An Interaction
With
CA.S.Krishnan
1
1. WHAT IS CAPITAL GAIN?
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
in
respect
of
a
capital
asset(residential property and/or land). Any expenditure incurred
wholly and exclusively in connection with transfer of such capital
asset can be added to the total figure of indexed cost of
acquisition and indexed cost of improvement to arrive at the total
cost.
2
Capital Gain Cont…

The nature of expenditure that can be claimed includes brokerage paid,
travelling, if any, advocate fees (paid for obtaining legal opinion, drafting of
deeds etc) and court expenses like in the case of obtaining probate of WILL
etc.

The
indexed
cost
of
acquisition
is
ascertained
by
multiplying
purchase/construction cost on the date of acquisition or market value of the
property as on 01-04-1981[if acquired prior to 01-04-1981] whichever is later,
with 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
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acquisition / purchase to arrive at the total indexed cost of acquisition.
Relevant Sections
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Sec 2(47)(v)
Dealing with transfer in relation to Capital asset
Sec 45(1) Dealing with capital gains
Secs 2(29A),29B,2(42A) and 2(42B) –Dealing with definition of what is a short-term asset,
long-term asset, short-term capital gains and long-term capital gains
Sec 48
Dealing with mode of Computation of Capital Gains
Sec 49
Dealing with cost with reference to certain modes of acquisition
Sec 54
Dealing with profit on sale of Property used for residence
Sec 54F
Dealing with capital gain on transfer of certain capital assets not to
be charged in case of investment in residential house
Sec 54EC Dealing with Capital gain not to be charged on investment in certain
bonds
Sec 50C
Dealing with Special provision for full value of consideration in
certain cases
Sec 56(2)(b)
Dealing with Gift from Other than Relatives – Immovable Property
Sec 112(1) (a)
Dealing with
Tax on Long term capital gains
Sec 195
Dealing with Payment to NRIs and PIOs
Sec 197
Dealing with Certificate for Deduction at Lower rate
Sec 27 & 64(1) Dealing with transfer of Asset for Inadequate Consideration
Sec.194-IA
Dealing
with
deduction of tax @ 1% on transfer of
immovable property other than agricultural land whose transfer value is more than Rs. 50
Lakhs.
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5
Analysis of Relevant Provisions

(A) As per the provisions of section 2(47) (v) “transfer” in relation to a
capital asset includes-

Any transaction involving the allowing 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.

This section assumes importance as it deals with the definition of the
word “transfer” and not sale. All actions have relevance with regard to
date of transfer.

This point ( the relevant date for computing/calculating capital gains is
the date of handing over of possession) has been reiterated by the Madras
High Court in the case of Madathil Brothers vs. Deputy CIT (2008)-301-ITR345(Mad).
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Analysis Cont…

The Supreme Court in the case of Rambhau Namdeo Gajre vs. Narayan Bapuji Dhotra
(dead) through Lrs. – 2004 (8) SCC 614 referred to the background with regard to
introduction of Section 53A enacted in 1929 by the Transfer of Property (Amendment) Act
1929 by importing into India in a modified form the equity of part performance as it
developed in England over the years and observed that doctrine of part performance as
stated in Section 53A of the Transfer of Property Act is an equitable doctrine which
creates a bar of estoppel in favour of the transferee against the transferor. The Supreme
Court in this case extracted at paragraph 8 of its order, from its earlier decision in the
case of Shrimant Shamrao Suryavanshi and another vs. Pralhad Bhairoba Suryavanshi, 2002
(3) SCC 676, the essential conditions which are required to be fulfilled if a transferee
wants to defend or protect his possession under section 53A of the Transfer of Property
Act in the following words.

There must be a contract to transfer for consideration of any immovable property;
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the contract must be in writing, signed by the transferor, or by someone on his behalf;

the writing must be in such words from which the terms necessary to construe the
transfer can be ascertained:
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the transferee must in part performance of the contract take possession of the property,
or of any part thereof;
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the transferee must have done some act in furtherance of the contract; and
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
the transferee must have performed or be willing to perform his part of the contract."
Analysis Cont…

The Supreme Court also made the following observations at paragraph 9 of its order-

“If these conditions are fulfilled then in a given case there is equity in favour of the
proposed transferee who can protect his possession against the proposed transferor even
though a registered deed conveying the title is not executed by the proposed transferor.
In such a situation equitable doctrine of part performance provided under Section 53-A
comes into play and provides that 'the transferor or any person claiming under him shall
be debarred from enforcing against the transferee and persons claiming under him any
right in respect of the property of which the transferee has taken or continued in
possession, other than a right expressly provided by the terms of the contract."

Therefore it is obligatory on the part of the transferee – the developer in the case of JDA
– to do some act in furtherance of the contract. This further act starts with applying to
various authorities after possession is taken by the transferee and so unless this further
act is done it cannot be stated that provisions of section 2(47)(v) of the Income Tax Act
apply so as to cover situation contemplated under section 53A of the Transfer of Property
Act 1882. Mere signing of Memorandum of Understanding between the owner and the
developer does not result in transfer of property and therefore it could legally be argued
based on the decisions of the Supreme Court referred to above that unless the planning
permit is sanctioned by the Appropriate Authorities permitting construction subject to
fulfilment of certain conditions, it could not be said that some act in furtherance of the
contract has been done by the transferee so as to cover situations contemplated under
section 53A of the Transfer of Property Act read with 2(47)(v) of the Income
Tax Act.
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Analysis Cont…

Though the decisions referred to above have been rendered in defining
the rights of the transferee under section 53A of the Transfer of Property
Act 1882 the general principle emanating out of these decisions, that
unless some further act is done by the transferee he cannot be said to
have done some act in furtherance of the contract resulting in part
performance of the contract, can be taken advantage of. So if adequate
care is taken in drafting the development agreement at the time when
the owner executes General Power of Attorney authorizing the developer
to apply to Appropriate Authorities for sanctioning of plan etc., then it is
possible to postpone the capital gains liability to a later year if the
sanctioning authority takes a longer time in according permission.

The Hyderabad Bench of ITAT in the case of Ms. K. Radhika v. Dy. CIT
[2011] 13 taxmann.com 92 through a detailed and well-reasoned order has
held that unless provisions of section 53A of the Transfer of Property Act
are satisfied transaction relating to Development Agreement of a property
cannot fall within the scope of deemed transfer under section9 2(47)(v) of
the Income-tax Act.
Analysis Cont…

The Hyderabad Bench of ITAT in a subsequent case in the case of S.Ranjith
Reddy vs.Deputy CIT [2013] 35 taxmann.com 415 (Hyd) through a detailed and
well-reasoned order has held that where nothing happened in relevant
previous year other than execution of agreement, whereby assessee assigned
his landed property in favour of joint venture between assessee and developer,
there was no transfer under section 2(47) as there was no extinguishment of
rights or receipt of consideration and where no progress or construction had
taken place in said landed property since date of signing development
agreement, it could not be held that developer had performed its obligations
as envisaged in section 53A of Transfer of Property Act, and therefore, there
was no transfer as per section 2(47) of the Income-tax Act.

If it is possible for the assessee to part with possession of the property in piece
meal falling in different assessment years, then capital gains tax gets
distributed accordingly. The Madras High Court in the case of Commissioner of
Income Tax vs. K. Jeelani Basha (2002) 256 – ITR – 282,following the decision of
the Delhi High Court in the case of Commissioner of Income Tax vs. Shakuntala
Rajeshwar (1986) 160 – ITR – 840 (Delhi.) has held that if the assessee parts
with possession of one third of property on receiving part payment
then the
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capital gains will have to be calculated only on the basis of such part
consideration received and not on total consideration agreed upon.
Analysis Cont…
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The Madhya Pradesh High Court in the case of Avtar Singh Vs. Income-tax
Officer [2004] 270 ITR 0092 has held that mere execution of general
power of attorney by the owner does not result in deliverance to the
purchaser if there is nothing in the agreement to indicate that possession
was delivered to the purchaser. The matter was remitted to the Tribunal
for fresh adjudication with regard to the factum of delivery of possession
or enjoyment of property by the purchaser by any other means.

Recently arguments are put forth by certain legal luminaries that if a
clause is added in the Joint Development Agreement (JDA) stating that the
possession of the property still lies with the owner and not handed over to
the builder for development purposes and the same shall be handed over
to the developer only after the flats are allotted to the owner and
therefore the property does not get transferred on mere signing of the
JDA. This argument is put forth to get over the definition of section
2(47)(v) of the Income Tax Act which defines the important term
“transfer”. But such a stand taken by such legal luminaries is against law
and the following decisions clearly explain the situation with regard to
transfer
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Analysis Cont…

G. Sreenivasan vs. Deputy CIT [2013] 140 ITD 235(Cochin)-The Cochin
Bench has observed that the substance shall prevail over the form. The
Bench also observed that “though it is mentioned in the agreement that
the possession of land shall be handed over only after handing over of the
assessee's portion of constructed area, yet the builder, under practical
circumstances, cannot start construction unless the physical possession of
land is handed over to him.” The Bench went on to observe that “ the
impugned agreement, being a development agreement, a mere
mentioning in one of the clauses of the agreement to the effect that
there is no handing over of possession, shall not take away the actual
fact that the physical possession was handed over to the builder.”
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Ravinder Singh Arora vs. Assistant Commissioner of Income-tax, Circle10(1), Hyderabad [2012] 24 taxmann.com 346 (Hyd.) –The Hyderabad
Bench in this case has held that “where a land owner has entered into an
agreement for development of property and certain rights were assigned
to developer who in turn has made substantial payment and,
consequently, has entered into property and, thereafter, if transferee
(developer) has taken steps in relation to construction of flats, then it is
to be considered as transfer under section 2(47)(v) attracting provisions of
section 45; and the fact that legal ownership continued with owner,
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which is to be transferred to developer at a future distant
date does
not affect applicability of section 2(47)(v)”
Analysis Cont…
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An interesting situation arose before the ITAT Hyderabad Bench in the case of Smt. P.
Prathima Reddy vs. ITO [2012] 25 taxmann.com 264 (Hyd.) wherein though the joint
development agreement was entered into during the assessment year 2006-07 a
Supplementary Agreement was entered into during the assessment year 2007-08 and the
consideration receivable by the assessee was specifically determined/fixed by such
Supplementary Agreement. Under the above circumstances the Tribunal held that
liability to capital gains tax arose only for the assessment year 2007-08 and not earlier
as ‘willingness to perform' being the crux of section 53A of the Transfer of Property Act
need to be satisfied for a transaction to fall within the scope of deemed transfer under
section 2(47)(v) of the Income-tax Act and the same was satisfied only during the
assessment year 2007-08. It is to be noted that in this case the assessee contended that
provisions of section 2(47)(v) of the Income-tax Act, could not be applied because
deemed transfer as contemplated thereat applied only to cases where possession was
given in connection with a contract to transfer for consideration as envisaged in section
53A of the Transfer of Property Act and not otherwise.

