No denial of capital gain exemption u/s 54F merely for the reason that assessee had later on let out said new property for commercial purpose to run restaurant

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No denial of capital gain exemption u/s 54F merely for the reason that assessee had later on let out said new property for commercial purpose to run restaurant

The key observation by Madras High Court in the case of

 

 Where reopening notice was issued against assessee on ground that land sold by it was situated within limits of city corporation and same could not be treated as an agricultural land as claimed by assessee, since assessee had already brought entire details about sale of land during original assessment and Assessing Officer had no new tangible material available to clarify its reopening, impugned reopening was unjustified

Where assessee had sold a land and invested sale consideration in purchase of new residential property, merely because assessee had later on let out said new property for commercial purpose to run restaurant in it, assessee could not be denied exemption under section 54F.The complete case is reproduced hereunder:

 

 [2020] 120 taxmann.com 403 (Madras) 

HIGH COURT OF MADRAS 

Commissioner of Income Tax, Chennai

v.

Ramesh Shroff

T.S. SIVAGNANAM AND MRS. V. BHAVANI SUBBAROYAN, JJ.

T.C.A.NO.269 OF 2020†

SEPTEMBER  7, 2020

Section 2(14), read with section 148, of the Income-tax Act, 1961 – Capital gains – Capital asset (Reassessment) – Assessment year 2011-12 – Assessee sold a land on 18-1-2011 for sale consideration of certain amount – Assessee filed its return of income contending that said land was agricultural land and, thus, capital gain on its transfer was exempt – Same was accepted and return of assessee was processed under section 143(3) – Subsequently, Assessing Officer issued a reopening notice against assessee on ground that land sold by assessee was situated within limits of city corporation and same could not be treated as an agricultural land – Accordingly, he assessed sale consideration from sale of lands as long-term capital gains – It was noted that Tribunal found that land sold by assessee came within corporation limits by virtue of Government order no. 97, dated 19-7-2011 – Thus, when assessee sold such land it was not within city municipal corporation limits – Tribunal further found that assessee had already brought entire details about sale of land during original assessment – Said Government notification was also very much available when original assessment was completed and Assessing Officer had no new tangible material available to clarify its reopening – Tribunal also noted that in case of assessee’s spouse who was co-owner of very same land, same was treated as agricultural land and said finding was undisturbed – Whether, on facts, impugned order passed by Tribunal holding said reopening notice as unjustified was to be upheld – Held, yes [Paras 12 to 14] [In favour of assessee] 

Section 54F of the Income-tax Act, 1961 – Capital gains – Exemption of, in case of investment in residential house (Use of new house) – Assessment year 2011-12 – Assessee sold its land and invested sale consideration for purchase of a residential house property – Accordingly, it claimed exemption under section 54F – Same was granted – Subsequently, Assessing Officer issued reopening notice on ground that new residential house property purchased by assessee was converted into a non-residential property by letting out same for running restaurant in it within one month of purchase and, thus, assessee was not entitled for exemption under section 54F – It was noted that certificate issued by City corporation showed that building in which assessee claimed to have bought said new residential house was situated in primary residential zone – Even in reopening proceedings, Assessing Officer did not dispute fact that such new property was a residential property but held against assessee on ground that within few months, property was let out for commercial purposes – Whether since new property purchased by assessee was residential property, merely because assessee had put it to use for non-residential purpose to run restaurant in it, that too, much after its purchase, assessee could not be denied exemption under section 54F – Held, yes [Paras 15 and 16] [In favour of assessee] 

CASE REVIEW

Asstt.CIT v. NKV Krishna[2014] 41 taxmann.com 306/62 SOT 129 (URO) (Chennai – Trib) (para 12)followed.

CASES REFERRED TO

Ramesh Shroff v. ACIT [IT Appeal No. 2710 (Chy.) of 2017, dated 13-12-2018] (para 2), Asstt. CIT v. N.K.V. Krishna [2014] 41 taxmann.com 306/62 SOT 129 (URO) (Chennai – Trib) (para 8) and Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC) (para 11).

Ms. R. Hemalatha, Sr. Standing Counsel for the Appellant. 

 

JUDGMENT

  1. S. Sivagnanam, J.– Heard Ms. R. Hemalatha, learned senior counsel for the appellant/revenue.
  2. This appeal filed by the revenue under section 260-A of the Income-tax Act, 1961 [‘the Act’ for brevity] is directed against the order passed by the ITAT, ‘A’ Bench in Ramesh Shroffv. ACIT [IT Appeal No.2710/Chny/2017 dated 13-12-2018] for the assessment year 2011-2012.
  3. The appellant/revenue has filed the following substantial questions of law for consideration:

‘1. Whether on the facts and in the circumstances of the case, the Tribunal was right in quashing the reassessment order made under section 147 on the ground that it was merely case of change of opinion especially when the AO had not formed any opinion in the first instance on the issue relating to transferred capital assets?

