2003-VIL-197-ITAT-PNE

Equivalent Citation: TTJ 082, 481, [2004] 2 SOT 628 (PUNE)

Income Tax Appellate Tribunal PUNE

IT (SS) APPEAL NO. 56 (PUNE) OF 1997

Date: 07.03.2003

KRISHNAGOPAL NAGPAL.

Vs

DEPUTY COMMISSIONER OF INCOME TAX.

BENCH

Member(s)  : B. M. KOTHARI., U. B. S. BEDI.

JUDGMENT

The assessee has raised following grounds in this appeal:

"1. On the facts and in the circumstances of the case, the learned AO erred in denying the exemption under s. 54 in respect of the seven row houses constructed by the appellant. This exemption was claimed by the appellant against the capital gains on sale of a flat at Mumbai of Rs. 1,08,30,625.

2. In this context, the learned AO was not justified in holding the view that as the appellant had invested the sale proceeds of the flat at Mumbai in a joint venture and as the seven row houses are received by the appellant towards his share of investment and profits, no exemption under s. 54 was admissible to the appellant.

3. Accordingly, the learned AO further erred in taking the capital gains of Rs. 1,08,30,625 on sale of flat at Mumbai as undisclosed income of the appellant.

4. The appellant submits that as per law, he was entitled to the exemption under s. 54 because of his acquisition of the row houses and thus the capital gains of Rs. 1,08,30,625 in respect of a flat at Mumbai were not taxable as undisclosed income of the appellant.

5. Without prejudice to the above grounds, even presuming that the capital gains on sale of the flat at Mumbai were taxable, the same could not be considered as undisclosed income of the appellant under Chapter XIV-B of the IT Act.

6. The appellant craves leave to add, alter or amend any of the grounds of appeal."

2. The assessee has also raised following additional ground vide application dt. 1st March, 2003.

"Without prejudice to the grounds of appeal filed along with the appeal memo, the appellant submits that if the capital gains are taxed in the hands of the appellant, the same are required to be taxed at the rates as per s. 112 of the IT Act following the ratio of Tribunal decision in the case of P.A. Chandran vs. Asstt. CIT (2000) 69 TTJ (Coch) 566."

3. Shri S.U. Pathak, the learned counsel appeared on behalf of the assessee. The learned counsel briefly explained the facts that late Smt. Vaishnabai Nagpal, the mother of the assessee owned a flat in Prabhat Building, Bombay. She executed a will on 23rd Dec., 1988. She unfortunately expired on 30th Aug., 1990. One Shri Madan Samant was appointed as a guardian of the assessee, who was then a minor. On 8th Sept., 1993, Shri Madan Samant in his capacity as legal guardian of Master Krishnagopal Nagpal entered into an agreement to sell the flat at Bombay on behalf of his ward with (1) Shri Faizan Nazir Gulamhussain; (2) Smt. Rashida Nazir Gulamhussai and (3) Irfan Nazir Gulamhussain, for a total consideration of Rs. 1,45,00,000. An application was made to the IT Department under the provisions of Chapter XX-A. No objection certificate was received from the appropriate authority in Feb., 1994. The possession of the said property was given on receipt of balance amount of Rs. 1,00,00,000 in April, 1994. The assessee did not file any return of income for asst. yr. 1994-95 or 1995-96, disclosing capital gain on sale of flat at Bombay. Proceedings of search under a. 132(1) was conducted on 19th June, 1996. Notice under s. 158BC of the Act was issued on 13th Sept., 1996. The assessee filed a return for the block period on 22nd April, 1997, declaring undisclosed income for the block period at Rs. 13,41,350. Subsequently, assessee filed revised return for the block period on 19th May, 1997, disclosing total undisclosed income for the block period at Rs. 51,20,990. The assessee while filing the return for the block period has shown NIL income, inter alia, in asst. yrs. 1994-95 and 1995-96. However, the computation of income for asst. yr. 1995-96 was shown at NIL as under:

Long-term capital gain

Sale consideration received (copy of sale deed will be produced at the time of hearing)		1,45,00,000
Less : (i) cost of acquisition Rs. 13,58,000 Indexed cost 13,58,000 x 259/100		35,17,220
(ii) cost of transfer legal fees	7,155
Brokerage	1,45,000
		1,52,155
Long-term capital gains			1,08,30,625
Less : Exemption under s. 54 purchase of 7 row houses (copy of sale deeds will be produced at the time of hearing)

 

 

It was contended on behalf of the assessee that Master Krishnagopal Nagpal entered into a joint venture agreement with Samant Estates (P) Ltd. for construction of the Raw houses in their project ‘Yashodanandan’ at Vimannagar, Pune, and invested capital gain in the said joint venture for availing deduction under s. 54 of the IT Act, 1961, (hereinafter referred as the ‘Act’). The AO observed that as per s. 54 Master Krishnagopal Nagpal should have obtained possession of these flats on or before 30th April, 1997. The assessee paid a sum of Rs. 1,20,00,000 to M/s Samant Estates (P) Ltd. in and around April, 1995, being the total amount payable towards construction. M/s Samant Estates (P) Ltd. allotted 7 row houses against investments and profits as per the terms of the joint venture executed between Samant Estates (P) Ltd. and the assessee. It was contended on behalf of the assessee that the joint venture agreement clearly indicates that the row houses were constructed by the assessee. If that is so, the time limit for construction or row houses to avail of exemption under s. 54 is three years from the date of sale. In November, 1996, the possession of all row houses were given to the other customers. The possession of 7 row houses, therefore, can be deemed to have been given to the assessee also in November/December, 1996. The assessee contended before the AO that he will be entitled to exemption under s. 54 of the Act on sale of flat at Bombay on total investments made for construction of 7 row houses through the joint venture agreement executed with Samant Estates (P) Ltd. It was also contended on behalf of the assessee that ‘residential house’ used in s. 54 includes plural also. The assessee will therefore, be entitled to grant of exemption under s. 54 on the entire amount of investments made for purchase/construction of 7 row houses acquired through the joint venture agreement. The AO did not accept the aforesaid explanation given on behalf of the assessee mainly on the ground that the assessee invested the capital gain arising on sale of flat at Bombay for completing the construction of Yashodanandan Project under joint venture agreement. This means that the assessee had invested this amount as his capital contribution towards the joint venture agreement. This venture and the tow houses acquired by the assessee represent the share of profit from joint venture including investments made by him. Therefore, the money so invested for carrying out the joint venture of completing the construction of Yashodanandan project cannot be treated as the amount utilised for construction of residential house. Therefore, irrespective of date of completion of the project or the date of handing over of the possession or number of units etc., the assessee is not entitled to grant of deduction under s. 54. The AO accordingly assessed the income for asst. yr. 1995-96 at Rs. 1,08,30,625.

