Income Tax Appellate Tribunal - Madras
M.A.C. Khaleeli vs Deputy Commissioner Of Income-Tax on 30 August, 1993
Equivalent citations: [1994]48ITD191(MAD)
ORDER
T.N.C. Rangarqjan, V.P.
1. These appeals relate to the taxability of the amounts received on the promotion of a multi-storeyed building. The assessee is an individual. He was the owner of a plot of land measuring 48,828 s. ft. at 146/149, Montieth Road, Egmore, Madras. There was an old godown building which was let out to Indian Explosives Ltd. By a settlement deed dated 24-6-1960 the assessee gifted a portion of this land to his wife and by another deed dated 20-4-1972 he gifted another portion to his two major sons. Consequently, the assessee was left with 71.97 per cent of the land, his wife 12.03 per cent and his two major sons 8 per cent each. On 15-1 -1986 the assessee, his wife and his two sons entered into an agreement with M/s. Alsa Investments (P.) Ltd. called guaranteed selling agent. This deed receited that the assessee had appointed M/s. Alsa Properties to construct a multi-storyed shopping complex called "Khaleeli Centre" with 73,485 sq. ft. of super built-up area and 34 garages under stilts, that the guaranteed selling agent shall sell the area at Rs. 285 per sq. ft. for office space, Rs. 360 per sq. ft. for shops and Rs. 25,000 for each garage or buy at the same rate, provide the finance without interest for constructing the complex and out of the sale proceeds after paying out Rs. 170 per sq. ft. to the contractor, pay the balance of Rs. 115 per sq. ft. for office space and Rs. 15,000 for garage to the assessee, his wife and sons as consideration for conveying the proportionate undivided share in the land. It was also provided that if there is escalation in the cost, it shall be borne by the guaranteed selling agent, who had the right to any sum realised over and above the price fixed. It was further provided that the vendors shall be owners of the terrace of the building and that the guaranteed selling agent alone shall be liable for the payment of any tax such as sales-tax etc. arising from the agreement. In pursuance of this agreement, Alsa Investments Pvt. Ltd. entered into agreements with a number of prospective purchasers and collected advances for the construction of the building. When the building was completed the total built-up area was 101,797 sq. ft. of which 77,832 sq. ft. were sold. Of the balance of 23,965 sq. ft., the assessee retained 19,427 sq. ft., Mrs. Khaleeli retained 2,938 sq. ft. and Azeez Khaleeli retained 1,600 sq. ft. Out of the space retained by the assessee, 18,000 sq. ft. was let out to the former tenant, M/s. Indian Explosives Ltd. for a period of five years under a lease deed dated 13-10-1988. The assessee received ultimately Rs. 285 per sq. ft. for office accommodation, Rs. 360 per sq. ft. for shop premises and Rs. 25,000 for garage. It was accepted that the amount stipulated in the agreement, namely Rs. 115 per sq. ft. for office space, Rs. 125 per sq. ft. for shop premises and Rs. 15,000 for garage would be the consideration for the conveyance of the land and the balance was taken by the Assessing Officer as business profit. The amounts received can be tabulated as follows: --
Rs. P. Rs. P.
Sale value 2,37,00,245.00
Less: Land conveyance 89,94,430.00
Construction cost 1,22,11,440.00 2,12,05,870.00
Surplus 24,94,375.00
Assessment year Assessment year Total
1989-90 1990-91
31-3-1989 31-3-1990
Rs. P. Rs. P. Rs. P.
Mr MA.C. K 71.97% 8,47,288.00 9,47,913.00 17,95 201.00
Mrs. F.K. 12.03% 1,41,627.00 1,58,447.00 3,00,074.00
Mr. M.A.A.K. 8% 94,183.00 1,05,367.00 1,99,500.00
Mr. M.A.W.K. 8% 94,182.00 1,05,368.00 1,99,550.00
11,77,280.00 13,17,095.00 24,94,375.00
2. In computing the total income, the Assessing Officer added the amount attributable to the assessee's wife to the total income of the assessee under Section 64(1)(iu) of the Income-tax Act, 1961 for the assessment year 1989-90. This was confirmed on appeal. In computing the income for the assessment year 1990-91 the Assessing Officer repeated the same addition and also denied the relief under Section 54F in respect of capital gains. This was also confirmed on appeal.
3. In the further appeals before'us the application of Section 64 to the income arising subsequent to the construction of the building was contested. It was submitted that even though capital gains may be exigible to tax under Section 64, the income arising by investment of the capital gains would not be subject to Section 64. It was also submitted that the assessee having reinvested the amount in the construction of another property, relief under Section 54 should be allowed. It was contended on behalf of the revenue that the entire transaction was a composite venture and hence the assessee must be assessed on the income arising to the wife also under Section 64. In respect of the claim for relief under Section 54F, it was submitted that the assessee had not deposited the unutilised funds in the bank account as required and, therefore, he was not entitled to the relief.
