Purchase of agricultural land made prior transfer is not eligible for capital gain exemption u/s 54B

Short overview:

  Section 54B clearly envisaged that deduction is allowable only in respect of agricultural land purchased after the transfer of existing agricultural land, therefore, purchase prior to the transfer of existing land would not be allowable for deduction under section 54B.

Assessee claimed deduction under section 54B with respect to agricultural land purchased by him prior to the transfer of existing agricultural land. AO denied deduction.

It is held that section 54B clearly envisaged that deduction is allowable only in respect of agricultural land purchased after the transfer of existing agricultural land, therefore, purchase prior to the transfer of existing land would not be allowable for deduction under section 54B.

Decision: Against the assessee.

IN THE ITAT, JAIPUR BENCH

VIJAY PAL RAO, J.M. & VIKRAM SINGH YADAV, A.M.

Mathur Lal v. ITO

IT Appeal No. 940 (Jp.) of 2018

A.Y. 2014-15

12 October, 2018

Appellant by: P.C. Parwal (CA)

Respondent by: Ram Singh (Addl. CIT)

Vijay Pal Rao, J.M.

This appeal by the assessee is directed against the order dated 19-2-2018 of learned Commissioner (Appeals), Kota for the assessment year 2014-15.

2. There is a delay of 91 days in filing the present appeal. The assessee has filed an application for condonation of delay, which has been supported by an affidavit of the assessee.

3. We have heard the learned AR of the assessee as well as the learned DR on condonation of delay and considered the cause of delay explained by the assessee in the affidavit. The learned AR has submitted that the only issue arising from the assessment order passed under section 143(3) of the Income Tax Act, 1961 (in short the Act) is regarding the capital gain assessed by the assessing officer in respect of sale of agricultural land and claim of deduction under section 54B and 54F of the Act. After the sale of the said agricultural land, the grandson of one Shri Raghunath from whom the land was purchased in the year 1965 by the father of the assessee challenged the title of the land in question by filing the case on 9-5-2016 in the court of the SDO. The assessee was fighting the said case filed in the court of SDO and in the mean time, the learned Commissioner (Appeals) has passed the impugned order, which was received by the assessee on 8-3-2018, however, thereafter on 4-6-2018, the case regarding title of the land in question was decided against the assessee by the SDO and therefore, the assessee had to take immediate steps for stay and filed the appeal against the said order of the SDO. Thus, the assessee got engaged and busy in the proceedings of the appeal filed before the Court of Revenue Appellate Authority, Kota and got the stay against the order of the SDO. Thereafter, the assessee realized that the assessee has not consulted his counsel for filing the appeal against the impugned order passed by the learned Commissioner (Appeals) and consequently the present appeal was filed. The learned AR has referred to the orders passed by the SDO as well as the Revenue Appellate Authority and submitted that both the developments happened simultaneously and therefore, the assessee could not take steps for filing the appeal in time. Thus, the learned AR has pleaded for condonation of delay in filing the present appeal.

4. On the other hand, the learned DR has vehemently opposed to the condonation of delay and submitted that when the assessee find time to file the appeal against the order passed by the SDO then at the same time, the appeal should have been filed against the impugned order passed by the learned Commissioner (Appeals).

5. Having considered the rival submissions as well as the relevant material on record we note that the assessee has explained the cause of delay in paragraphs No. 3 to 6 of the affidavit of the assessee as under :–

“3. That in respect of the agricultural land so sold by me a case was filed on 9-5-2016 in the court of SDO by Shri Chouthmal, grandson of Shri Raghunath about the title of this property from whom this land was purchased in 1965 by my father, Late Shri Jaganath. Therefore, during the period when the order passed by Commissioner (Appeals) was received by me, I got involved in this Court case.

