CAPITAL GAINS- A BRIEF ANALYSIS FOR RESIDENTS
AND NON-RESIDENTS
A.INTRODUCTION
As there has been lot queries with regard t...
2
4. Procedure for remittance / repatriation of funds by Non Residents.
B.RELEVANT PROVISIONS OF INCOME-TAX ACT
The follow...
3
capital gains accruing or arising from every reinvestment thereafter in, and sale of,
shares in, or debentures of, an In...
4
Explanation.—In this sub-section the expression “previous owner of the property”
in relation to any capital asset owned ...
5
(i) the amount not so utilised shall be charged under section 45 as the
income of the previous year in which the period ...
6
(3) Where the new asset is transferred within a period of three years from
the date of its purchase or, as the case may ...
7
(b) if the cost of the long-term specified asset is less than the capital gain
arising from the transfer of the original...
8
of India Act, 1988 (68 of 1988) or by the Rural Electrification Corporation Limited,
a company formed and registered und...
9
deposited under sub-section (2) shall be deemed to be the cost of the new
asset:
Provided that if the amount so deposite...
10
year in which the capital gain arises to the due date of
furnishing of return of income under sub-section (1) of sectio...
11
(a) the assessee claims before any Assessing Officer that the value
adopted or assessed or assessable by the stamp valu...
12
(i) without consideration, the aggregate fair market value of which exceeds
fifty thousand rupees, the whole of the agg...
13
(a) in the case of an individual or a Hindu undivided family, being a
resident,—
(i) the amount of income-tax payable o...
14
such certificate is granted shall, so long as the certificate is in force, make
payment of such interest or other sum w...
15
(d) “long-term capital gains” means income chargeable under the head
“Capital gains” relating to a capital asset, being...
16
(2) The deduction referred to in sub-section (1) shall be computed in accordance
with the formula –
Where,
A = the amou...
17
1. Agricultural land One or more
pieces of
agricultural land
(1) The original investment asset
was—
(i) an agricultural...
18
cost of acquisition is ascertained by multiplying by purchase/construction cost or
market value of the property as on 0...
19
year before the sale of capital asset, was entitled to the relief under s. 54F—No
substantial question of law arises
(b...
20
which arose was whether the income arising out of letting out of letting out of
such property was assessable under sect...
21
brothers. There was no written agreement regarding the construction and no
mutation was made nor was a sale deed execut...
22
6. The Lucknow Bench of ITAT in the case of Ashok Kumar Agarwal v. Income-
tax Officer, IV (4) Lucknow [2007] 13 SOT 32...
23
assessee should be the exclusive owner of the house constructed by her.
Further, as both the contracting parties were l...
24
received by assessee was assessable as ‘income from house property’ and not
under ‘income from other sources
11. Simila...
25
demolished within stipulated period specified in section 54F.It therefore held
that the lower authorities erred in rest...
26
that case were partitions, lavatories, air-conditioners, closets, fluorescent tubes,
water and electric metres etc.and ...
27
person a specific right, as to attend a theatre, ride on a train, claim or purchase,
etc."
The definition-para.42-can b...
28
sub-section (4) of section 139. The Bangalore Bench of ITAT In the case of
Nipun Mehrotra vs. Assistant Commissioner of...
29
amount of Rs. 9,50,484 could not be utilized for construction of house before
the due date of filing of the return. The...
30
saving bank account as against the scheme specified by the Central
Government through notification in the Official Gaze...
31
(b) As per provisions of section 54F the assessee who has transferred the
asset (property other than the residential pr...
Capital gains briefanalysis-residentsnonresidents.-09-07-13
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Capital gains briefanalysis-residentsnonresidents.-09-07-13
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Capital Gain Tax- India for Residents and Non Residents an analysis

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Capital gains briefanalysis-residentsnonresidents.-09-07-13

  1. 1. CAPITAL GAINS- A BRIEF ANALYSIS FOR RESIDENTS AND NON-RESIDENTS A.INTRODUCTION As there has been lot queries with regard to sale of immovable properties and resultant saving of tax by investing mostly in purchase of new residential properties and partly by way of investment in capital gain bonds this write-up has covered various issues arising out of such activities. The issues pertaining to Non-resident Indians (NRIs) / Persons of Indian Origin (PIOs) and Indian residents are covered in this write-up. The write-up also touches Joint Development of Property (JDA).Wherever a reference is made to NRIs it covers PIOs also. This write-up is split into various parts. Certain issues are common for a resident and non-resident person and wherever the procedure to be adopted in respect of these two entities is common the discussion has centered around keeping this in mind and wherever a different approach has to be adopted in respect of these entities the same is mentioned clearly. Section 55 of the Direct Taxes Code 2010 (DTC) dealing with “relief for rollover of investment asset” has also been covered. DTC is proposed to be introduced shortly (?).As per the proposed section 55 of DTC there is no corresponding beneficial provision like relief for investment in capital gain bonds as per section 54EC of the Income-tax Act. Moreover as per section 55 of DTC if the assessee owns more than one residential house other than the new investment asset on the date of the date of transfer of the original investment asset then there would be no relief for rollover of investment asset. This restriction is highlighted in the relevant place where section 55 of DTC has been extracted. This new provision has to be kept in mind and it would be better if the transfer transactions are concluded before introduction of DTC in cases where more than one residential property is owned by the assessee on the date of transfer of the original asset. Common issues:- 1. Computation of Capital Gains 2. Does the transfer of property come under section 54 or section 54F? 3. Whether investment in more than one residential property is possible? 4. When does the capital gains tax arise? 5. What should be the year of acquisition in case of properties acquired through Will, Settlement etc., and hence indexation value to be adopted for working out capital gains? 6. What are the avenues that are available to save capital gains tax apart from investing in residential property? With regard to NRIs 1. Applicability of section 195 read with section 197 regarding tax deducted at source 2. Applicability of Chapter XIIA of the Income-tax Act. 3. Facilities available to NRIs, PIO for investment in India
  2. 2. 2 4. Procedure for remittance / repatriation of funds by Non Residents. B.RELEVANT PROVISIONS OF INCOME-TAX ACT The following sections are relevant for this discussion. (a). SECTION 2(47) (v) OF THE INCOME-TAX ACT Definitions.--In this Act, unless the context otherwise requires,- 2(47)(v)-"transfer", in relation to a capital asset, includes,- any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; Explanation - For the purposes of sub-clauses (v) and (vi), "immovable property" shall have the same meaning as in clause (d) of section 269UA. (b). SECTION 45.(1) OF THE INCOME-TAX ACT Capital gains.--(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA. 54EB, 54F, 54G and 54H, be chargeable to income- tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place. (c) SECTIONS 2(29A), 2(29B), 2(42A) and 2(42B) OF THE ACT (29A) “long-term capital asset” means a capital asset which is not a short- term capital asset; (29B) “long-term capital gain” means capital gain arising from the transfer of a long-term capital asset; (42A) “short-term capital asset” means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer: (42B) “short-term capital gain” means capital gain arising from the transfer of a short-term capital asset. However in the case of shares and securities the period of holding need only be twelve months as against thirty-six months for other capital assets. (d) SECTION 48 OF THE INCOME-TAX ACT Mode of computation -The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:-- (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the asset and the cost of any improvement thereto: Provided that in the case of an assessee, who is a non-resident, capital gains arising from the transfer of a capital asset being shares in or debentures of, an Indian company shall be computed by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign currency as was initially utilised in the purchase of the shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so however, that the aforesaid manner of computation of capital gains shall be applicable in respect of
  3. 3. 3 capital gains accruing or arising from every reinvestment thereafter in, and sale of, shares in, or debentures of, an Indian company: Provided further that where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words "cost of acquisition" and "cost of any improvement", the words "indexed cost of acquisition" and "indexed cost of any improvement" had respectively been substituted: Provided also that nothing contained in the second proviso shall apply to the long-term capital gains arising from the transfer of a long-term capital asset being bond or debenture other than capital indexed bonds issued by the Government. Provided also that where shares, debentures or warrants referred to in the proviso to clause (iii) of section 47 are transferred under a gift or an irrevocable trust, the market value on the date of such transfer shall be deemed to be the full value of consideration received or accruing as a result of transfer for the purposes of this section. Provided also that no deduction shall be allowed in computing the income chargeable under the head “Capital gains” in respect of any sum paid on account of securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004. Explanation.--For the purposes of this section,-- (i) "foreign currency" and "Indian currency" shall have the meanings respectively assigned to them in section 2 of the Foreign Exchange Regulation Act, 1973 (46 of 1973); (ii) the conversion of Indian currency into foreign currency and the reconversion of foreign currency into Indian currency shall be at the rate of exchange prescribed in this behalf; (iii) "indexed cost of acquisition" means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later; (iv) "indexed cost of any improvement" means an amount which bears to the cost of improvement the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the year in which the improvement to the asset took place; (v)‘‘Cost Inflation Index’’, in relation to a previous year, means such Index as the Central Government may, having regard to seventy-five per cent. of average rise in the Consumer Price Index for urban non-manual employees for the immediately preceding previous year to such previous year, by notification in the Official Gazette, specify, in this behalf. (e) SECTION 49 (only relevant portions) OF THE INCOME-TAX ACT (1) Where the capital asset became the property of the assessee— (i) on any distribution of assets on the total or partial partition of a Hindu undivided family; (ii) under a gift or will; (iii) (a) by succession, inheritance or devolution the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.
