analysis of selective provisions recent ... - income tax bar

Analysis

of

selective provisions

&

recent issues

in

Capital Gain Taxation

I. T. Bar Association, 09/06/2018

Tushar P. Hemani

Advocate, High Court

“Capital Gain”

Income can be taxed under the head capital

gain if it fulfills the following conditions:

• There must be a capital asset;

• There should be a transfer of the capital asset;

• The capital asset should be something which

can be acquired by paying a cost i.e., it should

be capable of determining the cost of

acquisition of the capital asset; and

• There must be accrual of consideration for

transfer of capital asset.

Tushar P. Hemani, Advocate

Categories of Issues

• Fundamentals of Capital Gains

• Deeming Fictions under Capital Gains

• Indexation and Computation

• Exemptions


Fundamental Issues


Karuna Estates & Developers

170 ITD 249 (Visakhapatnam – Trib.)

• Facts:

• ―Partners‖ of the ―assessee-firm‖ transferred certain

plots of lands held by them as their respective capital

contribution and the same was taken as ―trading stock‖

of the assessee-firm.

• The sum credited to the partners’ capital accounts was

taken as ―cost of lands‖ by the assessee-firm on the

count that as per section 45(3), value recorded in the

books of accounts of the assessee-firm is to be taken as

fair market value for the purpose of computing capital

gains in the hands of the partners.

Tushar Hemani, Advocate 5

• AO found that value so adopted by the assessee-firm for

―stock of land‖ was much higher than fair market value

(FMV). Hence, AO adopted value as per Sub-Registrar’s

office (SRO) as FMV, P&L a/c was recast and certain

additions were made.

• Held:

• S.45(3) provides for methodology to determine capital

gains in the hands of the “partner” and not in the hands

of ―partnership-firm‖. If the ―firm‖ keeps the underlying

asset as ―capital asset‖, then AO may adopt the amount

credited to partners’ capital as value of capital asset for

the purpose of depreciation.


• In this case, ―capital asset‖ of the partner has been

converted into ―trading asset‖ of assessee-firm. Thus,

character of asset has changed in the hands of firm.

• Further, assessee-firm made payment to the ―partners‖

by way of crediting their capital account and such

―purchase cost‖ of land was claimed as ―expenditure‖.

• ―Partners‖ are covered by the provisions of S.40A(2)(b).

Hence, provisions of S.40A(2)(a) would apply and if

payment to partners towards such land is found to be

excessive or unreasonable as compared to fair market

value, AO can disallow the same u/s 40A(2)(a).


CIT vs. Balbir Singh Maini

86 taxmann.com 94 (SC)

• Facts:

• A co-operative housing society, of which assessee is a

member, entered into a tripartite Joint Development

Agreement (JDA) with two developers for development of a

land. Such JDA was not registered.

• As per the JDA, part consideration was received and balance

consideration was to be received only after the permission for

development is granted by authorities.

• Somehow, such permission was not granted and hence, JDA

did not take off the ground. Accordingly, even balance

consideration was never received.

• AO held that S.53A of The Transfer of Property Act, 1882 is

applicable to transactions under the JDA and accordingly,

―transfer‖ in terms of S.2(47)(v) has been effected since

―possession‖ was handed over in part performance of JDA.

Thus, he made addition in respect of ―capital gain‖.


• Held:

• As per S.17(1A) of The Indian Registration Act, 1908 as

amended by Amendment Act of 2001, an ―unregistered‖

agreement (like JDA in this case) shall have no effect in

law for the purposes of S.53A. Since JDA has not been

registered, it has no binding force in the eye of law and

hence, no ―transfer‖ can be said to have taken place

under such JDA. Hence, question of any ―capital gain‖

does not arise at all.

• For want of requisite permissions, the transaction

envisaged in the JDA could not materialize and did not

result into any income which was dependent upon

obtaining requisite permissions. Thus, no profit/gain

ever arose from transfer of capital asset which could be

brought to tax u/s 45 r.w.s. 48.


• Distinction between possession for the limited

purpose of development vis-à-vis possession in

part performance of an agreement to sell a

property.

• Capital Gain is only on real income and not on

hypothetical or notional income.

• S.2(47)(vi) of the Act can be invoked even if there is

no change in the membership of Society. ―in any

other manner whatsoever‖ is wide so as to include

these kinds of arrangements.


• Issues:

• Wef 01/04/2018, registered JDA shall be governed

by 45(5A) of the Act.

• Unregistered JDA would not be treated as transfer

within the meaning of S.2(47)(v) in view of this SC

decision.

• Decision of Chaturbhuj Dwarkadas Kapadia [260

ITR 491, (Bom)]

• Issues with regard to transfer in year one and right

to receive consideration or actual receipt of

consideration in later years.


Kaushalya Devi

92 taxmann.com 335 (Del)

• Facts:

• Assessee initially entered into an agreement to sale an

immovable property to Mr. A and received certain sum

as advance. However, such deal did not materialize.

• Later, the said property was sold to another person and

LTCG earned on sale of such property was declared as

income. However, assessee had to pay certain sum to

Mr. A for forgoing his right in the underlying property.

• While computing capital gain, assessee claimed

―liquidated damages‖ (i.e. sum paid to Mr. A) as

deduction u/s 48(i). Such claim was denied by AO.