4. We have considered the submissions of both sides and perused the agreements. The first question that arises is with reference to the nature of the transaction. The assessee and his wife and sons were the owners of the land. The agreement itself provides for a separate consideration for the transfer of the undivided interest in the land. The law in India recognises the land as a separate asset from the building - see CTT v. Madras Cricket Club [1934] 2 ITR 209 (Mad.). Since the land had been admittedly retained by them for more than 36 months it was a long-term capital asset. It follows that the amount received by the assessee, his wife and sons in respect of their undivided share in the land transferred by them would be assessable to long-term capital gains and would be eligible for the deduction under Section 54F if the conditions therein are fulfilled.
5. That section had been inserted by the Finance Act, 1982 with a view to encouraging house construction. It provides that if the assessee has purchased or constructed within a period of one year before or within a period of three years after the transfer of the asset a residential house, the amount invested would be allowed as a deduction. However, the Finance Act, 1987 introduced Sub-section (4) to say that the amount of net consideration which is not utilised for the construction of a new asset before the date of filing the return shall be deposited in a specified bank account and if it remains unutilised for the period of three years it shall be chargeable to tax as capital gains. In the present case, the assessee himself was carrying on business of building construction, called "Saabereh International". As and when the office space in the 'Khaleel Centre' was sold, the receipts therefrom were deposited by the assessee and his wife in the housing division of "Saabereh International". A residential property was constructed on the land purchased from Shri Ramanajulu Reddiar under an unregistered agreement dated 18-6-1990. According to the assessee, even though the building was constructed over a period of three years, the deposit of the money in the business amounted to utilisation of the funds for the construction of the property and the assessee was entitled to the deduction under Section 54F. According to the revenue, the deposit in the assessee's own business meant that the amount was available for the use of the assessee otherwise than for the construction of the house and thus defeated the claim for deduction. In order to understand the purpose of this condition that the unutilised funds should be deposited in a bank account, we looked into the legislative history.
6. Section 54F was introduced by the Finance Act, 1982 permitting the reinvestment of the proceeds received by transfer of a capital asset in the purchase within a year or construction within three years of a residential house to avoid payment of capital gains tax. The Memorandum explaining this provision stated in Circular No. 342, dated 30-6-1982 that this was with a view to encouraging house construction. Sub-section (4) introduced by Finance Act, 1987 by which it was provided that the unutilised funds should be deposited in a specified bank account. The Memorandum explaining this Sub-section states as follows:
26.1. Under the existing provisions of Sections 54, 54B, 54D and 54F, long-term capital gains arising from the transfer of any immovable property used for residence, land used for agricultural purppses, compulsory acquisition of lands and buildings and other capital assets are exempt from income-tax if such gains are reinvested in new assets within the time allowed for the purpose. The original assessment needs rectification whenever the taxpayer fails to acquire the corresponding new asset.
26.2. With a view to dispense with such rectifications of assessments, the amendments made to Sections 54, 54B, 54D and 54F provide for a new scheme for deposit of amounts meant for reinvestment in the new asset. After the aforementioned amendments, where the amount of capital gains or the net consideration, as the case may be, is not appropriated or utilised by the tax-payer for acquisition of the new asset before the date for furnishing the return of income, it shall be deposited by him on or before the due date of furnishing the return of income, under Section 139(1) in an account with a bank or institution and utilised in accordance with a scheme framed by the Central Government in this regard. The amount already utilised together with the amounts of deposit shall be deemed to be the amount utilised for the acquisition of the new asset. If the amount deposited is not utilised fully for acquiring the new asset within the period stipulated, the capital gain relatable to the unutilised amount shall be treated as the capital gain of the previous year in which the period specified in these provisions expires. In such cases, the threshold deduction often thousand rupees as well as the deduction under Section 53 will not be admissible. Further, the tax-payer shall be entitled to withdraw such amount in accordance with this scheme. This scheme will be applicable in relation to the new Section 54G also.
