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Investment out of borrowed funds do not affect capital gain exemption U/s 54 or 54F
There are various provisions which offers exemption from the amount of Long Term Capital Gain (LTCG). One such provision is by way of Section 54 of the Income-tax Act, 1961 which provides for exemption in respect of long-term capital gain arising from the transfer of a residential house by an individuals and Hindu undivided families. It is subject to various stipulations, terms & conditions.
One of the conditions is that transferor must have purchased a residential house within a period of one year before or two years after the date of transfer. Alternatively, assessee should construct a residential house within a period of three years from the date of the transfer of the original house.
Almost similar conditions persist in section 54F which provides for investment of sale proceeds of non-residential capital assets in residential house.
One of the common conditions arises in both this section is whether the same amount need to be invested for claiming an exemption u/s 54 & U/s 54F?
If an assessee sells the residential house or other capital asset and invests it in Gold/shares or other assets and thereafter invests subsequently in the house property within prescribed period by availing housing loan, whether he will be eligible for exemption u/s 54 or 54F? The question emerges, whether a distinction be drawn on the basis of source of funds r not ?
Whether the exemption can be denied to the extent sale proceeds have been used for other purposes and the assessee’s fund is not utilized for purchase of house proeprty?
It may be noted here that neither the law nor any circular required the identity of the amount received on sale to be utilized for purpose of section 54F and other relevant provisions.
In ITO vs. K.C. Gopalan (2000) 162 CTR (Ker) 566, the assessee sold 93.33 cents of land along with building. There was a claim under section 54 in respect of the ‘capital gain’ on the ground that the amount realized out of the sale of the property was utilized for the construction of a house at Calicut. This claim was not accepted by the Assessing Officer on the ground that the sale price was not utilized for the construction of the building and it was deposited in private banks. The Court held that the assessee has to construct or purchase a house property for his own residence in order to get the benefit of section 54. The wording of the section itself would make if clear that the law does not insist that the sale consideration obtained by the assessee itself should be utilized for the purchase of house property.
In Mrs. Prema P. Shah vs. ITO (2006) 101 TTJ (Mumbai) 849, the assessee filed the return showing the taxable income of Rs. 33,570 on 31st December, 1993. During the previous year relevant to the assessment year 1993-94, assessee sold residential property for Rs. 60 lakhs. It was jointly owned by the assessee and Mrs. Prema P. Shah. It was purchased for Rs. 14 lakhs on 29th March, 1983 and sold on 4th April, 1992 for the aforementioned price. Assessee claimed exemption under section 54, showing long-term capital gains as nil. The Revenue authorities rejected assessee’s claim under section 54 on the ground that borrowed amount and foreign earnings were invested and not the same sale consideration. It was held that the argument of the Revenue that the same amount should have been utilized for the acquisition of new asset, cannot be accepted in view of the decision of the Tribunal, in the case of Bombay Housing Corporation vs. Asstt. CIT (2002) 76 TTJ (Mumbai) 25. In this case the Tribunal held that even if an assessee borrows required funds and satisfies the conditions relating to investment in specified assets, he is entitled to exemption. There is no requirement for claiming exemption under section 54 that the same amount of sale consideration should be utilized for purchasing the property and even borrowed funds can be utilized for that purpose.
In Asstt. CIT vs. Dr. P.S. Pasricha (2008) 20 SOT 468 (Mumbai), the Tribunal has decided that the requirement of section 54 is that the assessee should acquire a residential house within the period of one year before or two years after the date on which transfer took place. Nowhere, it has been mentioned that the same funds must be utilized for the purchase of another residential house. The requirement of the law is that the assessee should purchase a residential house within the specified period and source of funds is quite irrelevant.
There is nothing in section 54F to suggest that the same funds from the sale of original asset should go into the purchase of the new asset. If this were to be the intention of the legislature, then it would not have provided relief for a situation wherein the new asset was purchased before the sale of the old asset.