• Held:

• It was held that earlier agreement to sell contained

specific clauses that Mr. A would be given property free

from all encumbrances and that vacant and peaceful

possession of the property would be given to him. In the

event of failure to execute sale deed and deliver vacant

peaceful possession, damages shall be paid to him.

• Further, there was a close nexus and connect between

payment of such liquidated damages and transfer of

property to the ultimate purchaser resulting into LTCG

in the hands of the assessee.

• There was a proximate link and the expenditure was

incurred was in furtherance and to effectuate transfer

of the asset and was not remote and unconnected. Tushar Hemani, Advocate 13

• Under such circumstances, liquidated damages were

incurred wholly and exclusively in connection with

transfer of the underlying asset and hence, the same

are allowable as deduction u/s 48(i).

• However, Hon’ble Court observed that the above ratio

should not be interpreted to mean that whenever an

assessee pays amount under an earlier agreement in

terms of settlement or even a court decree, the same

would be treated as expenditure wholly and exclusively

in connection with transfer (i.e. subject matter of capital

gains). Nature and character of the earlier agreement,

its timing, payment claimed as expenditure and date of

transfer resulting into capital gains are aspects which

need to be taken into consideration.


R. F. Nagrani HUF

93 taxmann.com 302 (Bom)

• Facts:

• Assessee, a retiring partner, received certain sum as

―goodwill‖ upon retirement from the concerned

partnership firm.

• Such sum came to be taxed as Long Term Capital Gain

by the AO.


• Held:

• Amount received by a retiring partner as ―goodwill‖ on

retirement from a partnership firm cannot be subjected

to capital gains tax in his hands.


Narendra J. Bhimani

169 ITD 245 (Rajkot – Trib.)

• Facts:

• Assessee sold certain plots of land and offered resultant

gain to tax as capital gains.

• AO found that assessee converted an agricultural land

into non-agricultural land, floated plotting scheme with

due permission of the authorities and eventually sold

such plots.

• AO held that sale of such plots was an adventure in the

nature of trade and hence, proceeds thereof are liable to

be taxed as ―business income‖ and not ―capital gains‖.


• Held:

• ITAT, in light of the followings facts, held that income

on sale of such plots was to be taxed as ―capital gain‖:

Land was purchased years back;

Land was all along held as ―capital asset‖;

With the passage of time and rapid urbanization,

―sellable standard unit size‖ had considerably come

down; Further, since land was in residential area,

where smaller sized plots are required by the end

users, assessee had to divide the land holding into

plots in order to get the market price for land;

It was a one-off transaction;

Even sale consideration was not ploughed back in

land investments;


CIT vs. Dynamic Enterprises

40 taxmann.com 318 (Kar)(FB)

• Facts:

• Assessee-firm purchased a property under a registered

sale deed. Later, assessee-firm was reconstituted and

five partners brought cash by way of capital

contribution. Nearly a year thereafter, erstwhile three

partners retired and had withdrawn their capital as

standing in books of assessee-firm.

• AO held that there was transfer of property from ―old

firm‖ to ―reconstituted firm‖ and that incoming partner

tried to evade capital gain tax as well as stamp duty

and therefore, capital gain tax was liable to be paid by

assessee-firm as per section 45(4).


• Held:

• It was held that in order to attract section 45(4) capital asset

of ―firm‖ must be transferred in favor of ―partner‖ resulting in

such firm ceasing to have any interest in such capital asset

so transferred and concerned partner should acquire

exclusive interest in such capital asset.

• In assessee’s case, partnership continued to exist after

retirement of three partners and business was carried on by

remaining partners. Thus, neither the firm dissolved nor

there was any distribution of capital asset when three

partners retired from assessee-firm. Retiring partners were

merely given cash representing their value of share in

partnership firm.

• In absence of (1) distribution of capital asset and (2) transfer

of capital asset in favor of retiring partners, no profit or gain

arose in the hands of assessee-firm. Hence, question of

assessee-firm being assessed u/s 45(4) and charging it tax for

profit which never accrued to it doesn’t arise at all.


CADD Centre vs. ACIT

65 taxmann.com 291 (Madras)

• Facts:

• Assessee-firm, consisting of two partners holding equal

stakes, revalued its assets and ―Firm‖ was converted

into ―Pvt. Ltd. Co.‖ as a going concern. All assets of firm

got vested as assets of company in which same partners

were interested.

• AO took a view that transfer of business assets of

assessee firm to company would constitute distribution

of assets and would attract capital gain as

contemplated u/s 45(4).


• Held:

• For invoking S.45(4), two conditions are to be fulfilled viz. (1) transfer by way of distribution of capital assets and (2) such transfer should be on dissolution of firm or otherwise.

• When firm is converted into company there is no distribution of assets and as such, there is no transfer. Rather, there is only taking over of assets from firm to company. Thus, the said condition was not satisfied in assessee’s case.

• S.45(4) is applicable only when firm is dissolved. Thus, even the said condition is not satisfied.

• It was observed that no consideration was received by assessee-firm on transfer of assets from firm to company; Firm had only revalued its assets which will not amount to transfer.

• In light of the above, it was held that vesting of property in private limited company is not consequent or incidental to transfer. There is no transfer of capital assets as contemplated u/s 45(1).


DCIT vs. R. L. Kalathia & Co.

66 taxmann.com 249 (Guj)

• Facts:

• Assessee-firm revalued its assets and credited partners’

capital account in the ratio of their shares in firm.

• Thereafter, assess-firm got converted into a limited

company and shares to the extent of revaluation of

assets were allotted to partners in firm as directors of

limited company.