  4. 4. 4 Explanation.—In this sub-section the expression “previous owner of the property” in relation to any capital asset owned by an assessee means the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to in clause (i) or clause (ii) or clause (iii) or clause (iv) of this sub- section. (f) SECTION 54 OF THE INCOME-TAX ACT Profit on sale of property used for residence.--(1) Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family the capital gain arises from the transfer of a long-term capital asset being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head "Income from house property" (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house, 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 residential house so purchased or constructed (hereafter in this section 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 or construction, as the case may be, 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 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 or construction, as the case may be, the cost shall be reduced by the amount of the capital gain. (2) The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new assets made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction 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 purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction 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 this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,--
  5. 5. 5 (i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three 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. (g) SECTION 54F OF THE INCOME-TAX ACT Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house.--(1) Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,-- (a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45: (b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45: Provided that nothing contained in this sub-section shall apply where— (a) the assessee,— (i) owns more than one residential house, other than the new asset, on the date of transfer of the original asset ; or (ii) purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset ; or (iii) constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and (b) the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head ‘‘Income from house property’’. Explanation.--For the purposes of this section,-- "net consideration", in relation to the transfer of a capital asset, means 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. (2) Where the assessee purchases, within the period of two years after the date of the transfer of the original asset, or constructs, within the period of three years after such date, any residential house, the income from which is chargeable under the head "Income from house property", other than the new asset, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a), or, as the case may be, clause (b), of sub-section (1), shall be deemed to be income chargeable under the head "Capital gains" relating to long-term capital assets of the previous year in which such residential house is purchased or constructed.
  6. 6. 6 (3) Where the new asset is transferred within a period of three years from the date of its purchase or, as the case may be, its construction, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a) or, as the case may be, clause (b), of sub-section (1), shall be deemed to be income chargeable under the head "Capital gains" relating to long-term capital assets of the previous year in which such new asset is transferred. (4) The amount of the net consideration which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of original asset took place, or which is not utilised by him for the purchase or construction 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 purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction 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 this sub-section is not utilised, wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,-- (i) the amount by which-- (a) the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of the new asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1), exceeds (b) the amount that would not have been so charged had the amount actually utilised by the assessee for the purchase or construction of the new asset within the period specified in sub-section (1) been the cost of the new asset, shall be charged under section 45 as income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and (ii) the assessee shall be entitled to withdraw the unutilised amount in accordance with the scheme aforesaid. (h) SECTION 54EC OF THE INCOME-TAX ACT Capital gain not to be charged on investment in certain bonds - (1) Where the capital gain arises from the transfer of a long-term capital asset (the capital asset so transferred being hereafter in this section referred to as the original asset) and the assessee has, at any time within a period of six months after the date of such transfer, invested the whole or any part of capital gains in the long- term specified asset, the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say, - (a) if the cost of the long-term specified asset is not less than the capital gain arising from the transfer of the original asset, the whole of such capital gain shall not be charged under section 45 ;
  7. 7. 7 (b) if the cost of the long-term specified asset is less than the capital gain arising from the transfer of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the long-term specified asset bears to the whole of the capital gain, shall not be charged under section 45. Provided that the investment made on or after the 1st day of April, 2007 in the long-term specified asset by an assessee during any financial year does not exceed fifty lakh rupees. (2) Where the long-term specified asset is transferred or converted (otherwise than by transfer) into money at any time within a period of three years from the date of its acquisition, the amount of capital gains arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such long-term specified asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1) shall be deemed to be the income chargeable under the head ‘‘Capital gains’’ relating to long-term capital asset of the previous year in which the long-term specified asset is transferred or converted (otherwise than by transfer) into money. Explanation.- In a case where the original asset is transferred and the assessee invests the whole or any part of the capital gain received or accrued as a result of transfer of the original asset in any long-term specified asset and such assessee takes any loan or advance on the security of such specified asset, he shall be deemed to have converted (otherwise than by transfer) such specified asset into money on the date on which such loan or advance is taken. (3) Where the cost of the long-term specified asset has been taken into account for the purposes of clause (a) or clause (b) of sub-section (1),— (a) a deduction from the amount of income-tax with reference to such cost shall not be allowed under section 88 for any assessment year ending before the 1st day of April, 2006 ; (b) “long-term specified asset” for making any investment under this section during the period commencing from the 1st day of April, 2006 and ending with the 31st day of March, 2007, means any bond, redeemable after three years and issued on or after the 1st day of April, 2006, but on or before the 31st day of March, 2007,— (i) by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 (68 of 1988) ; or (ii) by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 of 1956), and notified by the Central Government in the Official Gazette for the purposes of this section with such conditions (including the condition for providing a limit on the amount of investment by an assessee in such bond) as it thinks fit : Provided that where any bond has been notified before the 1st day of April, 2007, subject to the conditions specified in the notification, by the Central Government in the Official Gazette under the provisions of clause (b) as they stood immediately before their amendment by the Finance Act, 2007, such bond shall be deemed to be a bond notified under this clause; “long-term specified asset” for making any investment under this section on or after the 1st day of April, 2007 means any bond, redeemable after three years and issued on or after the 1st day of April, 2007 by the National Highways Authority of India constituted under section 3 of the National Highways Authority
  8. 8. 8 of India Act, 1988 (68 of 1988) or by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 of 1956) (i) Insertion of new section 54GB with effect from assessment year 2013- 14(Financial Year 2012-13) '54GB. Capital gain on transfer of residential property not to be charged in certain cases.—(1) Where,— (i) the capital gain arises from the transfer of a long-term capital asset, being a residential property (a house or a plot of land), owned by the eligible assessee (herein referred to as the assessee); and (ii) the assessee, before the due date of furnishing of return of income under sub-section (1) of section 139, utilises the net consideration for subscription in the equity shares of an eligible company (herein referred to as the company); and (iii) the company has, within one year from the date of subscription in equity shares by the assessee, utilised this amount for purchase of new asset, then, instead of the capital gain being charged to income-tax as the income of the previous year in which the transfer takes place, it shall be dealt with in accordance with the following provisions of this section, that is to say,— (a) if the amount of the net consideration is greater than the cost of the new asset, then, so much of the capital gain as it bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45 as the income of the previous year; or (b) if the amount of the net consideration is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45 as the income of the previous year. (2) The amount of the net consideration, which has been received by the company for issue of shares to the assessee, to the extent it is not utilised by the company for the purchase of the new asset before the due date of furnishing of the return of income by the assessee under section 139, shall be deposited by the company, before the said due date in an account in any such bank or institution as may be specified and shall be utilised in accordance with any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and the return furnished by the assessee shall be accompanied by proof of such deposit having been made. (3) For the purposes of sub-section (1), the amount, if any, already utilised by the company for the purchase of the new asset together with the amount
  9. 9. 9 deposited under sub-section (2) shall be deemed to be the cost of the new asset: Provided that if the amount so deposited 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 by which— (a) the amount of capital gain arising from the transfer of the residential property not charged under section 45 on the basis of the cost of the new asset as provided in sub-section (1), exceeds— (b) the amount that would not have been so charged had the amount actually utilised for the purchase of the new asset within the period specified in sub-section (1) been the cost of the new asset, shall be charged under section 45 as income of the assessee for the previous year in which the period of one year from the date of the subscription in equity shares by the assessee expires; and (ii) the company shall be entitled to withdraw such amount in accordance with the scheme. (4) If the equity shares of the company or the new asset acquired by the company are sold or otherwise transferred within a period of five years from the date of their acquisition, the amount of capital gain arising from the transfer of the residential property not charged under section 45 as provided in sub-section (1) shall be deemed to be the income of the assessee chargeable under the head "Capital gains" of the previous year in which such equity shares or such new asset are sold or otherwise transferred, in addition to taxability of gains, arising on account of transfer of shares or of the new asset, in the hands of the assessee or the company, as the case may be. (5) The provisions of this section shall not apply to any transfer of residential property made after the 31st day of March, 2017. (6) For the purposes of this section,— (a) "eligible assessee" means an individual or a Hindu undivided family; (b) "eligible company" means a company which fulfils the following conditions, namely:— (i) it is a company incorporated in India during the period from the 1st day of April of the previous year relevant to the assessment
