Benefit of Sec. 54G exemption isn’t available if land was notified as urban land after its sale: High Court

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Benefit of Sec. 54G exemption isn’t available if land was notified as urban land after its sale: High Court

Fabsun Engineering (P.) Ltd. v. ITO – [2021] 123 taxmann.com 132 (Karnataka)

Short overview of the case:

Assessee had a factory at Anekal, Bangalore. It decided to shift its operations from to a district in the State of Andhra Pradesh.

 The plot held by the assessee was sold on 26-9-1997 and the sale proceeds were invested in an industrial site located at District Ananthapur, Andhra Pradesh.

Assessee filed its return of income claiming exemption under Section 54G against long-term capital gains.

Assessing Officer (AO) rejected assessee’s claim on the ground that Bangalore was not an urban area.

Assessee challenged the order passed by AO. Both ITAT and CIT(A) upheld the order passed by AO.

Assessee contended that the Central Government vide Notification dated 27-4-2006 had declared Anekal to be an urban area for the purposes of Section 54G.

Revenue submitted that in the absence of any express legislative intent to give the Notification on which reliance was placed had a retrospective effect, the Notification could not be treated to have a retrospective effect.

 It was also urged that exemption Notification or clause should be interpreted strictly and the non-compliance of the same would render the assessee ineligible to claim exemption.

On further appeal, Karnataka High Court held that Explanation to section 54G(1) expressly empowers the Central Government to declare an area to be an urban area having regard to population, concentration of industries, need for proper planning of the area and other factors. In exercise of such power, the Central Government had issued notification on 27-4-2006 to declare Anekal where the factory of assessee was situated to be an urban area for the purposes of Section 54G.

However, from the perusal of the Notification, no inference can be drawn that the same have any retrospective operation.

 The Notification comes into force on the date of its publication in the Official Gazette.

Thus, assessee was not eligible for exemption under Section 54G.

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