• AO took a view that capital gain arising on transfer of

assets from assessee-firm to assessee-company was

liable to tax u/s 45.

• CIT(A) upheld AO’s view whereas ITAT held that the

said transaction could not be brought within the ambit

of either S.45(1) or S.45(4).


• Held:

• Hon’ble the High Court held that the primary

requirement for invoking S.45(4) is that there has to be

distribution of capital assets. The said factor is totally

missing in the assessee’s case as there is no

distribution of capital assets either by way of

dissolution of firm or otherwise.

• Thus, ITAT was justified in holding that sale of business

of firm as a going concern to the company for a

consideration of paid-up capital share capital does not

amount to transfer liable to tax as capital gain.


Pipelines India vs. ACIT

67 taxmann.com 112 (Madras)

• Facts:

• Partners of assessee-firm constituted a private limited

company (―company‖ for short) which was admitted as a

partner in the assessee-firm.

• Later on, natural partners executed a release deed

giving up all their rights in assessee-firm in favor of the

company. As a consequence, company became absolute

owner of assessee-firm.

• Natural partners were allotted shares in company for

relinquishing their rights in assessee-firm.

• AO, after holding that there was transfer of assets by

way of distribution of capital assets on dissolution of

assessee-firm, invoked S.45(4) & computed capital gain.


• Held:

• For attracting S.45(4), conditions which need to be satisfied are (1) profits and gains should arise; (2) from transfer of capital asset; (3) by way of distribution of capital asset; (4) on dissolution of firm or AOP or BOI not being company or a co-operative society and (5) or otherwise.

• In the present case, partners have taken equity shares in company which was inducted as partner. Therefore, whatever rights they had in capital assets of firm by virtue of being its partners, the same continued to exist in the form of equity shares which they held in company. Thus, one form of ownership which they had as partners of firm got converted into another form. Hence, this was neither a case of transfer of capital asset nor a case of distribution of capital asset. Accordingly, S.45(4) couldn’t have been invoked.


ITO vs. Alta Inter-Chem Industries

32 taxmann.com 138 (Ahd – Trib.)

• Facts:

• AO found that on 16.03.07, there was a major change

in shareholding pattern of assessee-firm and five new

partners have been introduced. Further, assets of

assessee-firm were revalued on 30.03.07.

• AO was of the view that by aforesaid revaluation,

investments made by new partners had been

appreciated without paying any taxes.

• It was also the case of AO that assessee had not fulfilled

condition prescribed u/s 47(xiii) of the Act. Hence, it

was disentitled for exemption and thus, capital gain u/s

45(iv) was attracted.


• Held:

• It was held by Hon’ble the ITAT that it was a case of

―Conversion from firm to company‖ and in the said

process, no ―transfer‖ is involved. Hence, appreciation

of assets in the process of conversion from firm to

company was not liable to be taxed under the head

―capital gain‖.


Arun Sunny vs. DCIT

184 Taxman 498 (Ker)

• A property held by assessee since period even prior to

01.04.81 became capital asset as per notification issued

on 06.01.94.

• The controversy between the assessee and Department

was as to what is the date on which cost of

acquisition/fair market value of such property has to be

computed. Is it the date of notification i.e. 06.01.94 on

which such property was notified as capital asset or it

is to be computed as on 01.04.81 in terms of S.55(2)(b).


• It was held that incidence of levy u/s 45 is on capital

gain computed in the manner provided for in section 48

r.w.s. 55(2). Deduction permissible u/s 48 is in respect

of ―Cost of acquisition‖ of capital asset transferred,

whether or not it was capital asset on the date of its

acquisition.

• The only condition to attract charge u/s 45 is that

property transferred must be a capital asset on the date

of transfer and it is not necessary that it should have

been capital asset also on the date of its acquisition.

• Accordingly, cost as at 01.04.81 is to be adopted and

not cost as at the date of notification.


CIT vs. D. P. Sandu Bros. Chembur P. Ltd.

142 Taxman 713 (SC)

• If an income cannot be charged to tax u/s 45

because of inapplicability of provisions of

section 48, then it is not open for the

Revenue to tax such income under the

residuary head.


Issues wrt

Deeming Fiction


Date for the purpose of Valuation

• Normally date of registration of conveyance deed;

• However, if transferred within the meaning of S. 2(47),

then the date of agreement to sale shall be date for

determining the Jantri rate.

• Dy CIT Vs. S Venkat Reddy 324 Taxmann.com

24 (Hyd.)

• ITO .v. Modipon Ltd. (Delhi)(Trib.)

(09/01/2015)


• Where ―Agreement to sale‖ is entered into and

part consideration is received in a given year

and ―Sale deed‖ is executed in subsequent

year, then transfer of property is said to have

taken place in earlier year i.e. the year in which

―Agreement to sale‖ has been entered into. [CIT

vs. Shimbhu Mehra – 65 taxmann.com 142

(Allahabad)].


Reference to DVO

• AO is bound to refer the matter to DVO. [Manjula

Singhal vs ITO (2011) 46 SOT 149 (Jodh.) & Ajmal

Fragrances and Fashions Pvt. Ltd. 34 SOT 57 (Mum)]

• Reference once made, valuation of DVO is binding on

AO, even if it is less than circle rate.[Bharti Jayeesh

Sangani Vs ITO (2011) 128 ITD 345 (Mum)]

• Burden to claim that Circle rate is higher than FMV is

on Assessee. [Sharad Dinesh Photograper Vs ITO

(2011) 43 SOT 452 (Mum)]


• If the Assessee does not object before the AO in terms of

Section 50 C (2), AO is not obliged to make a reference

to the DVO.