4. That this case was decided against me by the SDO Court vide order dated 4-6-2018. Therefore, I had to take immediate steps for stay and filing appeal against this order. Accordingly, I got involved to protect my title in this land and filed appeal on 11-6-2018 before the Court of Revenue Appellate Authority, Kota for stay of the order of SDO Court. This case is still pending before the Revenue Appellate Authority, Kota. Because of all these litigations, the order received from the office of Commissioner (Appeals) slipped from my mind and I could not consult my legal counsel about the future course of action to be taken against the order of Commissioner (Appeals).

5. That in the last week of July, 2018 when I was looking in to the old papers, I noticed that I have not consulted my counsel against the action to be taken in respect of the order of Commissioner (Appeals). Accordingly, I approached him on 30-7-2018 when I was told that appeal was required to be filed before ITAT within 60 days of the receipt of the order and therefore, he suggested me to consult M/s. Kalani & Company, Jaipur for future course of action.

6. That when I approached M/s. Kalani & Co., Jaipur on 31-7-2018, I was advised to file the appeal before the Hon’ble ITAT with a prayer to condone the delay in filing the appeal.”

We note that the assessee has also filed the orders passed by the Revenue Appellate Authority whereby the order of the SDO was stayed and the matter was still pending before the Revenue Appellate Authority. The reason explained by the assessee in the affidavit are found to be correct as there was an order of SDO against the assessee whereby the title of the assessee over the land in question was held to be invalid. Thus, when the subject matter of the dispute in the appeal itself was under challenge in the proceedings before the SDO and thereafter the assessee filed the appeal before the Revenue Appellate Authority then the reasons and cause of delay explained by the assessee having involved in protecting the title of the land by contesting the case before the SDO as well as by filing the appeal before the Revenue Appellate Authority is a reasonable explanation. Accordingly, we satisfy that the assessee was having a reasonable cause for not filing the appeal within the period of limitation. Hence, we condone the delay of 91 days in filing the present appeal.

6. Now we decide the appeal on merits. In this appeal, the assessee has raised following grounds of appeal :–

“1. The learned Commissioner (Appeals) has erred on facts and in law in confirming the disallowance of indexed cost of improvement to the extent of Rs. 6,75,930 in computing income from long term capital gain.

2. The learned Commissioner (Appeals) has erred on facts and in law in not allowing the claim of deduction under section 54B to the extent of Rs. 18,26,320 on the ground that the agriculture land purchased for Rs. 7 lakhs on 16-5-2012 in the name of the son is before the date of transfer of agriculture land sold by the assessee and that the expenditure of Rs. 10,11,000 incurred on such land is not eligible for deduction. He has further erred in not considering the stamp duty expenses of Rs. 1,15,320 incurred on purchase of such land in considering the claim of deduction under section 54B.

3. The learned Commissioner (Appeals) has erred on facts and in law in considering the cost of the property on which deduction under section 54F is claimed at Rs. 38,21,640 as against Rs. 45,65,000 claimed by the assessee and thereby, restricting the claim of deduction under section 54F at Rs. 20,07,687 as against Rs. 27,39,676 claimed by the assessee.

4. The assessee craves to amend, alter and modify any of the grounds of appeal.

5. The appropriate cost be awarded to the assessee.”

7. Ground No. 1 of the appeal is regarding disallowance of indexed cost of improvement amounting to Rs. 6,75,930 while computing the long-term capital gain. The assessee sold the agricultural land for a consideration of Rs. 88.00 lacs vide sale agreement dated 11-6-2013 and subsequently a sale deed was executed on 22-9-2015. Since the stamp duty valuation was taken at Rs. 1,17,95,288, therefore, the full value consideration under section 50C of the Act was adopted at Rs. 1,17,95,288. The assessee claimed indexed cost of improvement at Rs. 42,12,292 which includes the indexed cost in respect of the expenditure incurred for land levelling cost of Rs. 89,980 in the year 1984-85. The said claim of Rs. 6,75,930 towards indexed cost of land levelling cost was disallowed by the assessing officer as the assessee did not file any supporting evidence. The assessee submitted the receipt of the said expenditure before the learned Commissioner (Appeals), however, the learned Commissioner (Appeals) did not accept the claim of the assessee on the ground that all genuine and allowable cost of improvement has been allowed.

