's (Appellant's) Arguments

Department / Assessing Officer's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Jagan Nath Singh Lodha v. Income-tax Officer

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