This itself shows that the purpose of the deposit was to see that the amount is actually utilised and not for depriving the assessee of the use of the funds. This is in contrast with Section 54E where originally any investment of the proceeds in specified assets were exempt under the section as enacted by Finance Act, 1978. Subsequently, by Finance Act, 1983 it was provided that if the tax-payer takes a loan on the security of the specified asset, he would forfeit the exemption from capital gains. In the present section there is no such provision and hence in our considered opinion the purpose of Section 54F(4) requiring the deposit of unutilised funds is not for depriving the assessee of the use of the funds but only for avoiding the rectification of the assessment by bringing to tax the amount which had been earlier claimed as exempt by reason of re-investment. Furthermore, on the peculiar facts of the present case it is clear that by depositing the funds in the housing division of the assessee's contract business, the assessee was actually utilising the funds for the purpose of building a residential house. Even if he had entrusted the funds to an independent contractor, there is no guarantee that every pie given by the assessee will be utilised only for the purchase of materials for the construction of a house for the assessee alone as such funds would be part of the circulating capital of the contractor's house building business. In such an event, the assessee cannot be denied the exemption merely because the contractor had the use of the funds in his house construction business. The present case is no different except that the house construction business happens to be that of the assessee himself. Yet it is not to be gainsaid that it fulfils the main object of the section, viz., to encourage the construction of houses. In the circumstances, we are convinced that the deposit of the monies by the assessee with the housing division of the assessee's own house construction business amounted to utilisation of the funds for the purpose of the construction of his own residential house. The assessee also points out that in actual fact the funds were utilised for purchase of materials for the construction of the house by the business unit and it is verifiable from the accounts of the business unit. Hence we uphold the claim of the assessee for deduction under Section 54F to the extent to which there was a re-investment in the new residential house fulfilling the other conditions of Section 54F.
7. The second question that arises is with reference to the amount received in respect of the super-structure. The authorities below have treated it as a business venture and the receipts as business income. We have gone through the documentation as referred to in the earlier part of the order and we find that the assessee, his wife and sons were not entitled to any share of the profits but only a fixed amount over and above the cost of construction. Moreover, without the land provided by the assessee, the construction could not have been made. The contract to construct the house was given only by the assessee and his family and it is only after the construction that the floor space is allotted to the purchasers of the undivided share of the land. The specifications have been given by the assessee's family. No doubt, the finance was provided by the guaranteed selling agent free of interest in consideration of which he was entitled to the profit over and above the guaranteed amount. Taking all these facts together, we are of the considered opinion that the assessee was only creating an asset of a structure over the land and selling the same. Since the assessee and the guaranteed selling agent did not form an Association of Persons or entered into a venture in the nature of trade by sharing the profits it must be held that the amount received by the assessee was only short-term capital gains. This is underlined by the fact that the assessee was not selling every inch of the floor space and the guaranteed selling agent was also not entitled to insist on selling every inch of the floor space.
So far as the guaranteed selling agent is concerned, the profit earned may be a business profit in the sense that finance was provided and the profit was realised. But as far as the assessee and his family are concerned, they were only creating a capital asset which was sold within the year thereby making a short-term capital gains. However, this makes no difference to the tax impact as short-term capital gains is assessed as if it is a business profit. We are stating this only to keep the record straight.
8. The third point in dispute is with reference to the share of the assessee's wife which was added to the income of the assessee under Section 64(1)(iv). The case of the revenue is that the capital gains in respect of the land as well as the short-term capital in respect of the floor space accrued to the wife from the land which was transferred by the assessee without consideration and, therefore, it was to be added back under Section 64(1)(iv) of the Act. The case of the assessee is that the amounts receivable by the assessee would not be treated as income indirectly arising from the asset transferred. However, as far as the capital gains arising from the transfer of the land itself is concerned, the issue is concluded against the assessee by the decision of the Supreme Court in the case of Sevantilal Maneklal Sheth v. CIT [1968] 68 ITR 503. The Supreme Court held that capital gains would also be income includible under that section. Therefore, we have to reject the contention of the assessee that the long-term capital gains arising from the transfer of the land cannot be included under Section 64(1)(iv). The alternate contention of the assessee is that such long-term capital gains would be eligible for deduction under Section 54F. Though the revenue opposed this contention, we find that the assessee's claim has to be allowed. Even though the income of the spouse is to be added to the total income of the assessee, the addition has to be under the same head. In other words, the character of the income as capital gains and the computation of that income as capital gains will not be affected in any way. This principle has been affirmed by the Supreme Court in the case of CIT v. J.H. Gotta [1985] 156 ITR 323 as well as in the case of CIT v. Maharaj Kumar Kamal Singh [l973] 89 ITR 1. Therefore, as capital gains it will be eligible for such exemption as are admissible. The revenue reiterated the objection to the grant of relief under Section 54F on the ground that the amount had not been deposited in a bank account as required under Section 54F(4). The case of the wife is stronger than the case of the husband as in her case the amount is deposited with the business belonging to the husband who as far as she is concerned is an independent contractor. In the circumstances, it cannot be said that the amount deposited by the wife with the housing division of the assessee's house construction business was not utilised for the purpose of investment in a residential house. Hence the amounts so deposited would be eligible for deduction under Section 54F.
