Income Tax Appellate Tribunal - Bangalore
Gouli Mahadevappa, Gangavathi vs Assessee on 16 February, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH : BANGALORE
BEFORE SHRI GEORGE GEORGE, K. JUDICIAL MEMBER
AND
SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER
I.T.A No.587/Bang/2009
Assessment year : 2005-06
Shri Gouli Mahadevappa,
Ramarathna Oni,
Gangavathi.
: Appellant
Vs
The Income-tax Officer,
Ward-2,
Hospet. : Respondent
Appellant by : Shri V.Srinivsan
Respondent by : Smt. V.S.Sreelekha
ORDER
PER SHRI A. MOHAN ALANKAMONY, AM;
This appeal of the assessee is directed against the order of the Ld. CIT (A), Hubli in ITA No.61/CIT(A) HBL/08-09 dated: 16.2.2009 for the assessment year 2005-06.
2. The assessee has raised five grounds in his appeal. The first ground being general and no specific issue involved, it becomes non-consequential. In the remaining grounds, the cruxes of the issues raised are reformulated as under:
(1) the CIT(A) was not justified in upholding the LTCG of Rs.14.06 lakhs as worked out by the AO on sale of property;2 ITA No.587/B/2009
- he had failed to appreciate that the entire CG arising from transfer of property qualify for exemption u/s 54F(1)(a) of the Act;
- without prejudice, the CIT(A) was not justified in confirming the adoption of Rs.36 lakhs as sale consideration in terms of s.50C of the Act as the assessee was in receipt of Rs.20 lakhs on the sale of property and consequently the assessment of LTCG on Rs.36 lakhs was unjustified;
- without prejudice, the taxable of Long Term Capital Gain determined by the authorities below was highly excessive and liable to be reduced substantially;
(2) the assessee denies himself liable to be charged to interest u/s 234A and 234B of the Act; & (3) the assessee may be awarded costs in prosecuting the appeal and also order for the refund of institution fees as part of the costs.
3. During the course of hearing, the Ld. A.R came up with a plea for admission of additional grounds of appeal, the gist of which is as under:
"(i) The impugned order of the AO passed u/s 143(3) r.w.s 147 of the Act was bad in law in as much as there was no income escaping assessment, considering the ROI filed by the assessee on 9.1.2007 and, therefore, the impugned order invoking the provisions of s. 147 of the Act deserves to be cancelled; &
- Without prejudice, the order of the reassessment was bad in law and void-ab-initio for want of requisite jurisdiction, especially, the mandatory requirements to assume jurisdiction u/s 148 of the Act did not exist and have not been complied with and consequently, the reassessment requires to be cancelled.
3.1 After due consideration of the submissions of the either party, the additional ground raised by the assessee was admitted and the 3 ITA No.587/B/2009 registry was directed to take on the application for admission of additional grounds on record.
4. Briefly stated, the assessee, an individual, whose only source of income was pension being a freedom fighter. The AO was in possession of information from CIT (CIB) that the assessee had sold a property at Bangalore on 5.6.2004 for Rs.36 lakhs, and, accordingly, a notice u/s 142(1) was served on the assessee requiring him to furnish a return of income. There was no response from the assessee's side. However, the assessee furnished certain details in compliance to the AO's letter dt: 18.12.2007 requiring him to produce bank pass book, source for investment, books of account etc. 4.1 Subsequently, the assessee furnished a return of income on 9.1.08 incorporating the sale proceeds and also freedom fighters' pension as the income chargeable to tax. The AO had reasoned that since the income chargeable to tax had escaped assessment within the meaning of s.147, a notice u/s 148 was served on the assessee. In compliance, the assessee vide his communication requested that the return of income already furnished be treated as in response to notice u/s 148 of the Act.
4.2 It was contented, briefly, by the assessee that -
"The sale consideration of the site situated at Bangalore was only for Rs.20,00,000/- and the entire sale proceeds was utilized for construction of the house at Gangavathi and, 4 ITA No.587/B/2009 hence, the entire sale consideration was eligible for deduction u/s 54C of the Act. The assessee, a senior citizen and being a freedom fighter receives freedom fighter's pension and, there was no other taxable income and, hence, no return of income was furnished. The cost of construction was estimated at Rs.24 lakhs as per valuation report and the difference of Rs.4 lakhs utilized for construction was from the agricultural income and past savings of pension."
4.3 After giving due weight-age to the assessee's contention with regard to the applicability of s.50C for calculating exemption u/s 54F of the Act, the AO, by extensively quoting s.50C which was inserted by the Finance Act 2002 w.e.f. 1.4.2003 [special provision for full value of consideration in certain cases], had observed thus -
"9..................... the assessee has not disputed the value so adopted or assessed by the Stamp Valuation Authority in any court of law. The assessee in his reply accepts that entire capital gain claimed as exemption u/s 54F and s.50C is applicable for adoption of net consideration for the purpose of s.48 i.e., while calculating gross taxable gain i.e., capital gain before calculating exemption u/s 54A, 54E C and 54F.
10. The assessee's request to consider Rs.20,00,000/- as sale consideration as against value of the property valued at Rs.36,00,000/- as per the Government guidelines value is not acceptable and sec.50C is clear regarding the consideration received or accruing as a result of transfer of capital asset. I proceed to conclude the assessment as under adopting the value as adopted by the Valuation officer in the sale deed as per letter No.501/07-08 dated: 31.12.2007 received from the Senior Sub-Registrar, Bangalore."