  10. 10. 10 year in which the capital gain arises to the due date of furnishing of return of income under sub-section (1) of section 139 by the assessee; (ii) it is engaged in the business of manufacture of an article or a thing; (iii) it is a company in which the assessee has more than fifty per cent share capital or more than fifty per cent voting rights after the subscription in shares by the assessee; and (iv) it is a company which qualifies to be a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006 (27 of 2006); (c) "net consideration" shall have the meaning assigned to it in the Explanation to section 54F; (d) "new asset" means new plant and machinery but does not include— (i) any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; (ii) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house; (iii) any office appliances including computers or computer software; (iv) any vehicle; or (v) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any previous year.'. (j) SECTION 50C OF THE INCOME TAX ACT Special provision for full value of consideration in certain cases. (1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government (hereafter in this section referred to as the “stamp valuation authority”) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer. (2) Without prejudice to the provisions of sub-section (1), where—
  11. 11. 11 (a) the assessee claims before any Assessing Officer that the value adopted or assessed or assessable by the stamp valuation authority under sub- section (1) exceeds the fair market value of the property as on the date of transfer; (b) the value so adopted or assessed or assessable by the stamp valuation authority under sub-section (1) has not been disputed in any appeal or revision or no reference has been made before any other authority, court or the High Court, the Assessing Officer may refer the valuation of the capital asset to a Valuation Officer and where any such reference is made, the provisions of sub- sections (2), (3), (4), (5) and (6) of section 16A, clause (i) of sub-section (1) and sub-sections (6) and (7) of section 23A, sub-section (5) of section 24, section 34AA, section 35 and section 37 of the Wealth-tax Act, 1957 (27 of 1957), shall, with necessary modifications, apply in relation to such reference as they apply in relation to a reference made by the Assessing Officer under sub-section (1) of section 16A of that Act. Explanation 1 - For the purposes of this section, “Valuation Officer” shall have the same meaning as in clause (r) of section 2 of the Wealth-tax Act, 1957 (27 of 1957). Explanation 2 - For the purposes of this section, the expression “assessable” means the price which the stamp valuation authority would have, notwithstanding anything to the contrary contained in any other law for the time being in force, adopted or assessed, if it were referred to such authority for the purposes of the payment of stamp duty. (3) Subject to the provisions contained in sub-section (2), where the value ascertained under sub-section (2) exceeds the value adopted or assessed or assessable by the stamp valuation authority referred to in sub-section (1), the value so adopted or assessed or assessable by such authority shall be taken as the full value of the consideration received or accruing as a result of the transfer. (k) SECTION 56 OF THE INCOME-TAX ACT Income from other sources.--(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources" if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes shall be chargeable to income-tax under the head "Income from other sources", namely:-- (vii) where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after the 1st day of October, 2009,— (a) any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum ; (b) any immovable property,— (i) without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property ; (ii) for a consideration which is less than the stamp duty value of the property by an amount exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such consideration ; (c) any property, other than immovable property,—
  12. 12. 12 (i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property ; (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration : Provided that where the stamp duty value of immovable property as referred to in sub-clause (b) is disputed by the assessee on grounds mentioned in sub-section (2) of section 50C, the Assessing Officer may refer the valuation of such property to a Valuation Officer, and the provisions of section 50C and sub-section (15) of section 155 shall, as far as may be, apply in relation to the stamp duty value of such property for the purpose of sub-clause (b) as they apply for valuation of capital asset under those sections : Provided further that this clause shall not apply to any sum of money or any property received— (a) from any relative ; or (b) on the occasion of the marriage of the individual ; or (c) under a will or by way of inheritance ; or (d) in contemplation of death of the payer or donor, as the case may be ; or (e) from any local authority as defined in the Explanation to clause (20) of section 10 ; or (f) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10 ; or (g) from any trust or institution registered under section 12AA. Explanation. — For the purposes of this clause, “relative” means— (i) spouse of the individual ; (ii) brother or sister of the individual; (iii) brother or sister of the spouse of the individual ; (iv) brother or sister of either of the parents of the individual; (v) any lineal ascendant or descendant of the individual; (vi) any lineal ascendant or descendant of the spouse of the individual; (vii) spouse of the person referred to in clauses (ii) to (vi). (l) SECTION 63 OF THE INCOME-TAX ACT For the purposes of sections 60, 61 and 62 and of this section,— (a) a transfer shall be deemed to be revocable if— (i) it contains any provision for the re-transfer directly or indirectly of the whole or any part of the income or assets to the transferor, or (ii) it, in any way, gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets ; (b) “transfer” includes any settlement, trust, covenant, agreement or arrangement. (m) SECTION 112(1)(a) OF THE INCOME TAX ACT Tax on long-term capital gains (1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head “Capital gains”, the tax payable by the assessee on the total income shall be the aggregate of,—
  13. 13. 13 (a) in the case of an individual or a Hindu undivided family, being a resident,— (i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been his total income ; and (ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent : Provided that where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income- tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such long-term capital gains shall be computed at the rate of twenty per cent ; (n) SECTION 195 OF THE INCOME-TAX ACT Other sums.--(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode. Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O. Explanation.--For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called "Interest payable account" or "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. (2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable. (3) Subject to rules made under sub-section (5) any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub-section (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorising him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom
  14. 14. 14 such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under sub-section (1). (4) A certificate granted under sub-section (3) shall remain in force till the expiry of the period specified therein or, if it is cancelled by the Assessing Officer before the expiry of such period, till such cancellation. (5) The Board may, having regard to the convenience of assessees and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under sub-section (3) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith. (6) The person referred to in sub-section (1) shall furnish the information relating to payment of any sum in such form and manner as may be prescribed by the Board. (o) SECTION 197 OF THE INCOME-TAX ACT Certificate for deduction at lower rate.--(1) Subject to rules made under sub-section (2A), where, in the case of any income of any person or sum payable to any person, income-tax is required to be deducted at the time of credit or, as the case may be, at the time of payment at the rates in force under the provisions of sections 192, 193, 194, 194A, 194C, 194D, 194G, 194H, 194I, 194J, 194K 1194L, 194LA and 195, the Assessing Officer is satisfied that the total income of the recipient justifies the deduction of income-tax at any lower rates or no deduction of income-tax, as the case may be, the Assessing Officer shall, on an application made by the assessee in this behalf, give to him such certificate as may be appropriate. (2) Where any such certificate is given, the person responsible for paying the income shall, until such certificate is cancelled by the Assessing Officer, deduct income-tax at the rates specified in such certificate or deduct no tax, as the case may be. (2A) The Board may, having regard to the convenience of assessees and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under sub-section (1) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith. (p) Chapter XII A of the Income-tax Act contains special provisions relating to certain incomes of non-residents and the important sections so far this discussion is concerned are the following- 1. Section 115C. In this Chapter, unless the context otherwise requires,— (a) “convertible foreign exchange” means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made there under; (b) “foreign exchange asset” means any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange; (c) “investment income” means any income derived from a foreign exchange asset;
  15. 15. 15 (d) “long-term capital gains” means income chargeable under the head “Capital gains” relating to a capital asset, being a foreign exchange asset which is not a short-term capital asset; (e) “non-resident Indian” means an individual, being a citizen of India or a person of Indian origin who is not a “resident”. Explanation.—A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India; (f) “specified asset” means any of the following assets, namely :— (i) shares in an Indian company; (ii) debentures issued by an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956); (iii) deposits with an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956); (iv) any security of the Central Government as defined in clause (2) of section 2 of the Public Debt Act, 1944 (18 of 1944); (v) such other assets as the Central Government may specify in this behalf by notification in the Official Gazette. 2. SECTION 115E. Where the total income of an assessee, being a non-resident Indian, includes— (a) any income from investment or income from long-term capital gains of an asset other than a specified asset; (b) income by way of long-term capital gains, the tax payable by him shall be the aggregate of— (i) the amount of income-tax calculated on the income in respect of investment income referred to in clause (a), if any, included in the total income, at the rate of twenty per cent; (ii) the amount of income-tax calculated on the income by way of long- term capital gains referred to in clause (b), if any, included in the total income, at the rate of ten per cent; and (iii) the amount of income-tax with which he would have been chargeable had his total income been reduced by the amount of income referred to in clauses (a) and (b).] 3. Section 115-I.- A non-resident Indian may elect not to be governed by the provisions of this Chapter for any assessment year by furnishing [his return of income for that assessment year under section 139 declaring therein] that the provisions of this Chapter shall not apply to him for that assessment year and if he does so, the provisions of this Chapter shall not apply to him for that assessment year and his total income for that assessment year shall be computed and tax on such total income shall be charged in accordance with the other provisions of this Act (q) Code / Section55 of the Direct Taxes Code (proposed to be introduced shortly ?) reads as under- 55. Relief for rollover of investment asset.—(1) An individual or a Hindu undivided family shall be allowed a deduction, in respect of rollover of any original investment asset referred to in sub-section (3) of section 51, from the capital gain arising from the transfer of the asset in accordance with the provisions of this section.
