Capital gains exemption admissible even if assessee didn’t get legal title to land due to pending litigation

Short Overview : The assessee had complied with conditions for grant of deduction under sections 54B inasmuch as he has utilised, within a period of two years from the date of transfer of capital asset, the capital gain in purchasing another land for being used for agricultural purposes, therefore, mere fact that assessee did not get legal title to the land could not be ground to deny benefit of deduction under sections 54B.

Assessee invested a sum of Rs. 4 crores by paying advance for purchase of agricultural lands and accordingly claimed deduction under sections 54B. AO denied deduction on the ground that due to pending litigation. Assessee did not get legal title to the land.

it is held that The assessee had complied with conditions for grant of deduction under sections 54B inasmuch as he has utilised, within a period of two years from the date of transfer of capital asset, the capital gain in purchasing another land for being used for agricultural purposes, therefore, mere fact that assessee did not get legal title to the land could not be ground to deny benefit of deduction under sections 54B.

Decision: In assessee’s favour.

Supported: CIT-II v. Kuldeep Singh in [ITA No. 117/2014, dt. 12-8-2014] : 2014 TaxPub(DT) 3685 (Del-HC) and CIT v. Sambandam Udaykumar (2012) 345 ITR 389 (Karn-HC) : 2012 TaxPub(DT) 1804 (Karn-HC).

IN THE ITAT, BANGALORE BENCH

N.V. VASUDEVAN, V.P. & JASON P. BOAZ, A.M.

Chinnappa Anthonappa v. Asstt. CIT

ITA No. 663/Bang/2015

31 July, 2019

Appellant by: B.S. Balachandran, Advocate

Respondent by: Vikas Suryavamshi, Additional Commissioner (Departmental Representative) (ITAT), Bengaluru.

ORDER

N.V. Vasudevan, V.P.

This appeal by the assessee is directed against the Order, dated 19-2-2015 of the Commissioner (Appeals)-4, Bangalore relating to assessment year 2010-11.

2. The issue involved in this appeal by the assessee is with regard to the validity of initiation of proceedings under sections 147 of the Income-Tax Act, 1961 (“the Act”) with regard to allowability of assessee to exemption under sections 54B of the Act.
3. There is a delay of two days in filing this appeal by the assessee before the Tribunal. The assessee is 84 year old senior citizen with health issues. Because of old age and ill-health, the assessee could not contact the counsel and file the appeal in time. The delay in filing the appeal is only two days and hence keeping in mind that there is no negligence or lack of diligence in filing the appeal belatedly, we condone the delay of two days in filing the appeal.
4. The assessee is an individual. He sold agricultural lands belonging to him in Sy.No. 165/17, Doraisanipalaya, Bilekahalli Village, Begur Hobli for a consideration of Rs. 6,95,00,000 under an agreement, dated 6-9-2007 whereby possession of the property was also delivered to the purchaser in assessment year 2008-09. The assessee deposited Rs. 6 crores in capital designated capital gain deposit account with Syndicate Bank, Jayanagar Market Branch on 14-12-2007. The provisions of section 54B of the Act are as follows :–

“Capital gain on transfer of land used for agricultural purposes not to be charged in certain cases.–54B.(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 or a parent of his 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.”

5. As can be seen from the provisions of section 54-B (2) of the Act, if the capital gain is not utilized as contemplated under sections 54-B(1) of the Act within the due date for filing return of income under sections 139 of the Act, to claim exemption/deduction, the Assessee has to deposit the capital gain in a specified account. As per proviso to section 54B(2), if the amount deposited in the capital gains account is not utilised wholly or partially for purchase of new asset within the period specified in sub-section (1) i.e., within a period of two year after the date of transfer of capital asset which gives rise to capital gain, then the amount not so utilised shall be charged under sections 45 as income of the previous year in which period of two years from the date of transfer of the original asset expires. In that case the capital gain will not be taxed in the year of transfer but will be taxed in the previous year within which it had to be utilized and if not so utilized it will be charged to capital tax in that year in which the period for utilization of the capital gain expires. This is how the deduction under sections 54B of the Act came up for consideration in assessment year 2010-11 even though the transfer of the capital asset which gave raise to capital gain was in assessment year 2008-09.
6. The assessee contemplated buying of another agricultural land and claimed exemption from tax of capital gain under sections 54B of the Act. As far as assessment year 2010-11 is concerned, the assessee had filed return of income on 20-5-2011. As to whether, there was any intimation under sections 143(1) or 143(3) order is not clear from the order of assessment passed under sections 143(3) read with section 147 of the Act. However, the assessment order mentions the fact that assessment was being reopened by issue of notice under sections 148 of the Act as it was found that assessee did not reinvest the sale proceeds received on transfer of agricultural land which was deposited in the capital gain scheme account within the stipulated time. In the reassessment proceedings, the assessee submitted that the net capital gain of transfer of capital asset was Rs. 5,24,56,600 which was not disputed because this is the sum brought to tax as capital gain (long term) in the reassessment proceedings.
7. The assessee submitted that it had utilised the capital gain for purchase of another agricultural land and paid the following sums to the following persons under agreement for sale:–