  1. Whether the reasoning and finding of the Tribunal is proper in entertaining an alternate claim made u/s 54F, when the original claims should have been sustained by the Assessee in the return of income filed in response to notice issued under section 148, but however in the present case, assessee has changed the original claim by treating the impugned land as capital assets liable to capital gains deviating from its original claim that the land was an agricultural land?
  2. Whether on the facts and in the circumstances of the case, the Tribunal was right in allowing deduction under section 54F to the extent of residential portion of property acquired by the Assessee when the facts remains that as per the records of Corporation of Chennai and as per Assessee’s own Wealth-Tax returns filed the impugned property was shown as an commercial property and not a residential one?’
  3. The first issue is to be considered whether the reopening of assessment under section 147 of the Act was justified or not? The following facts would be relevant to consider this issue.
  4. The respondent/assessee, who is an individual has filed his return of income on 30-7-2011 admitting a total income of Rs. 4,44,610/-. The case was selected for scrutiny and notice under section 143(2) of the Act was issued on 1-8-2012 accepting the return filed by the assessee. Thereafter, the assessee had sold properties at Uthandi by a registered sale deeds dated 18-1-2011 and 20-7-2011 for a total consideration of Rs. 2,56,40,000/- and Rs. 2,45,70,000/-, in all, Rs. 5,02,10,000/-. The assessee contended that the properties, which were sold were agricultural lands and did not offer any capital gain on such transfer. This was a ground on which assessment was re-opened by stating that income chargeable to capital gain has escaped assessment. In the re-assessment proceedings, the assessee contended that lands were agricultural lands, however, the assessing officer did not accept the same and assessed the sale consideration under ‘long term capital gains’. The assessing officer also did not give benefit of cost of acquisition, since the assessee failed to submit parent documents of the said property. Accordingly, the assessing officer assessed the entire sale consideration of Rs. 5.02/-Crores under ‘long term capital loss’.
  5. Further, the assessing officer observed that the property cannot be treated as a rural area property, as the property is situated within the limits of the Corporation of Chennai, for which purpose, the assessing officer referred to the Web-Site of the Registration Department, Government of Tamilnadu. Further, the Assessing officer held that no agricultural income was offered in the earlier return and assessee treated the land as non agricultural, which were later sold by the assessee during the reassessment proceedings.
  6. The assessee made alternate claim that the property was treated as capital asset and out of the sale consideration, the assessee has purchased the property at Nungambakkam, Chennai and therefore, deduction under section 54 of the Act was given. The assessing officer did not accept this alternate plea on the ground that the property, which was purchased on 3-2-2011 within one month, the assessee entered into sale agreement on 21-3-2011 for running a restaurant and there is no possibility to convert the residential property into a non-residential house/restaurant within one month. Further, in the wealth tax assessment, the assessee had disclosed the property at Nungambakkam as a commercial property, accordingly, the assessing officer assessed the amount of Rs. 5,02,10,000/- under the head of ‘long term capital gains’. The assessee preferred an appeal before the Commissioner of Income-tax (Appeals) – 4, Chennai, (in short, ‘CIT[A]’). The CIT(A), Chennai held that reopening of the assessment as well as the finding of the assessing officer that the transfer of the asset was liable for long term capital gains, the rejection of the alternate submission by claiming deduction under section 54F of the Act in respect of cost of acquisition of Uthandi Property. The CIT(A) upon perusal of the sale deed dated 5-6-1992, which discloses the sale consideration of Rs. 4 Lakhs, directed the assessing officer to recalculate the capital gains by granting due benefit of cost of acquisition as per Law.
  7. Aggrieved by the dismissal of the appeal, challenging the re-opening, and treating the land which was sold as capital asset and holding it to be liable for long term capital gains, assessee preferred an appeal before the Tribunal. The Tribunal allowed the assessee’s appeal and held that reopening was a mere ‘change of opinion’. It referred to co-ordinate bench of the Tribunal in the case of Asstt. CITv. N. K. V. Krishna, [2014] 41 taxmann.com 306/62 SOT 129 (URO) (Chennai – Trib) and held that Uthandi Villige came within the limits of Corporation of Chennai only by virtue of G.O.Ms.No.97 dated 19-7-2011 and not prior to it. Further, the Tribunal took note of the assessment of the assessee’s spouse, who was the co-owner of the very same property, wherein the scrutiny assessment under section 143(3) of the Act was completed by order dated 14-3-2014 accepting that the land which is sold is agricultural land and the said assessment of the co-owner/spouse remained undisturbed. Accordingly, the Tribunal came to the conclusion that the land, which was sold by sale deed dated 18-1-2011 is an agricultural land and Uthandi village was annexed to the limits of Corporation of Chennai only in July, 2011. Challenging the order of the Tribunal, the Revenue is on appeal before us.