Since, in terms of joint development agreement and supplementary agreement no event
resulting in transfer of property took place in the previous year relevant to assessment
year 2007-08, capital gain so assessed was to be deleted. It seems that the assessee
tried to escape capital gain liability by preparing two agreements in successive
assessment years the first one without mentioning consideration and the second one
mentioning consideration. The Tribunal repelled all these contentions raised on behalf of
the assessee.
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Other cases of Relevance

(i) In the case which arose before ITAT Hyderabad Bench in Mali Florex Ltd. vs.
Deputy Commissioner of Income-tax [2013] 32 taxmann.com 373 (Hyderabad Trib.) the assessee entered into agreement for sale of land for consideration of
Rs. 2.24 crore out of which it received Rs. 8 lakh and had not parted with
possession of same. Under the above circumstances the Tribunal held that such
transaction could not be treated as transfer within meaning of section 2(47) of
the Income-tax Act.
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(ii) The Delhi High Court in the case of CIT vs. Delhi Apartments (P) Ltd.[2013]
352 ITR 322 has held that where assessee received advance in the year under
consideration for sale of land and conditions of execution of written agreement
and handing over of possession had not taken place in that year then there was
no transfer and, thus, nothing could be brought to tax in assessment year under
consideration.
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(iii) In the case of Sowcar Janaki vs. Income-tax Officer [2013] 27ITR (Trib)
226(Chennai) ground number 6 (para.3-page 229) raised by the assessee before
the Tribunal was as under-

“The CIT erred in confirming the stand of the Assessing Officer that section 50C is
applicable and that the sale consideration for the land foregone
to the developer
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is the guideline value of the property as on 1.4.1981 instead of taking the cost of
construction of 9 flats allotted to the appellant as the sale consideration.”
Other cases of Relevance Cont…
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This issue was decided in favour of the assessee by the Tribunal at para.14 (page
237) by observing as under-
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“As far as ground of appeal no.6 is concerned i.e. invoking the provisions of
section 50C and considering the guideline value of registration department for
the purpose of computing capital gains, we are unable to endorse the view of the
Commissioner of Income Tax (Appeals) in accepting the decision of the Assessing
Officer in invoking the provisions of section 50C of the Act. The Jodhpur Bench of
the Tribunal in the case of Navneet Kumar Thakkar Vs. ITO (110 ITD 525) held that
unless the property transferred has been registered by sale deed and for that
purpose value has been assessed and stamp duty has been paid by the parties
section 50C inserted by Finance Act, 2002 with effect from 1.4.2003 cannot come
into operation. Similar view has been taken by the co-ordinate Bench of this
Tribunal in the case of ITO Vs. Kumudhini Venugopal (5 ITR (Trib) 145), wherein
the Tribunal held that when the agreement is not registered, the provisions of
section 50C have no application. A similar view has been expressed by the
Lucknow Bench of the Tribunal in the case of Carlton Hotel (122 TTJ 515) and
Jaipur Bench of the Tribunal in the case of Vijayalakshmi Dhadia (20 DTR365).
Respectfully following the above decisions, we reverse the order of the
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Commissioner of Income Tax (Appeals) on this issue and allow
the ground of
appeal no.6 raised by the assessee.”
Other cases of Relevance Cont…
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(iv) However 2 judicial decisions-one rendered by the Andhra Pradesh High Court
in the case of Potla Nageswara Rao vs. Deputy CIT. ITTA No. 245 OF 2014 (Order
dated 09-04-2014) and the other rendered by the Cochin Bench of ITAT in the case
of Smt. Jayasree Gopakumar Saranya v. ITO [IT Appeal No. 505/Coch/2009, dated
9-5-2012] have to be got over in the following manner-
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(a) The Andhra Pradesh High Court in the case of Potla Nageswara Rao (supra)
held that “ in case of development agreements transfer completes on handing
over possession despite non receipt of payment” This observation was based on
the factual situation which was obtaining in that case to the following effect-(
copied from the order of the High Court)
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“In the instant case, on 07.03.2003 an agreement was entered into by the
assessee with M/s. Bhavya Constructions Pvt., Ltd., and the plan of the building
was approved on 31-.03.2003. These dates fall in the previous year 2002-03,
relevant to assessment year 2003-04. Thus, in this case, the land being capital
asset was transferred by the assessee to the developer during the assessment
year under consideration, viz., 2003-04, for construction and it is enough if the
assessee has received the right to receive consideration on a later date, so as to
attract eligibility to tax on capital gains during the year under appeal.”
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Other cases of Relevance Cont…
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(b) The Cochin Bench in the case of Smt. Jayasree Gopakumar Saranya v. ITO [IT
Appeal No. 505/Coch/2009, dated 9-5-2012] held that granting of permission
would relate back to the date of agreement and as the possession of the property
was given to the builder on 16-09-2004 transfer took place during the previous
year, pertaining to the assessment year 2005-06 and not as contended by the
assessee.
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In this case it was contended by the assessee that as the permit was sanctioned
after 31st March 2005 in the financial year 2005-06 the transfer did not take place
during the financial year 2004-05 and reliance was placed by the assessee on the
decisions of the Hyderabad Bench of the ITAT in the case of Ms. K. Radhika v. Dy.
CIT [2011] 47 SOT 180 (URO)/13 taxmann.com 92 and of the Delhi Bench of the
ITAT in the case of ITO v. Finian Estates Developers (P.) Ltd. [2012] 23
taxmann.com 360 for the proposition that till such time, permission was granted
by the appropriate authority, transfer of property would not take place, even
though the property had been put in possession of the developer on an earlier
date. But the Cochin Bench held against the assessee by observing that in the
case which arose before the Hyderabad Bench of the ITAT in Ms. K. Radhika
(supra), the Bench had no occasion to consider clause (vi) of section 2(47) of the
Act and in the case which arose before the Delhi Bench of the ITAT in Finian
Estates Developers (P.) Ltd. (supra) no permission was obtained/received
for
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construction of the building.
Other cases of Relevance Cont…

The Cochin Bench of the ITAT in this case extracted the provisions of section 2(47)
of the Act and placed reliance on clause (vi) of section 2(47) of the Act which
states 'any transaction which has the effect of transferring or enabling the
enjoyment of any immovable property would come within the meaning of
transfer’. It is submitted, with respect, that the conclusion arrived at by the
Cochin of ITAT in this case, is faulty for the following reasons-

(1)The Cochin Bench has overlooked the concept of “part performance” as
explained by the Supreme Court in a catena cases decided by the Supreme Court
starting with Sheth Maneklal Mansukhbhai v. Hormusji Jamshedji Ginwalla & Sons
AIR 1950 SC 1(all these cases extracted earlier in this write-up)

(2)Moreover, if the time gap between the handing over possession of property and
granting of permission by the appropriate authorities is so large for whatever
reason and these two fall in two different assessment years separated say more
than 2/3 years how can the assessee file his return for the assessment year in
which property is put in possession of the developer treating it (handing over
possession of property) as transfer within the meaning of section 2(47) of the Act
without knowing about the outcome of the application made to appropriate
authorities for planning/building permit?
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Other cases of Relevance Cont…
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What would happen if the assessment had been completed for the assessment
year in which the assessee had filed his return in the year of handing over of
possession of property treating it as transfer and the planning/building permit is
refused in a later year?
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(3) Moreover both the clauses (v) and (vi) of section 2(47) were inserted for
different reasons, as explained by Circular No. 495, dated 22nd September, 1987.
The relevant clause runs as under:

"Definition of 'transfer' widened to include certain transactions:
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11.1 The existing definition of the word 'transfer' in section 2(47) does not include
transfer of certain rights accruing to a purchaser, by way of becoming a member
of or acquiring shares in a co-operative society, company, or association of
persons or by way of any agreement or any arrangement whereby such person
acquires any right in any building which is either being constructed or which is to
be constructed. Transactions of the nature referred to above are not required to
be registered under the Registration Act, 1908. Such arrangements confer the
privileges of ownership without transfer of title in the building and are a common
mode of acquiring flats particularly in multi-storeyed constructions in big cities.
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Other cases of Relevance Cont…
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The definition also does not cover cases where possession is allowed 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. New sub-clauses (v) & (vi) have been
inserted in section 2(47) to prevent avoidance of capital gains liability by
recourse to transfer of rights in the manner referred to above.

11.2 The newly inserted sub-clause (vi) of section 2(47) has brought into the
ambit of 'transfer', the practice of enjoyment of property rights through what is
commonly known as Power of Attorney arrangements. The practice in such cases
is adopted normally where transfer of ownership is legally not permitted. A
person holding the power of attorney is authorised the powers of owner, including
that of making construction. The legal ownership in such cases continues to be
with the transferor.

11.3 These amendments shall come into force with effect from 1-4-1988 and will,
accordingly apply to the assessment year 1988-89 and subsequent years.“
20
Other cases of Relevance Cont…

(4) Moreover, provisions of section 2(47)(vi) –on which reliance was placed by the
Cochin Bench in the case of Smt. Jayasree Gopakumar Saranya(supra)- usually
come into play whenever transfer of property takes place on account of
dissolution of a firm and one of the erstwhile partners takes over one of the
properties - refer to CIT v. Southern Tubes [2008] 171 Taxman 254 (Ker.)

(v) The Hyderabad Benches of ITAT in the cases of M/s. Fibars Infratech Pvt.
Ltd. vs. ITO in ITA NO.477/Hyd./2013-Assessment Year 2007-08-Order dated 0301-2014 and Binjusaria Properties (P.) Ltd. vs. Assistant Commissioner of Incometax, Hyderabad [2014] 45 taxmann.com 115 (Hyderabad - Trib.) have reiterated
that where assessee entered into a development agreement of land with a
developer in terms of which developer had to develop property according to
approved plan and deliver a part of constructed area to assessee, in view of fact
that developer had not done anything to discharge obligations cast on it, capital
gains could not be brought to tax in year under appeal merely on basis of signing
of development agreement
21
Other cases of Relevance Cont…
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(B) Section 48 speaks of expenditure which can be deducted from the value of
full consideration to arrive at capital gains. One such expenditure could be the
sum paid by the assessee for discharge of mortgage on the property inherited
by him where the mortgage was created by the previous owner from whom the
property devolved on the assessee. In this regard the decision of the Supreme
Court in the case of Arunachalam (Rm.) vs.CIT [1997] 227 ITR 222 may be
referred to.
22
Other cases of Relevance Cont…

This is what the Supreme Court observed in this case-

“We are unable to endorse the view of the Kerala High Court in Ambat Echukutty Menon
v. CIT [1978] 111 ITR 880 to which reference has been made by the High Court in the
impugned judgment. In that case, the assessee, as one of the heirs, had inherited
property from the previous owner who had mortgaged the same during his lifetime and
after his death the heirs, including the assessee, had discharged the mortgage created by
the deceased. The said property was subsequently acquired under the Land Acquisition
Act and for the purpose of capital gains the assessee sought deduction of the amount
spent to clear the mortgage. The High Court held that the capital asset had become the
property of the assessee by succession or inheritance on the death of the previous owner
under section 49(1) of the Act and the cost of acquisition of the asset is to be deemed to
be the cost for which the previous owner acquired it, as increased by the cost of any
improvement of the assets incurred or borne either by the previous owner or by the
assessee. According to the High Court, having regard to the definition of the expression
“cost of improvement” contained in section 55(1)(b) of the Act, in order to entitle the
assessee to claim a deduction in respect of the cost of any improvement, the expenditure
should have been incurred in making any additions or alterations to the capital asset that
was originally acquired by the previous owner and if the previous owner had mortgaged
the property and the assessee his co-owners cleared off the mortgage so created, it
23
could not be said that they incurred any expenditure by way of effecting any
improvement to the capital asset that was originally purchased by the previous owner.