  16. 16. 16 (2) The deduction referred to in sub-section (1) shall be computed in accordance with the formula – Where, A = the amount of capital gains arising from the transfer of the original investment asset B = the amount invested for purchase or construction of the new asset referred to in sub-section (6) within a period of one year before the date of transfer of original investment asset C = the amount invested for purchase or construction of the new asset referred to in sub-section (6) by the end of the financial year in which the transfer of the original investment asset is effected or six months from the date of transfer, whichever is later D = the amount deposited in an account in any bank by the end of the financial year in which the transfer of original investment asset is effected or six months from the date of transfer, whichever is later in accordance with the Capital Gains Deposit Scheme framed by the Central Government in this behalf ; E = the net consideration received as a result of the transfer of the original investment asset. (3) The deduction computed under sub-section (2) shall not exceed the amount of capital gains arising from the transfer of the investment assets. (4) Any amount withdrawn from an account under the Capital Gains Deposit Scheme shall be utilised within a period of one month from the end of the month in which the amount is withdrawn, for the purposes of purchase or construction of the new asset. (5) The amount deposited in the account under the Capital Gains Deposit Scheme shall be utilised for the purposes of purchase or construction of the new asset within a period of three years from the end of the financial year in which the transfer of the original asset is effected. (6) The deduction under this section in respect of capital gain arising from the transfer of an investment asset, specified in column (2) of the Table given below, shall be allowed with reference to the corresponding new investment asset referred to in column (3) of the said Table, subject to the fulfilment of conditions specified in column (4) thereof : Table Rollover Relief Serial number Description of the original investment asset Description of the new investment asset Conditions (1) (2) (3) (4)
  17. 17. 17 1. Agricultural land One or more pieces of agricultural land (1) The original investment asset was— (i) an agricultural land during two years immediately preceding the financial year in which the asset is transferred ; and (ii) acquired at least one year before the beginning of the financial year in which the transfer of the asset took place. 2. Any investment asset Residential house (2) The new asset shall not be transferred within one year from the end of the financial year in which the new asset is acquired— (i) the assessee does not own more than one residential house, other than the new investment asset, on the date of transfer of the original investment asset ; and (ii) the original investment asset was acquired at least one year before the beginning of the financial year in which the transfer of the asset took place ; (iii) the new asset shall not be transferred within one year from the end of the financial year in which the new asset is acquired or constructed. (7) In this section, "net consideration" means the full value of consideration received or accruing as a result of the transfer of an investment asset as reduced by any expenditure incurred wholly or exclusively in connection with such transfer. C-1. COMPUTATION OF CAPITAL GAINS (i) Capital gain is the difference between the selling price (total consideration) and total sum up of indexed cost of acquisition and indexed cost of improvement. Any expenditure incurred wholly and exclusively in connection with transfer of asset can be added to the total figure of indexed cost of acquisition and indexed cost of improvement to arrive at the total cost. The nature of expenditure that can be claimed includes travelling, if any, advocate fees (paid for obtaining legal opinion, drafting of deeds etc) and consultancy charges paid for obtaining legal advice in respect of capital gains. The indexed
  18. 18. 18 cost of acquisition is ascertained by multiplying by purchase/construction cost or market value of the property as on 01-04-1981 whichever is later by cost inflation index pertaining to the year of sale and divide it by cost inflation index pertaining to the year of purchase/construction or if the purchase/construction is made prior to 01-04-1981 by 100. If there had been any improvement to the property then indexed cost of improvement can be calculated likewise and added to original indexed cost of acquisition / purchase to arrive at the total indexed cost of acquisition. The Supreme Court in the case of Arunachalam (Rm.) vs.CIT[1997] 227 ITR 222 has held that where property placed under mortgage by previous owner was acquired by the assessee(as the present owner) and the mortgage is discharged by the assessee then such sum paid by the assessee becomes part of cost of acquisition. The Madras High Court in the case of CIT vs. Bradford Trading Co. (P.) Ltd. [2003] 261 ITR 0222 had explained the decision of the Supreme Court in the case of Arunachalam (Rm) in the following words- “The distinction pointed by the Supreme Court in R.M. Arunachalam’s case (supra) is that where the assessee acquired property subject to mortgage and later on it was discharged at the time of transfer by vendee, then, it would become an expenditure incurred in connection with the transfer, and where the assessee himself created the mortgage after acquisition of capital asset, the amount would not go to reduce the full value of consideration received by the assessee” The avenues by which capital gains / sale proceeds can be invested and exemption can be claimed are 1. Investing in residential house property 2. Investing in capital gain bonds. The relevant provisions of section 54,54F, 54EC and 54GB have been extracted earlier. (ii) Investment in purchase of a residential house can be made even one year prior to date of transfer which is defined in section 2(47)(v) of the Act. If investment in purchase of a residential house is made after the date of transfer then the time limit provided is 2 years within the date of transfer. In the case of construction of a residential house a time limit of 3 years has been fixed from the date of transfer for claiming exemption under section 54 of the Act. The following decisions may be referred to in this regard. (a) COMMISSIONER OF INCOME TAX vs. R. SRINIVASAN (2010) 45 DTR (Mad) 208-Decision dated 12-04-2010 The catchwords run as under- Capital gains—Exemption under s. 54F—Investment out of sale proceeds of original asset—AO rejected the claim of exemption on the ground that the investment in the new asset i.e., house property was not made from the sale consideration of the original asset—Not justified—Sec. 54F provides option to the assessee to invest even within a period of one year before the date on which the transfer takes place—There is no such pre-condition imposed by the provision to the effect that the property is to be purchased by the assessee out of consideration received on account of transfer of the capital asset—Sec. 54F is clear, unambiguous and plain—Sec. 54F encourages investment in residential house and the same is required to be interpreted in such a manner as not to nullify the object—Assessee having purchased the house within a period of one
  19. 19. 19 year before the sale of capital asset, was entitled to the relief under s. 54F—No substantial question of law arises (b) The decision of the Hyderabad Bench of ITAT in the case of Muneer Khan vs. ITO (2010)-7 taxmann.com 30 (Hyd-ITAT) wherein it has been held as under- “Since law itself permits investment in a new property even before sale of property covered by sections 54 and 54F, the law does not contemplate the identity of the funds on sale for its investment; since money has no colour, all that is required is compliance with the conditions of investment within the specified time “ (c) The Delhi High Court in the case of Commissioner of Income-tax Vs. Smt. Brinda Kumari [2002] 253 ITR 0343 has held that when amount was advanced to builder for specific purpose of construction of flats in new building and the Appellate Tribunal has also held that construction can be treated as construction by assessee that finding of fact is binding on the Court and the Tribunal was right in holding that the assessee was entitled to exemption under section 54(1) of the Act. The following observations were made by the High Court in the judgment – We find substance in the assessee’s stand. The Tribunal has, inter alia, recorded a positive finding in the following terms: “In the present case, on the facts, there is no dispute that the late Maharani advanced a sum of Rs. 5,25,000 for the specific purpose of constructing flats for her on third floor of the Akash Deep Building. The Akash Deep Building was constructed after demolishing 9, Hailey Road, which was sold by the late Maharani to Ansal and Sehgal Properties P. Ltd. If therefore the latter constructed the flats on behalf of the late Maharani with the funds advanced by her, there appears to be no difficulty in treating the construction as the construction made by her.” As provisions of 54F are similar so far as investing in a house within one year prior to date of transfer is concerned, these decisions can be taken advantage of even in respect of issues arising under section 54. It should also be noted that any additional facilities (to be) provided in the new residential property can be claimed as part of investment made under section 54 of the Income-tax Act.