  8. We have elaborately heard the learned senior standing counsel for the appellant/revenue.
  9. First, we would consider as to whether the reopening of the assessment was valid in law and whether the Tribunal was right in allowing the assessee’s appeal?.
  10. Ms. R. Hemalatha, learned senior standing counsel places reliance on the decision of Hon’ble Supreme Court in Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 wherein, the Hon’ble Supreme Court held that it is to be seen whether there was prima faciesome material on the basis of which, the Department could reopen the case. The sufficiency or correctness of the material was not a thing to be considered, at the stage of reopening. By placing reliance on this decision, the learned counsel submitted that in the original assessment, there is no finding rendered by the assessing officer with regard to the classification of the land and therefore, the reopening of the assessment is valid in law.
  11. To examine as to whether, the Tribunal was justified in quashing the re-opening of the assessment, we need to examine the facts. The primary reason for re-opening the assessment was on the ground that the land fell within the limits of the Corporation of Chennai and the classification cannot be a agricultural land. To justify such a conclusion, the assessing officer referred to the Government order in G.O.Ms.No.97, in which, the Uthandi Village was annexed to the territorial limits of the Corporation of Chennai. This according to the assessing officer was a reason for re-opening, as this was not considered by the assessing officer while completing the assessment under section 143(3) of the Act. The Tribunal examined the said contention factually and found that the Gazette Notification published in the Government of Tamilnadu annexing Uthandi village to the limits of Corporation of Chennai was on 9-11-2010, whereas, the transfer of the land took place much after to that, i.e.,on 18-1-2011, this aspect was dealt with by the Co-ordinate Bench of Tribunal in the case of NKV Krishna and by an order dated 26-9-2013, the Tribunal, in the said assessee’s case held that Uthandi village came within the Corporation of Limits by virtue of G.O.Ms.No.97 dated 19-7-2011 and this was brought to the notice of the assessing officer in the said case and the revenue did not dispute the finding of the CIT(A) that the land was located at the distance of more than 18 Kms away from the outer limits of the nearest municipality.
  12. The Tribunal after noting the said decision, on facts found that the assesseevide letter dated 6-1-2014 during the original assessment proceedings had brought the entire details about the sale of the land in Uthandi Village and also noted the fact that the Gazettee notification issued by the Government of Tamilnadu was very much available when the original assessment was completed and the assessing officer had no new tangible material to clarify its reopening. By relying upon the decision in the case of NKV Krishna, it was held that the land sold was an agricultural land.
  13. Apart from that, a crucial aspect was taken note of the Tribunal, i.e.,in the case of assessee’s spouse, who was also co-owner of the very same property, the property was treated as agricultural land and the assessment was completed under section 143(3) of the Act and the said finding remain undisturbed. The above will clearly show that the re-opening of the assessment in the instant case was a clear case of ‘change of opinion’ and the Tribunal was justified in allowing the assessee’s appeal.
  14. With regard to the eligibility of the assessee to claim deduction under section 54(F) of the Act, the Tribunal, in our view, rightly, took note of the certificate issued by the Executive Engineer, Greater Chennai Corporation, showing that the building is situated in primary residential zone and the building plan has been sanctioned for residential purpose only. Even in the re-opening proceedings, the assessing officer did not dispute the fact that the property which was purchased was a residential property situated at the distance of more than 18 Kms away from the outer limits of the nearest municipality, but held against the assessee on the ground that within few months, the property, which was a residential property was let out for commercial purpose to run the restaurant.
  15. There are several instances where residential properties are put to use for non-residential purposes and this cannot be a test to decide the nature of the property under the provisions of the Income-tax Act, especially, in assessee’s case, where the letting out of the property for non-residential purpose was much after the purchase on 03-2-2011 and the lease agreement was on 21-3-2011. So far as the Wealth-Tax assessment is concerned, it may be true that in the assessment, the property is shown as commercial complex, as on the relevant date, 31-3-2011, the property was leased out for commercial purpose. Therefore, the Tribunal was right in holding that the assessee would be entitled to claim deduction under section 54F of the Act and also rightly restricted to the residential portion only.

For all the above reasons, the appeal filed by the revenue is dismissed and the substantial questions of law are answered against the revenue. No costs.

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