Other cases of Relevance Cont…
This decision has been followed in subsequent decisions of the High Court in Salay
Mohamad Ibrahim Sait v. ITO [1994] 210 ITR 700 (Ker) and K. V. Idiculla v. CIT [1995] 214
ITR 386. A contrary view has been taken by the Gujarat High Court in CIT v. Daksha
Ramanlal [1992] 197 ITR 123. In taking the view that in a case where the property has
been mortgaged by the previous owner during his lifetime and the assessee, after
inheriting the same, has discharged the mortgage debt, the amount paid by him for the
purpose of clearing off the mortgage is not deductible for the purpose of computation of
capital gains, the Kerala High Court has failed to note that in a mortgage there is transfer
of an interest in the property by the mortgagor in favour of the mortgagee and where the
previous owner has mortgaged the property during his lifetime, which is subsisting at the
time of his death, then after his death his heir only inherits the mortgagor’s interest in
the property. By discharging the mortgage debt his heir who has inherited the property
acquires the interest of the mortgagee in the property. As a result of such payment made
for the purpose of clearing off the mortgage the interest of the mortgagee in the property
has been acquired by the heir. The said payment has, therefore, to be regarded as “cost
of acquisition” under section 48 read with section 55 (2) of the Act. The position is,
however, different where the mortgage is created by the owner after he has acquired the
property. The clearing off of the mortgage debt by him prior to transfer of the property
would not entitle him to claim deduction under section 48 of the Act because in such a
case he did not acquire any interest in the property subsequent to his acquiring the same.
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Other cases of Relevance Cont…

In CIT v. Daksha Ramanlal [1992] 197 ITR 123, the Gujarat High Court has rightly held that
the payment made by a person for the purpose of clearing off the mortgage created by
the previous owner is to be treated as cost of acquisition of the interest of the mortgagee
in the property and is deductible under section 48 of the Act”.

However if the mortgage was created by the assessee himself then he cannot claim it as
an expenditure at the time of transfer. 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”

It is to be noted that any expenditure incurred by the assessee to evict the tenants at the
time of transfer of property can be claimed as an expenditure under section 48(i) of the
Act as was held by the Delhi High Court in the case of CIT vs. Eagle Theatres [2012] 205
25
Taxmann 449. The Delhi High Court while arriving at a decision favourable
to the assessee
relied on number of precedents on this issue.
Other cases of Relevance Cont…

However when there was no obligation on the part of the assessee to settle
claims of tenants for getting vacant possession but the assessee pays
compensation to such tenants for delivering vacant possession then such
payment would partake the character of “cost of improvement” under section
48(ii) of the Act and not merely expenses on transfer under section 48(i) of the
Act thus enabling the assessee to claim indexation as provided under section
48(ii) of the Act [ see CIT vs. Spencers and Co.Ltd. (2013) 359 ITR 644(Mad)]

(C) Section 49 is an important and interesting section and it deals with cost of
acquisition with regard to certain modes acquisition. In case of property
acquired through will, inheritance, settlement or gift the indexation relates
back to the year of acquisition of the property by the first owner. This view is
supported by the decision of the Bombay High Court in the case of CIT vs.
Manjula J. Shah (2012) 204 Taxman 691 (Bom) which while approving the
decision of the Mumbai Special Bench of ITAT in the case of Deputy
Commissioner of Income Tax vs. Manjula J. Shah (2010) 35 SOT 105 (Mum) has
held that indexation relates back to the year of acquisition of the property by
the first owner. The High Court of Bombay has followed the decision in the case
of Manjula J. Shah (Supra) in a subsequent decision in the case of CIT vs.
Raman Kumar Suri (2013) 29 taxman.com 231 (Bom) with 26regard to relating
indexation back to the year of acquisition of the property by the first owner.
Other cases of Relevance Cont…

The High Court of Bombay in the case of Commissioner of Income-tax-18,
Mumbai vs. Ms. Janhavi S. Desai [2012] 24 taxmann.com 314 (Bom.) has held
that previous owner of property for purpose of sections 2(42A) and 49(1) does
not include a person who acquired property by a mode of acquisition referred to
in sub-clauses (i) to (iv) of section 49(1).In other words it refers to the first
owner. In fact the Punjab & Haryana High Court in the case of CIT vs. Sathish
Kumar Arora in ITA No.633 of 2009(Date of decision 20-09-2010) was the first
High Court to hold that in case of inheritance the date of acquisition by the
present owner relates back to the date of acquisition by the first owner. The
Delhi High Court in the case of Arun Shungloo Trust vs.CIT [2012] 205 Taxman
456 (Del) following the decision of the Bombay High Court in the case of Manjula
J. Shah(supra) has held in favour of assessee by observing that benefit of
indexed cost of inflation is given to ensure that tax payer pays capital gains tax
on ‘real’ or actual ‘gain’ and not on increase in capital value of property due to
inflation; this is the object or purpose in allowing benefit of indexed cost of
improvement, even if the improvement was made by previous owner in cases
covered by section 49 of the Income-tax Act. The ITAT, Chennai Bench in the
case of Assistant Commissioner of Income-tax v. Syed Maqbul Hussain [2010] 004
ITR (Trib) 0044 has also adopted the same view. The first favourable view in
favour of the assessee in this direction was expressed by Chandigarh
Bench of
27
the Income-tax Appellate Tribunal in the case of Mrs. Pushpa Sofat v. ITO [2002]
81 ITD 1 (Chd.) (SMC).
Other cases of Relevance Cont…

The Gujarat High Court in the case of CIT vs. Rajesh Vitthalbhai Patel [2013] 37
taxmann.com 439(Guj) has held that where assessee's brother acquired a
property prior to 1-4-1981 and he had gifted said property to assessee on 23-51995 and subsequently the assessee had sold property on 7-2-2006, while
computing capital gain indexed cost of acquisition was to be worked out with
reference to 1-4-1981 and not with reference to date on which assessee
acquired property by gift, i.e., 23-5-1995. The Gujarat High Court in a
subsequent decision in the case of CIT vs. Gautam Manubhai Amin[2013] 38
taxmann.com42 (Guj) following the decision of the Bombay High Court in the
case of Manjula J.Shah(supra) has reiterated the same principle by holding that
period of holding of inherited property would include duration of possession of
asset by previous owner. The Chennai Bench of ITAT in the case of Assistant
Commissioner of Income-tax vs. M.Sankar Trading and Consultancy Private Ltd.
in ITA No.2103/Mds/2012(order dated 26th March,2013) following precedents
has held that for the purpose of computation of long term capital gains arising
from the transfer of a capital asset which had become property of the assessee
under gift, the first year in which the capital asset was held by the assessee had
to be determined to work out the indexed cost of acquisition, as envisaged in
28
the Explanation (iii) of Sec. 48 after taking into account the
period for which
the said capital asset was held by the previous owner.
Other cases of Relevance Cont…

(D) The three basic differences between the provisions of section 54 and 54F are-

(i) In order to claim exemption under section 54 it is sufficient if only the capital gains are
invested in purchase of residential property( capital asset) 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 in purchase of capital asset.

(ii) 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.

(iii) 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 falls under section 54.
29
Other cases of Relevance Cont…

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.) may be referred to in this regard. The Cochin Bench of ITAT in
the case of Tony J. Pulikal [2013] 37 taxmann.com 221 (Cochin), after
referring to number of case laws cited at the time of hearing including
that of Zaibunnisa Begum(supra), has held that for allowing deduction
under section 54/54F, extent of land appurtenant to residential house
has to be determined with regard to locality where residential house is
situated, social status and profession of individual and other factors for
proper and convenient enjoyment of residential house 30
Other cases of Relevance Cont…

PLEASE NOTE
Where,
however,
before
entering
into
development agreement and handing over
residential
property,
assessee
himself
demolished the same, he could not claim benefit
of deduction under section 54 as has been held
by the High Court of Karnataka in the case of
Commissioner of Income-tax, Central Circle vs.
Ved Prakash Rakhra [2012] 26 taxmann.com 166
(Kar.)
31
INTEREST PAID ON AMOUNT BORROWED FOR
THE PURPOSE OF INVESTMENT

INTEREST PAID ON AMOUNT BORROWED FOR THE PURPOSE OF INVESTMENT
IN CAPITAL ASSET CAN ALSO BE ADDED TO THE COST OF SUCH CAPITAL ASSET
AND THIS TOTAL SUM CAN BE SET OFF AGAINST SALE (TRANSFER) PRICE OF
CAPITAL ASSET

The following discussion buttresses this point

(a). Interest paid during the period of holding, if the liability had been
incurred for acquiring the property or holding on to the same has to be
included in the cost of acquisition as was held in CIT v. Mithlesh Kumari [1973]
92 ITR 9 (Delhi) ; Addl. CIT v. K. S. Gupta [1979] 119 ITR 372 (AP) and CIT v.
Maithreyi Pai [1985] 152 ITR 247 (Kar).