(a)	Sale Agreement with Ramakrishna K.C. and Amount paid to the Vendor	Rs. 1,45,25,000
(b)	Balance Due to Ramakrishna K.C. Payable at the time of Registration	Rs. 94,75,000
(c)	Sale Agreement with Narayanappa & Others Amount paid to the Vendor	Rs. 1,60,00,000
(d)	Sale Agreement with Narayanappa & Others Amount paid to the Vendor	Rs. 38.00,000
(e)	Probable Stamp Duty and Reg. Fee	Rs. 30.00.000
		Rs. 4,68,00,000

8. Copy of sale agreement between assessee andNarayanappa & Ors., dated 3-3-2008 is at page 19 to 45 of assessee’s PB. Similarly, another agreement, dated 26-11-2008 between Narayanappa & Ors. and assessee is also at pages 46 to 57 of assessee’s PB. The assessee pointed out that because of disputes regarding title of the Vendors under these agreements in courts of law, the sale could not be completed. The assessee also filed copy of agreement with Ramakrishna K.C. and assessee, dated 25-4-2016. Even in respect of the property agreed to be purchased from Ramakrishna K.C., there were disputes in the courts of law and therefore the sale could not be completed. Stand of the assessee was that as per the requirements of section 54B of the Act, capital gain had to be utilised in purchase of another agricultural land and the fact that assessee had paid the entire sum of Rs. 4,68,00,000 out of the capital gain within the period contemplated under sections 54B of the Act was not disputed. The fact that registration and other formalities could not be completed owing to circumstances beyond the control of assessee cannot be the basis on which deduction under sections 54B of the Act can be denied to the assessee. The assessee in this regard had placed reliance on the decision of the Hon’ble High Court of Karnataka in the case of CIT v. Sambandam Udaykumar in ITA No. 175 of 2012, Judgment, dated 15-2-2012 wherein the Hon’ble High Court took the view in the context of provisions of section 54F of the Act which requires construction of a residential house for claiming exemption.

The Court found that capital gain had been invested for construction, but the construction of house was not complete. The Court took the view that requirements of section 54F of the Act were completed by the assessee inasmuch as within the period required by provisions of section 54F of the Act, capital gain was invested in construction of residential house, but the fact that actual construction was completed beyond the period contemplated under sections 54F of the Act was no ground to deny the benefit of deduction under sections 54F. Applying the same analogy, the assessee pleaded that the capital gain in question should be allowed as deduction under sections 54B of the Act.

9. The assessing officer, however, did not allow the claim of assessee and he proceeded to hold as follows :–

“According to section 54B cited above, the assessee ought to have purchased a property within the stipulated period to claim the exemption under section 54B.In the instant case the assessee has paid an advance and entered into an agreement to buy a property however, the property was not bought by the assessee even till date, hence the assessee is not eligible for the deduction under section 54B of the Income Tax Act, 1961. Accordingly, the amount of Rs. 3,98,00,000 claimed as consideration required to be paid for purchase of agricultural land and reduced from the net capital gain is disallowed. The claim o deduction under section 54B can only be allowed if the conditions are fulfilled. In this case as the assessee couldn’t fulfill the condition as required under section 54B, he is not eligible for the deduction. The addition comes to Rs. 3,98,00,000.

The LTCG on transfer of agricultural land is re-computed as follows:–

Sale value received		Rs. 7,25,00,000
Less:
Amount paid to
Smt. Nirmala Kumari	Rs. 30,00,000
Expenses incidental to transfer	Rs. 41,50,000
Indexed cost of acquisition	Rs. 1,28,93,400
	—	Rs. 2,00,43,400
Net capital gain chargeable to tax		Rs. 5,24,56,600 “

10. Accordingly, capital gain in question was brought to tax by the assessing officer.
11. Before the Commissioner (Appeals), the assessee challenged the initiation of reassessment proceedings on the ground that reasons recorded was not provided to the assessee and that there was no belief regarding escapement of income chargeable to tax. This ground was rejected by the Commissioner (Appeals) by observing that from the records it is seen that assessee was provided with reasons recorded by the assessing officer and assessee’s representative filed objections before the assessing officer. The Commissioner (Appeals) accordingly rejected the claim of assessee.
12. With regard to deduction under sections 54B of the Act, the Commissioner (Appeals) held that thought the amount of capital gain was invested in purchase of agricultural land, the assessee failed to get valid title in his name within the stipulated period and therefore assessee was not entitled to deduction under sections 54B of the Act. The assessee had, before the Commissioner (Appeals), relied on the decision of the Hon’ble Delhi High Court in the case ofCIT v. Kuldeep Singh (2014) 49 taxmann.com 167 (Delhi) wherein the Hon’ble Court took the view that if the assessee enters into an agreement with the builder within the prescribed period contemplated under sections 54 of the Act, i.e., two years from the date of transfer of capital asset, the assessee’s claim for deduction should be allowed, even though the assessee did not get legal ownership of the flat in which he had invested the capital gain. This decision was, however, distinguished by the Commissioner (Appeals) with the following observations:–