Ambattur Clothing Co. Ltd - 326 ITR 248 (Mad)

Sanjaybhai Z. Patel - 48 SOT 231 (Ahd)]

• If the Purchaser has objected to the SDV before the

stamp authorities it does not still debar the seller

to object to the said valuation before the AO.

B. N. Properties Holdings Pvt. Ltd. [2010] 6 ITR

(Trib) 1 (Chennai)


• For the purpose of computing capital gain on transfer of land or building, if value ascertained by Valuation Officer doesn’t exceed value adopted by State Stamp Duty Authority, then value ascertained by “Valuation Officer” shall prevail. However, if valuation as per Valuation Officer exceeds State Stamp Duty Authority, then valuation of such “stamp authority” shall prevail. [Pr.CIT vs. Rajabhai Lumbhabhai Ladhiya – (2016) 65 taxmann.com 18 (Gujarat)].

• If Assessee has challenged the SDV before Stamp Valuation authority, can it still request the AO to make a reference to DVO? (―any other authority‖)


Valuation of Land / Building / Both

• Section 50 C applies only in cases where it

is a capital asset and such capital asset is

―land or building or both land and

building‖. Any rights in land or building or

both are therefore not covered.

• For purpose of section 50C, land and

building are not to be considered as

separate assets and their joint valuation is

to be adopted. [J. Anjaneya Sharma v. CIT

221 Taxmann 148 (AP)]


Various Rights

• Transferable Development Rights (TDRs) / Floor Space

Index (FSI)

– TDRs are held to be immovable properties. However,

the same is not land / building / both.

• Development Agreement

– Arif Akhtar (45 SOT 257 (Mum)

– Transfer within the meaning of S. 2(47)


• Lease right is neither Land or Building or both hence

Sec.50 C not applies.

– Atul G. Puranik v/s. ITO (2011) 132 ITD 499

(Mum);

– ITO Vs. Pradeep Steel Re Rolling Mills (P) Ltd.

[39 Taxman. Com123 (Mum)]

– DCIT Vs. Tejinder Singh [ 50 SOT 391 (Kol)]

• Provisions of section 50C are not applicable on transfer

of ―Tenancy rights‖ [Fleurette Marine Novelle Hatam

(2015) 61 taxmann.com 362 (Mumbai Trib.)].


50C vis-à-vis Confirming Party

• When a person receives consideration as a confirming

Party, would S. 50C apply?

• Example:

– A executes Agreement to Sale on 1.4.2000 in favour

of B for Rs. 1.00 Cr. (Stamp Duty Value (SDV) on

1.4.2000 – 1.00 Cr.)

– Sale Deed is executed between A and C with B as

confirming Party for Rs. 2.00 Crores on 1.4.2015

(SDV on 1.4.2015 is 2.50 Crores)


• Questions:

– Whether any additional tax payable by either A or B?

• Reference date for A (whether 1.4.2000 or

1.4.2015 for SDV), assuming substitution of date

permissible even for 50C

• B only transfers his right to purchase the land

and not land. (Transfer of rights)


Transfer of shares results in transfer of

Land / Building

• If land / building is held through an SPV, being a

private limited company, whether transfer of shares of

such SPV will amount to transfer of land / building /

both and thus covered by 50 C?

– Transfer of shares of a company instead of transfer

of ―assets‖ owned by such company is a valid

transaction:

Bhorukha Engineering Ltd. vs. DCIT – 356 ITR

25 (Kar)

Irfan Abdul Kader Fazlani & Others [(2013) 29

taxmann.com 424 (Mumbai Trib)

– Lifting of corporate veil was not permitted.


• Property of ―company‖ is not property of ―shareholder‖.

Shareholders merely have interest in company arising

out under AoA, measured by a sum of money for the

purpose of liability and by share in distributed profit

[Electronics Corporation of India Ltd vs Secretary –

(1999) 4 SCC 458].


S. 50C vs 50B

• Business as a whole is sold as a going concern

for a lump sum consideration. Such deal may

include land/building or both.

– Book value of such land and building could

be significantly lower than market value

– Total consideration for the undertaking itself

could be less than individual value of land /

building / both

– Whether Section 50 C can be invoked


• Section 50 C applies when there is a transfer

and such transfer is of land / building / both

– Sale of undertaking as slump sale is not sale of

each of underlying asset separately

– However, it should fall within the definition of

―Slump Sale‖ u/s 2(42C) and ―Undertaking‖ u/s.

2(19AA)

• DCIT vs Summit Securities (135 ITD 99)(SB)(Mum)


S.50C vs S.45(3)

• Whether the SDV can be substituted

in cases where the asset is introduced

as capital contribution by the Partner

if the amount credited to the capital

account of the partner is less than the

SDV

• Canoro Resources 180 Taxman 220 –

Transfer Pricing Vs. 45 (3)


S. 50C Vs. S. 50

– If a building being a depreciable asset is

disposed off at a value which is less than

the SDV, whether S 50 C will apply

– Section 50 only substitutes the cost of

acquisition and not the full value of

consideration

– United Marine Agencies [130 ITD 113

(Mum)(SB)] held that S 50 does not debar

application of Section 50 C


S. 50C vis-à-vis S. 54 / 54 F / 54 EC etc.

• If actual consideration is substituted with SDV, impact

on Section 54 / 54 F / 54 EC

– Section 54 and 54 EC, the exemption is granted with

reference to capital gains and not with reference to

―net consideration‖

– Therefore, increased consideration to be taken into

account for considering the eligibility U/s. 54 / 54

EC.