(b)(i) CIT v. K. Raja Gopala Rao (2001) 252 ITR 459 (Mad)

“4. Here, there can be no doubt that the cost of acquisition to the assessee
was not merely the amount that he had paid to the vendors but also the cost
of the borrowing made by him for the purpose of paying the vendor and
obtaining the sale deed… Without the money borrowed, the assessee would
not have been in a position to buy the property... Payment of consideration for
the sale indisputably having been made with the borrowed funds, the
32
borrowing directly related to the acquisition and, interest paid
thereon would
form part of the cost of acquisition.” (emphasis supplied)”

The head note of this case –as taken out from ITR-runs as under-

“The assessee purchased immovable property for Rs. 5,45,349 on December 6,
1970. On the same day he mortgaged the property to secure a loan of Rs. 4
lakhs and this loan was raised solely for the purpose of paying his vendor and
for meeting the cost of the stamp duty on the sale deed. He sold the property
partly in the assessment year 1973-74 and partly in the assessment year 197475. He claimed that for computing the capital gains the cost of execution of
the mortgage and the amount of interest paid to the mortgagee till the date of
sale of the property would require to be added to the purchase price for
arriving at the cost of acquisition. This claim was disallowed by the Assessing
Officer and the first appellate authority, but was allowed by the Appellate
Tribunal. On a reference:

Held, that the cost of acquisition to the assessee was not merely the amount
that he had paid to the vendor, but also the cost of the borrowing made by him
for the purpose of paying the vendor and obtaining the sale deed. The fact
that the mortgage was executed after the sale deed was obtained even though
both the documents were signed and registered on the same day did not
render the mortgage and the borrowing made thereunder irrelevant to the
task of determining the cost of acquisition. As the assessee had not made the
purchase with his own funds he was required to pay interest for the borrowed
fund and secure the borrowing by creating a mortgage.
33

Such a mortgage could not have been created earlier as he had to first acquire
title before encumbering the same. Payment of consideration for the sale
having been made with the borrowed funds, the borrowing directly related to
the acquisition and the interest paid thereon would form part of the cost of
acquisition.

Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC) relied on.”

(ii) CIT and ITO v Hariram Hotels (P) Ltd. (2010) 229 CTR 455 (Kar)/(2010) 325
ITR 136(Kar)

“The Tribunal is justified in granting the relief to the assessee since the
property has been purchased out of the loan borrowed from the Directors and
any interest paid thereon is to be included while calculating the cost of
acquisition of the asset..”

The head note of this case –as taken out from ITR-runs as under-

The assessee borrowed loans from some of its directors and purchased an
immovable property in order to put up a hotel building but it could not
materialize on account of various reasons. Ultimately, the assessee sold the
property and while filing the return for computation of the capital gain, it
claimed a sum of Rs. 37,45,042 towards interest paid to the directors on the
loan borrowed from them in order to purchase the property. The Assessing
Officer disallowed the claim made by the assessee, but the Tribunal allowed it.
34
On appeal to the High Court:

Held, dismissing the appeal that since the property had been purchased out of the loans
borrowed from the directors any interest paid thereon was to be included while
calculating the cost of acquisition of the asset.

CIT v. Maithreyi Pai [1985] 152 ITR 247 (Karn) relied on.

(c) The ITAT Pune Bench in the case of S. Balan alias Shanmugam vs. Deputy
Commissioner of Income-tax, Circle 3, Pune[2009] 120 ITD 469 (PUNE) has held that
interest paid on acquisition of capital asset can be added to the cost of the capital
asset.

(d). The ITAT Chennai Bench in the case of Assistant Commissioner of Income-tax,
Business Circle – IV vs. C. Ramabrahmam[2012] 27 taxmann.com 104 (Chennai - Trib.)
has gone to the extent of holding that an assessee can include interest paid on housing
loan for computation under section 48 even though said amount has already been
deducted under section 24(b) while computing income from 'house property‘

(e).The ITAT, Ahmedabad Bench in the case of INCOME-TAX OFFICER vs. Smt.PUSHPABEN
B. WADHWANI[1986] 16 ITD 704 (AHD.) has held that interest paid on loan taken for
construction of a flat, would form part of cost of acquisition of flat for purposes of
computation of capital gains
35
CAN COMMENCEMENT OF CONSTRUCTION
PRECEDE SALE OF CAPITAL ASSET?

The issue for discussion now is whether commencement of construction of new
building can be made before sale. The Karnataka High Court in the case of CIT
vs. Subramanya Bhat [1987] 165 ITR 571 has held that where commencement
of construction of new building was started before sale of old building but
completed after sale of old building the assessee is entitled to claim
exemption under section 54 of the Income-tax Act. Following this decision of
the Karnataka High Court, the Allahabad High Court in the case of CIT vs.
Kapoor(H.K) (Deceased) [1998] 234 ITR 753 held that assessee is entitled to
exemption under section 54 of the Act and commencement of construction of
new building before sale of old building is immaterial. The Ahmedabad Bench
of ITAT in the case of in the case of Asstt.CIT vs. Subhash Sevaram
Bhavnani,[2012] 23 taxmann.94 (Ahd.) following the ratio of the decision in
the case of Subramaniya Bhat (supra) has held that where construction
commenced before transfer of old house and completed after transfer within
the three year time-limit the assessee is entitled to benefit of deduction under
section 54 of the Act. The Ahmedabad Bench allowed the entire amount
invested in construction without making a distinction between amount spent
before sale of the house and after the sale of the house.
36

However the Hyderabad Bench of ITAT in the case of Smt. Nimmagadda Sridevi
vs. Deputy Commissioner of Income-tax , Circle-3(3), Hyderabad [2013] 33
taxmann.com 306 (Hyderabad - Trib.) has held that investment in new
residential property made by assessee is not entitled to deduction under
section 54F to extent the same is made before sale of existing residential
property following the decision of the Tribunal in the case of Chandru L.
Raheja v. ITO [1988] 27 ITD 551 (Bom.). It is to be stated at this juncture that
the decision of Chandru L. Raheja(supra) which was rendered on 15th February
1988 ( relied by the Hyderabad Bench in Smt. Nimmagadda Sridevi) did not
refer to the decision of the Karnataka High Court in the case of CIT vs
Subramanya Bhat(supra) which was rendered on 9th June 1986.It is further to
be noted that the decision of the Ahmedabad Bench of ITAT in the case of
Subhash Sevaram Bhavnani,(supra) was not brought to the notice of the
members of the Hyderabad Bench who decided this case.

However it is to be noted that when the construction of new house is complete
before transfer of old house then the assessee is not entitled to deduction
under section 54 of the Act as was held by the Gujarat High Court in the case
of Smt. Shantaben P. Gandhi v. CIT 129 ITR 218.
37

In the case which arose the Delhi High Court in the case of CIT vs. Ashok Kumar
Ralhan [2014] 46 taxmann.com 416 (Delhi) the assessee had sold a property in
Oct. 2006 and declared capital gains of Rs. 51, 71,994.He had purchased a
property in December 2004 on construction of which he claimed to have spent Rs.
59,98,451 and claimed benefit under section 54F.

The Assessing Officer denied benefit under section 54F to assessee on ground that
there was no need for the assessee either to reconstruct or to renovate the
purchased property as it was already fully constructed. The Commissioner
(Appeals), relying on certificate issued by the architect who had stated that the
earlier structure was demolished and thereafter, new construction was made on
the plot, held that it was a case of new construction after demolition and,
therefore, the assessee was entitled to exemption under section 54F.When the
issue ultimately reached the Delhi High Court made the following observations at
para.7 of its judgment-

“The word "construction" in Blacks' Law Dictionary, 6th Edition at page 312 has
been defined to mean to build; erect; put together; make ready for use. The
word "construct" is distinguishable from maintenance, which means to keep up, to
keep from change, to preserve. The word "construction" for the purpose of the
section has to be given realistic, practical and a pragmatic meaning keeping in
mind the object and purpose of the provision. Section 54F is a beneficial provision
as an earlier capital asset, which is sold, is replaced by a new capital asset in the
38
form of a residential house, which should be purchased or constructed
within the
time period stipulated.”

The Delhi High Court ultimately held in favour of the assessee by dismissing the
appeal preferred by the Revenue.

However the Mumbai Bench of ITAT in the case of Farida A Dungerpurwala vs. ITO
in I.T.A. No.5169/Mum/2010-order dated 12th September, 2014[2014] 35 ITR
(Trib.) 205(Mumbai) has held that “ booking of a flat which is going to be
constructed by a builder is to be considered as a case of “construction of flat”
and deduction under section 54 is available to only if the assessee constructs a
new house within three years after the date of transfer”

The Mumbai Bench relied on the observations rendered by a Co-ordinate Bench
in the case of CIT(Asst.) vs. Sunder Kaur Sujan Singh [2005] 3 SOT 206(Mum) for
arriving at distinction between construction and purchase. However neither the
decision rendered by the Delhi High Court on 22-11-2013 in the case of Ashok
Kumar Ralhan(supra) nor other decisions rendered by other High Courts were
brought to the notice of the members who decided this case.

One redeeming feature is that another Mumbai Bench in the case of Income-tax
Officer- 21(2)(4), Mumbai vs. Saroja S. Mekal[2014] 49 taxmann.com 270
(Mumbai - Trib.)(decision dated 21st May 2014) has held that “investment made
for purchase of new residential house within a year even prior to sale of capital
asset raising LTCG would be entitled to section 54F exemption.”
39
LAND MAY BELONG TO ONE PERSON AND THE BUILDING
TO ANOTHER PERSON


It is to be noted that land may belong to one person and building
to another person. 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. There are number of case
laws available on this issue.
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).
40

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)

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.”
41

From the order of ITAT Chennai in the case of Assistant CIT v. V. Ram Mohan
[2013] 24 ITR (Trib.) 50 (Chennai)

The assessee entered into a Joint Development Agreement with a builder and
was entitled to 42.5% of built-up area and transferred 57.5% of the area to the
builder. It was agreed between them that the buildings would be sold at an
agreed rate at the end of the construction period by the builder and the amount
due to the assessee-owner would be paid after adjusting advance paid to him.
The assessee claimed that gains from transfer/sale of land which was done in 2
instalments-once at the time of entering into the Joint Development Agreement
and second time when building constructed by the builder was sold on behalf of
the assessee- should be assessed as long-term capital gains and profits from sale
of super structure should be assessed as short-term capital gains. The assessee
submitted detailed workings before the authorities and the same was approved
by the Tribunal. The assessee had adopted guideline valuation in respect of land
transferred at the second stage with indexation benefits and the same was
accepted by the Tribunal. With regard to value of superstructure the value as per
the agreement was adopted as the cost of acquisition. In other words the
Tribunal agreed with all the contentions of the assessee with regard to capital
gain issues and held in his favour.
42

EXPENSES ON PROVIDING BASIC FACILITIES CAN BE CLAIMED AS PART OF COST IN THE
CASE OF JDA/ WHEN AN OLD HOUSE IS PURCHASED

(i) It is to be noted that in the case of JDA any expenditure incurred on providing basic
facilities such as fitting of air-conditioners and electrical items, carpentry work, modular
kitchen etc. can be treated as part of cost of investment in new capital asset as the house
only on providing these facilities becomes (in)habitable-see Saleem Fazelbhoy vs. Deputy
Commissioner of Income-tax [2007] 291 ITR (A.T.) 0169/ (2007)-106-ITD-167(Mum).

