By TIOL News Service

MUMBAI, SEPT 02, 2016: THE issue is - Whether exemption u/s 54F is available where sum received on sale of capital asset is not appropriated neither unutilised amounts were deposited in specified bank account as per Sec 54F(4). NO is the verdict.

Facts of the case

The assessee sold a plot of land On 29th April, 1995. On 16th July, 1996, Assessee entered into an agreement to purchase a flat for a consideration of Rs.69,60,000/-. The assessee paid two installments of Rs.10,00,000/- each on 17th July, 1996 and 23rd October, 1996 to the developer / builder i.e. before the due date for filing of return of Income under Section 139(1) of the Act i.e. 31st October, 1996. On 1st November, 1996 the assessee paid to the developer a further installment of Rs.15,00,000/- for purchase of flat pursuant to the agreement dated 16th July, 1996. On 4th November, 1996 the assessee filed his return of income for the Assessment year 1996-97. This was after the due date of filing the return of income. Assessing Officer passed an Assessment Order under Section 143(3) read with Section 147. The Assessment Order determined the net consideration at Rs.75.39 lakhs. Thereafter the Assessing Officer allowed a proportionate exemption of Rs.31.55 lakhs (out of Rs.35 lakhs paid till the filing of return) from Capital Gain Tax in terms of Section 54F of the Act. However, the balance consideration of Rs.43,84,334/- which was payable for purchase of the flat pursuant to the agreement dated 16th July, 1996 was brought to tax under the head 'Capital Gains' on account of assessee's failure to deposit the unutilized consideration for purchase of the flat in specified bank accounts in accordance with the scheme of Central Government as provided under Section 54F(4) of the Act. CIT(A) did record the fact that the assessee had obtained possession of the new flat on 27th January, 1997. However, the order of the Assessing Officer was not disturbed. ITAT dismissed assessee’s appeal by holing that the assessee had only utilized Rs.35,00,000/- of the net consideration received on sale of land towards purchase of a flat before the due date of filing the return of income. Further, the balance of the net consideration had not been deposited in the specified bank account as mandated by Section 54F(4) of the Act.

Having heard the parties, the Court held that,

++ Section 54F(1) of the Act which grants exemption from Capital gain tax where a flat is purchased either within one year prior to the sale of capital asset or within 2 years after the date of sale of the capital asset or where a residential house is constructed within 3 years from the date of sale of the capital asset, is now subject to the provisions of Section 54F(4) of the Act. Thus, where the consideration received on sale of capital asset is not appropriated (where purchase was earlier than sale) or utilized (where purchase is after the sale) then the same would be subject to the charge of capital gain tax, unless the un-utilized amounts are deposited in specified bank account as notified in terms of Section 54F(4) of the Act. The exemption would be available to the un-utilized amounts only if the mandate of sub-section (4) of Section 54F of the Act is complied with. Further the proviso to sub-section(4) of Section 54F of the Act, safeguards the Revenue where the assessee had not invested the amounts chargeable to Capital Gains within the time prescribed under sub-section(1)of Section 54F of the Act. This by providing that in such cases, Capital Gain under Section 45 of the Act would be charged on the un-utilized amount as Income of the previous year in which the period of three years from the date of transfer of the capital asset expires;

++ the sale of capital asset took place on 29th April, 1995 for a consideration of Rs.85.33 lakhs. The agreement for purchase of construction of flat for consideration of Rs.69.90 lakhs was entered into by the assessee on 16th July, 1996. An amount of Rs.35 lakhs were utilized by the Assessee in purchase of flat before the return of income was filed on 4th November, 1996 under Section 139 of the Act. However, the mandate under sub Section (4) of Section 54F of the Act is that the amount not utilized towards the purchase of the flat has to be deposited before the due date of filing return of Income under Section 139(1) of the Act in the specified bank account. In this case admittedly the entire amount of capital gains on sale of asset which is not utilized has not been deposited in a specified bank account before due date of filing of return under Section 139 (1) of the Act. Therefore where the amounts of capital gains is utilized before filing of the return of income in purchase / construction of a residential house, then the benefit of exemption under Section 54F of the Act is available. Except Rs.35 lakhs, the balance of the amounts subject to capital gains tax has not been utilized before date of furnishing of return of income i.e. 4th November, 1996 under Section 139 of the Act. Therefore, on plain interpretation of Section 54F of the Act, it appears that the impugned order of the ITAT cannot be faulted;

++ the provision of Section 54F(4) of the Act are very clear. There is no ambiguity. Thus, there is no occasion to apply liberal / beneficial construction while interpreting the Section as contended by the Assessee;

++ Section 54F(4) of the Act itself clearly states that the amount not utilized in purchase / construction of flat / house should be deposited in the specified Bank notified by the Government. Thus the plain language employed in Section 54F(4) of the Act makes a clear distinction between cases of appropriation (purchase prior to sale of capital asset) and utilization (purchase/construction after the sale of capital asset). Therefore the word "appropriated" would have no application in cases of purchase / construction of a house after the sale of capital asset with which we are concerned;

++ on 4th November, 1996 when the return of income was filed, the entire amount which was subject to capital gain tax had not been utilized for the purpose of construction of new house nor were the unutilized amounts deposited in the notified Bank Accounts in terms of Section 54F(4) of the Act before filing the return of income. The Assessing Officer had taken into account all amounts utilized for construction of a house before filing the return of income on 4th November, 1996 for extending the benefit of exemption under Section 54F of the Act;

++ question no. 2 is also answered in the affirmative i.e. in favour of the revenue and against the assessee.

(See 2016-TIOL-1949-HC-MUM-IT)