• Case of 54 F

– Deduction granted in proportion of investment in

new asset made to the ―net consideration‖;

– ―net consideration‖ defined in explanation to S 54 F

(1)

– Section 50 C uses the term ―for the purpose of

section 48‖ and therefore does not extend to 54F

– 54F Deduction =

Capital Gain x Consideration Invested in New Property

Actual Consideration Received (not SDV)

• Gouli Mahadevappa v. ITO (2013) 356 ITR 90 (Kar.)


Raj Kumar Parashar

167 ITD 237 (Jaipur – Trib.)

• Facts:

• Assessee sold a property resulting into capital gain.

However, “entire sale consideration” was deposited into

capital gain account scheme for the purpose of

purchasing a new house property and eventually, new

property was also purchased within the prescribed time

limit. Hence, entire capital gain was exempt u/s 54F.

• AO invoked section 50C, substituted sale consideration

by ―stamp duty valuation‖ (which was almost four times

the actual sale consideration) and computed capital gain

after duly granted benefit of deduction u/s 54F to the

extent of actual investment in new house property.


• Held:

• As per S.54F, where “cost of new asset” is not less than

“net consideration” in respect of the original asset, then

“whole of such capital gain” shall not be charged under

section 45 of the Act.

• “Net consideration” for the purposes of section 54F has

been defined as full value of consideration received or

accruing as a result of transfer of capital asset as

reduced by any expenditure incurred wholly and

exclusively in connection with such transfer.


• Consideration determined u/s 50C based on stamp

duty authority valuation is not the consideration which

has been received by or accrued to the assessee.

Rather, it is a value which is deemed to be the full value

of consideration for the limited purposes of determining

income chargeable as capital gains u/s 48.

• Thus, provisions of section 50C cannot be applied to

section 54F for determining full value of consideration.

Accordingly, once ―net consideration‖ is fully invested in

the ―new asset‖, the whole of the capital gain (even as

worked out in terms of section 50C) shall not be charged

under section 45.


S. 50C vis-à-vis S. 69B

• S.50C cannot apply in the hands of the Purchaser:

CIT vs. M/s. Sarjan Realities Ltd.

[Tax Appeal No.1374 of 2011, (Guj)]

DCIT vs. Vallabhbhai – (2012) 27 taxmann.com 306 (Ahd)

Vishnuprasad S. Agarwal vs. ITO – ITA Nos.2567 &

2571/Ahd/2011, Order dated 17.07.15


TDS u/s 194IA

• Tax deductible sum for the purpose of TDS u/s 194IA

(@1%) shall be the actual consideration paid/payable

and not the value replaced by Section 50C.


S. 50C not applicable to Charitable Trust

eligible for S. 11 benefits

• Deeming fiction created by virtue of section 50C in

determining capital gain cannot be extended to

section 11(1A). Section 11(1A) has to be applied for

definite or limited purpose for which it is created.

Sec 11(1A) being specific section governing

taxability of capital gains for trusts and a complete

code in itself, shall prevail over Sec 50C which is a

general section and does not start with a non-

obstante clause. The Upper India Chamber of

Comm. [TS-735-ITAT-2014(LKW)]


50C vs S.271(1)(c)

• Deeming fiction cannot extend to

penalty.

– CIT vs Madan Theaters Limited (2014)

(44 taxmann.com 382) (Kol)

– CIT vs Fortune Hotels & Estate (P) Ltd.

(2014)(52 taxmann.com 330)(Bom)


CIT vs. Polestar Industries

(2014) 41 taxmann.com 237 (Guj)

• Facts:

• Assessee earned ―Short term capital gain‖ on sale of

―Depreciable assets‖ worked out u/s 50 of the Act.

Admittedly, such depreciable assets were held for more

than 36 months and hence, the same were ―Long Term

Capital Assets‖.

• Assessee had claimed deduction u/s 54EC in respect of

investment made in specified bonds within specified

time limit which was denied by AO on the count that by

virtue of provision of section 50, concerned capital gain

was ―Short term capital gain‖ whereas deduction u/s

54EC is available only in respect of capital gain arising

on sale of ―Long Term Capital Asset‖.


• Held:

• It was held that deeming fiction prescribed u/s 50 of

the Act was only for the purpose of mode of

computation of capital gain u/s 48 and 49 and not for

other provisions.

• Capital gain arising on sale of ―Long Term Capital

Asset‖, if invested in specified asset, cannot be charged

to tax and exemption provided u/s 54EC cannot be

denied to the assessee merely on account of the fact

that deeming fiction is created u/s 50.

• Thus, assessee cannot be charged to capital gain when

―Short term capital gain‖ on sale of ―Long term capital

asset‖ gets invested in areas specified under the law i.e.

(Bonds prescribed u/s 54EC in the present case).


Akash Association

87 taxmann.com 84 (Guj)

• Facts:

• Assessee transferred a plot of land under a ―banakhat‖

(agreement to sale) and declared resultant capital gain.

No final sale deed was ever executed.