5. Aggrieved, the assessee had approached the Ld.CIT(A) for relief. After due consideration of the forceful arguments put-forth by the assessee, the Ld. CIT (A) had taken a stand that -
5 ITA No.587/B/2009"5.1....................................................The appellant has sold a plot at Bangalore at Rs.20 lakhs as per the agreement with Sri J.A. Earanna dt: 5.6.2004 and it is also stated the entire sale proceeds are invested in the house property at Gangavathi, accordingly, exemption u/s 54F of the Act is being claimed. It is seen by the AO that the provisions of section 50C of the Act are applicable in the case because the value as per stamp duty registration is at Rs.36 lakhs, therefore the AO has calculated the capital gain considering the value at Rs.36 lakhs. The Ld. AR has explained that the provisions of section 50C are not applicable since the AO has not established the receipt of Rs.36 lakh and as per the agreement the sale proceeds are at Rs.20 lakh only. Therefore, AO cannot assess the capital gain on Rs.36 lakhs. It is seen that as per section 2(47) of the Act there is a transfer of property leading to long term capital gain tax, this fact is not disputed. Whereas the only objection of the AR is that a notional amount of sale proceeds cannot be applied when the actual amount as per the sale deed is declared by the appellant. The provisions of section 50C are incorporated by the Finance Act 2002 w.e.f. 1.4.2003. The intention of the Legislature was to bring to tax the transactions over and above the recorded transactions and to keep the infirmity the concerned Registration Authorities have introduced certain fixed value area-wise and city-wise after the proper survey of the real value which is generally not shown in the real estate transactions. Therefore, after well decided consideration both the Registration Authorities as well as the provisions of section 50C are going to indicate that the real sale proceeds are not declared. Hence, these over-riding provisions are introduced. The Apex Court while deciding the issue of levy of concealment penalty in the case of Dharmendra Textiles has taken enough care in respect of interpretation of Legislative Statutes cannot be interpreted in a way other than what is intended by Legislative body, right or wrong. In this situation, the provisions are introduced after a well thought scheme to curb or to reduce the transactions of real estate at a lower rate. In view of the same, the stamp duty registered value of Rs.36 lakhs is a valid one though the AO has not established the actual receipt of Rs.36 lakhs and after reading the provisions of 50C of the Act along with the decision of the Apex Court in the case of Dharmendra Textiles in respect of interpretation of Legislative Statutes, there is no need for the AO to establish the receipt of Rs.36 lakhs. This is over riding section and naturally it has to be interpreted from the importance of the provision being introduced. Therefore, the AO has rightly adopted Rs.36 lakhs at the sale proceeds to compute the capital gain tax in the case."6 ITA No.587/B/2009
6. Agitated, the assessee has come up with the present appeal.
The lengthy and elaborate arguments/submissions made by the Ld. A R during the course of hearing are summarized as under:
(i) During the year under dispute, the assessee had sold a site at Bangalore for Rs.20 lakhs and the entire sale consideration received along with the certain other funds available with the assessee to the extent of Rs.4 lakhs was invested in acquisition of a new residential house at Gangavathi for Rs.24 lakhs and, thus, claimed 'Nil' capital gain as the entire CG was exempt by virtue of the provisions of s.54F of the Act.
(ii) During the assessment proceedings initiated u/s 147 of the Act; the AO found that the said property was registered by the purchaser by paying stamp duty on the guideline value of the property at Rs.36 lakhs.
Accordingly, the AO had recomputed the CG at Rs.1406494/-, adopting Rs.36 lakhs as the sale consideration by virtue of the provisions of s.50C of the Act;
- The contention of the assessee that the entire CG was exempt u/s 54F of the Act was turned down by the AO, but, allowed exemption u/s 54F of the Act to the extent of Rs.20 lakhs being the sale consideration received by the assessee and invested in the new asset. The stand of the AO was confirmed by the CIT(A).
(iii) the levy of CG is regulated by the provisions of s.45.
S.45(1) of the Act is the general charging section and relevant to the issue on hand is reproduced as under:
"Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EV, 54F, 54G and 54H be chargeable to income-tax under the head 'Capital gains' and shall be deemed to be the income of the previous year in which, the transfer took place."
- As can be seen from the aforesaid charging section any profits or gains arising from the transfer of the capital asset is chargeable to capital gains and the capital gains shall be deemed to be the income of the 7 ITA No.587/B/2009 previous year in which the transfer took place. However, by virtue of the use of the expression 'save as otherwise provided' after the comma in s.45(1), the said charging section is made, subject to the provisions of 'sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H of the Act' that follow the expression 'save as otherwise provided in.' It means that the first limb of s.45(1) of the Act ending with the word 'shall' should yield to the following limb in which, the above stated provisions are mentioned. In other words, in situations to which the aforesaid sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H of the Act are attracted, the levy of tax u/s 45(1) of the Act will be modified and subject to the aforesaid provisions. Thus, in order to determine the charge u/s 45(1) of the Act and the taxable capital gain, necessarily, the provisions of sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H of the Act have to be applied and in that sense, both s.45(1) and s.54F are provisions that have to be applied simultaneously in the first place.
- relies the case law in the case of V.V.George reported in 227 ITR 893 (Ker)
- thus, the levy of capital gain under the provisions of s.45(1) of the Act and the exceptions to the levy contained in the provisions of sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H of the Act have to be examined in order to determine the taxable capital gains;
(iv) The provisions of s.48 relate to the process of computing the capital gain and they may be called the computational provisions. The process of computing the capital gains is the next step in the process of levy and the same is not something which is anterior to the levy of capital gains tax u/s 45(1) of the Act. Since the provisions of s. 45(1) are linked to the exemption provisions, both the charging section and the exemption provisions operate simultaneously. However, certain exemption provisions like s.54 etc., provide the conditions for its operation based on the computation of capital gains. In such cases, the computation provisions have to be given effect to, simultaneously. However, where the conditions mentioned in exemption sections do not require the computation of capital gains to judge its application then, the computational provisions of s.48 comes second and not simultaneous with the levy and 8 ITA No.587/B/2009 exemption. In either case, the provisions of s.48 are not something that are to be determined before the exemption provisions as the exemption provisions by virtue of the link with s.45(1) operate simultaneously with the operation of s.45(1) of the Act.
