Advance u/s 54G be allowed for utilization of capital gain?


Advance u/s 54G be allowed for utilization of capital gain?

Section 54G provides for the exemption of taxability of capital gains. This benefit is available on transfer of assets in case of shifting of industrial undertaking from urban area. As per this section investment shall be made in the assets at the new area. The question is whether the term investment includes the investment in form of ADVANCE?

To have the answer about this question, we have to look at the landmark judgement of Fibre Boards (P) Ltd v. CIT.


Facts of the case:


The assessee, in order to shift its industrial undertaking from an urban area to a non-urban area, sold its land, building and plant and machinery situated at Thane and out of the capital  gains  so earned, paid advances of various amounts to different persons for purchase of land, plant and machinery, construction of factory and building at the new area. The  assessee  claimed exemption under section 54G of the Income-tax Act, 1961, on the capital gains earned from the sale proceed.

The  Assessing Officer refused to grant exemption to the assessee under section 54G  on  the ground that the non-urban area had not been declared to  be so by  any general or special order of the Central Government and that giving advances did not amount to utilisation of  capital gains for acquiring the assets.

The CIT (Appeals) dismissed the case of the assessee while at the same time the Appellate Tribunal allowed the appeal by stating that even an agreement to purchase is good enough and that Explanation to section 54G is declaratory in nature and would be retrospectively applicable.

The High Court reversed the order of the Appellate Tribunal and denied the exemption on the reasoning that the expression “purchase” in the section 54G cannot be equated with the expression “towards purchase” and accordingly the advance for purchase of land, plant and machinery would not entitle the assessee to claim exemption under section 54G.


Supreme Court’s Observations:

The Apex Court observed that, for the purpose of availing exemption, all that was required for the assessee is to “utilise” the amount of capital gain for purchase and acquisition of new machinery or plant and building or land. Since the entire amount of capital gain, in this case, was  utilized by  the  assessee by  way of advance for acquisition of land, building, plant and machinery, the assessee was entitled to avail exemption/deduction under section 54G.

Have a look at the Supreme Court Judgement:



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