• AO was of the view that sale consideration declared by

the assessee was on the lower side and hence, AO made

a reference to DVO u/s 55A for the purpose of

determining FMV of the land as on the date of transfer.

• Eventually, AO adopted value of land as assessed by

DVO and computed capital gain accordingly.


• Held:

• S.50C provides for adoption of value taken by stamp

valuation authorities for the purpose of stamp duty as

full value of consideration of the transferred asset for

the purpose of section 48 of the Act. However, reference

to DVO u/s 55A for ascertaining full value of

consideration is not permissible.

• The above position would remain unaltered even if final

sale deed has not been executed since the expressions

―adopted‖ or ―assessed‖ or “assessable” used u/s 50C

would include even a case where the document

evidencing transfer of capital asset has not been

presented for registration.


Indexation

&

Computation


New Base year and Holding period

Finance Act, 2017, wef 01/04/2018 made the

following amendments:

• Holding period to qualify for long-term gains

has been reduced to 2 years from 3 years

for an immovable property being land or

building or both [S.2(42A) 3rd Proviso].

• 2001 in place of 1981, has been made the

new base year for calculating indexed cost

of acquisition [55(2)(b) rw Explanation to

S.48].


Why change in the base year?

Why was the base year changed from 1981 to

2001?

• There has been a considerable hardship in

determining this fair value since it depends on

a period which is more than three decades old.

• Property prices appreciated at a much higher

rate between 1981 and 2001, compared to the

increase in CII or inflation.


Relevant Provisions

S. 55 Meaning of “adjusted”, “cost of

improvement” and “cost of acquisition”.

(2) For the purposes of sections 48 and 49, ―cost

of acquisition‖,—

(b) in relation to any other capital asset,—

(i) where the capital asset became the property of

the assessee before the 1st day of April, 2001,

means the cost of acquisition of the asset to the

assessee or the fair market value of the asset on

the 1st day of April, 2001, at the option of the

assessee ; Tushar P. Hemani, Advocate

Relevant Provisions

(ii) where the capital asset became the

property of the assessee by any of the modes

specified in sub-section (1) of section 49, and

the capital asset became the property of the

previous owner before the 1st day of April,

2001, means the cost of the capital asset to

the previous owner or the fair market value of

the asset on the 1st day of April, 2001, at the

option of the assessee;


Relevant Provisions

S. 48 Mode of computation.

Explanation.—For the purposes of this section,—

(iii) “indexed cost of acquisition” means an

amount which bears to the cost of acquisition the

same proportion as Cost Inflation Index for the

year in which the asset is transferred bears to

the Cost Inflation Index for the first year in which

the asset was held by the assessee or for the year

beginning on the 1st day of April, 2001,

whichever is later;


Relevant Provisions

(iv) “indexed cost of any improvement” means an

amount which bears to the cost of improvement the

same proportion as Cost Inflation Index for the year

in which the asset is transferred bears to the Cost

Inflation Index for the year in which the Improvement

to the asset took place;

(v) “Cost Inflation Index”, in relation to a previous

year, means such Index as the Central Government

may, having regard to seventy-five per cent of average

rise in the Consumer Price Index (urban) for the

immediately preceding previous year to such previous

year, by notification in the Official Gazette, specify, in

this behalf. Tushar P. Hemani, Advocate

What is Fair Market Value?

S. 2(22B) defines “fair market value”, in

relation to a capital asset, means—

(i) the price that the capital asset would

ordinarily fetch on sale in the open market on

the relevant date ; and

(ii) where the price referred to in sub-clause (i)

is not ascertainable, such price as may be

determined in accordance with the rules

made under this Act ;



• As per Income tax Guidelines for Immovable

properties of 2009

Market value is the price that a willing purchaser

would pay to a willing seller for a property, having

due regard to its existing conditions, with all its

existing advantages and its potential possibilities

when laid out in its most advantageous manner.

Fair Market Value is the estimated price which any

asset in the opinion of Valuation officer would fetch if

sold in the open market on the valuation date.



• The terms ―Market Value‖ and ―Fair Market

Value‖ are synonym except for the word ―Fair‖

introduces an element of a hypothetical

market. The expression ―if sold‖ does not

contemplate actual sales or actual state of

market. The expression ―Open Market‖ does

not contemplate a purely hypothetical market

exempt from the restriction imposed by law.

The fair market value excludes sentimental

value advertisement, brokerage, stamp-duty,

commission etc. for affecting the sale

transaction. Tushar P. Hemani, Advocate

How to find FMV? How to find Fair Market Value or FMV?

According to the Income-tax Act, 1961, FMV shall be

the higher of the cost of acquisition of the property or

the price that the property shall ordinarily sell for if sold

in the open market. There is no fixed formula to

calculate FMV of a property.

• Average Sale price of similar properties in the

neighbourhood sold in the year 2001

• Jantri/ Circle Rates or Guidance Value.

• Real Estate Indices e.g. National Housing Bank’s

(NHB’s) Residex, the Reserve Bank of India (RBI)—

Housing Price Index (HPI) and Residential Property

Price Index (RPPI).

• Registered Valuer


Smt. Vidhi Agarwal

88 taxmann.com 306 (Allhabad)

• Facts:

• Assessee’s mother-in-law purchased a flat in 1970 and

gifted the same to the assessee in 1999. Assessee sold

the above flat during Asst. Year 2009-10.