(v) The provisions of s. 50C deems the full value of consideration to be substituted for the purposes of computation of capital gains in s.48 of the Act in certain cases;
- the provisions of s. 50C of the Act create a limited fiction to the effect that the full value of consideration shall be substituted in the provisions of s.48 of the Act by the amount taken by the Sub-Registrar for registration purposes. Thus, this fiction u/s 50C of the Act is extended only the second aspect of computation of capital gains and the same does not extent of the charging section or the exceptions to the charging section. It is well settled that the fiction created by the Legislature has to be strictly construed and applied only for the particular purpose for which the fiction has been created. It is impermissible to extend the operation of the fiction to situations or circumstances for which, the said fiction has not been extended. This is because, the Legislature is fully aware of the meaning of the term 'full value of consideration', which is employed in several sections. The Legislature consciously intended to apply the fiction u/s 50C of the Act only to the expression used in s.48 of the Act and not in any other place. This is because, the Legislature would have used the expression, 'for the purpose of this chapter' instead of 'for the purpose of s.48' in the provisions of s.50C of the Act, if it intended to apply the fiction to the exemption provisions as well. In other words, the fiction contained in s.50C of the Act can be applied only for the purpose of computation of capital gains u/s 48 of the Act and not beyond;.
(vi) With regard to s.54F of the Act, the provisions of this section was inserted by the Legislature as an incentive provision to exempt the levy of capital gains for encouraging purchase of a new residential house;
- the provisions of s.54F carves out an exception to the levy of capital gain u/s 45(1) of the Act. The exception craved out results either in the exemption of the entire capital gain or in the exemption of only the 9 ITA No.587/B/2009 partial capital gain. In other words, s.54F of the Act modifies the extent of capital gains chargeable u/s 45(1) of the Act;
- the provisions of s.54F contain a complete code in itself by which the extent of the modification to s.45(1) is specified. The conditions mentioned u/s 45F and enquiry to be made to ascertain the application of s.54F require the determination of only the two criteria, namely, (a) the cost of the new asset; & (b) the net consideration for the transfer;
- relies on the case law in the case of CIT v. Assam Petroleum Industries (P) Ltd reported in 262 ITR 587 (Gau);
- the object behind the use of 'net consideration' in s.54F is to determine the extent of money available with the assessee on the transfer of the asset. An assessee would have funds from the sale of the asset after incurring the expenses in connection with the transfer. It is the extent of such funds available with the assessee that he is expected to invest to avail the exemption as he cannot be expected to invest funds exceeding the amount of net consideration as the expenditure incurred for transfer would be an outgo from the consideration received. In other words, s.54F mandates that the entire consideration after incurring the expenses which is undoubtedly available with the assessee must be utilized for acquiring the new asset. If the entire consideration is so used then the capital gain is exempt entirely. However, in case the entire consideration is not used by the assessee for acquisition of new asset, only proportionate exemption is allowed. It is to this effect that the provisions of s.45)1) stand modified by virtue of the provisions of s.54F at the stage of chargeability itself;
- After giving illustration of the application of s.54F in a case where the provisions of s.50C are attracted, the contention was that the aforesaid construction placed on the provisions of s.54F would be only construction that would be effectuate the object behind the enactment of the provisions of s.54F and make the same workable. The scope and effect of s.54F has been explained in the Board's Circular No.346 dt.30.6.82 [138 ITR (St)24] and in Circular No.794 dt. 9.8.2000 [245 ITR (St) 21] the extension of the scope 10 ITA No.587/B/2009 of s.54F was explained. A conjoined reading of the aforesaid two circulars brings out the intention of the Legislature to treat the capital gains on the sale of long term assets in a concessional manner with the object of encouraging house construction;
- The provisions of s.54F(1)(a) will become unworkable, if the construction placed thereon, would require the consideration as per s.50C to be taken to work out the amount of exemption of the capital gains. This would mean and require the assessee to invest the entire deemed consideration u/s 50C of the Act to avail the benefit of exemption in full. An assessee who does not have the resources beyond the net consideration cannot be expected to invest amounts that he never realized in order to come within the ambit of s.54F(1)(a). This is precise reason that the Legislature has consciously restricted the operation of the legal fiction u/s 50C only for the purpose of s.48 and not for the entire Chapter IV-E relating to the taxation of capital gains.
- When the provisions of s.54F have been enacted to give an incentive to the tax payer and to encourage house construction, they have to be construed in a manner to effectuate the object and intention of Legislature.
(vii) the provisions of s.50C were introduced by the Finance Act 2002 w.e.f. 1.4.2003. the Board's Circular No.8 of 2002 dated: 27.8.2002 has explained the scope of s.50C, according to which, the deeming fiction u/s 50C of the Act is restricted to adopting the full value of the consideration to the computation of capital gains u/s 48 of the Act. There was nothing in the Circular to construe that the provisions of s.50C have to be reckoned and applied for the computation of the extent of exemption u/s 54F of the Act;
(viii) the provisions of s.50C which have been enacted by the Finance Act 2002 to curb unaccounted income in property transaction create a fiction and a presumption that the guideline value for registration is the full value of the consideration. However, this presumption is rebuttable having regard to the provisions of s.50C(2)and (3) of the Act and a procedure is laid down for making a reference to the DVO to make a valuation of the capital asset. Even in terms of s.50C(2), the full value of consideration is to be determined by the DVO on valuation only and not otherwise. The provisions of s.50C(2) do not make any provision to determine the actual consideration based on evidence of the transaction as entered into between the seller and the purchaser. The question of valuation is one of the estimates and by virtue of the statutory fiction an 11 ITA No.587/B/2009 unreal and fictional consideration is taken as the basis for computing the capital gain instead of the actual amount received. However, the benefit of exemption u/s 54F of the Act is linked to the net consideration which is defined to mean the extent of available funds, having regard to the rationale behind the use of the said expression. Thus, where any assessee complies with the requirements of s.54F(1)(a) having regard to the plain language employed therein, he cannot be denied the benefit of exemption by referring to the provisions of s.50C which is applicable for computation and which is a step removed from the levy. In cases where the provisions of s.54F(1)(b) are attracted, the proportionate exemption of capital gain is available. In either case, the extent of exemption is based upon the fulfillment of the criteria mentioned u/s 54F of the Act only.