“7. I find that this decision is distinguishable on facts. The case before the Hon’ble Court was that advance had been paid to the builder and the same was linked to the stage of construction, moreover there was a very high degree of certainty in completing the transaction of purchase. Whereas in the instant case, there is no certainty that the assessee was going to win the litigation in his favour and the whole matter is dependent on merits of the case before the judiciary. Hence, there is no degree of certainty at all. On account of these reasons, I am in agreement with the assessing officer that the exemption/deduction needs to be denied and his action is hereby upheld.”

13. Aggrieved by the aforesaid order of the Commissioner (Appeals), the assessee is in appeal before the Tribunal.
14. We have heard the rival submissions. The learned counsel for the assessee reiterated the submissions made before the revenue authorities and further placed reliance on the decision of ITAT Chennai Bench in the case ofSmt. V.A. Tarabai v. DCIT, ITA No. 1894(Mds)/2011, dated 12-1-2012, wherein the Tribunal took the view that when there are disputes pending in court, the assessee cannot be expected to comply with the conditions of deduction under the Income Tax Act.
15. The learned Departmental Representative relied on the order of revenue authorities.
16. This appeal was heard on several occasions. On 6-2-2018, the learned Departmental Representative was asked to produce the assessment records to verify the reasons recorded by the assessing officer for initiating proceedings under sections 147 of the Act. On 21-5-2018, time was given to the department to comply with the directions, dated 6-2-2018, but the department did not produce the records to show what was the reasons recorded by the assessing officer for initiating proceedings under sections 147 of the Act. On 24-5-2018, another opportunity was given to the department, but the department did not produce the relevant assessment records. Later, on 25-6-2018 as well as 3-12-2018 and 25-3-2019, the department did not comply with the directions of Tribunal.
17. When the appeal was finally heard on 27-3-2019, even on this date, the department could not produce the relevant records. The assessee had pleaded for copy of reasons recorded under the RTI Act, 2005 and in response to the said application, the assessing officer has given a copy of the assessment order to the assessee, but has informed the assessee that assessment records for assessment year 2010-11 was not readily traceable and reasons recorded would be furnished as soon as records are available. Even in the proceedings before the Tribunal, the department has informed that appeals may be decided on merits, rather than on validity of initiation of proceedings under sections 147 of the Act.
18. We are of the view that initiation of reassessment proceedings have not been established to have been in accordance with the requirements of section 147 of the Act. There is no material brought to our notice that reasons were recorded before issue of notice under sections 148 of the Act which is a sine quo non for valid initiation of reassessment proceedings under sections 147 of the Act. Apart from the above, there appears to be no tangible material coming into the possession of assessing officer after expiry of period of limitation for framing assessment order under sections 143(3) of the Act based on which, he came to the conclusion that there has been escapement of income chargeable to tax.

The department has also not been able to show before the Tribunal the reasons recorded to justify the validity of initiation of reassessment proceedings under sections 147. In these circumstances, drawing an adverse inference, we hold that initiation of reassessment proceedings under sections 147 of the Act were not valid.

19. As far as merits of the addition is concerned, it is seen that the assessee has invested a sum of Rs. 4.68 crores by paying advance for purchase of agricultural lands. It is not disputed that had the sale been completed pursuant to those agreements, the assessee would be entitled to benefits of deduction under sections 54B of the Act. It is also not disputed that due to pending litigation, the sale could not be completed between these parties. However, in respect of agreement between assessee and Narayanappa & Others., the litigation has ended and assessee had got title of property on 3-7-2019, copy of the sale deed was filed before us. We are of the view that even otherwise, the assessee has complied with the conditions for grant of deduction under sections 54B of the Act inasmuch as he has utilised, within a period of two years from the date of transfer of capital asset, the capital gain in purchasing another land for being used for agricultural purposes. The fact that the assessee did not get legal title to the lands is no ground to deny the benefit of deduction under sections 54B. The decision of the Hon’ble Delhi High Court in the case ofKuldeep Singh (supra) as well as the decision of the Hon’ble High Court of Karnataka in the case of Sambandam Udaykumar (supra) clearly supports the plea of assessee. In the given facts and circumstances of the case, the assessee should be entitled to benefit of deduction under sections 54B of the Act. We hold and direct accordingly. To the extent capital gain over and above the sum of Rs. 4.68 crores excluding the stamp duty and registration fees but including the actual stamp duty and registration charges paid for acquiring title to the property from Narayanappa & Ors. vide Sale Deed, dated 3-7-2019, the assessee should be allowed deduction under sections 54B of the Act. These observations are only made by way of abundant caution. The initiation of reassessment proceedings has already been held to be bad in law by us in the earlier part of this order.
20. In the result, the appeal by the assessee is allowed.