• Assessee, for the purposes of computing capital gains,

relied on the provisions of section 55(2)(b)(ii) and

disclosed value of such flat as at 01.04.81 on the basis

of a ―valuation report‖ of an approved valuer.

• AO discarded such valuation report on the count that

no evidence was led in support of the valuation report,

such as circle rate, etc.


• Held:

• As per section 55(2)(b)(ii), where assessee becomes

owner of an asset after 01.04.81 from a previous owner

who, in turn, may have acquired that asset prior to

01.04.81, ―cost of acquisition‖ shall be either ―FMV as

at 01.04.81‖ or ―cost of previous owner‖, at the option of

the assessee.

• Once assessee exercises his option to adopt FMV as at

01.04.81 on the basis of a ―approved valuer’s report‖,

then such ―valuer’s report‖ itself is a piece of evidence.

Such valuation report need not be further supported by

any other evidence in the form of circle rate, etc.


Issues wrt

Exemptions


M. Raghuram

169 ITD 315 (Chennai – Trib.)

• Once assessee invests entire capital gain in the

new house property within the time period

stipulated u/s 54 of the Act, then the mere facts

that ―construction‖ was not completed by the

builder and ―possession‖ was not handed over to

the assessee within the stipulated time period

would not come in the way of claim for deduction

u/s 54 of the Act.


Mustansir Tehsildar

168 ITD 523 (Mum. Trib.)

• Booking a new residential house in an ―under

construction project‖ amounts to ―construction‖

and not ―purchase‖ for the purposes of claiming

exemption under section 54.

• Section 54 is silent about ―commencement‖ of

construction and hence, commencement of

construction can precede the date of sale of the

original asset.


CIT vs. Bharti Mishra


• Facts:

• Assesse earned capital gain on sale of share and

claimed exemption u/s 54F in respect of construction of

a house property.

• AO denied exemption u/s 54F on the count that

construction of the said house property had

commenced prior to the date of sale of shares.


• Held:

• Section 54F doesn’t stipulate that construction of house

property must begin after the date of sale of original/old

asset. There is no condition or reason for ambiguity and

confusion which requires moderation or reading words

of the said section in a different manner.

• Section 54F is a beneficial provision and is applicable to

an assessee when the old capital asset is replaced by a

new capital asset in form of a residential house. Once

an assessee falls within the ambit of a beneficial

provision, then the said provision should be liberally

interpreted. Accordingly, exemption u/s 54F was

allowed to the assessee.


Laxmi Narayan

402 ITR 117 (Rajasthan)

• Where assessee purchases new agricultural land

out of sale proceeds of his agricultural land,

deduction u/s 54B is available even if the final

conveyance deed is executed in the name of

assessee’s ―wife‖.

• Tube-well and other expenses are for betterment of

agricultural land for the purposes of carrying out

agricultural activities. Hence, such expenses must

be considered as part of investment for the purpose

of deduction u/s 54B.


CIT vs. Kamal Wahal


• Facts:

• Assessee sold a property which into capital gain and

claimed deduction u/s 54F in respect of investment of

sale proceeds in a vacant plot and purchase of

residential house in the name of his ―wife‖.

• AO took a view that concerned investment ought to

have been made in ―assessee’s name‖ and not in ―wife’s

name‖. Accordingly, deduction u/s 54F was denied.


• Held:

• Section 54F merely says that assessee should have

purchased/constructed a residential house. It doesn’t

require that new residential property must be

purchased in the name of the assessee.

• Assessee had purchased new property only in the name

of ―wife‖ and not in the name of a stranger or someone

who is unconnected with him. There was also no

dispute as to entire investment coming out of sale

proceeds of property sold by assessee and no

contribution from assessee’s wife.

• In such a scenario, it was held that assessee was

eligible for deduction u/s 54F of the Act.


Dr. (Smt.) Sujhata Ramesh

401 ITR 242 (Karnataka)

• Once assessee invests capital gain arising on sale

of a property in the prescribed bonds, there is

substantial compliance of the provisions of section

54EC of the Act.

• Merely because there is some delay in making such

investments (six months in this case), deduction

u/s 54EC should not be denied.

• CBDT must, upon receiving application u/s 119,

condone delay in making such investments once

reasonable cause for delay is shown. Tushar Hemani, Advocate 83

Jyotindra H. Shodhan

87 ITD 312 (Ahd)(SB)

• Facts:

• Assessee sold some plots of land and executed sale

deeds on 07.08.82 but on account of litigation, last and

final payment towards sale consideration was received

on 25.10.86. Assessee invested the same in specified

bonds and claimed exemption u/s 54E on the ground

that such investments were made within six months of

―receipt of final installment‖.

• AO denied exemption u/s 54E on the count that such

investments were not made within six months of

―transfer‖ as contemplated u/s 54E.


• Held:

• It was held that S.54E specifically provides for

investment in specified bonds within a period of six

months from the date of ―transfer‖ and there is no

ambiguity in the said statutory provision.

• Since assessee failed to make investment within six

months from the date of ―transfer‖, assessee was not

eligible for exemption u/s 54E.


Shankar Lal Saini

89 taxmann.com 235 (Rajasthan)

• Even if unutilized sale consideration is deposited in

capital gain account scheme before the due date of

furnishing return of u/s 139(4) (i.e. belated return),

deduction u/s 54B and 54F cannot be denied;

• Legislature requires depositing unutilized sale

consideration in capital gain account scheme

before ―due date of furnishing return u/s 139‖

which implies due date u/s 139(1) as well as

139(4).