(ix) when the provisions of s.54F and s.50C are to be construed, it has to be so construed in a manner that effectuate and advances of the object of s.54F of the Act entirely and not in a manner to defeat or render inoperable any of the said provisions. This is because the provisions of s.54F are incentive provisions and, therefore, any construction that seeks to restrict the benefit given by virtue of s.54F of the Act cannot be adopted as the provisions of s.50C have not been enacted to explain and limit the benefits given u/s 54 of the Act. Furthermore, the above construction placed on s.54F will not frustrate the provisions of s.50C, because, the provisions of s.50C are intended to curb unaccounted money in property transactions and the same would apply in circumstances where the exceptions contained u/s 54F are not applicable;
(x) thus, the harmonious construction of s. 54F and s.45(1) of the Act along with the computational provisions of s.48 r.w.s.50C of the Act can only be achieved, if the provisions of s.54F are given the natural and literal meaning not a strained meaning by subjecting it to the provisions of s. 50C of the Act.
- relies on the case laws:
(a) CIT v. Ace Builders (P) Ltd - 281 ITR 210 (Bom)
(b) ITO v. Sak Soft Ltd. (2009) 30 SOT 55
7. On the other hand, the Ld. D R was very vehement in her argument that as per s.50C of the Act which was inserted by the 12 ITA No.587/B/2009 Finance Act 2002 w.e.f. 1.4.2003 was a special provision for full value of consideration in certain cases. Moreover, the assessee had not disputed the value adopted by the Stamp Valuation Authority.
The assessee's claim to adopt Rs.20 lakhs as sale consideration as against value of the property adopted at Rs.36 lakhs as per the Government guidelines cannot be accepted and s.50C of the Act is very clear with regard to the consideration received or accruing as a result of transfer of capital asset. The AO, it was argued by the Ld. DR, had in a judicious manner adopted the value determined as per the Government guidelines, which requires to be sustained. The Ld. DR had placed a strong reliance on the Board's Circular No.8 of 2002, dated 27th August, 2002 wherein it has been categorically affirmed -
"37.1 The Finance Act, 2002 has inserted a new section 50C in the Income-tax Act to make a special provision for determining the full value of consideration in cases of transfer of immovable property.
37.2 It provides that where the consideration declared to be received or accruing as a result of the transfer of land or building or both, is less than the value adopted or assessed by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall be deemed to be the full value of the consideration, and capital gains shall be computed accordingly under section 48 of the Income-tax Act."
8. We have duly considered the rival submissions, diligently perused the relevant records and also the case laws on which the either party had placed their respective reliance.
13 ITA No.587/B/20098.1 On examining the ground raised by the assessee for award of cost in prosecuting the appeal and to refund of institution fees, we do not find any merit since the issue involved is complex. Therefore this ground is dismissed.
8.2 Before looking into the main issue, let us now address to the additional grounds raised by the assessee during the course of hearing. The assessee's grievance was that the impugned order of the AO passed u/s 143(3) r.w.s 147 of the Act was bad in law in as much as there was no income escaping assessment, considering the ROI filed by the assessee on 9.1.2007(sic) 9.1.2008 and, therefore, the impugned order invoking the provisions of s. 147 of the Act deserves to be cancelled and that [without prejudice] the order of the reassessment was bad in law and void-ab-initio for want of requisite jurisdiction, especially, the mandatory requirements to assume jurisdiction u/s 148 of the Act did not exist and have not been complied with.
8.3 We have duly considered the submission of the Ld. A R and also perused the relevant records. It is evident from the reasoning of the AO that he was in possession of information that the assessee had sold a property for Rs.36 lakhs in Bangalore which was not finding a place anywhere in the earlier return of income which was processed u/s 143(1).
8.4 In our considered view, this reasoning indicates that the AO had reason to believe that the income had escaped assessment.
14 ITA No.587/B/2009Thus, the AO was within his domain to assume jurisdiction u/s 147 of the Act. Accordingly, the additional ground raised on this count is dismissed.
8.5 The crux of the issues raised are two-fold, namely -
(i) the AO was not justified in working out the LTCG at Rs.14.06 lakhs on sale of property; &
(ii) the Ld. CIT (A) had failed to appreciate that the entire CG arising from transfer of property qualify for exemption u/s 54F(1)(a) of the Act.
8.6 The assessee's main contention was that he had sold a plot at Bangalore for Rs.20 lakhs as per the agreement with Sri J.A. Eranna dated 5.6.2004 and that the entire sale proceeds were invested in a house property at Gangavathi and that the entire sale proceeds of the property at Bangalore was exempt u/s 54F of the Act. To drive home his point, the assessee had perhaps filed an affidavit to assert that the sale consideration was only Rs.20 lakhs which was received by way of DD obtained from Canara Bank, Bangalore and so on and so forth. He had stoutly challenged the stand of the AO in invoking the provisions of s.50C of the Act which according to the assessee is applicable for adoption of net consideration for the purpose of s.48 of the Act i.e., capital gain before calculating exemption u/s 54, 54A, 54EC, 54F of the Act.