In my view It is sufficient compliance of section 54F if the new asset is purchased within one year before or two years after the sale of the original asset.
One may refer the decision of the Supreme Court in the case of CIT vs. T.N. Aravinda Reddy (1979) 12 CTR (SC) 423 : (1979) 120 ITR 46 (SC) wherein assessee sold his old house attracting capital gains & acquired full ownership of another house of which he was already a co-owner with the brothers by obtaining release deeds executed by his brothers in his favour.
The consideration for the release deed was Rs. 30,000 for each brother, which was adjusted against certain other moneys due to the assessee from his brothers. The Supreme Court held that the word “purchase” must be given its common meaning of buying for a price by payment in any form, there being no stress on the manner or source by which the new asset was acquired.
Here is the judgment in the case of Bombay Housing Corporation Vs. ACIT which may be relevant for the taxpayers. The same is produced hereunder
BOMBAY HOUSING CORPORATION vs. ASSISTANT COMMISSIONER OF INCOME TAX
ITAT, MUMBAI ‘C’ BENCH
R.V. Easwar, J.M. & Satish Chandra, A.M.
ITA Nos. 2685/Mum/1996 & 2694/Mum/1998; Asst. yr. 1992-93
14th February, 2001
(2001) 20 CCH 0055 MumTrib
(2002) 76 TTJ 0025 : (2002) 81 ITD 0545
Legislation Referred to
S.E. Dastur & P.J. Pardiwalla, for the Appellant : H. Srinivasulu, for the Respondent
R.V. EASWAR, J.M.: :
These two appeals were heard together and are disposed of by a common order. Both relate to the same assessment year. One of the appeals arises out of the order of the CIT(A) dt. 30th Jan., 1996, passed, in appeal against the assessment order under s. 143(3) of the Act. The other appeal arises out of the order of the CIT(A) dt. 19th Dec., 1997, passed in appeal against the order of the AO dt. 21st Jan., 1997, under s. 143(3) r/w s. 250. What happened was that by the order dt. 30th Jan., 1996, the CIT(A) had restored the issue relating to the exemption under s. 54E to the AO for de novo consideration taking note of certain contentions raised by the assessee. The AO examined the case afresh pursuant to the directions of the CIT(A) and denied the claim for exemption again. This order was also confirmed by the CIT(A). Thus, there are two appeals.
- The first issue which is covered by the first four grounds in ITA No. 2685/Mum/96 relates to the income to be assessed after the disclosure made by the assessee under the Kar Vivad Samadhan Scheme. The assessee is a builder engaged in the business of development and construction of real estate. From the asst. yr. 1983-84 to the asst. yr. 1990-91, the assessee was declaring a percentage of the sale price as its profits for income-tax purposes. In the asst. yr. 1991-92, the AO noted that the project undertaking by the assessee was completed. The project consisted of three buildings. In respect of two buildings, they were fully sold out and in the third building, 50 out of the 130 flats has been sold out. This was the reason for the view of the AO that the project has been completed in the asst. yr. 1991-92. The assessee filed applications under the Kar Vivad Samadhan Scheme of 1998. The assessee filed applications under the Kar Vivad Samadhan Scheme of 1998 and declared a total income of Rs. 2,43,87,406 for the asst. yr. 1991-92, which is the figure adopted by the AO in the assessment. However, in the assessment for the asst. yr. 1992-93 which is under appeal, the AO repealed the assessment made by him for the asst. yr. 1991-92 and estimated the profit at 15 per cent. He arrived at the business income at Rs. 2,46,85,149 as under :
|Total profit on the project as a whole
|Less : Profit which is already disclosed in earlier years (including current year)
|Add : Current year’s profit as per computation of the assessee
- This was confirmed by the CIT(A). The contention of the assessee before the Tribunal is that either a direction should be issued for excluding the amount of Rs. 75,30,524 plus the amount of Rs. 2,43,87,406 (amount declared under the KVSS) or there should be a direction to give credit for what has been assessed in the past including the amount declared for the asst. yr. 1991-92 under KVSS. The learned Departmental Representative does not dispute the contention. We, therefore, direct the AO to compute the business income of the assessee after giving credit for what has been assessed in the past upto the asst. yr. 1991-92 including the amount declared under KVSS. This direction disposes of ground Nos. 1 to 4.