(at pages 25 to 27 infra) (iii) Sometimes it may so happen that the proceeds arising out of sale of residential/other property may have to be invested in lands not belonging to the assessee-seller and the question which would then arise is “whether it is possible to do so?” The following write-up provides an answer in the affirmative. LAND MAY BELONG TO ONE PERSON AND SUPER-STRUCTURE TO ANOTHER PERSON 1. The Madras High Court as early as 01-05-1934 vide its decision in CIT v. The Madras Cricket Club [1934] 2 ITR 209(Mad) held that that in order that a person may be assessed as the owner of a building under section 9 of the Indian Income-tax Act, 1922, it is not necessary that he should also be the owner of the land on which the building stands. In this case the assessee took on long lease a parcel of land from the Government and erected buildings thereon with a provision for permitting the removal of the buildings erected upon the land by the assessees at the expiration or upon the determination of the lease. The question
  20. 20. 20 which arose was whether the income arising out of letting out of letting out of such property was assessable under section 9 of the Indian Income Tax Act, 1922.which deals with income from house property and is akin to section 22 of the Income-tax Act 1961.This decision of the Madras High Court was followed in Sakarchand Chhaganlal v. CED [1969] 73 ITR 555 (Guj.) and Wealth-tax Officer vs. Hemlata Shukla/Sarla Shukla(1983)-6-ITD-750(All) 2. The Gujarat High Court in the case of Sakarchand Chhaganlal v. CED [1969] 73 ITR 555 (Guj.) made the following observations at page 560 of its judgment- “Now having regard to the observations of the Privy Council in Narayan Das v. Jatindra Nath [1927] LR 54 IA 218 ; AIR 1927 PC 135 and Vallabhdas Naranji v. Development Officer, Bandra [1929] LR 56 IA 259 ; AIR 1929 PC 163, and the decision of the Supreme Court in Dr. K.A. Dhairyawan v. J.R. Thakur AIR 1958 SC 789, it must be taken as well settled that the doctrine of English law embodied in the maxim quic quid plantatur solo, solo cedit, that is, what is annexed to the soil goes with the soil, has no application in this country. Unlike the English law, the law in India recognizes dual ownership, the land belonging to one person and the structure upon it belonging to another.” 3..The Calcutta High Court in the case of Ballygunge Bank Ltd. v. Commissioner of Income-tax (1946)-14-ITR-409(Cal) following its earlier decision in Commercial Properties Ltd., In re [1928] ILR 55 Cal. 1057 held as follows-Head note of ITR “Income derived from the ownership of buildings is chargeable to tax under Section 9 of the Indian Income-tax Act irrespective of whether an individual or a company is the owner and also irrespective of whether one of a company's objects, or its sole object, is to acquire and let out buildings at rents; ownership itself is the criterion of assessment under that section. The assessees, a limited company, which had as one of their objects to acquire land, build houses and let them to tenants, obtained a lease of a plot of land for a period of 40 years. The lease deed provided, inter alia, that the assessees should build houses on the land within a specified time by using the best materials that the lessors or their representatives would be entitled to supervise the building construction, and that after the expiration of 40 years the houses would belong to the lessors. Under the lease the assessees should pay the entire municipal tax in respect of the houses and a proportionate municipal tax in respect of the land. Upon acquisition of the land by the Government or by a public authority the lessors were entitled to all compensation in respect of the land but compensation in respect of the buildings was to be divided between the lessors and the assessees: Held, that the assessees were the owners of the buildings until the period of the lease expired and they were therefore assessable under Section 9 of the Indian Income-tax Act in respect of the rents derived from the buildings.” 4. The Rajasthan High Court in the case of Saiffuddin v CIT (1985)-156-ITR- 127(Raj) observed as follows (head note of ITR) “Section 22 of the I.T. Act, 1961, brings to tax income from house property and not the interest of a person in the property. As a matter of fact what is taxed under s. 22 is the income from the annual value of the property of which the assessee is the owner. The owner is that person who can exercise the rights of an owner, not on behalf of the owner but in his own right. The assessee purchased a plot of land. A hotel was constructed on the land and the expenses of construction were borne by the assessee and two of his
  21. 21. 21 brothers. There was no written agreement regarding the construction and no mutation was made nor was a sale deed executed by the assessee in favour of his brothers. The ITO assessed the entire income from the property in the hands of the assessee and this was upheld by the Tribunal. On a reference: Held, that so far as the construction on the plot which was purchased by the assessee was concerned, as the expenses of the same were borne by the assessee and his two brothers in equal proportion, the assessee and his two brothers were joint owners, each having a 1/3rd share. The entire income from the property was not assessable in the hands of the assessee. CIT v. Madras Cricket Club [1934] 2 ITR 209 (Mad), CIT v. Fazalbhoy Investment Co. (P.) Ltd. [1977] 109 ITR 802 (Bom) and Kala Rani v. CIT [1981] 130 ITR 321 (P & H) followed.” The Rajasthan High Court referred to the decision of the Madras High Court in the case of CIT v. Madras Cricket Club [1934] 2 ITR 209.in the following words- “Before a Division Bench of the Madras High Court, the meaning of the word 'owner' as used in section 9(1) came up for consideration in CIT v. Madras Cricket Club [1934] 2 ITR 209. In that case, the construction on the plot was made by the lessee. The lessee was entitled to remove the building on the termination of the lease. It was held that in order that a person may be assessed as the owner of a building under section 9(1), it is not necessary that he should also be the owner of the land on which the building stands. While considering the question regarding the ownership, it was observed as under: ". . . The rule in India which is different from that in England, is that a person who builds a superstructure upon the land of another man remains the owner of the superstructure and can at the end of his term remove that superstructure from the land, whereas in England a person who erects a building on the land of another cannot do so as the building at the end of the lease becomes the property of the lessor. . . ." (p. 215) 5..The Calcutta High Court applying the principles laid down in Nawab Bahadur or Murshidabad v. Commissioner of Income-tax [1955] 28 I.T.R. 510 (Cal.) and Ballygunge Bank Ltd. v. Commissioner of Income-tax [1946] 14 I.T.R. 409 (Cal.) held in the case of Sri Ganesh Properties Ltd. Vs. Commissioner of Income-tax [1962] 044 ITR 0606(Cal) as under (head note of ITR) “In the case of a building lease the presumption is that the lessor remains the owner of the subject-matter of the lease including the building. But, if the terms of the lease-deed show that the ownership of the super-structures is vested in the lessee while the ownership of the site remains in the lessor, the lessee can be assessed in respect of the income from the super-structures under section 9 of the Income-tax Act as income from property. The lessee cannot claim that such income should be assessed under section 12 of the Act.(section 12 of the 1922 Act deals with income from other sources) A person may be assessed as the owner of a property under section 9 of the Act even though he has no right to alienate the property or his full right of ownership is in some other way subject to contractual or other limitations.” In other words when the assessee claimed that the income should be assessed under section 12 under the head other sources it was held by the Tribunal and confirmed by the High Court that the correct head of income is income from house property.