8.7 The firm assertion of the assessee was that he had received the sale consideration of Rs.20 lakhs only by means of a DD, that the entire sale consideration of Rs.20 lakhs was pumped in 15 ITA No.587/B/2009 (invested) to the construction of a house (at Gangavathi) which was valued at Rs.24 lakhs, the balance of Rs.4 lakhs was met out of agricultural income and past savings. He had pleaded before the AO on the one hand that he did not have any source of income other than the freedom fighter's pension and on the other hand, when he had tried to explain the balance of Rs.4 lakhs purported to have been invested in the house property at Gangavathi, a part of the amount from agricultural income. However, no documentary evidence is forth-coming to suggest that the assessee owns agricultural lands.
8.8 Reverting back to the main theme, the assessee asserts that he had received the sale consideration of only Rs.20 lakhs.
However, the Stamp Valuation Authority - an authority of the State Government, on the basis of Government Guideline rate, had adopted the value of the plot at Rs.36,00,000/- for the transfer of the said property. The assessee had, perhaps, inadvertently, admitted the very fact that the stamp duty value of the plot sold was for Rs.36,00,000/-, but, his affirmation that he received consideration of Rs.20 lakhs only doesn't hold water. His other contention that he received DD for Rs.20 lakhs as sale consideration cannot in any way come to his rescue for the simple reason that the person who obtained the DD for Rs.20 lakhs would have tendered the said amount which, by any stretch of 16 ITA No.587/B/2009 imagination, would not suffice to constitute the full sale consideration for the said plot.
8.9 We have carefully considered the elaborate submission made by the Ld. A R wherein he had elaborately dealt with the applicability of the provisions of sections.45, 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G & 54H of the Act. However, the moot question before us is - whether the provisions of s.50C of the Act which is a deeming section can be imposed on section 54F of the Act?
8.10 Let us have a look at the provisions of s.50C of the Act.
[Special provision for full value of consideration in certain cases.] 50C. (1) where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed by any authority of a state Government (hereafter in this section referred to as the "stamp valuation authority") for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall, for the purposes of section 48, be deemed to be the full value of consideration received or accruing as a result of such transfer.
(2) without prejudice to the provisions of sub-section (1), where-
(a) the assessee claims before any assessing officer that the value adopted or assessed by the stamp valuation authority under sub-section (1) exceeds the fair market value of the property as on the date of transfer;
(b) the value so adopted or assessed by the stamp valuation authority under sub-section (1)has not been disputed in any appeal or revision or no reference has been made before any other authority, court or the High Court, assessing officer may refer the valuation of the capital asset to a valuation officer and where any such reference is made, the provisions of sub- sections (2), (3), (4), (5) (6)of section 16A, clause (i) of sub-section 17 ITA No.587/B/2009 (1) and sub-sections (6) and (7) of section 23A, sub-section (5) of section 24, section 34AA, section 35 and section 37 of the Wealth-tax Act, 1957 (27 of 1957), shall, with necessary modifications apply in relation to such reference as they apply in relation to a reference made by the assessing officer under sub- section (1) of section 16A of that Act.
Explanation- for the purposes of this section, "valuation officer" shall have the same meaning as in clause (r)of section 2 of the Wealth-tax Act 1957 (27 of 1957) (3) Subject to the provisions contained in sub-section (2), where the value ascertained under sub-section (2) exceeds the value adopted or assessed by the stamp valuation authority referred to in sub-section (1), the value so adopted or assessed by such authority shall be taken as the full value of the consideration received or accruing as a result of the transfer.)"
As per section 50C of the Act [inserted by the Finance Act 2002 w.e.f. 1.4.2003] which makes abundantly clear that where the consideration received or accruing as a result of the transfer by an assessee of a capital asset is less than the value adopted or assessed by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall, for the purposes of section 48, be deemed to be the full value of consideration received or accruing as a result of such transfer. Thus, the value so adopted [Rs.36,00,000] for the purposes of s.48, be deemed to be the full value of consideration received as a result of such transfer.
8.11 Now, let us move on to have a glimpse of s.45(1) of the Act which is the charging section.
" Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54,54B,54D, [ 54EA, 54EB, ] 54F [54G and 54H], be chargeable to income tax under the head 18 ITA No.587/B/2009 "capital gains", and shall be deemed to be the income of the previous year in which the transfer took place."
8.12 The contention of the Ld. AR is that, by virtue of the saving clause in the section, the first limb of the section which ends with word "SHALL" should yield to the following limb of the section. In other words, wherein sections 54, 54B, 54D, [54EA, 54EB, ] 54F [54G and 54H], of the Act apply, the charge created by virtue of the first limb of section 45(1) of the Act will be modified and subject to the aforesaid sections of the Act. Thus, in order to determine the charge u/s. 45(1) of the Act, on the capital gain, necessarily, the amount computed under the sections 54,54B,54D, [54EA, 54EB, ] 54F [54G and 54H], of the Act has to be simultaneously excluded. The Ld. AR placed reliance in the case of V.V. George reported in 227 ITR 893. The relevant portions are extracted here below for reference:
"The subject of capital gains gets codified as a separate situation - E. Capital Gains - from section 45 of the Act onwards. A perusal of the initial section of this Chapter will serve as a guide to know the scheme of the subject statutorily dealt with. "Capital Gains" basically relate to a situation of transfer of a capital asset, resulting into either profits or gains as a result thereof. Section 45 of the Act itself makes it clear that even though this is the ordinary position, the statutory provisions of section 53, 54, 54B, 54D, 54E, 54F and 54G are in the nature of exceptions thereto. We are concerned with section 54E which is in the nature of an exception from the plain language of the statute, thus profits or gains arising out of a situation of transfer is understood as capital gains chargeable to income tax under the head "Capital Gains" and gets a deeming situation to be the income of the previous year in which the transfer took place."