9. With reference to the short-term capital gains arising on the transfer of the floor space constructed by the assessee and sold through the guaranteed selling agent, the case of the assessee is that the construction itself came out of the capital gains which was the wife's income and, therefore, there could not be an addition of the amount received therefrom under Section 64(1)(iv). On the other hand, the case of the revenue was that since the construction could not take place without the availability of the undivided share of the wife, the amount realised should be treated as indirectly arising from the asset transferred by the assessee. In this connection reference was made to the judgment of the High Court in the case of Sevantilal Maneklal Sheth v. CIT [1965] 57 ITR 45 (Bom.). In that case the assessee made a gift of shares in a limited company worth Rs. 69,730 at the time of the gift. She sold the shares for Rs. 1,54,800 and made capital gains of Rs. 70,860. The entire sale proceeds were deposited and fetched an interest of Rs. 9,288 annually. The High Court held that the capital gains of Rs. 70,860 could be added under Section 16(3)(a)(iv) of the Indian Income-tax Act, 1922 [equivalent to Section 64(1)(iv) of the Income-tax Act, 1961]. But such portion of the interest as attributable to the original gift of Rs. 69,730, namely Rs. 4,184 alone could be treated as income arising from the assets transferred. On the same analogy', the present case only the profit which was earned by utilising the land could be included under Section 64(1)(iv). In the present case the cost of construction was met initially by the guaranteed selling agent by giving interest-free advances. All that the assessee's wife had provided was a licence to build on her undivided share in the land. Obviously, a licence does not require consideration and in the circumstances it cannot be said that the amount received by transfer of the construction permitted to be made on the land was derived from the land itself. In the circumstances, we have to hold that no part of the short-term capital gains arising from the transfer of the share of the wife in the superstructure could be added to the total income of the assessee under Section 64(1)(iv).
10. The next point relates to the addition to be made under Section 64(1)(iv) in respect of the floor space retained by the assessee's wife. Though she had 2.89 per cent share in the total land, after the construction of the building and the sale of the floor space she retained 2,938 sq. ft. The undivided share of land corresponding to that floor space will be 2.89 per cent, i.e., 1,411 sq. ft. The contention of the assessee is that in making the addition under Section 64(1)(IV) in respect of the floor space retained by her, the entire floor space cannot be taken as asset transferred by the assessee and only the proportionate part should be taken as asset transferred by the assessee and only the proportionate part of the income of this floor space should be added. Reliance was placed on the decision of the Tribunal in the case of ITO v. S. Parthasarathy [1982] 2 ITD 639 (Mad.). On the other hand, the contention of the revenue was that the floor space was to be considered as conversion of the transferred asset and therefore the income attributable to the entire floor space retained by her should be added under Section 64(1)(iv).
11. We have considered these submissions and we have also perused the order of the Tribunal. This is not a case where the asset originally transferred was fully converted into another asset and retained by the wife. In the process of constructing the building complex and selling away the floor space the assessee's wife had also sold away part of the undivided share in the land given to her by the assessee. Therefore, the floor space retained by her does not represent the full value of the transferred asset. In the circumstances it is necessary to apportion the income attributable to the floor space between the undivided share in the land retained by her and the undivided share of land sold away by her. As pointed out by the assessee this exercise has already been carried out in the wealth-tax proceedings and the WTO in the assessment for the assessment year 1990-91 had accepted that the undivided share of land retained by the wife was only 1,411 sq. ft. out of 5,878 sq. ft. which was the undivided share transferred by the assessee to his wife. In the circumstances, the income proportionate to that ratio of 1,411/5,878 alone can be added under Section 64(1)(iv). We direct the Assessing Officer to restrict the addition to that extent.
12. The next point relates to the disallowance of the collection charges from the rental income derived by the assessee in respect of the space let out to M/s. Indian Explosives Ltd. Section 24(1)(viii) provides for deduction of any sums spent to collect the rent from the property, not exceeding six per cent of the annual value of the property. Admittedly, the assessee had not spent any amount for collection of the rent which was paid by cheque by the tenant. Hence the disallowance to claim 6 per cent of the annual value is upheld.
13. The next point relates to the claim for deduction of a sum of Rs. 92,444 being the amount incurred for the fabrication of the electricity panel board. The authorities below have treated this as capital expenditure. It was contended on behalf of the assessee that the switch board was fixed for the use of the tenant of a hired air-conditioner and, therefore, it must be taken as a revenue expenditure. However, we find that the switch board is independent of the equipment which draws power from it and it is a permanent fixture to the building which could be used even if there is any change in the tenancy. The assessee has, therefore, derived an enduring benefit from this switch board and hence the expenditure was rightly capitalised by the authorities below.
14. For the assessment year 1990-91 there are two other grounds relating to the profit in respect of eight garages and the computation of the demand. Both these points do not arise from the order of the CIT (Appeals). We leave it to the assessee to seek rectification in case of any omission in the orders of the authorities below on these points.
15. In the result, both the appeals are partly allowed.