CIT vs. Ms. Jagriti Agarwal

15 taxmann.com 146 (P&H)

• Facts:

• Assessee sold a house on 13.01.06 (i.e. AY 06-07) and

filed ―belated return‖ u/s 139(4) on 28.03.07 claiming

deduction u/s 54 since assessee had purchased

another property on 02.01.07.

• AO denied claim u/s 54 of the Act on the counts that

assessee failed to deposit amount of capital gain in

capital gain accounts scheme and also failed to

purchase to house property before the ―due date of

filing return of income‖ which was 31.07.06 as per

section 139(1) of the Act.


• Held:

• Section 139(4) provides for an extended period of

limitation as an exception to section 139(1). Such

extended time is one year from the end of relevant

assessment year and in assessee’s case, such extended

time limit works out to 31.03.07.

• Section 139(4) is not an independent provision but

relates to time contemplated u/s 139(1) and therefore,

sub-section (4) to section 139 has to be read along with

sub-section (1).

• Accordingly, due date of furnishing return of income as

per section 139(1) is subject to extended period

provided u/s 139(4). Since assessee has filed return of

income within time limit prescribed u/s 139(4),

assessee is eligible for benefit u/s 54 of the Act.


Smt. M. K. Vithya

91 taxmann.com 102 (Chennai – Trib.)

• If construction of a new residential house is

completed within the stipulated time period of

three years, the mere fact that in the year of

transfer, assessee failed to deposit unutilized sale

consideration in the capital gain account scheme

before the due date of furnishing return of income

cannot be a ground to deny exemption u/s 54F.


Smt. Amina Ismil Rangari

167 ITD 199 (Mum. Trib.)

• Exemption u/s 54F claimed even in a “belated”

return of income filed in response to notice u/s 148

is allowable since section 54F neither makes it

mandatory to file return of income within the

stipulated time period nor places an embargo as

regards claim of such exemption in case return of

income is filed belatedly.


CIT vs. Devdas Naik

49 taxmann.com 30 (Bom)

• Facts:

• Assessee sold a bungalow and bought three flats, one in

his own name, another in name of assessee and his wife

and the third one in the name of his wife.

• Assessee claimed deduction u/s 54 on purchase of two

flats in which he was either sole owner or a joint owner.

• AO denied the said claim on the count that it was

contrary to the legislative intent and also the plain

language of section 54 of the Act.


• Held:

• Hon’ble the High Court observed that though two flats

were acquired under two distinct agreements and from

different sellers, map of general layout and internal

layout indicated that there was only one common

kitchen. Flats were constructed in such a manner that

adjacent flats can be combined into one.

• In light of the above, it was held that so long as there is

a residential unit or house, benefit or deduction cannot

be denied. In the present case, there was a single unit.

Once there was a single kitchen, plans can be relied

upon. In such peculiar factual backdrop, deduction u/s

54 was allowed.

•


CIT vs. Ashok Kumar Ralhan


• Facts:

• Assessee sold a property in October 2006 and declared capital gain. He had purchased a property in December 2004 on construction of which he claimed to have certain sum in respect of which exemption was claimed u/s 54F.

• AO denied exemption u/s 54F on the count that there was no need for the assessee either to reconstruct or renovate the purchased property as it was already fully constructed.

• CIT(A), relying on certificate issued by an architect wherein it was stated that earlier structure was demolished and thereafter new structure was made on the plot, held that it was a case of new construction after demolition and hence, assessee was eligible for exemption u/s 54F. The said view was upheld by ITAT.


• Held:

• Hon’ble the High Court observed that based on factual

finding recorded by first appellate authority and

affirmed by ITAT, it was apparent that it was a case of

―construction‖ u/s 54F.

• Section 54F requires that construction should be

carried out within a period of three years from the date

of sale of the capital asset and the in the instant case,

construction was carried out within the prescribed time

frame.

• Accordingly, it was held that assessee was eligible for

exemption u/s 54F.


CIT vs. Sambandam Udaykumar

19 taxmann.com 17 (Kar)

• Facts:

• Assessee sold certain shares, earned capital gain and

claimed exemption u/s 54F in respect of investment

made in construction of a residential house.

• AO found that flooring work, electrical work, fitting of

door shutters and window shutters were still pending.

AO took a view that even after a lapse of three years

from the date of transfer of shares, construction of

residential house was not complete. Hence, AO denied

exemption u/s 54F of the Act.


• Held:

• Section 54F is a beneficial provision of promoting

construction of residential house and therefore, the

same has to be construed liberally.

• The intention of the legislature was to encourage

investments in acquisition of a residential house.

Completion of construction or occupation is not the

requirement of law.

• The condition precedent for claiming benefit u/s 54F is

that capital gain realized on sale of capital asset should

have been parted by the assessee and invested either in

purchasing or constructing a residential house.


• In assessee’s case, developer of house had

acknowledged that only minor fittings like window

shutters and some electrical work were pending.

Assessee had produced sale deed showing transfer of

property in assessee’s name. Assessee had also been

put in possession of such property.

• Thus, object of section 54F i.e. encouraging investment

in a residential building was completely fulfilled.

• In light of the above, exemption u/s 54F was granted to

the assessee.


Success is not final, failure is not

fatal: it is the courage to continue

that counts.

Winston S. Churchill

Thank You Tushar P. Hemani, Advocate

analysis of selective provisions recent ... - income tax bar

Documents