8.13 Section 45(1) of the Act can be dissected as under:
(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall;
(2) Save as otherwise provided in sections 54,54B,54D, [ 54EA, 54EB, ] 54F [54G and 54H], of the Act; & 19 ITA No.587/B/2009 (3) be chargeable to income tax under the head "Capital Gains" and shall be deemed to be the income of the previous year in which such transfer took place.
The first limb of the section pinpoints at the profits or gains arising from the transfer of a capital asset effected during the previous year. The second limb of the section provides for the amount to be excluded from the profits or gains referred in the first limb of the section. The ratio of the case mentioned supra by the ld. AR (227 ITR 893) had also made it clear that the second limb of section 45(1) is in the nature of exemption. Therefore, it is obvious that one has to compute the "profits or gains" as per the provisions of the Act and thereafter compute the exemption as provided under the relevant exemption sections and exclude the same from the "profits and gains" so computed. Needless to mention that, the computation of the capital gain has to be in accordance with section 48 of the Act and computation of exemptions in accordance with the relevant exemption sections of the Act i.e., Sections, 54,54B,54D, [54EA, 54EB, ] 54F [54G and 54H] of the Act. Section 45(1) is a charging section therefore while interpreting the section strict construction principle is applicable. The provisions of the charging sections must be interpreted as per the language used therein and when the words of the statute are in themselves precise and unambiguous, no more exercise is necessary than to expound those words in their natural and ordinary sense. It is also made it clear in the case Shri Sajjan Mills Ltd. v. CIT 156 ITR 585 that the strict construction principle does not rule out the application of principle of reasonable construction to give effect to the purport and intention of any particular provisions as apparent from the scheme of the Act. Therefore, it is apparent that the submissions of the ld. AR that "the provisions of section 48 of the Act are not something that are to be determined before the exemption provisions, as the exemption provisions by virtue of the link with section 45(1) of the Act operate 20 ITA No.587/B/2009 simultaneously with the operation of section 45(1) of the Act " does not hold any water.
8.14 The first limb of section 45(1) refers to profits or gains arising from the transfer of capital asset - the computation of the capital gain is said in section 48 of the Act - the second limb specifies the amount that has to be carved out of the profits or gains arising from the transfer of capital asset - the manner in which the computation of the exemption are specified within the relevant exemption section i.e., in sections 54,54B,54D, [ 54EA, 54EB, ] 54F [54G and 54H], of the Act. Therefore the process of arriving at the capital gains and the exemptions are distinct and separate. One does not override the other.
8.15 The next submission of the ld. AR is that section 50C of the Act creates a limited fiction to the effect that the full value of consideration shall be substituted for the purpose of section 48 of the Act by the amount taken by the Sub-Registrar for registration purpose. Thus, the fiction u/s. 50C of the Act is extended only to the second aspect of computation of capital gains and the same does not extend to the charging section or the exemptions to the charging section. The Legislature consciously intended to apply the fiction U/s. 50C of the Act only to the expression used in section 48 of the Act and not in any other place. On this submission of the Ld.AR, we would like to clarify that, by virtue of section 45(1), a charge is created for levy of tax on the profit or gains arising out of the transfer of capital asset effected during the previous year coupled with certain exemptions. The exemption sections 54, 54B, 54D, [54EA, 54EB, ] 54F [54G and 54H], are self contained sections which also includes the method of computation of the exemption. The manner in which the profits or gains arising out of the transfer of the capital asset are to be computed as mentioned in section 48 which goes without saying that the charge is on the profits or gains 21 ITA No.587/B/2009 so computed. While computing the profits or gains as per section 48, the deeming provision imbedded in section 50C has to be given effect to. The charge is created on the enhanced profits or gains arrived at from the fiction of section 50C. This aspect was justified by the Hon. Finance minister in his budget speech that section 50C will curb the menace of unaccounted income in the property transactions by presuming the sale consideration to be the value of the guide line value for registration in case it is stated lower than that.
8.16 With respect to section 54F of the Act, the Ld. AR made the following submissions:
(i) The provisions of section 54F of the Act is a complete code in itself by which the extent of modification to section 45(1) of the Act is specified. The conditions mentioned u/s. 54F of the Act and the enquiry to be made to ascertain the application of section 54F of the Act require the determination of only the following two criteria:
(a) the cost of the new asset &
(b) the net consideration for the transfer.
(ii) The net consideration has been explained in section 54F of the Act itself to mean the full value of consideration as reduced by the cost incurred for transfer. The object behind the use of net consideration is to determine the extent of money available with the assessee on the transfer of the asset.
(iii) The provisions of section 54F(1)(a) of the Act will become unworkable, if the construction placed thereon, would require the consideration as per section 50C of the Act to be taken to work out of the amount of exemption of the capital gains. That is the precise reason that the Legislature has consciously restricted the operation of the legal fiction u/s. 50C of the Act only for the purpose of section 48 of the Act and not for the entire Chapter IV-E relating to taxation of capital gains.
(iv) No circular provides that the provisions of section 50C of the Act have to be reckoned and applied for the computation of the extent of exemption u/s. 54 of the Act.
(v) Where the assessee complies with the requirement of section 54F(1)(a) of the Act, having regard to the plain 22 ITA No.587/B/2009 language employed therein, he cannot be denied the benefit of exemption by referring to provisions of section 50C of the Act, which is applicable for computation, and which is a step removed from the levy. In case where the provisions of section 54F(1)(b) are attracted, the proportionate exemption of capital gain is available. In either case, the extent of exemption is based upon fulfillment of the criterion mentioned u/s. 54 of the Act only.