(ii) The ITAT Mumbai Bench in the case of Meher R. Surti v. ITO [2013] 27 ITR-Trib.340
(Mum) has observed that residential house means proper habitable house and not mere
structure. The Tribunal in this case thereafter went on to hold that when an assessee
purchases an old house and incurs expenditure on its renovation then he is entitled to
exemption for expenditure made for making old house habitable under section 54 of the
Income-tax Act.

(iii) The Chennai ITAT Bench in the case of S. P. Balasubramaniyam v. ITO [2013] 24 ITR
(Trib.) 47 (Chennai) has held that while computing capital gains alterations to buildings has
to be added as cost of improvement when assessee purchased semi-finished building and
made alterations by paying to contractors deducting tax at source.

(iv) To the same effect is the decision of the ITAT Ahmedabad Bench in the case of
Shrinivas R. Desai vs. Assistant Commissioner of Income-tax (OSD) [2013] 35 taxmann.com
170 (Ahmedabad - Trib.) wherein it has been held that where assessee incurred bona fide
construction expenditure after purchasing new house property, additional expenses so
incurred would be eligible for qualifying investment under section 54 after due
43
verification.
WHETHER THE SAME FUNDS SHOULD BE USED WHILE PURCHASING NEW PROPERTY?

The next issue which normally arises is whether same funds received on sale of old capital asset
(whether be residential property or other capital asset) should be utilized in purchase of new
residential property. There are decisions taking stand on either way. Some of these decisions are-

(A) Those taking a favourable view are

(i) Bombay Housing Corporation vs. Assistant Commissioner of Income Tax (2002) 81 – ITD – 545
(Mum) (14.02.2001)

(ii) Prema P. Shah vs. Income Tax Officer (2006) 100 – ITD – 60 (Mum) (29.11.2005)

(iii) Nipun Mehrotra vs. Assistant Commissioner of Income Tax (2008) 110 – ITD – 520 (Bang.)
(29.03.2007)

(iv) Assistant Commissioner of Income Tax vs. Dr. P.S. Pasricha (2008) 20 – SOT – 468 (Mum)
(11.01.2008)

(v) Lalit Marda vs. Assistant Commissioner of Income Tax (2008) 23 – SOT – 250 (Kol) (29.02.2008)

(vi) Ishar Singh Chawla vs. Deputy Commissioner of Income Tax – 2010 – 130 – TTJ – 108 (Mum)
(UO) (04.03.2010).

(vii) P. Thirumoorthy vs. Income-tax Officer [2011] 007 ITR (Trib) 0010 (Chennai) - (14-10-2010)

(viii) J.V. Krishna Rao vs. Deputy Commissioner of Income-tax, Circle 3(3), Hyderabad [2012] 24
taxmann.com 104 (Hyd.)

Those cases where a contrary view was expressed-

(i) Smt. Shasikala Rajkumar Kabra vs. Income Tax Officer (1999) 64 – TTJ – 754 (Nag.) (SMC)
(31.08.1998)

(ii) Milan Sharad Ruparel vs. Assistant Commissioner of Income Tax (2009) 27 – SOT – 61 (Mum)
(16.10.2008)
44

OTHER CASES OF RELEVANCE

The decision of the Madras High Court in the case of Commissioner of Income-tax vs.
R.Srinivasan (2010)-235-CTR (Mad) 588(12-04-2010) is worth noticing.

The assessee, in this case, sold goodwill for a price of Rs.56 lakhs during the
assessment year 2000-01 to a company in which he was a director but no
consideration in cash was received by him as book adjustment was made through a
journal entry by crediting the director’s account with a corresponding debit to
goodwill account for the aforesaid sum of Rs.56 lakhs in the books of the company.
The assessee thereafter purchased a property for a sum of Rs.56,23,740 and the
registration of the property was done 18th August,2000 and therefore made a claim
under section 54F of the Act.

The High Court, on appeal by Revenue, after referring to the observation of the
assessing officer that “as the property has been purchased by the assessee not out of
consideration received on account of transfer of the capital asset deduction under
section 54F is not allowed” noted that “no such pre-condition to that effect is
imposed by the provision. Only the Assessing Officer assumed that there is a precondition which is not contemplated by the provision. Section 54F is clear,
unambiguous and plain. It is only a mere presumption and45 assumption of the
Revenue”.

The High Court then referred to the oft quoted famous observations of Rowlatt J. in the
case of Cape Brandy Syndicate vs.IRC(1921) 1KB 64 (at page 71) which were to the
following effect-

“In a taxing statute one has to look mainly at what is clearly said. There is no room for any
intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is
to be read in, nothing is to be implied. One can only look fairly at the language used.”

and held at para.10 as follows-

“Section 54F encourages investment in residential house and the same is required to be
interpreted in such a manner as not to nullify the object. Therefore, we are of the view
that the assessee is entitled to the relief under section 54F and confirm the concurrent
findings given by both the appellate authorities. The learned counsel appearing for the
Revenue is also unable to furnish any material or evidence or case law or compelling
reason to take a contrary view of the Tribunal”

However the Kerala High Court in the case of Commissioner of Income Tax vs.V.R.Desai
(2011) 197 Taxman 52 (Ker) (26.11.2009) struck a different note.

The assessee was the managing partner of a firm which was engaged, among other things,
in real estate business including construction and sale of flats. During the assessment year
1995-96, the assessee transferred certain land to the partnership firm treating it as his
contribution to the capital of the firm. The firm, in turn, credited capital account of the
assessee with the full value of the land. Thereafter, the assessee availed loan from bank
for the construction of a house and within three years from the date of transfer of land to
the firm got the new house constructed.
46

In the return filed for the relevant assessment year, the assessee claimed exemption on
the capital gains arising from transfer of the land under section 54F of the Act. The
assessee succeeded in the second appeal filed before the Tribunal

The Revenue filed an appeal before the High Court. This is what the High Court held at
para. 3 of its judgment

“3. On going through section 54F, particularly sub-section (4), we are of the view that in
order to qualify for exemption on capital gains, before the last date for filing return, the
net sale consideration should have been deposited in any bank account specified by the
Government for this purpose. In fact, the requirement of sub-section (4) of section 54F is
that the assessee should produce along with the return, proof of deposit of the amount
under the specified scheme in a Nationalised Bank. Admittedly, the assessee allowed the
firm to which the property was transferred to retain and use it as a business asset and
towards consideration he got only credit of land value in his capital account. In other
words, sale consideration was not received by the assessee in cash or deposited the same
in terms of clause 4 of section 54F with any Nationalised Bank or institution. Consequently
the assessee did not have the sale proceeds available for investment in terms of scheme
under section 54F(3) of the Act. In our view, in order to qualify for exemption under
section 54F(3), the assessee should have first deposited the sale proceeds of the property
in any bank account and the construction of the house to qualify for exemption under
section 54F should have been completed by utilising the sale proceeds also available with
the assessee. In this case, though the assessee constructed new building within the period
of three years from the date of sale, it was with funds borrowed from HDFC. In our view,
the assessee is not entitled to exemption under section 54F because the assessee neither
deposited the sale proceeds for construction of the building in the bank in terms of subsection (4) before the date of filing returns nor was the sale proceeds utilised for
construction in terms of section 54F(3) of the Act. So much so, the assessee was not
entitled to claim exemption on capital gains under section 54F 47
of the Act which the
Assessing Officer rightly declined.”

The High Court also held that as the exemption claimed under section 54F of the Act
was prima facie inadmissible
the assessing officer was justified in making
disallowance under section 143(1) (a) of the Income-tax Act.
POINTS TO BE NOTED

(i) It is therefore clear that barring two Tribunal decisions and one High Court decision
there is a positive view in favour of the tax payer as the object of introduction of
beneficial provisions like sections 54 and 54F of the Act is to aid the tax payer.
However there is no straight jacket formula to be adopted in each case. The
peculiarities of each case have to be studied in the light of the facts obtaining in such
case and they to be properly analyzed before applying case laws. In other words the
facts of the case obtaining in a given situation should be compared with the facts that
arose in earlier decisions and the case should be properly presented with full facts
before the Assessing Officer as it will help the assessee either at the first appellate
stage or before the Tribunal when the issue comes up for hearing, in case the
assessing officer does not agree with the views projected in that case.
48

(ii) The fact that sections 54 and 54 F of the Act are beneficial provisions has also
been recognized by the Punjab &Haryana High Court in the case of Commissioner of
Income-tax-II, Chandigarh vs. Ms. Jagriti Aggarwal [2011] 15 taxmann.com 146
(Punjab and Haryana) where following the decision of the Karnataka High Court in the
case of Fathima Bai vs. ITO [2009] 32 DTR 243(Kar.) and CIT vs. Rajesh Kumar Jalan
[2006] 286 ITR 274/157 Taxman 398 (Gau.) the Court has held that for purposes of
section 54 of the Act due date for furnishing return of income as provided under
section 139(1) of the Act is subject to extended period as provided under sub-section
(4) of section 139 of the Act. The Tribunal Benches following these decisions have also
held in favour of the assessees on this issue.

(iii) Following the decision of the Madras High Court in the case of CIT vs. Sardarmal
Kothari reported in [2008] 302 ITR 286(Mad) [which has been affirmed by the Supreme
Court vide preliminary hearing in CC Nos.3953-3954/2009 decided on 6.4.2009] the
Karnataka High Court in the case of Commissioner of Income-tax vs. Sambandam
Udaykumar by judgment dated 15th February 2012 and reported in [2012] 19
taxmann.com 17 (Karnataka) has held that if assessee has invested money in
constructing a residential house, benefit under section 54F cannot be denied merely
because construction is not complete in all respects or house was not fit to be
occupied within stipulated period of 3 years.
49

So it can beneficially be said that if proper care is taken in analyzing the facts of
the case on hand and proper advice is tendered before occurrence of any event
such as sale or transfer of house property or any other capital asset lot of
litigations could be avoided and in case of litigation the required benefit can be
achieved at the second appeal stage itself [(i.e.) before the Income Tax
Appellate Tribunal].

(iv) The Pune Bench of ITAT in the case of Chetan Vithal Tupe vs. Assistant
Commissioner of Income Tax (2011) 12 taxmann.com 125 (Pune) [31-05-2011] has
held that when there is adjustment by way of book entries without physical
receipt of sale consideration –i.e. in cases of exchange of property- beneficial
provisions of 54F read with section 54 would be applicable.
50

THE FOLLOWING CASES OF IMPORTANCE MAY BE GONE THROUGH IN DETAIL

(i) Where long-term capital gain arose from sale of two distinct and separate assets, viz.,
residential house and plot of land, and assessee had invested entire capital gain in
purchase of a new residential house, he was entitled to claim exemption under sections 54
and 54F of the Income-tax Act. It was so held in Venkata Ramana Umareddy vs. Deputy
Commissioner of Income-tax, Circle-3(3), Hyderabad [2013] 32 taxmann.com 157
(Hyderabad - Trib.)