8. Before us, the learned AR has referred to the copy of the receipt dated 25-5-1984 and submitted that since it was an old record and the assessee could not trace at the time of assessment proceedings, however, the assessee filed the said receipt before the learned Commissioner (Appeals) which shows that the assessee got the work of land levelling and incurred the said expenditure. Thus, the learned AR has submitted that the denial of claim without considering the supporting evidence is not justified.

9. On the other hand, the learned DR has relied upon the orders of the authorities below and submitted that the receipt filed by the assessee is an afterthought evidence as the assessee has failed to establish the requirement of levelling of the land in the year 1984-85.

10. We have considered the rival submissions as well as relevant material on record. We note that the assessing officer has denied the claim of cost of improvement to the extent of Rs. 6,75,930 towards the land levelling cost of Rs. 89,980 claimed to have been incurred in the year 1984 for want of any supporting evidence. The assessee filed the receipt of the said expenditure before the learned Commissioner (Appeals). We have gone through the receipt filed by the assessee which is placed at page No. 52 of the paper book and found that the said receipt contains all the details of the tractor with registration number and owner of the tractor who has issued the receipt. The nature of work done alongwith the rate as well as the total amount raised against the said work. It is stated in the said receipt that the levelling of the land was got done for the purpose of irrigation from canal though subsequently the assessee also got the tube well bored in the land itself. Thus, having regard to the area of the land and the contents of the receipt we find that the claim of expenditure incurred in the year 1984 for land levelling has been established by the assessee by production of the said receipt. Accordingly, the claim of the assessee deserves to be allowed. We direct the assessing officer to allow the claim of the assessee for indexed cost of improvement of land at Rs. 6,75,930. Hence, this ground of the assessee’s appeal stands allowed.

11. Ground No. 2 of the appeal is regarding disallowance of claim under section 54B of the Act to the extent of Rs. 18,26,320. The assessee claimed deduction under section 54B of Rs. 48,43,320 which includes purchase of agricultural land of Rs. 7.00 lacs on 16-5-2012 in the name of son and the expenditure on improvement of the said land of Rs. 10,11,000 including the cost of construction of two rooms and further the stamp duty paid by the assessee in respect of another agricultural land purchased on 5-7-2013. The learned AR of the assessee has submitted that the learned Commissioner (Appeals) while deciding the claim of deduction under section 54B of the Act has confirmed the disallowance in respect of the agricultural land purchased on 16-5-2012. However, the assessee received the consideration in respect of the land sold at the time of the agreement dated 29-12-2011 thus, the learned AR has submitted that the said consideration to the extent of Rs. 70.00 lacs received at the time of first agreement dated 29-12-2011 was invested in purchase of agricultural land and therefore, the agricultural land purchased of Rs. 7.00 lacs on 16-5-2012 is eligible for deduction under section 54B of the Act. The learned AR has pointed out that though there was subsequent agreement dated 11-6-2013 and thereafter the sale deed was executed on 22-9-2015, however, the assessee received part consideration at the time of first agreement to sell dated 29-12-2011. Hence, the learned AR has submitted that once the sale consideration received against the sale of the land in question was used for purchase of agricultural land then the claim should not be denied on technical reasons.

12. On the other hand, the learned DR has submitted that the provisions of section 54B of the Act clearly envisaged that the deduction is allowable only in respect of the agricultural land purchased after the sale of existing agricultural land. Thus, it is the deduction allowed only when the capital gain is used for purchase of agricultural land within a period of two years after the date of transfer and not before the transfer. He has relied upon the orders of the authorities below.