(vi) The provisions of section 54F of the Act and section 50C of the Act are to be construed, which has to be construed in a manner that effectuate and advances of the objects of section 54F of the Act entirely and not in a manner to defeat or render inoperable any of the said provisions.
(vii) The harmonious construction of section 54F of the Act and section 45(1) of the Act along with computational provisions of section 48 read with section 50C of the Act can only be achieved if the provisions of section 54F are given its natural and literal meaning and not a strained meaning by subjecting it to the provisions of section 50C of the Act.
8.17 We do accept that section 54F of the Act is an exemption provision and a complete code in itself. Since it is a complete code in itself, the computation of eligible exemption has to be worked out within its framework as far as possible. Being an exemption provision, beneficial interpretation has to be given. However, in any interpretation, the maxim "ut res magis valeat quan pareat" should be kept in mind. The construction which would reduce the legislation to a futility should be avoided; and alternative that will introduce uncertainty, fiction or confusion into the working of the system should be rejected. An interpretation which leads to unworkable results and absurdity should be avoided.
8.18 Section 54F of the Act is reproduced herebelow for an analytical understanding:
"54F.(1) Subject to the provisions of sub-section (4), where, in the case of assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long term capital asset, not being a residential house (hereinafter in 23 ITA No.587/B/2009 this section referred to as the original asset), and the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house (hereinafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say, -
(a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45;
(b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45:
Provided that nothing contained in this sub-section shall apply where -
(a) .........
.........
.........
.........
........
Explanation. - For the purposes of this section, -
"net consideration", in relation to the transfer of as capital asset, means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer."
8.19 We do agree that deeming fiction contained in any other provision cannot be breath into section 54F being an exemption section. Only the plain meaning of the language has to be construed for the operation of exemption provisions. The legal fiction created by virtue of section 50C in determining the "capital gain" cannot be extended to section 54F of the Act. Section 54F of the Act has to be applied only for the definite and limited purpose for which it is created. In the case of Executors and Trustees of Sir Cawasji Jehangir v. CIT (1959) 35 ITR 537 (Bom), it has been 24 ITA No.587/B/2009 explained that unless it is clearly and expressly provided, it is not permissible to impose a supposition on a supposition of law. It is not permissible to subjoin or track a fiction upon fiction. In the light of the above facts, it is apparent that as far as arriving at the exemption allowable u/s. 54F of the Act, one has to strictly follow the provisions of the section and compute the exemption accordingly without imposing any section creating a legal fiction into the section. The case law - CIT Vs Ace Builders Pvt. Ltd., Bombay High Court, 281 ITR 210, on which the ld. AR has placed reliance also subscribes to the aforesaid view. It was held thus :-
"that there was nothing in section 50 to suggest that the fiction created in section 50 is not only applicable to sections 48 and 49 but also applies to other provisions. On the contrary, this section makes it explicitly clear that the deeming fiction created in sub-sections(1) and (2) is restricted only to the mode of computation of capital gains contained in sections 48 and 49. The legal fiction is to deem the capital gain as short-term capital gain and not to deem the asset as short term capital asset. Section 50 did not convert a long term capital asset into a short term capital asset. Though section 50 was enacted with the object of denying multiple benefits to owners of depreciable assets, yet that restriction was limited to the computation of capital gains and not the exemption provisions. Thus, the exemption under section 54E could not be denied to the assessee on account of the fiction created in section 50".
8.20 In the light of above ruling, let us view section 54F of the Act. The operational part of the section is dissected herebelow for a proper understanding.
25 ITA No.587/B/2009Section 54F (1) ........................................., the capital gain arises from the transfer of any long term capital asset, ............................................. ....... .......................................................................................... ...., the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say, -
(a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45;
(b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45:
....................................
....................................
....................................
Explanation. - For the purposes of this section, -
"net consideration", in relation to the transfer of as capital asset, means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer."
8.21 The main ingredients of the Statute to be dealt with to compute the exemption allowable under these sections are, (1) the "capital gain" arising from the transfer of any long term capital asset, (2) net consideration in respect of the original asset, (3) extent of the net consideration invested in the new asset.
The "capital gains" and the "net consideration" have to be worked out within the framework of section 54F of the Act, without imposing any fiction created by any other section. Thus, the capital gains arising from the transfer of any long term capital asset for the purpose of section 54F has to be worked out applying section 48 without imposing section 50C into it. As regards to net consideration, the section itself has made it clear in the Explanation the method in which it has to be arrived at. Needless to mention that the words "such capital gain" and "capital gains"
26 ITA No.587/B/2009mentioned in section 54F(1)(a) & (b) of the Act refers to "the capital gains" arising from the transfer of any long term capital asset worked out as mentioned in section 54F(1) of the Act read with section 48 and not worked out as mentioned in section 45(1) read with section 48 and 50C of the Act. When this interpretation is adopted, every provisions of the Chapter will fall in line without producing any absurd result and thereby giving a fruitful purpose for the enactments. Alternatively, as canvassed by the learned AR, if the term "capital gain" in sec. 54F is arrived at by imposing section 50C of the Act, then the intention for introducing section 50C of the Act would be defeated, because whatever may be the capital gain arrived at by imposing section 50C of the Act would be exempt, if the net consideration, however meagre it may be, is invested in the new asset.
8.22 To make the concept clear, we here below demonstrate with an illustration modifying the illustration submitted by the ld. AR.
DATA .