(ii) Where two flats were sold in two different years and capital gain arising from sale of
both flats was invested in one residential house, exemption under section 54 would be
available. It was so held in the case of Deputy Commissioner of Income-tax, Central Circle32 vs. Ranjit Vithaldas [2012] 23 taxmann.com 226 (Mum.)

(iii) The issue which arose before ITAT,Chennai Bench in the case of Ifthiqar Ashiq vs.ITO-in
ITA No.232/MDS/2013-Order dated 11th June 2013 was whether the assessee was entitled
to claim exemption under section 54F of the Act if he was owner of a residential as well as
commercial property on the date of transfer of landed property. It was argued on behalf of
the assessee that though the income was returned under the head income from house
property it was still a commercial property and in support of this submission placed
reliance on the rental agreement entered into with the tenant, water51 supply bills, planning
permit issued by the Madras Metropolitan Development Authority etc.

It was also submitted before the Tribunal that rental income from both residential
and commercial properties have to be declared only under the same head “Income
from house property” and both the lower authorities were of the opinion that as
income from both the properties was returned under the same head the other
property could not be considered as a commercial property. The Tribunal referred to
the provisions of section 22 of the Act and observed that no distinction has been
provided between rental income from house property and rental income from
commercial property. The Tribunal after observing that the term ‘building’ used in
section 22 is not qualified by the word “commercial” and after referring to the
decision of the Supreme Court in the case of Shambhu Investment P. Ltd. v.
Commissioner of Income-tax [2003] 263 ITR 0143 for the proposition that income from
letting out of commercial buildings/warehouses/factory premises is assessable under
section 22 of the Act, held in favour of the assessee

(iv) The Hyderabad Bench of ITAT in the case of Sri Prasad Nimmagadda vs. Deputy
Commissioner of Income-tax, (International Taxation)-II, Hyderabad [2013] 32
taxmann.com 5 (Hyderabad.) has held that where amount of capital gain claimed as
exempt under section 54 is not utilised in construction of residential house within 3
years, it will be charged to capital gain in year in which period of 3 years expires;
however, exemption already granted shall not be denied.
52

However while calculating cost inflation index the indexation point pertaining to the
year in which capital gains arose should be adopted and not in the later year in which
the exemption is withdrawn as was decided by the Kerala High Court in the case of
CIT vs. Thomy P.Chakola [2011] 200 Taxman 74. The Chennai Bench in the case of
Joint Commissioner of Income-tax (OSD), Company Circle-I(1), Chennai vs. B.
Shivkumar[2012] 27 taxmann.com 305 (Chennai) echoed the same views.

(v) The Mumbai Bench of ITAT in the case of Kishore H. Galaiya vs. Income-tax Officer,
Ward 8(2)(3) [2012] 24 taxmann.com 11 (Mum.) has held that booking of flat with a
builder, is a case of 'construction' for purpose of claiming exemption under section 54;
if construction is complete within 3 years. Section 54 exemption would be available
even if possession was not taken within three years. It is to be noted that the Delhi
High Court in the case of CIT v. Smt. Brinda Kumari [2002] 253 ITR 343/[2001] 114
Taxman 266 has held that when amount was advanced to builder for specific purpose
of construction of flats in new building and the Tribunal had also held that
construction could be treated as construction by the assessee that finding of fact was
binding on the Court and the Tribunal was right in holding that the assessee was
entitled to exemption under section 54(1).
53

(vi) The assessee had claimed abatement of capital gains for reinvestment in a
residential house property under section 54F but could not complete construction
within the time limit because of the restraint order from the court. The assessee had
however purchased the plot well within the time but the construction was impossible
in view of the court order. In fact, the entire sale consideration was utilised by the
assessee in purchase of the land itself. The condition that the assessee has not
completed construction because of the impossibility of compliance, it was held by the
Tribunal, should not stand in the way of relief in the circumstances of the case as was
decided by the Tribunal in Smt. V. A. Tharabai v. Deputy CIT [2012] 14 ITR (Trib) 15
(Chennai).

(vii) Where assessee purchased old residential house and demolished it within 2 years,
deduction under section 54F would be withdrawn- Assistant Commissioner of Incometax-21(3) vs. Dilip Manhar Parekh [2013] 31 taxmann.com 386 (Mumbai - Trib.)

(viii) The ITAT Chennai Bench in the case of Asstt. CIT v. Ms. Sultana Nazir [2012] 21
taxmann.com 385 (Chennai - Trib.) has held that when an assessee has availed of
exemption under section 54F by acquiring a residential house and, subsequently,
transfers the same within three years and acquires another residential house, the
forfeiture of exemption for the sale can be nullified by the subsequent investment in
54
the second residential house.

(ix) The Jaipur Bench of ITAT in the case of Assistant Commissioner of Income-tax,
Circle-2, Ajmer vs. Om Prakash Goyal [2012] 24 taxmann.com 67 (JP.) has held that
residential house constructed on agricultural land would be eligible for exemption
under section 54F

(x) The Kolkata Bench of ITAT in the case of Deputy Commissioner of Income-tax,
Circle-8, Kolkata vs. Rajeev Goyal [2012] 22 taxmann.com 34 (Kol.) has held that in
case of clubbing of income of minor child, deduction under section 54EC is to be
allowed on minors' income from LTCG separately and only net income is to be
clubbed.

(xi) The Kerala High Court in the case of Pushpa vs. Income tax Officer [2013] 31
taxmann.com 33 (Kerala) has held that section 54F does not provide for exemption in
case of renovation or modification of an existing house and what gains exemption is
only construction of a new house. The decision of the Madras High Court in the case
of CIT vs.Pradeep Kumar [2007] 290 ITR 90 was followed.

(xii) The ITAT Mumbai Bench in the case of Jatinder Kumar Madan vs. Income-tax
Officer, Ward 19(1)(3) [2012] 21 taxmann.com 316(Mum)has held that acquisition of
new flat under a development agreement in exchange of old flat amounts to
construction of new flat for purpose of claiming deduction under
section 54 of the
55
Income-tax Act.

(xiii) The Mumbai Bench of ITAT in the case of Assistant Commissioner of Income-tax-19(2) vs. Jaimal K.
Shah [2012] 24 taxmann.com 91 (Mum.) has categorically held that where assessee land owner, under a
development agreement, received some flats as consideration and later on sold same, period of holding
of such flats is to be considered taking into account date of possession of flats and not date of
development agreement. Though this decision runs counter to the decision of the Kolkata Bench in the
case of Income-tax Officer vs.Vikash Behal and reported in (2010)-36-DTR (Kol) (Trib) 385, it is
submitted with respect, that this decision of the Kolkata Bench requires reconsideration by a Special
Bench. The Kolkata Bench in this case held that while calculating period of holding in respect of sale of
flats which were allotted by the builder as a result of JDA the period of holding in respect of such flats
should be reckoned from the (earlier) date of handing of land for development. The Kolkata Bench had
no occasion to consider an earlier decision given by a co-ordinate bench in the case of Statesman Ltd v.
Assistant Commissioner of Income-tax, Circle-1, Kolkata [2008] 114 ITD 595 as it was not cited at the
time of hearing nor was it noticed by the Bench. In the earlier case capital gain was split up into long
term for land and short-term for building depending upon the period of holding.

(xiv) The Chennai Bench of ITAT in the case of Asstt. CIT Vs. Dr. S. Balasundaram (ITAT – Chennai), ITA
No. 1832/Mds/2012,( Date of pronouncement: 27.05.2013 ) has held that benefit under 54B of the Act
can be claimed even if new agricultural land is purchased prior to transfer of previously owned
agricultural land.
56

(xv) With regard to dates which are relevant the catchwords from the decision of the
Punjab & Haryana High Court in the case of Smt. Shail Moti Lal vs. Commissioner of
Income-tax, Chandigarh [2013] 35 taxmann.com 46 (Punjab & Haryana) may be gone
through-

Section 54, read with section 2(47), of the Income-tax Act, 1961 - Capital gains Profit on Sale of Property Used for Residence - Assessment year 2005-06 - Appellant
entered into agreement to transfer rights in property 'A' on 27-12-2002 after receipt
of earnest money of Rs. 15 lakhs - Sale deed was executed on 24-9-2004 when entire
sale consideration of Rs. 1.32 crores was received - Appellant purchased property 'B'
on 30-4-2003 and claimed deduction under section 54 - Whether since there was
delivery of possession and receipt of entire sale consideration was on date of
execution of sale deed on 24-9-2004, it was date of transfer of property A and date of
agreement to sell on 27-12-2002 could not be treated as date of transfer of this
property - Held, yes - Whether, resultantly, date of purchase of property B being prior
to one year of transfer of right in property A, assessee was not entitled to deduction
under section 54 - Held, yes
57

(xvi) The Mumbai Bench of the ITAT in the case of Rajesh Keshav Pillai vs.ITO (2011)44-SOT-617(Mum) has held that if there are sales of more than one residential house,
exemption has to be computed with reference to each set of sale of residential house
and the corresponding investment in one residential house. The Tribunal went on to
hold that aggregation is not permitted and the principle of one to one has to be
followed meaning thereby that surplus (difference between investment in new house
property and capital gains), if any, arising out of sale of one residential property
cannot be adjusted against deficit (difference between capital gains and investment
in new house property) arising out of sale of other property.

(E) If provisions of section 54EC are analyzed then investment in capital gain bonds
has to be made within a period of 6 months from the date of receipt. However the
Kolkata Bench of ITAT in the case of Chanchal Kumar Sircar vs. ITO (2012) 18
taxmann.com 304 (Kol) has held that in case of receipt of sale consideration in
instalments, period of six months for claiming deduction under section 54EC has to be
calculated from date of actual receipt of amount. The Pune Bench of ITAT in the case
of Mahesh Nemichandra Ganeshwade vs. Income-tax Officer [2012] 21 taxmann.com
136 (Pune) has also echoed the same views.
58
The following cases may also be noted
(i) It is even possible to invest in capital gain bonds out of any advance/earnest
deposit (to be) received from the builder even before transfer of property as
specified in Section 2(47)(v) of the Income Tax Act. It has been so held by the High
Court of Bombay in the case of Mrs. Parveen P. Bharucha vs. Deputy Commissioner of
Income-tax, Circle 2, Pune [2012] 28 taxmann.com 274 (Bom.). In the light of this
decision it can therefore be stated, that the order of the Ahmedabad Bench of ITAT in
the case of Smt. Dakshaben R. Patel vs. Assistant Commissioner of Income-tax, Circle2(1), Baroda which held that where assessee purchased REC Bonds prior to date of
sale of property, exemption under section 54EC was not available, is no longer good
law.