13. We have considered the rival submissions as well as the relevant material on record. The provisions of section 54B of the Act set out the conditions for allowing the deduction in respect of the capital gain arising from transfer of agricultural land if the assessee has purchased within a period of two years, any other land for being used for agricultural purposes. For ready reference, we quote the provisions of section 54B of the Act :–

“54B. Capital gain on transfer of land used for agricultural purposes not to be charged in certain cases.–(1) [Subject to the provisions of sub-section (2), where the capital gain arises] from the transfer of a capital asset being land which, in the two years immediately preceding the date on which the transfer took place, was being used by [the assessee being an individual or his parent, or a Hindu undivided family] for agricultural purposes [(hereinafter referred to as the original asset)], and the assessee has, within a period of two years after that date, purchased any other land for being used for agricultural purposes, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,–

(i) if the amount of the capital gain is greater than the cost of the land so purchased (hereinafter referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase, the cost shall be nil; or

(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase, the cost shall be reduced, by the amount of the capital gain.]

(2) The amount of the capital gain which is not utilised by the assessee for the purchase of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset :

Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase of the new asset within the period specified in sub-section (1), then, —

(i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of two years from the date of the transfer of the original asset expires; and

(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.”

Thus, the provisions envisaged the benefit of deduction when the capital gain arising from the transfer of agricultural land is used for purchase of another agricultural land within a period of two years after the date of transfer. The Legislature has not intended to allow the claim in respect of the land purchased prior to such transfer as in the case of deduction under section 54 and 54F of the Act. Thus, the beneficiary provision has to be construed and interpreted strictly so far as the primary condition for eligibility to be satisfied though the other ancillary and procedural conditions regarding keeping the fund in the capital gain account scheme before due date of furnishing return of income can be construed liberally once the primary condition for eligibility of the deduction is satisfied. Even otherwise the assessee initially entered into an agreement to sell on 29-12-2011 and thereafter another agreement was entered into by the assessee on 11-6-2013, therefore, the first agreement was no more in existence when the parties have entered into a second agreement which has ultimately culminated in execution of sale deed on 22-9-2015. It is not the case that the first agreement dated 29-12-2011 was the basis of the execution of sale deed. Even otherwise the assessee has declared the transfer of the land in question for the year under consideration and not in the year relevant to the first agreement dated 29-12-2011. Therefore, if the contention of the learned AR of the assessee is accepted then the transfer itself would take place from the date of first agreement and the entire case has to be reversed back. Thus, having regard to the facts and circumstances of the case when the assessee himself has declared the transfer of the land in question vide agreement dated 11-6-2013 then the earlier agreement dated 29-12-2011 cannot be considered as a relevant document for the purpose of transfer of the land in question. There is no dispute that the land for Rs. 7.00 lacs was purchased by the assessee vide agreement dated 16-5-2012 which is prior to the sale declared by the assessee vide agreement dated 11-6-2013. Consequently, the said purchase prior to the sale of the existing land would not be allowable for deduction under section 54B of the Act.

13.1 The next grievance of the assessee is regarding the disallowance of expenditure of Rs. 10,11,000 claimed by the assessee on improvement of the said land which is purchased vide agreement dated 5-7-2013. Though the learned Commissioner (Appeals) has allowed the claim under section 54B of the Act to the extent of purchase cost of the said land, however, the claim of improvement was disallowed by the learned Commissioner (Appeals). We find that out of the said claim of Rs. 10,11,000, the assessee has incurred some amount in respect of levelling of the land and erecting boundary wall and the balance amount was incurred in respect of the construction of two rooms. As far as the expenditure incurred by the assessee for improvement of the agricultural and making it fit for agricultural operations, the said expenditure can be allowed as cost of the land itself. However, the expenditure incurred for construction of two rooms cannot be regarded as an expenditure incurred for the purpose of agricultural land. Hence we allow the part claim of the assessee to the extent of the expenditure incurred on improvement of the agricultural land and erection of boundary wall. The assessing officer is directed to re-compute the deduction under section 54B of the Act by allowing the said part of cost of improvement on the agricultural land.