Sl.No. Particulars Amount Rs. (a) Sale consideration actually received 1,00,000 (b) Guideline value taken as consideration u/s. 50C of the Act 10,00,000 (c) Expenses on transfer 10,000 (d) Indexed cost of acquisition 30,000 (e) Cost of the new asset (situation A) 1,00,000 (f) Cost of the new asset (situation B) 50,000 (g) Net consideration (as per 54F) 90,000 (1) Working of capital gain as per section 48 of the Act without giving effect to section 50C of the Act. Sale consideration actually received 1,00,000 Less: 1) Expenses on transfer 10,000 2) Indexed cost of acquisition 30,000 40,000 Capital gains 60,000 27 ITA No.587/B/2009
(2) Working of capital gain as per section 48 of the Act giving effect to section 50C of the Act.
Sale consideration as per the guideline value 10,00,000 Less: 1) Expenses on transfer 10,000
2) Indexed cost of acquisition 30,000 40,000 Capital gains 9,60,000 (3) Net consideration worked out as per section 54F of the Act Net consideration as per Sec, 54F of the Act 1,00,000 Less: Expenses on transfer 10,000 90,000 8.23 Exemption u/s. 54F of the Act:
The maximum exemption the assessee can claim in this given case is Rs.60,000 as worked out in para 8.22 (1) i.e., without imposing section 50C of the Act while applying section 48 because while addressing to capital gain mentioned in section 54F any deeming fiction arising out of any other provisions of the Act cannot be breathed into section 54.
Situation- I: (When the amount invested in the new asset is Rs.1,00,000).
In this case, the entire sale consideration actually received by the assessee is invested in the new asset. However, as per section 54F, the maximum deduction possible will be the capital gain worked out as per section 48 without imposing section 50C. In this case the capital gain worked out with respect to section 54F of the Act is Rs. 60,000/- as worked out in para 8.22(1). Therefore the allowable deduction shall be restricted to Rs.60,000 even though the assessee has invested the entire sale consideration of Rs. 1,00,000/- which is more than the net consideration.
Situation II: (When the assessee has invested Rs.90,000) In this situation the assessee has invested the entire net consideration of Rs. 90,000/- as worked out in para 8.22(3).28 ITA No.587/B/2009
However the maximum deduction possible U/s 54F will be Rs.60,000/- because the capital gain recognised U/s. 54F of the Act is only Rs.60,000/- as worked out in para 8.22(1).
Situation III: (when the assessee has invested Rs. 50,000/-) In this hypothesis the assessee has invested only Rs. 50,000/- which is below the net consideration. Therefore the assessee can claim exemption, so much of the capital gain as it bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration. In other words where part of the net consideration is invested on the new asset, exemption can be availed proportionately. The proportionate exemption will be that amount which bears the same proportion which amount invested in the new asset bears to the net consideration of the transferred asset. Viz:
Capital gain as per X Amount Invested in the new asset Sec 54F Net Consideration In this case: Rs. 60,000/- X 50,000 = Rs.33,334/-
90,000 Situation IV: (when the assessee has invested Rs. 2,00,000/-) In this illustration the assessee has invested Rs. 2,00,000/- which is more than the net consideration of Rs. 90,000/-. However the maximum allowable exemption will be restricted to Rs. 60,000/- being the capital gain arrived at within the scope of section 54F.
8.24. Now coming to the case on hand, following the ratio as deduced above the computation of long term capital account is worked out as follows:
(A) Sale value of the property No.107 at RMV 2nd Stage Bangalore, sold on 5.6.2004 as per Stamp Valuation Authority Valuation as per section 50C of the Act Rs.36,00,000 29 ITA No.587/B/2009 (B) Less Indexed cost of acquisition Cost of the site purchased - 89900 Indexation : 89900 x 480 1,93,506 223 (C) Income chargeable to tax under the head Capital gains 34,06,494 (D) Less: Deduction u/s. 54(F)(1)(a) (1) Capital gains as inferred u/s. 54F being the maximum deduction permissible under the section Actual sale value 20,00,000 Less: Indexation as worked above 1,93,506 Capital gain as U/s.54F 18,06,494 (2) Net consideration received 20,00,000 (3) Amount invested in new asset 24,00,000 Deduction as per sec. 54F(1) and 54(1)(a) [Whole of such capital gain as exempted u/s.
54(1)(a) 18,06,494
------------------
Taxable long term capital gains
as per sections 45, 48, 50C and 16,00,000
54F of the Act [(C) - (D)] -------------------
8.25 It appears that the ld. AO has also erred in his computation to arrive at the long term capital gains.
8.26 To sum up the reformulated grounds in para 2 are dealt with as follows:-
(i) Ground No.1 is dismissed; (ii) Ground No.2 is consequential;
(iii) Ground No.3 does not survive considering the complication of the issue; &
(iv) The additional ground raised by the assessee is answered in favour of the Revenue.
9. Before parting with the case, this Bench records its deep appreciation of the spirited arguments advanced by the young and 30 ITA No.587/B/2009 enthusiastic Shri. V. Srinivasan, the Ld. A.R on behalf of the assessee and also to Smt. V.S. Sreelekha, the Ld. D.R who had nobly countered the stand of the Ld. A.R in an impeccable manner - kudos to them. The Bench also records its unreserved appreciation and applauds to the assessee's contribution in his younger days in defending the nation against the imperialism as a freedom fighter.
10. In the result, the appeal of the assessee is dismissed.
Pronounced in the open court on this 16th day of July, 2010.
Sd/- Sd/-
( GEORGE GEORGE K. ) (A. MOHAN ALANKAMONY )
Judicial Member Accountant Member
Place: Bangalore,
Dated: 16-7-2010.
am*/ds
Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file (1+1)
By order
Assistant Registrar
ITAT, Bangalore.