(ii) The High Court of Bombay in the case of Commissioner of Income-tax, Central III,
Mumbai vs. Cello Plast[2012] 24 taxmann.com 111 (Bom.) has held that if bonds of
assessee's choice are not available throughout period of six months as provided under
section 54EC, time to invest in bonds would get automatically extended till bonds are
available in market. In other words extension of time is available in such cases
59

(iii) When no evidence was forthcoming to show that assessee had ever applied for
bonds but due to their non-availability, failed to invest within time, the assessee was
not entitled to deduction under section 54EC of the Income-tax Act.-It has been held
so by the Chennai Bench of ITAT in the case of Smt. Anuradha Venkatesan vs. Incometax Officer, Business Range 1(1), Chennai [2013] 29 taxmann.com 68 (Chennai - Trib.)

(iv) Deduction under section 54EC cannot be denied on ground that assessee has
availed exemption under section 54F also in respect of a part of capital gainsAssistant Commissioner of Income-tax, Cr. 23(2), Mumbai vs. Deepak S. Bheda[2012]
23 taxmann.com 159 (Mum.)

(v) The Ahmedabad Bench of ITAT in the case of Aspi Ginwala, Shree Ram Engg. & Mfg.
Industries vs. Assistant Commissioner of Income tax, Circle-5, Baroda [2012] 20
taxmann.com 75 (Ahd.) has held that where investment in eligible bonds was
temporarily closed and by time it was reopen time limit of six months had expired,
investment made on date of reopening was eligible for exemption under section 54EC
60

(vi) The Mumbai Bench of ITAT in the case of Yahya E. Dhariwala vs. Deputy
Commissioner of Income-tax, Circle-15(2) [2012] 17 taxmann.com 159 (Mum.) has
held that for purpose of section 54EC, period of six months has to be reckoned from
end of month in which transfer took place. The Tribunal held that in accordance with
language in section 54EC six months period should be reckoned from end of month in
which transfer took place. The Mumbai Bench in its order dated 19th June 2013[2013]36 CCH 167(Mum) Trib. in the case of Aquatech Engineers vs. Additional CIT –ITA
No.8029/Mum/2011 has echoed the same views.

The Special Bench of ITAT in the case of Alkaben B. Patel vs. Income-tax Officer, Ward
-14(2), Ahmedabad[2014] 43 taxmann.com 333 (Ahmedabad - Trib.) (SB) adopting the
reasoning which found favour with ITAT Mumbai Bench in the case of Yahya E.
Dhariwala(supra) has held that time limit of 'six months' in sec 54EC means 'six British
Calendar months' in view of the General Clauses Act, 1897.The Special Bench also
observed that in the absence of any definition of the word 'month' in the Act, the
definition of the General Clauses Act,1897 will be applicable. Legislature in its
wisdom has chosen to use the word 'month' and this was done keeping in view the
definition in section 3(35) of the General Clauses Act, 1897. The Special Bench
rejected the Revenue's interpretation that 'month' should be understood in the
ordinary sense-i.e. the month is a period from a specified date in a month to the date
61
numerically corresponding date in the following month

The following observations from the above referred decision of the Special Bench are
worth noticing-

“The subtle question is that whether the word "month" refers in this section a period
of 30 days or it refers to the months only. Section 54EC, prescribes that an investment
is required to be made within a period of six months. Whether the intention of the
legislator was to compute six calendar months or to compute 180 days. To resolve this
controversy, one has to be guided by a decision of Allahabad High Court pronounced in
the case of CIT v. Munnalal Shrikishan [1987] 167 ITR 415 where answering the dispute
in respect of law of limitation the Court has clearly held that there is nothing in the
context of section 256(2) to warrant the conclusion that the word 'month' in it refers
to a period of 30 days, therefore, refers to six months in section 256(2) is to six
calendar months and not 180 days. [Para 6]”

(F) Capital Gains vis-à-vis sections 27 and 64 of the Act

When capital assets are transferred to spouse for inadequate consideration so as to be
caught by the provisions of section 27 of the Act and the spouse transfers the capital
asset the resultant capital gains will be included only in the total income of the
transferor. It was so held by the Madras High Court in the case of Commissioner of
Income-tax vs. Ganesan (G.S.) [1995] 215 ITR 0334.
62

The Madras High Court opined that any provision subject to another provision is
understood to incorporate the other provision and to exclude matters which fall
under the said provision or to expand and provide for matters in addition to what is
found in the said provision and a provision subject to the other provisions of the Act
or any other law necessitates a combined reading of such provisions. The High Court,
reversing the decision of the Tribunal, held that proviso to section 53 (now deleted)
of the Income-tax Act which placed restriction with regard to ownership of more than
one property at that time, would be applicable to the donor even after transfer of
property for inadequate consideration. In other words the exemption under section 53
of the Income-tax Act was denied as the assessee-transferor had one more property
disentitling him to exemption even though the transferee (wife) had no property
other than the property sold.

It is to be noted that the assessee-transferor is otherwise entitled to claim all
deductions as are applicable in accordance with provisions of sections. 22 to 27 of the
Income-tax Act as was held by the Madras High Court in the case of Siddique (S.M.A.)
v.CIT (1984)-148-ITR-307

However in the following cases it has been held that where there is no transfer of
property for inadequate consideration or an intention to live apart and the assessee,
either being a minor or spouse, earns income by way of capital gains generated out of
his /her own assets then the minor or the spouse is entitled separate deduction under
section 54F or section 54 of the Income-tax Act.63

(a) Assistant Commissioner of Income-tax VS. Madan Lal Bassi [2004] 88 ITD 557
(CHD.)

(b) Joint Commissioner of Income-tax, S.R.44 v. Govind Rohira alias Srichand Rohra
[2005] 95 ITD 77 (MUM.)

(c) Deputy Commissioner of Income-tax, Circle-8, Kolkata vs. Rajeev Goyal [2012] 22
taxmann.com 34 (Kol.)/[2012] 52 SOT 335 (Kol)

But in all these cases, as stated earlier, there was no transfer of assets. In fact in the
case of Assistant Commissioner of Income-tax vs.. Madan Lal Bassi(supra) one of the
points which weighed favourably with the Tribunal was that there was no transfer by
the assessee-father to the minor child for inadequate consideration and the income of
the minor was being added in the income of the father as a matter of policy and not
on account of any evasion or avoidance of tax. This is what the Tribunal observed at
para.17 of its order by distinguishing the decision of the Madras High Court in the case
of CIT v. G.S. Ganesan (supra)
64

“17. The ld. D.R. also relied on the decision of Hon'ble Madras High Court in the case
of CIT v. G.S. Ganesan [1995] 215 ITR 334. In that case, capital gain arising on transfer
of assets which were earlier received in transfer by wife from her husband without
adequate consideration was held to be taxable in the hands of the assessee husband
without allowing benefit of section 53 of the Act as the husband held property worth
more than Rs. 50,000 on the relevant date.”

So no attempt should be made to transfer a portion of the property by the assessee to
his wife or vice versa for inadequate consideration as such a transaction would be hit
by the decision of the Madras High Court in the case of Commissioner of Income-tax
vs. Ganesan (G.S.)(supra) in the sense that the transferee –either husband or wife as
the case may be- will not be able to claim deduction under section 54EC of the Act.
65
G.SECTIONS 195 and 197 OF THE ACT

As per provisions of section 195 any payment made to an NRI attracts tax deduction
@30% unless the NRI gets a certificate under 197(1) from the Income-tax Officer,
International Taxation directing the transferee (payer) to deduct tax at the
appropriate tax. Though the transferee (payer) can make an application under section
195(2) of the Act to the Income-tax Officer, International Taxation if he (the payer) is
of the opinion that the whole payment made to an NRI would not be chargeable to
tax, this seldom happens as the payer would not like to take any chance.

Even an NRI purchaser was not spared by ITAT Bangalore Bench in the case of Syed
Aslam Hashmi vs. Income-tax Officer, (International Taxation), Ward-2(1) [2012] 26
taxmann.com 6 (Bangalore - Trib.). The ITAT Bangalore Bench in this case has
categorically held that if the NRI purchaser fails to take recourse to section 195(2) of
the Act then he would be required under section 195(1) to deduct tax on entire sale
consideration payable to the NRI seller and in the absence of such deduction he would
be treated as an assessee-in-default exposing himself to interest under section
201(1A) of the Act on the amount of tax not deducted. So it is better to adopt a safe
and cautious approach.
66

The ITAT (Chennai Special Bench) in the case of Income-tax Officer vs. Prasad
Production Ltd. [2010] 003 ITR (Trib) 0058 has summarized the various situations that
can arise for the applicability of section 195 as under-

(a) In case of a bona fide belief by the payer that no part of the payment bears
income character, it is not mandatory for him to undergo the procedure of section
195(2) before making any payment to a non-resident. However, if the Department is
of the view that the payer ought to have deducted tax at source, it will have recourse
under section 201 of the Act. Thus, here the interest of the Revenue is protected. In
the proceedings under section 201, the Assessing Officer will determine the portion
chargeable to tax according to the provisions of the Act and determine the tax
payable by the payer. The Assessing Officer is bound to determine the income
chargeable to tax in accordance with the provisions of the Act. In any case, the
liability of the payer cannot exceed that of the payee and if the payer is dissatisfied
with the order under section 201, he will have recourse to appeal against the said
order. Thus, the interests of both the parties are protected.
67

(b) If the payer believes that whole of the payment is chargeable to tax and if he deducts
and pays the tax, no problem arises.

(c) If the payer believes that only a part of the payment is chargeable to tax, he can apply
under section 195(2) for deduction at appropriate rates and act accordingly. No interest is
jeopardised.

(d) If the payer believes that a part of the payment is income chargeable to tax, and does
not make an application under section 195(2), he will have to deduct tax from the entire
payment. Thus, the interests of the Revenue stand protected.

(e) If the payer believes that the entire payment or a part of it is income chargeable to tax
and fails to deduct tax at source, he will face all the consequences under the Act. The
consequences can be the raising of demand under section 201, disallowance under section
40(a)(i), penalty, prosecution etc. The interests of the Revenue stand protected.

(f) If the payee wants to receive the payment without deduction of tax, he can apply for a
certificate to that effect under section 195(3) and if he gets the certificate, no one is
adversely affected.