  22. 22. 22 6. The Lucknow Bench of ITAT in the case of Ashok Kumar Agarwal v. Income- tax Officer, IV (4) Lucknow [2007] 13 SOT 321 (LUCK.) held as under (Catchwords) Section 22, read with section 26, of the Income-tax Act, 1961 - Income from house property - Chargeable as - Assessment year 2002-03 - Whether superstructure built on land owned by other person can be separately owned and assessed under section 22 - Held, yes - Whether ownership of superstructure is to be considered de hors ownership of land and there is no presumption, in law, that superstructure will be owned by same person who owns land - Held, yes - Assessee declared his income from house property let out to a bank at an amount which was one fourth of rental income from that property on ground that rest amount had been distributed among other three co- owners, viz., his wife, his son and his daughter-in-law - Assessee submitted that assessee had entered into agreement dated 3-5-1985 with other co-owners that total investment in construction of property was made by those four persons and assessments had been made since long in hands of those persons individually - Assessing Officer rejected assessee’s submission and held that it was a colourable device and claim of co-ownership of property and distribution of rental income was not, in any way, legitimate - Assessing Officer, therefore, assessed entire income from house property in hands of assessee holding that other co- owners could not be treated as owners of property within meaning of section 22 - Whether since agreement dated 3-5-1985 clearly provided that all co-owners were equally responsible for overall management of property and repayment of loan and this agreement had not been found to be sham as it had actually been acted upon by all parties in letter and spirit, assessee’s claim that income from house property was to be assessed individually in hands of all four persons as co-owners was to be accepted - Held, yes 7.. The Delhi Bench of ITAT in the case of Mrs.Kamlesh Bansal v.ITO (2008)-26- SOT-3(Delhi)(URO) has held that even though the assessee had only 50% in a land jointly owned with her husband she would be entitled to claim exemption under section 54F on amount of investment made in construction of residential house when she had built super-structure on such land. This goes to prove that the assessee need not be the full owner of the land on which super structure is built. The head note of this case runs as under- The assessee had built the structure for the residential house on the land owned by her husband as per agreement in terms of which she held 50 per cent share in the house. The claim of deduction under section 54F had been denied on the ground that the assessee did not hold the legal title of the property. That view was legally not tenable. In the context of the Act, it is not necessary for someone to hold the registered title in respect of a house property in order to become an owner. Merely because, in the instant case, the contract was between husband and wife, it could not be said that the assessee was not owner of the 50 per cent of the house. No case had been made by the revenue that the agreement between husband and wife was not genuine or that the investment in the super structure had not been made by the wife. It was an undisputed fact that the super structure had been built by the assessee. The only requirement of section 54F is that the assessee should have constructed a residential house. In the facts of the instant case, it could not be said that the assessee had not constructed a residential house. There is no requirement in section 54F that the
  23. 23. 23 assessee should be the exclusive owner of the house constructed by her. Further, as both the contracting parties were living together, division was immaterial. What was material was the ownership. The assessee was no doubt the owner of the 50 per cent of the house which had been built by her. Therefore, finding of the Commissioner (Appeals) could not be sustained; the same was to be set aside and the claim of the assessee was to be allowed 8..SImilar case - The Pune Bench of ITAT in the case of Mukesh Malhotra v. Deputy Commissioner of Income-tax [2000] 75 ITD 355 (Pune) has held as under(Catchwords)- Section 54F of the Income-tax Act, 1961 - Capital gains - Exemption of, in case of investment in residential house - Assessment year 1994-95 - On a land owned by assessee, company ‘W’ constructed a residential accommodation (super- structure) and later sold it to assessee - Assessee had made investment in said purchase, after selling another land, within specified period as per section 54F and he claimed proportionate deduction from capital gains under section 54F - Whether since concept of dual ownership, i.e., land belonging to one and super- structure belonging to another, is recognised in Indian law, it would be wrong to hold assessee as co-owner of super-structure which belonged to ‘W’ and on that ground to deny assessee’s claim for exemption of capital gains invested in purchase of super-structure - Held, yes 9. The Calcutta Bench of ITAT in the case of Assistant Commissioner of Wealth- tax v. Anupam Pictures (P.) Ltd. [1997] 60 ITD 640 (CAL.) held as under (Catchwords) Section 3 of the Wealth-tax Act, 1957, read with section 40 of the Finance Act, 1983 - Charge of tax - Assessment years 1988-89, 1989-90 and 1990-91 - Assessee-company entered into memorandum of agreement for lease for 30 years regarding roof portion of a premises, raised structure thereon, gave it on rent and after some years sold it - It contended that in absence of lease having not been registered, it was not owner of said structure and hence not assessable to wealth-tax - Whether, even though unregistered lease deed was void as a permanent lease, it could be deemed to be a monthly lease terminable by 15 days’ notice under section 106 of Transfer of Property Act - Held, yes - Whether, in view of clear provisions of section 108(h) of Transfer of Property Act, lessee who put up construction on leased land was owner thereof and hence, assessee being legal owner of aforesaid structure, was assessable to wealth-tax in respect of said asset - Held, yes - Whether assessee, not being engaged in buying/selling of flats and buildings, said structure put up by it could not constitute stock-in-trade in its hands - Held, yes This goes to show that not only separate ownership-land belonging to one person and super structure belonging to another person- is recognized in Income-tax Act but also liability to wealth-tax cannot be avoided merely because the assessee, without being owner of land, is only owner of super structure 10. In the case which arose before ITAT Hyderabad Bench in the case of PRAVINCHANDRA MODI (HUF) v. INCOME-TAX OFFICER [1986] 17 ITD 747 (HYD.) assessee purchased superstructure on land owned by trust GM, and GM effected additions to structure at its cost as requested by assessee and entire structure was leased out to company DR, and lease agreements provided that assessee would receive Rs, 6,500 per month as rent from DR, and would in turn pay rent of Rs. 3,250 to GM.It was held that net rental income of Rs.3,250
  24. 24. 24 received by assessee was assessable as ‘income from house property’ and not under ‘income from other sources 11. Similar cases on this issue are- (a) CIT v. Fazalbhoy Investment Co. (P.) Ltd. [1977] 109 ITR 802(Bom) (b). CIT v.Vimal Chand Golecha [1993] 201 ITR 442(Raj) (c).CITvs.Parthas Trust (2001)-249-ITR-520(Ker) 12. Land and building are 2 separate assets. This splitting of land and building into long-term capital asset and short-term capital asset based on the period of holding of the respective assets was recognized by the Madras High Court in the case of CIT v. Dr. D. L. Ramachandra Rao [1999] 236 ITR 51 (Mad) following the decision of the Rajasthan High Court in the case of CIT v. Vimal Chand Golecha [1993] 201 ITR 442 (Raj).The same view has been taken in a subsequent decision by the Madras High Court in the case of CIT v. T. C. Itty Ipe [2001] 249 ITR 591 (Mad).The Supreme Court as early as 1967 in the case of CIT v. Alps Theatres [1967] 65 ITR 377 has held that superstructure has to be treated distinctly from the land, even where such superstructure is married to the land. The decision of the Karnataka High Court in the case of CIT v. C. R. Subramanian [2000] 242 ITR 342 (Kar) has also fallen in tune with the decision of other High Courts. The need for treatment of land and superstructure as distinct assets was also recognized in CIT v. Citibank N. A. [2003] 261 ITR 570 (Bom) following the decision of the Madras High Court in CIT v. Dr. D. L. Ramachandra Rao [1999] 236 ITR 51 (Mad) 13.The Bombay High Court in the case of CIT Vs Hindustan Hotels Ltd. and ITAT(2010)-TMI-78206(Bombay High Court) has held at para.11 of its order as under- “It is well settled by now that, unlike in England, in India, the concept of dual ownership is recognised in the sense that the land may belong to one person and the building standing thereon may belong to another. Reference may be made in that connection to the decision of the Supreme Court in Dr. K. A. Dhairyawan V/s J. R. Thakur, AIR 1958 SC 789 and a decision of the Division Bench of this Court in CIT V/s Fazalbhoy Investment Co. Pvt. Ltd. (1977) 109 ITR 802.” From the detailed discussion arising out of various case laws the following points emerge- 1. There is no prohibition with regard to dual ownership 2. The super structure will be treated as a separate entity for taxation purposes. 3. It is better to have a Memorandum of Understanding between the assessee and the other person comprehensively covering all points such as payment of taxes on the property sharing of rental if the property is let out in future etc. (iv) Investment in cost of plot shall also form part of investment in new residential property- The ITAT Bangalore Bench in the case of M. Vijaya Kumar vs. Income-tax Officer, Ward 1(1), Bangalore [2010] 122 ITD 15 (BANG.) has held that when the assessee had demolished the old house and put up a new construction out of the sale proceeds of other assets the assessee was entitled to claim the demolition cost plus the cost of construction as the total cost of investment in purchase of a new residential property since assessee would not have constructed a house unless old building was demolished and moreover, it had constructed a residential house on same site where old building was