- Ground Nos. 5 to 7 in ITA No. 2685/Mum/96 and ground Nos. 1 to 3 in ITA No. 2694/Mum/98 relate to the same issue viz., whether the assessee is entitled to deduction under s. 54E of the Act. The brief facts giving rise to the issue are that during the relevant accounting year, the assessee disposed of its entire business as a going concern for a price of Rs. 3.55 crores. This was as per the balance sheet as on 26th Sept., 1991. The business was sold to M/s Monde Consultants (P) Ltd. The sale price was received in full between 27th Sept., 1991, and 22nd Oct., 1991. A sum of Rs. 84 lakhs was received on 27th Sept., 1991, and this was paid over to B.C. Vaswani (HUF) for the credit of different partners of the assessee-firm on the very same day. The amount of Rs. 1.5 crores received on 10th Oct., 1991, was paid to B.C. Vaswami (HUF) and to Vaswani Trust for the credit of the partners of the assessee-firm on the very same day. Similarly, the balance amount of Rs. 1.21 crores received on 22nd Oct., 1991, was paid to Vaswani Trust for the credit of the assessee’s partners on the same day. All these details have been annexed as Annexure-J to the assessment order and there is no dispute about them. On 28th Oct., 1991, the assessee borrowed a sum of Rs. 1.42 crores from M/s Vaswani Trust and the borrowed amount was invested in IDBI Bonds on 30th Oct., 1991, which are specified assets for the purpose of s. 54E.
- Before the AO, the assessee claimed the benefit of deduction under s. 54E proportionate to the amount invested in the IDBI Bonds. The AO was of the view that s. 54E contemplated the investment or deposit of the sale consideration itself in the specified assets and inasmuch as the assessee has diverted the sale consideration of Rs. 3.55 crores to various partners and has made the investment in the bonds by borrowing an amount of Rs. 1.42 crores from Vaswani Trust, the exemption as claimed cannot be given. The CIT(A) has endorsed the view taken by the AO and hence the present grounds.
- The contention of Mr. Dastur, the learned counsel for the assessee, runs like this. He points out to the phraseology of s. 54E which requires that the assessee should invest or deposit the “whole or any part of the net consideration” which according to him is different from saying that the assessee should invest moiles “out of the whole or any part of the net consideration” He says that the only requirement of the section, having regard to the object, which is to encourage certain sectors of the economy, is that funds should be channelised into these sectors and it is not strictly necessary to show that those funds came out of the sale consideration and it is sufficient if the required funds, whatever be the source are invested or deposited in the specified assets. Mr. Dastur further poses the question as to how as assessee, claiming exemption under the section, can invest or deposit the net consideration if the consideration has not been received but has merely accrued to him. He submits that since the law permits exemption to be claimed irrespective of whether the consideration has been actually received or has merely accrued, it is clear that the intention of the section is that even if an assessee borrows the required funds and satisfies the condition relating to investment is specified assets, he should be entitled to the exemption. He contrasts the provisions of s. 88(2) of the Act which clearly say that the deposit or investment by the assessee should be “out of his income chargeable to tax”. He also points out that both the case of exchange of capital assets as also a transaction in the nature of part-performance as mentioned in s. 2(47)(v) are also to be treated as transfers for the purpose of capital gains and in such cases, the assessee, in the very nature of things could not have received any monetary consideration or full consideration and it would be absurd to insist on investment or deposit “out of” the sale consideration. The section according to Mr. Dastur, should be so interpreted as to be amenable to uniform application to all cases covered by it and any kind of discriminatory or differentiating treatment should be avoided. He also pointed out that the section itself gives 6 months time which is an indication that the legislature did not intend that the sale consideration itself should be invested in the specified assets.
