1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 17 TH DAY OF NOVEMBER 2014 PRESENT THE HON'BLE MR.JUSTICE N.KUMAR AND THE HON'BLE MR.JUSTICE B.MANOHAR BETWEEN: ITA NO.223/2009 Shri.R.S.Sharma, 44, 4 th Floor, Lakshmi Complex, K.R.Road, Fort, Bangalore 560 002. Appellant (By Sri.A.Shankar and M.Lava, Advocates) AND: The Income Tax Officer, Ward 1(4), HMT Bhavan, Bellary Road, 6 th Floor, Bangalore 560 032.. Respondent (By Sri.K.V.Aravind, Advocate) This ITA is filed u/s.260-a of I.T.Act, 1961 arising out of Order dated 29/12/2008 passed in ITA No.822/Bng/2008, for the Assessment Year 2005-2006, praying that this Hon ble Court may be pleased to formulate the substantial questions of law stated therein and allow the appeal and set aside the order
2 passed by the ITAT, Bangalore in ITA.No.822/Bng/2008 dated 29/12/2008 and M.P.No.7/Bang/2009 in the interest of justice. This appeal coming on for hearing this day, N.KUMAR J., delivered the following: J U D G M E N T The assessee has preferred this appeal challenging the order dated 29-12-2008 passed by the Income Tax Appellate Tribunal, Bangalore Bench A (hereinafter referred to as the Tribunal for short) in ITA No.822/Bang/2008, wherein the Tribunal had upheld the order passed by the lower authorities and levied tax on the capital gains for the assessment year 2005-06. 2. The assessee has filed the return of income for the assessment year 2005-06 on 30-01-2006 declaring the total income of Rs.5,56,960/- wherein he claimed long term capital gain exemption under Section 54F of the Income Tax Act, 1961 (hereinafter referred to as the Act for short). The Assessing Authority passed an order dated 6-12-2007, under Section 143(3) of the Act
3 recalculating the computation of income filed by the assessee and held that the long term capital gain exemption has to be disallowed. He also imposed interest under Sections 234B and 234C of the Act. Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals)-I, Bangalore (hereinafter referred to as the First Appellate Authority for short). The First Appellate Authority vide order dated 30-04-2008 partly allowed the appeal giving exemption of a paltry sum ofrs.28,510/-, however affirmed the order of assessment insofar as long term capital gain is concerned. Aggrieved by the said order, the assessee preferred an appeal to the Tribunal. The Tribunal dismissed the appeal. Being aggrieved by the said order, the present appeal is filed. 3. The following substantial questions of law arise for our consideration in this appeal.
4 1. Whether the Tribunal failed to appreciate that in accordance with the provisions of Section 54F (4) the amount deposited in the capital deposited in the capital gains account is deemed to be the cost of the new asset and consequently the appellant was entitled to exemption under Section 54F(1) of the Act for the assessment year 2005 06? 2. Whether the Tribunal failed to appreciate that in view of the proviso to Section 54F (4) the liability to tax will not arise for the assessment year 2005-06? 3. Whether it is permissible in law to tax the income for the assessment year 2005-06 as per the assessing Officer and for the assessment year 2007-08 as offered by the appellant? 4. Learned counsel for the assessee assailing the impugned order contended that when once the amount is deposited in the capital gain account in terms of Section 54(F)(4) within the time stipulated, the said amount is deemed to be construed as new Asset. Even if that amount is not utilized either for purchase of a property or construction of a residential house, the said amount shall be charged under Section 45 of the Act as
5 income of the previous year in which period of three years from the date of transfer of the original asset expires. Therefore the authorities erred in assessing the said income for the assessment year 2005-06. 5. Per contra, learned counsel for the Revenue argued in support of the order passed by the Tribunal. 6. This Court had an occasion to consider the identical issue in respect of a case falling under Section 54(2) of the Act in the case of the COMMISSIONER OF INCOME TAX V/S KHOOBCHAND M.MAKHIJA reported in (2014) 223 ITR 189 (Karnataka). Paragraph 21 of the said judgment reads as under: 21. A reading of the aforesaid provision makes it very clear that the capital gain acquired by sale of a property should be deposited on or before the due date prescribed under Section 139(1) of the Act in the relevant year in which the property was sold. Therefore, the assessee has to utilize the said amount for purchasing the residential house within two years and if he is constructing a residential house within three years. In the event of the purchase or construction is completed within a year or two,
6 the question is, is he liable to offer the unutilized capital gain immediately thereafter in the said current financial year? The answer is no because the proviso to Section 54(2) expressly provides that, if the amount deposited under sub-section (2) of Section 54 of the Act is not utilized wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then the amount not so utilized shall be charged under Section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires. Therefore, the statute prescribes expressly when the capital gain is to be offered to tax. If the said amount is deposited in a nationalized bank as required under law, the entire capital gain or the unutilized capital gain chargeable under Section 45 is to be offered for tax only in the previous year in which the period of three years from the date of the transfer of the original asset expires. Therefore, the contention that immediately after the purchase of the new asset in the relevant year, the unutilized capital gains should have been offered to tax, is untenable. That is precisely what the authorities have held. 7. Section 54F(4) of the Act is pari materia with Section 54(2) of the Act. Therefore, what follows is that when the statute prescribes expressly when the capital gain is to be offered to tax. It shall be treated
7 accordingly. If the said amount is deposited in a Nationalized Bank as required under law, in capital gain account the deposit is construed as investment in new asset. Subsequently if the amount deposited is not utilized the entire capital gain or the unutilized capital gain chargeable under Section 45 is to be offered for tax only in the previous year in which the period of three years from the date of the transfer of the original asset expires. Therefore, assessing the said amount for the assessment year 2005-06 when the property is sold on 28-04-2005 is erroneous. In the facts and circumstances of the case, though the assessee purchased a site on 26-09-2005, he could not put up construction because of business exigencies and thus sold the property on 6-10-2006. Immediately thereafter he offered the said amount for tax in the assessment year 2007-08. Therefore, the authorities erred is assessing the income of the assessee for the assessment year 2005-06 in respect of the capital gain is contrary to
8 law and therefore, it requires to be set aside. The substantial questions of law are answered in favour of the assessee and against the Revenue. Accordingly, we pass the following: ORDER The appeal is allowed. The impugned order passed by the authorities below are hereby set aside. Sd/- JUDGE Sd/- JUDGE mpk/-*