  25. 25. 25 demolished within stipulated period specified in section 54F.It therefore held that the lower authorities erred in restricting exemption to cost of land and building and not to cost of construction incurred on very site where old house stood demolished. The cost of plot can also be included in total cost of investment eligible under section 54 and section 54F of the Income-tax Act and the board circular issued in this regard and extracted below explains the position- Circular Number: 667 dated 18-10-1993[1993] 204 ITR (Stat) 0103 File Number: 207/3/93-ITA.II Topic: Interpretation of section 54 and 54F of the Income-tax Act, 1961--Regarding. Text: To All Chief Commissioners of Income-tax, All Directors-General of Income-tax. Sir, Sections 54 and 54F provide for a deduction in cases where an assessee has, within a period of one year before or two years after the date on which the transfer of a capital asset takes place, purchased, or has within a period of three years after that date constructed a residential house. The quantum of deduction is itself dependent upon the cost of such new asset. It has been represented to the Board that the cost of construction of the residential house should be taken to include the cost of the plot, as, in a situation of purchase of any house property, the consideration paid generally includes the consideration for the plot also. 2. The Board has examined the issue whether, in cases where the residential house is constructed within the specified period, the cost of such residential house can be taken to include the cost of the plot also. The Board are of the view that the cost of the land is an integral part of the cost of the residential house, whether purchased or built. Accordingly, if the amount of capital gain for the purposes of section 54, and the net consideration for the purposes of section 54F, is appropriated towards purchase of a plot and also towards construction of a residential house thereon, the aggregate cost should be considered for determining the quantum of deduction under section 54/54F, provided that the acquisition of plot and also the construction thereon are completed within the period specified in these sections. 3. This may be brought to the notice of all the Assessing Officers in your region. Yours faithfully, (Sd.) Ajay Kumar, Under Secretary, (v) The additional facilities provided in the new property will also add to the cost of the new asset.-See the note below- ADDITIONAL FACILITIES-REFURNISHING EXPENSES The Kerala High Court in the case of Dr. P.A. Varghese vs. Commissioner of Income-tax [1971] 80 ITR 180 (KER.) has held that no building would be fit for habitation without some of the necessary amenities and that it is not possible to treat a building separate from the fittings therein which go along with it as part thereof. The High Court also observed that the extent of the amenities may vary, depending upon several considerations The facilities agreed to be provided in
  26. 26. 26 that case were partitions, lavatories, air-conditioners, closets, fluorescent tubes, water and electric metres etc.and the issue arose whether these fittings formed part of building and the court answered in the affirmative. The Mumbai Bench of ITAT in the case of Saleem Fazelbhoy Vs. Deputy Commissioner of Income-tax [2007] 291 ITR (A.T.) 0169/ (2007)-106-ITD- 167(Mum) has held that investment in residential house would not only include the cost of purchase of the house but also the cost incurred in making the house inhabitable subject to the condition that the payment was made during the period specified in section 54F. The beneficial provisions of section 54F and section 54 are similar except that under section 54F the assessee should not hold more than one residential property other than the one transferred and the entire sale consideration (and not the capital gains alone unlike under section 54) will have to be invested. Hence as exemption under section 54 is broader in perspective when compared to section 54F the benefit of this decision can also be extended to issues arising under section 54 of the Income-tax Act. The Mumbai Bench of ITAT in this case in Saleem Fazelbhoy Vs. Deputy Commissioner of Income-tax (supra) while deciding the issue in favour of the assessee referred to the following observations made by the Supreme Court in the case of Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188 so far applicability of beneficial provisions is concerned. “The provision in a taxing statute granting incentives for promoting growth and development should be construed liberally; and since the provision for promoting economic growth has to be interpreted liberally, restriction on it too has to be construed so as to advance the objective of the provisions and not to frustrate it.” To the similar effect is the decision of Mumbai Bench of ITAT in the case of Mrs. Sonia Gulati v. ITO [2001] 115 Taxmann 232 (Mum.)(Mag.).wherein it was held that the investment in house would be complete only when such house becomes habitable. In fact this decision in Mrs. Sonia Gulati v. ITO [2001] 115 Taxmann 232 (Mum.)(Mag.) has been followed in Saleem Fazelbhoy vs. Deputy Commissioner of Income-tax [2007] 291 ITR (A.T.) 0169/ (2007)-106-ITD- 167- (Mum)(supra) The Mumbai Bench of ITAT Mrs. Gulshanbanoo R. Mukhi vs. Joint Commissioner of Income-tax [2002] 83 ITD 649 (MUM.) has held that “the words used about the amount spent on purchase of new asset are “cost thereto” and not “price thereto”. The cost includes purchase as well. Consequently, we are of the view that the word used signifies that the amount of purchase will include other necessary expenditure in this behalf to make a residential house habitable and taken together will be the cost of the new asset.” The benefit,in this case, was claimed under section 54 of the Income-tax Act. It is also submitted that the definition of a word or phrase as found in the dictionary can be adopted, has been reiterated by the Constitution Bench of the Supreme Court in the case of Sunrise Associates vs. Government of NCT of Delhi & others (and other appeals, special leave petitions and writ petitions) [2006] 145 STC 0576 wherein at para 42-page 594 of STC referred to the definition of a ticket as found in Webster’s Words & Phrases, permanent edition Vol. 25A supplement and para.42 is reproduced below- Webster's Words and Phrases, permanent edition, volume25A supplement defines a "ticket" as "a printed card or a piece of paper that gives a
  27. 27. 27 person a specific right, as to attend a theatre, ride on a train, claim or purchase, etc." The definition-para.42-can be found at page 1907-2ndEdition-Webster’s New Twentieth Century Dictionary Unabridged Edition and basing its observations on this definition and on its earlier decision in the case of H. Anraj (3) (1986) 1 SCC 414 the Supreme Court in the case of Sunrise Associates vs. Government of NCT of Delhi & others [2006] 145 STC 0576 (supra) held that “a lottery ticket has no value in itself. It is a mere piece of paper. Its value lies in the fact that it represents a chance or a right to a conditional benefit of winning a prize of a greater value than the consideration paid for the transfer of that chance. It is nothing more than a token or evidence of this right.” This decision of the Supreme Court goes to show that reliance can be placed on the dictionary meaning whenever necessity arises to decide an issue. So when reference to the word “Habitable” is made to Webster’s New Twentieth Century Dictionary (unabridged –Second Edition –Deluxe Colour) it is defined as “capable of sustaining human beings” and the word “habitation” means place of abode; a settled dwelling house; a house or other place in which to live in.(page 815) So the additional facilities such as interior decor including wood work, fitting of air conditioners in bed rooms, modular kitchen and split air conditioner in drawing room can be considered as part of cost of the new residential property. (vi) It is to be noted that as per provisions of section 54(2) of the Act if the amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilized by him for the purchase or construction 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 utilized 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 purposes of sub- section (1), the amount, if any, already utilized by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset. Though only section 139 is mentioned in section 54(2) enabling certain High Courts and Tribunal Benches to hold that the deposit in such designated account can be made at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier as per provisions of section 139(4) of the Income-tax Act it is advisable to deposit in such designated account on or before 31st July (the due date for filing of the return). The Punjab & Haryana High Court in the case of CIT v. Ms. Jagriti Aggarwal [2011] 203 Taxman 203 /15 taxmann.com 146 following the decision of the Karnataka High Court in the case of Fathima Bai v. ITO [2009] 32 DTR 243 and CIT v. Rajesh Kumar Jalan [2006] 286 ITR 274/ 157 Taxman 398 (Gau.) has held that for purposes of section 54 due date for furnishing of return of income as provided under section 139(1) is subject to extended period as provided under
  28. 28. 28 sub-section (4) of section 139. The Bangalore Bench of ITAT In the case of Nipun Mehrotra vs. Assistant Commissioner of Income-tax Circle 14(2), Bangalore [2008] 110 ITD 520 (BANG.) following the decision of the Gauhati High Court in the case of CIT v. Rajesh Kumar Jalan(supra) has held that section 139 of the Act mentioned in section 54F will not only include section 139(1) but will also include all sub-sections of section 139 of the Act. The Delhi Bench of ITAT in the case of Income-tax Officer, Ward No. 24(4), New Delhi vs. Smt. Sapana Dimri [2012] 19 taxmann.com 15 (Delhi)/50 SOT96, following CIT v. Ms. Jagriti Aggarwal(supra) and CIT v. Rajesh Kumar Jalan has also held that if the assessee had invested in new property within time allowed under section 139(4) of the Act, then he would be entitled for exemption under section 54 to extent amount invested in new property. The facts as obtaining in P. Thirumoorthy v. Income-tax Officer [2011] 007 ITR (Trib) 0010 also indicate if action is taken by the assessee within the time allowed under section 139(4) of the Act then he would be entitled to the benefits of section 54F of the Act. The facts obtaining in P.R. Kulkarni & Sons (HUF) vs. Additional Commissioner of Income-tax [2012] 19 taxmann.com 358 (Bang.) also point out to the same effect. The Chennai Bench of ITAT in a recent case decided on 15th June 2012 - R.K.P. Elayarajan vs. Deputy Commissioner of Income-tax, Circle - I, Vellore[2012] 23 taxmann.com 206 (Chennai - Trib.) has held that merely because investment is made after due date of filing of return, section 54F exemption cannot be denied where investment is made prior to filing of return under section 139(4) As per proviso to section 54(2) of the Income-tax Act if the amount so deposited is not utilized wholly or partly for the purchase or construction of the new asset within the specified period then the amount not so utilized shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires. However the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid. The scheme which has been referred to in this section is the Capital Gains Accounts Scheme 1988. It is to be noted that the assessee has no option but to open a capital scheme account (the specified account) if he does not purchase the property before the due date of filing of the return. The assessee cannot pick up particular provisions in his own way and to defeat the benefit of introduction of section 54F. Please see the ITAT decision (gist) below in this regard. DECISION OF INCOME-TAX APPELLATE TRIBUNAL ON SECTION 54 F “The Ahmedabad Bench of ITAT in the case of Thakorlal Harkishandas Intwala vs. Income-tax Officer, Ward-1, Bharuch [2010] 7 TAXMANN.COM 82 (AHD.) /[2011] 43 SOT 347 (Ahd.) has held that where the assessee had deposited the sale proceeds in normal saving bank account as against the scheme specified by the Central Government, proviso to section 54F would apply against the assessee and he cannot be given any benefit under section 54F Facts of the case During the year the assessee sold a plot of land and deposited the sale proceeds in normal savings bank account. Out of said money, the assessee utilized only Rs. 45,000 towards construction of new house and the balance