- In support of the above contentions, Mr. Dastur relied on the following orders/judgments :
(1) Addl. CIT vs. Surat Art. Silk Mfrs. Association (1979) 13 CTR (SC) 378 : (1980) 121 ITR 1 (SC);
(2) CED vs. Roshan Jahangir Gandhi (1994) 117 CTR (SC) 47 : (1994) 205 ITR 428 (SC);
(3) Santosh Agarwal (1989) 156 ITR 323 (SC) (sic); and
(4) IAC vs. Jayantilal Chimanlal (HUF) (1988) 32 TTJ (Ahd) 110 : (1988) 26 ITD 1 (Ahd).
With reference to the judgment of the Andhra Pradesh High Court, in S. Gopal Reddy vs. CIT (1990) 181 ITR 378 (AP), which has been heavily relied upon by the IT authorities, Mr. Dastur pointed out that this decision in distinguishable on facts inasmuch as it was a case of compulsory acquisition of the land and not a voluntary sale and in this judgment itself, the High Court has recognised the injustice that would be caused if investment in the specified asset within the time-limit prescribed by the section from the date of acquisition is insisted upon in a case where the additional compensation is received after protracted litigation. Accordingly, Mr. Dastur contended that while interpreting a beneficial provision, the injustice such interpretation is likely to cause should always be eschewed.
- The learned senior Departmental Representative strongly relied on the orders of the IT authorities especially the order of the CIT(A) in the second round of the proceedings. He drew our attention to pp. 13 and 15 of the order and submitted that the observations therein accurately sum up the factual and the legal position and should be accepted by the Tribunal. His main contention was that the section in terms required the net consideration to be immobilised and it is such net consideration which has to be channelled into the specified assets and not any amount which the assessee may come to possess. He submitted that if the interpretation placed by the assessee on the section is accepted, that would frustrate the very object of the section. He, therefore, submitted that the orders of the IT authorities denying the exemption should be upheld.
- On a careful consideration of the rival contentions, we are of the view that the better or more reasonable interpretation would be that placed on the section by Mr. Dastur. His contention that the section should be so interpreted as to apply equally to all cases of transfers covered by the statutory provisions is, with respect, unexceptionable. Whatever may be the position with regard to a case of “exchange”, so far as an assessee in whose case the consideration has not been received but has merely been promised or has merely accrued in his favour is concerned, he would not be in a position to meet the deadline of 6 months from the date of the sale for making the investment in the specified asset. If for some reason, the vendee defaults and delays the payment of the consideration beyond 6 months, the transferor-assessee should not suffer. He should also be able to avail of the exemption and the only way he can do is to interpret the section in such a manner as to permit him to borrow monies equal to the consideration and invest the same in the specified assets. If this can be permitted in the case of accrual, there is no reason why it should not be permitted even in a case where the consideration is actually received but for some reason or the other is tied up and could not be released in time for making the investment. There can be numerous instances where an assessee finds himself in such a situation. The present case is a case in point. What the section requires as we understand it, is that it is necessary for the assessee only to invest an amount which is arithmetically equal to the net consideration in the specified assets. It cannot be the intention of the section that the other normal transactions or activities of an assessee should be curtailed or that the sale price should be immobilised. One example which immediately comes to our mind is as to what would happen if the sale price is lost by theft and the deadline of 6 months is about to be crossed. In such a case, the assessee should not be deadline of 6 months is about to be crossed. In such a case, the assessee should not be denied the exemption if he, in a desperate attempt to avail of the exemption, resorts to borrowing and utilises the borrowed amount for investment. No distinction can be made between an assessee who is forced to borrow for the purpose of making the investment and another assessee who effects the borrowing not because of forced circumstances, but because he consciously or deliberately used the sale consideration for a different purpose. As we have already seen the object of the provision is that funds should be channelised into certain sectors and this object is achieved in both the cases. We are of the view that in giving effect to the object, we should shun a wooden approach.