13.2 The next grievance of the assessee in respect of the claim of deduction under section 54B of the Act is regarding the stamp duty expenditure was not taken as part of cost of purchase of land. The learned AR has referred to the order of the learned Commissioner (Appeals) and submitted that though the learned Commissioner (Appeals) has allowed the claim of deduction under section 54B of the Act in respect of the land purchased vide sale deed dated 5-7-2013, however, the stamp duty paid by the assessee of Rs. 66,410 was not included in the cost of purchase of land. We find that the stamp duty is part of cost of purchase of land and therefore while allowing the claim of deduction under section 54B of the Act, the total cost of land including the stamp duty has to be taken into consideration. Accordingly, we direct the assessing officer to consider the stamp duty paid by the assessee as part of the cost of purchase of agricultural land while computing the deduction under section 54B of the Act. Hence, this ground of assessee’s appeal is partly allowed.

14. Ground No. 3 of the appeal is regarding restricting the claim of deduction under section 54F of the Act to Rs. 20,07,687 as against Rs. 27,39,676 claimed by the assessee. We have heard the learned AR as well as the learned DR and considered the relevant material on record. The assessee purchased residential plot and then constructed a house. The assessee has claimed the cost of new house at Rs. 45,65,000 and filed a copy of valuation of a registered valuer in support of his claim. The learned Commissioner (Appeals) referred the matter of valuation of cost of the property to the DVO who has determined the cost of property at Rs. 38,21,640. The learned Commissioner (Appeals) has adopted the cost of new house estimated by the DVO and consequently restricted the deduction under section 54F of the Act to Rs. 20,07,687 as against the deduction claimed by the assessee of Rs. 27,39,676. The learned AR has pointed out that the assessee has purchased plot of land for construction of house at Rs. 8.50 lacs as per the agreement dated 17-8-2013 and also filed an affidavit of the seller to confirm the purchase consideration of the land. He has further contended that the DVO has adopted DLC rate at Rs. 5,46,840 ignoring the actual purchase consideration paid by the assessee. Further the DVO has not given any price acceleration while estimating the cost of construction of the house whereas the registered valuer has added the same @ 19.60% from the year 2012 to 2014. Thus, the learned AR has submitted that the cost of new house claimed by the assessee is based on the actual expenditure incurred by the assessee and shall be allowed for the purpose of deduction under section 54F of the Act.

15. On the other hand, the learned DR has relied upon the orders of the authorities below and submitted that the learned Commissioner (Appeals) has already allowed the claim of assessee to the extent of cost of new house determined by the DVO. The assessee has not pointed out any defect in the value determined by the DVO except raising the minor issues which is nothing but the subject matter of estimates.

16. Having considered the rival submissions as well as relevant material on record at the outset, we note that, so far as the purchase consideration of residential plot, the assessee has produced the evidence of Rs. 8.50 lacs as recorded in the purchase agreement dated 17-8-2013 and further an affidavit of the seller was filed by the assessee. Therefore, to the extent of the cost of plot of land in question is concerned when the assessee has produced the evidence of actual purchase consideration paid by the assessee then the question of estimation of the purchase consideration does not arise. Even otherwise when the land in question is within the village abadi land then the DLC rate adopted by the DVO is not proper. Hence, to the extent of the cost of purchase of land we allow the claim of assessee of Rs. 8.50 lacs being the actual purchase consideration paid by the assessee. As regards the cost of construction of the house, we find that the assessee has filed a valuation report of registered valuer estimating the cost of construction at Rs. 37,03,630 whereas the DVO has estimated the cost of construction at Rs. 32,74,800. Since the claim of assessee as well as the department is based on the estimated cost of construction determined by the respective valuers, therefore, it is a pure subject matter of estimate not based on actual expenditure incurred. Having regard to the facts and circumstances of the case when two separate estimates are the basis of claim of both the parties then to bring the controversy to an end we find it proper to estimate the cost of construction of the house as average of both the estimates made by the registered valuer as well as by the DVO. The assessing officer is directed to take the cost of construction of house as average of both the valuations done by the registered valuer and by the DVO. Hence, this ground of appeal is partly allowed.

17. In the result, appeal of the assessee is partly allowed.