  29. 29. 29 amount of Rs. 9,50,484 could not be utilized for construction of house before the due date of filing of the return. The Assessing Officer was of the view that since the assessee did not deposit the sale proceeds as under section 54F(4) in the Capital Account Scheme, 1988, the assessee would not be entitled for deduction under section 54F(4) of Rs. 9,50,484. Accordingly, deduction under section 54F(4) was restricted to Rs. 45,000 only due to non-compliance of certain conditions. On appeal, the Commissioner (Appeals) confirmed the order of the Assessing Officer. On second appeal: Held in Para 14 of its order as follows- Sub-section (4) of section 54F provides the amount of net consideration which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place or which is not utilized by him for the purchase or construction of a new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return in an account in bank or institution as may be specified and utilize in accordance with any scheme notified by the Central Government in the Official Gazette and such return shall accompany the proof of such deposit and for the purpose of sub- section (1), the amount if any already utilized by the assessee for the purchase or construction of new asset together with the amount so deposited shall be deemed to be cost of the new asset. The proviso to the above provision provides that if the amount so deposited under the sub-section is not utilized wholly or partly for purchase or construction of a new asset within the time so specified then the amount shall be charged under section 45. Any amount not utilized for purchase or construction of the new house should be deposited by the assessee within the time and in the manner required by sub-section (4) and should be utilized by the assessee in accordance with the notified scheme, in order to avail himself of the benefit of sub-section (1). However, in the instant case, the assessee had kept the amount in his ordinary saving bank account meaning thereby the amount remained in the custody and control of the assessee and the assessee could utilize the same in any manner as he wished. It would, therefore, frustrate the very purpose of the notified scheme by the Government. The above provisions would thus prove that in case the assessee seeks exemption from the payment of tax on account of long-term capital gains, the assessee shall have to satisfy the mandatory provisions of law as noted above. The interpretation of the above provision would show that the assessee shall have to strictly comply with the provisions of law in order to get exemption under section 54F. No other interpretation could be given to such provisions of law. The assessee, therefore, in order to secure the benefit of the above provisions of law shall have to comply with the conditions noted above. The assessee cannot pick up particular provisions in his own way and to defeat the benefit of introduction of section 54F. The provisions contained under section 54F are substantive provisions under the law and cannot be given go by, by the assessee in order to get the benefit from exemption of taxes. It was admitted fact that the assessee had deposited the sale proceeds in normal
  30. 30. 30 saving bank account as against the scheme specified by the Central Government through notification in the Official Gazette as per section 54F (4). The Assessing Officer specifically noted that the assessee utilized only Rs. 45,000 towards construction of new house and balance amount of Rs. 9,50,484 could not be utilized for construction of the house as per notified scheme before the due date of filing of the return. Since the assessee did not deposit the sale proceeds as per section 54F(4) in the notified bank account scheme, therefore, the assessee would not be entitled for any benefit under the provisions of law. It would, therefore, show that the assessee had violated the provisions of section 54F(4) by not opening a designated account and depositing the proceeds in that account. It was, therefore, not a case of technical default but a case of substantial non-compliance of the provisions of law. The whole scheme of the Act had thus been violated and ignored. The assessee deposited the sale proceeds in a normal saving bank account and did not utilize the amount as per scheme thus defeated the very concessional scheme provided under the Act. The Assessing Officer directed the assessee to furnish the evidences in support of his claim and details of construction of residential house. The Assessing Officer considering the explanation of the assessee specifically noted that the assessee had up to the date of filing of the return utilized only an amount of Rs.45,000 towards construction of house as on 3-7-1996. Thus, the assessee had not utilized the amount in question for construction of house before the due date of filing of the return of income, i.e., 31-8-1996 as per notified scheme. The assessee had also not filed any evidences with the return of income regarding deposit of sale consideration in the Capital Gain Account Scheme, 1988 and utilized the amount after the date of filing of the return. Therefore, it was a clear case of violation of the provisions of section 54F (4). The assessee had not explained any reasons about non-utilization of the remaining amount as per the scheme. Therefore, proviso to section 54F would apply against the assessee and the assessee could not be given any benefit under the law. Considering the above discussions, there was no justification to interfere with the orders of the authorities below. Therefore, appeal of the assessee was to be dismissed.” (vii) It is further to be noted that the Kerala High Court in the case of CIT vs.Thomy P.Chakola (Decd.)-(2011)-49-DTR (Ker) 24 has held that if the assessee does not purchase the property within the stipulated period then he is entitled to adopt indexation only with regard to the year of sale of property and not indexation with regard to the year in which the capital gain was not utilized resulting in withdrawal of deposit. C-2. DOES THE TRANSFER OF PROPERTY COME UNDER SECTION 54 OR SECTION 54F? This issue assumes importance because of three basic differences between the provisions of section 54 and 54F.These three differences are (a) In order to claim exemption under section 54 it is sufficient if only the capital gains are invested in purchase of new residential property and/or investment in capital gain bonds whereas under section 54F the entire net sale consideration (which, in effect, is a higher amount) has to be invested.
  31. 31. 31 (b) As per provisions of section 54F the assessee who has transferred the asset (property other than the residential property) should not own more than one residential house property on the date of transfer of the property whereas there is no such restriction under section 54. (c) As per provisions of section 54F the assessee loses exemption under this section if he purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; There is no such restriction in section 54 of the Act. So when a residential building with an extensive piece of land is sold the advantage would be plenty if the transfer of property is brought under section 54. In fact section 54 opens with the following- “Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head “Income from house property” (hereafter in this section referred to as the original asset)” The decision of the Andhra Pradesh High Court in the case of Commissioner of Income-tax vs. Zaibunnisa Begum [1985] 151 ITR 0320(A.P.) provides an answer in favour of the assessee in the sense that only more beneficial provisions of section 54 (and not section 54F) are applicable. The head note from the decision of the Andhra Pradesh High Court in the case of Commissioner of Income-tax vs. Zaibunnisa Begum [1985] 151 ITR 0320(A.P.)(supra) buttresses the above point. It runs as under- “Section 54 of the Income-tax Act, 1961, grants a concession where capital gains arise from the transfer of buildings or lands appurtenant thereto used by the assessee in the two years immediately preceding the date of transfer as his own or his parent's residence, if he constructs a house property or purchases one for purposes of residence within the time specified in the provision. The expression "land appurtenant thereto" occurring in section 54 has not been defined. It must, therefore, be understood in its popular and non- technical sense. It is not possible to accept the contention that clause (b) of the Explanation to section 5(1)(ivc) of the Wealth-tax Act, 1957, defining "land appurtenant" for the purpose of that clause should be considered equally applicable for the purpose of understanding that expression occurring in section 54 of the Income-tax Act. The Explanation in the Wealth-tax Act is only for the purpose of section 5(1)(ivc) because it is specifically stated so. The meaning assigned to that expression in the Urban Ceiling and Regulation Act is also not relevant. The tax authorities will have to determine the extent of land appurtenant to a building transferred, taking into consideration a variety of circumstances that may be relevant for the purpose. It is not possible to lay down infallible tests to be applied as the tests would vary depending upon the facts and circumstances of each case. For instance: (1) If the building together with the land is treated as an indivisible unit and enjoyed as such by the persons occupying the building, it is an indication that the entire extent of land is appurtenant to the building; (2) If the building has extensive lands appurtenant thereto and even if the building and the land have been treated as one single unit and enjoyed as such by the occupiers, an enquiry could be made to find out

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