- We suppose that the requirement of the section would have been met if the assessee had first paid over the amount of Rs. 1.42 crores borrowed from Vaswani Trust to its partners and thereafter taken out an equal amount from the partners’ accounts for being invested in the bonds. In that case, it would not have been possible to say that the bonds were purchased out of borrowed monies. The amount invested would have been traceable to the sale proceeds advanced to the partners. The facts that instead of doing that, the borrowed amount was directly invested in the bonds should not, in our view, make any difference to the principle.
- The order of the Ahmedabad Bench of the Tribunal cited supra is directly in point and has adopted the purposive interpretation to give the benefit to the assessee under s. 54E under identical circumstances. The judgment of the Supreme Court in Rohan Jahangir Gandhi’s case (supra) is fully in support of Mr. Dastur’s contention. That case arose under the ED Act. The accountable person was entitled to reduce the estate duty proportionate to the amount of capital gains tax paid on assets transferred within two years of death under s. 50B of the ED Act. That section gave relief in respect of estate duty by a sum which bears to the total amount of tax so paid the same proportion as the amount paid towards estate duty out of the proceeds of transfer bears to the gross proceeds of such transfer”. Note that the relief was given in respect of the amount paid as estate duty out of the proceeds of the transfer. The accountable person had borrowed monies for payment of provisional estate duty. She sold shares to the person from whom she had borrowed monies and paid capital gains tax. She claimed rebate from the estate duty proportionate to the capital gains paid under s. 50B. The claim was refused by the authorities on the ground that the duty was not paid “out of the proceeds” of the transfer. The accountable person’s claim was however, accepted by the High Court as well as the Supreme Court. At p. 432 of the report, it was held by the Supreme Court that a strict construction cannot be adopted with regard to a provision dealing with or relating to a tax and such a construction should be limited to a provision imposing a tax. It held further that the interpretation placed by the High Court on s. 50B is an eminently arguable one, though another view may also be possible and that if two views are possible. It is the view which advances the cause of justice that should be preferred. It may be seen that in the case before the Supreme Court also, the estate duty was paid out of the borrowings and not out of the proceeds of the transfer of shares. But still, adopting a purposive interpretation or an interpretation that would advance the cause of justice, the Supreme Court held that it must be considered to be a payment of duty out of the payment of the proceeds of the transfer of shares and the rebate should be allowed. The facts of the present case bear close similarity.
- The judgment of the Andhra Pradesh High Court in the case of Gopal Reddy (supra) has been heavily relied upon by the IT authorities and also by the learned senior Departmental Representative before us. But in the light of the judgment of the Supreme Court in the case of Roshan Jahangir Gandhi (supra), we are unable to give effect to the judgment of the Andhra Pradesh High Court. Even otherwise, the Andhra Pradesh High Court has adopted the principle of interpretation which would advance the cause of justice by saying that in a case of compulsory acquisition of land where additional compensation is awarded after court proceedings, the time limit of 6 months from the date of transfer for investment in specified assets, laid down in s. 54E, should be reckoned only from the date on which the additional compensation is received by the assessee. It is the same purposive interpretation or the interpretation that would advance the cause of justice that requires that in the present case also the assessee should be held entitled to the deduction. We direct accordingly and allow these grounds.
- Ground No. 8 in ITA 2685/Mum/96 does not arise out of the orders of the IT authorities and is hence rejected.
- Ground Nos. 9 and 10 in ITA 2685 are general and require no decision.
- Ground No. 4 in ITA No. 2694/Mum/98 which is against the levy of interest under ss. 234B and 234C, is consequential to our order. The other grounds are general and require no decision.
- In the result, both the appeals are partly allowed.