(g) If the payee fails to get the certificate, he will have to receive payment net of tax. No
interest is jeopardised.
68
WHEN NRI IS THE SELLER

You in this write-up refers to an NRI

The following can be stated as ACTION PLAN for NRI (transferor-seller) in this regard

Apply in Form No.13-the prescribed form to be signed by you and submit the same to
the Income-tax Department, International Taxation Section Chennai along with the
following documents.

a.
Copy of all parent documents – the documents through which the property was
purchased/ inherited through WILL/devolved through Settlement or Family
Arrangement etc.

b.
Details of any improvements / additions made in respect of the property with
copies of bills etc.

c.
Copy of the proposed sale agreement/Joint Development Agreement

d.
Copies of returns for the last 5 years.

e.
Copy of your PAN card.
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
f.
Copy of your passport for the last 8 years to substantiate about your residential
status-i.e.-You were a non-resident during these years.

g. Copy of the Capital Gain workings-to be prepared by your Chartered Accountant (at
his end) to indicate the capital gain and as to how the capital gain tax (liability)
would be discharged.

h.
An authorization in favour of the Chartered Accountant to present these
documents and obtain deduction certificate at an appropriate rate – certificate from
the Income Tax Officer, International Taxation. In this case the certificate may be
issued for withholding (deduction) of tax by the purchaser @ 20.6%. (In the absence of
a certificate tax withholding would be @ 30.9%)

All these documents shall be filed by the Chartered Accountant along with an
affidavit signed by you with regard to capital gain workings and his letter and the
Chartered Accountant will attend to this matter of processing at the Income Tax
Office, International Taxation Section and will normally obtain the certificate within
20 to 25 working days from the date of application made before the Income Tax
Officer, International Taxation.
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
The Income-tax Officer, through this certificate, would issue necessary instructions to
the transferee-purchaser with regard to withholding of tax on behalf of you as the
transferor-seller-i.e.-at what rate tax has to be deducted and remitted on behalf of
the transferor-seller by the transferee-purchaser.

The intention of obtaining a certificate from the Income Tax Department is to save
withholding of tax at full rate of 30% by the purchaser (of residential property). By
undertaking this exercise the final assessment in your case will be very smooth as the
Income Tax Department would have gone through all the documents submitted by you
before issuing the necessary certificate now.
Adhere to the following for smooth completion of the work in entirety.

(a) Chalk out a plan with meticulous care with the help of a competent professional
and adhere to that schedule without any deviation.

(b) Kindly preserve all documents right from purchase of property in respect of original
asset including improvements. Documents to be preserved include income-tax certificate
(to be) obtained (now) by NRI from Income-tax Officer, International Taxation.
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
All necessary/required documents have to be filed with the income-tax returns in the
year in which the property is sold/Jointly developed and in the year in which new
property is purchased if both fall in different financial years. If investment in new
property is(to be) made for taking advantage of provisions of section 54 of the
Income-tax Act then preserve a copy of the purchase document carefully and if any
basic facilities are required to be provided preserve such bills as the cost of such
basic facilities can be taken as part of cost of investment in new property. If
investment in Capital Gain Bonds is required to be made kindly preserve proof for
having made investment in Capital Gain Bonds.

(c) Kindly preserve all bills pertaining to transfer of property and these bills include
tickets purchased by NRI on his /her trip to India to sign the sale deed in person.
Brokerage slip/bill given by the broker has to be preserved as this is an expenditure
which can be claimed against sale consideration. Advocate fees is an allowable
deduction.

(d) Ensure filing of income-tax returns in the year of transfer of old property and
subsequent years

(e) Kindly do not hesitate to take professional advice at the time of need from a
Competent Professional.
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H.TDS ON PURCHASE OF IMMOVABLE PROPERTY (SEC. 194-IA)

Section 194-IA has been inserted with effect from June 1, 2013

•Who is responsible for tax deduction – Any person (being a transferee) responsible
for payment (other than the person referred to in section 194LA) to a resident
transferor any sum by way of consideration for transfer of any immovable property
(other than agricultural land in rural areas in India), is liable to deduct tax at source
under section 194-IA.

•Time of deduction – Tax shall be deducted at the time of payment (in cash or by
issue a cheque or drafts or by any other mode) or at the time of giving credit to the
transferor (in the books of account of the transferee), whichever is earlier.

•Rate of tax deduction – Tax is deductible at the rate of 1 per cent. If, however, the
recipient does not furnish his PAN to the deductor, tax will be deducted (by virtue of
section 206AA) at the rate of 20 per cent.

•Threshold limit – No tax is deductible where the consideration paid or payable for
the transfer of an immovable property is less than Rs.50,00,000/-.
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
•Provisions of TAN not applicable – Provisions of section 203A (pertaining to TAN) shall
not apply in respect of tax deducted under section 194-IA.
Other points – The following points should be noted –

1.
The above provisions of section 194-IA are not applicable if a person acquires
rural agricultural land in India. For this purpose, the definition of section 2(14) will
apply

2.
Immovable property means any land or any building or part of the building.
Such property may be situated in India or may be situated outside India. If the
transferor is resident in India, TDS provisions of section 194-IA will apply. However, as
mentioned earlier, if a person acquires an agricultural land in a rural area in India,
TDS provisions will not be applicable.
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FURTHER POINTS TO BE NOTED

1.
These provisions are not applicable in the case of sale of residential and landed
properties to Non-Resident Indians who are covered under provisions of section 195
read with section 197 of the Income Tax Act. However these provisions are applicable
if Non-Resident Indians sell property to Resident Indians.

2.
As provisions stand today there is no way by which a certificate can be obtained
from the Jurisdictional Assessing Officer with regard to less deduction or nil
deduction. In other words tax deduction has to be made statutorily (compulsorily) by
the purchaser of the property or a developer in the case of Joint Development of
Property.

3.
It is to be noted that the threshold limit of Rs.50 lakhs is applicable property
wise irrespective of share of the sellers in such property.

4.
Section 194LA deals with payment of compensation on acquisition of certain
immovable property.

5. The tax deducted at source has to be remitted to the credit of the Central Government
before the 7th of the following month.
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4.TIPS FOR TAX PLANNING

(a) By resorting to genuine Family Arrangement no transfer as contemplated in
section 2(47)(v) is involved and there is no question of any liability to capital gains
tax. A family arrangement is an agreement between members of the same family,
intended to be generally and reasonably for the benefit of the family either by
compromising doubtful and disputed rights or by preserving the family property or the
peace and security of the family by avoiding litigation or by saving its honour
(Halsbury’s Laws of England, 4th Edn. Vol 16, para 301). But where share in property
is released against receipt of cash, instrument of release cannot be called a family
settlement and would be covered by term 'transfer' and exigible to capital gains tax
as was held by the Chandigarh Bench of ITAT in the case of Mrs. Lalitha Rathnam
vs.ITO [2013] 35 taxmann.com 37(Chandigarh). However it has been held by the
Punjab & High Court in the case of CIT vs. Ashwani Chopra [2013] 30 taxmann.com
299 (P& H) that amount of owelty i.e. compensation deposited to settle inequalities
in partition, represents immovable property and would not attract capital gain tax.
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
(b) When property to be transferred by an assessee is very extensive with huge value
then the assessee can settle the property on his family members( refer to the
definition of relative appearing in section 56(2) (vii) of the Act) -may be the ultimate
beneficiaries on the happening of the event- and all these beneficiaries and the
assessee can jointly enter into JDA or sale agreement as the case may be for transfer
of the property by which capital gains would get distributed and each one of them
will be entitled to claim basic exemption and available benefits under sections 54/
54F and 54EC of the Act

(c) Retaining Life Interest in the property by the assessee-settlor when property is
settled on relatives is one way by which settlor’s interest in the property is protected
in the sense that the property cannot be sold without his consent and at the same
time capital gain gets distributed and when the property is ultimately sold a portion
of sale consideration can be allocated to the assessee towards life interest and
exemption provisions of section 54F and 54EC can be availed in respect of capital
gains pertaining to life interest arising out of transfer of property. In this regard the
decisions of Madras High Court in the case of CIT vs. C.V.Soundararajan [1984] 150 ITR
80(for understanding what is life interest) and that of the ITAT Pune Bench in the case
of Smt. Nargis A. Irani vs.ITO[2006] 102ITD 297(for calculation of life interest) may be
referred to.
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
(d) Sometimes an assessee may have to give guarantee to bank or other financial
institutions for his close friends and/or relatives for proper discharge of loan taken by
them and guarantee may be in the form of shares and securities or immovable property. If
by misfortune such persons do not repay the loans and the financial institution disposes of
the property towards satisfaction of the amounts owed to it and no amount is received by
the assessee out of such guaranteed property, then he cannot be held liable to pay capital
gains tax. The Delhi Bench of ITAT in the case of Addl.CIT vs. Glad Investments (P)
Ltd.[2006] 102 ITD 227 has held that when no consideration is received by or accrues to
the assessee on sale of assets no liability to pay capital gains tax arises.

(e) The Kolkata Bench in the case of Chanchal Kumar Sircar vs. ITO (supra) has held that in
case of receipt of sale consideration in instalments, period of six months for claiming
deduction under section 54EC has to be calculated from date of actual receipt of amount.
Likewise tax planning done in the case of Ifthiqar Ashiq (supra) explores the possibilities of
converting residential properties into commercial properties to get the embargo placed by
explanation to section 54F on the number of residential property that can be held by an
assessee at the time of transfer of any other capital asset.
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5. NOTE OF CAUTION

It is important to bear in mind the following observations of the Supreme Court in the case
of CIT v. Sun Engineering Works (P.) Ltd. [1992] 198 ITR 297/64 Taxman 442 -

"It is neither desirable nor permissible to pick out a word or a sentence from the judgment
of the Supreme Court divorced from the context of the question under consideration and
treat it to be the complete law declared by the court. The judgment must be read as a
whole and the observations from the judgment have to be considered in the light of the
questions which were before the court. A decision of the Supreme Court takes its colour
from the questions involved in the case in which it is rendered and, while applying the
decision to a later case, courts must carefully try to ascertain the true principle laid down
by the decision."
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
There is no – in fact there can be no- straight jacket formula for any given (ideal or
otherwise) situation as factual happenings may differ and even one small difference in
facts may completely alter the ready made answer situation. Basic principles taught to us
indicate that before analyzing a live situation and comparing it with an assumed situation
or a decided case-law first find out as to the facts based on which earlier case was decided
and what are the facts obtaining in the live situation and what was the point of law then
and what is the point of law now-by point of law what is meant is whether any higher
authority has decided the case other way after earlier ruling was given or a decision has
been given by a jurisdictional High Court now either way or has there been any
amendment subsequent to date of last decision or is there any change in assessment year
meaning thereby change in law? The point to be considered is – Any change in the thinking
of the persons who matter most-the judicial authorities? Kindly note that what is being
expressed in blogs is only opinion but what is being given in real situation is what can be
termed as “procedure” which has more value than opinion as the “procedure” to be
adopted in an actual live case is normally/usually rendered after a deep study of facts
presented and law applicable to the given situation.
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S.KRISHNAN
CHARTERED ACCOUNTANT
NO.2, C.V. RAMAN ROAD
ALWARPET, CHENNAI – 600 018
TEL. NO.044-24671175
TELEFAX.044-24671437
MOBILE 098407 01449
E-MAIL Ids: ariyurkrish@gmail.com and krishnagesh2@eth.net
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