MUMBAI, MAR 08, 2013: THE issue before the Bench is - Whether Section 54F benefits are not available on capital gains computed as per the deeming fiction u/s 50. And the verdict goes in favour of the assessee.

Facts of the case

The assessee is a Member of Parliament (MP) and a film actor owning M/s. Babbar Visuals. During the A.Y. under consideration the assessee had sold a plot of land in Lonavala which was purchased in the year 1984. The assessee computed capital gains after deducting indexed cost of acquisition. In the return of income filed with the AO the assessee claimed deduction u/s 54F of the Act as the sale consideration was applied for construction of residential property. In course of assessment the AO invoked provisions u/s 50C and re-computed capital gain as per Stamp duty paid. Further, the AO disallowed the deduction claimed by assessee u/s 54F since the assessee already owned a house and thus u/s 54F(1)(a) of the act the deduction was not available and the investment in residential property was made prior to two years before the transfer of plot. The assessee contended that the construction was carried on the existing residential property of the assessee by building additional floors. Further, the construction of additional floor was within 3 years from the date of transfer .i.e from date of sale on 6 July, 2007. The construction started from July 2006 and was completed by March 2008. The cost incurred prior to July 2006 Rs. 15,34,353/- was accountable to purchasing TDR, obtaining BMC permission etc. The cost of construction incurred from 2006 to 2008 was Rs. 17,65,752/. In appeal the CIT(A) agreed with application of provisions u/s 50C of the Act and upheld the AO’s computation of capital gains at Rs. 14,71,837/-. However, the deduction u/s 54F was restricted to capital gains of Rs 5,84,837 as computed by the assessee. The CIT(A) stated that the capital gain computed as per consideration u/s 50C was a deeming fiction and the deduction u/s 54F could be allowed only on actual consideration received by the assessee. Reliance was placed on the Tribunal decision in case of Gouli Mahadevappa whereby it was held that the deduction was available on actual consideration and not deeming fiction.

Before Tribunal the assessee argued against the availability of deduction u/s 54F being restricted to capital gain computed by the assessee in return of income. Reliance was placed on the tribunal decision in case of Gouli Mahadevappa and Gyan Chand Batra.

Held that,

++ it is a settled issue that the provisions of section 54F of the Act are code by itself. Thus, the plain reading of the provisions of sections 45, 48, 50C and 54F of the Act suggest that there is nothing to bar benefits of exemption u/s 54F in respect of the capital gains relatable to the FVC as per the deemed fiction u/s 50C of the Act. Clause (a) of section 54F(1) specifies that If the cost of the new asset is not less than the net consideration in respect of the original asset, there is no chargeable capital gains u/s 45 of the Act. In the instant case, the cost of the new asset is Rs. 17,65,752/- and ‘net consideration’ as defined is ‘..the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer’ ie Rs 16,87,000 as per sec 50C and Rs 8 lakhs as per the sale deed. The said clause (a) refers to the provisions of section 45 of the Act. In the given facts of the instant case, no chargeable capital gains arises u/s 45 of the Act. Thus, in this case, with investment of Rs. 17,65,752/- in new asset, the cost of the new asset is not less than the net consideration (NC) in respect of the original asset. Of course, the ‘net consideration’ has two variants depending on FVC adopted and in this case, the NCs are quantitatively lesser than the cost of the new asset leaving no chargeable capital gains u/s 45 of the Act. Therefore, in our opinion, the assessee is not chargeable to any capital gains considering the given facts of the case and also the said clause (a) of section 54F(1);

++ therefore, based on the factual matrix of the present case, where the assessee invested total full value consideration of Rs 16,87,000/- (as per the SRO) in the residential house, which is one house only as it has only one kitchen, and these FVC is less than the invested amounts of 17,65,752/-, during the specified period, the assessee is not chargeable to tax on the capital gains u/s 45 of the Act. Whether we compute the capital gains and apply FVC as per the sale deed or the deemed FVC as per the section 50C, the net consideration is less than the investment in one residential house. None of the decisions of the Tribunal cited above are against such interpretation. Therefore, considering the provisions of section 54F(1)(a) of the Act, we are of the opinion that the order of the CIT(A) is not proper in denying exemption in respect of the capital gains relatable to the deemed full value of the consideration mentioned in section 50C of the Act. Accordingly, the grounds raised by the assessee are allowed and in favour of the assessee.

(See 2013-TIOL-166-ITAT-MUM)