4. The learned counsel submitted that separate agreements were executed between M/s Samant Estates (P) Ltd. and the assessee through his legal guardian Mr. Madan T. Samant in relation to each of the seven row houses. A specimen copy of one of these seven agreements has already been submitted in the compilation. It was stated that all other agreements executed in respect of seven row houses are similar. The learned counsel submitted that it is an undisputed fact that possession of the flat at Bombay was given in April, 1994, and capital gains, if any, is assessable in asst. yr. 1995-96. The Department has not disputed the fact that possession of the flat at Bombay sold by the assessee was given in April, 1994. The period of three years allowed for construction of residential house in order to avail the exemption under s. 54 of the Act will therefore, have to be reckoned w.e.f. April, 1994. The possession of seven row houses was received by the assessee in November/December, 1996. Therefore, the fact that the assessee invested Rs. 1.20 crores for construction of seven row houses before completion of three years from the date of transfer is also not in dispute.

5. The AO has held that the amount of sale proceeds of flat at Bombay has been invested for completing the construction of Yashodanandan project under the joint venture agreement which represents capital contribution made for carrying out the business activity in joint venture with Samant Estates (P) Ltd. The amount cannot be treated as invested in purchase of a residential house as envisaged in s. 54.

5.1 The learned counsel submitted that a proper reading of the joint venture agreement dt. 20th June, 1995 shows that the assessee had to pay total sum of Rs. 1,20,58,000 and in consideration thereof, he was entitled to get five row houses of 1377 sq. ft. each, one row house of 1999 sq. ft. and one row house of 2008 sq. ft. Clause 3 of the joint venture agreement clearly provides that the assessee shall not be liable for any losses nor will be entitled to any profits in the said Yashadanandan project except to get seven row houses to be constructed in Yashodanandan Project. The gist of the joint venture agreement was that the assessee had to pay Rs. 1,20,58,000 in lieu of which he was entitled to get 7 row houses to be constructed in Yashodanandan project.

6. The learned counsel submitted that the word ‘a residential house’ used in s. 54 of the Act will include plural by virtue of s. 13(2) of General Clauses Act, 1897. He placed strong reliance on the decision of the Tribunal Mumbai, in the case of Mr. Ratanchand Murarka, Mumbai, in ITA No. 4485/Mum/1999, dt. 12th Sept., 2001. The Bombay Tribunal has held that ‘a residential house’ would mean ‘any residential house’. It was further observed that use of a singular noun cannot be an impediment to the allowance of the exemption to more than one house. The quantum of exemption is linked to the amount of capital gain. It is difficult to imagine that the legislature would have intended to deny the exemption merely because the capital gains are invested in different residential houses and not a single residential house. It would be illogical to hold that only when the entire capital gain is invested in one residential house then the gain will be exempt and when the entire capital gain is invested in different or more than one residential houses, it will not be exempt. The assessee, for various reasons, including personal and family reasons, reasons of safety and security or employment, may think of buying more than one house with the capital gains, spread over different places. The Bombay Tribunal in the aforesaid decision also referred to the judgment of Hon’ble Bombay High Court decision in the case of K.C. Kaushik vs. P.B. Rane, ITO & Ors. (1990) 84 CTR (Bom) 62 : (1990) 185 ITR 499 (Bom). The aforesaid decision has been distinguished by the Tribunal on the ground that the question before the Hon’ble Bombay High Court was whether the assessee could claim exemption from capital gain in respect of the investments made in property at Priyadarshini or investments made in Kalpana property. This was not a case where the assessee claimed exemption under s. 54 with reference to investments made for purchase of a flat at Kalpana in July, 1980 and flat in Priyadarshini in October, 1979. The Tribunal has also observed that the Hon’ble Bombay High Court at p. 503 of 185 ITR has observed that capital gain can be adjusted against one of the flats only. However, this observation has to be understood in the context of the facts and controversy before the Hon’ble Bombay High Court.

7. The learned counsel also placed reliance on the decision of Tribunal Bombay in the case of Fulwanti C. Rathod vs. ITO in ITA No. 1092/Mum/1995 dt. 3rd May, 2002, in which it was held that investments made in more than one residential house will qualify for exemption under s. 54F.

8. The learned counsel also placed reliance on the circular dt. 25th March, 1997 in which it was clarified by the Board that s. 54 of the Act as is existed in the relevant year, lays emphasis on the use of property mainly for the purposes of assessee or his parents’ own residence. If an assessee has retained more than one house for the purpose of his own or his parents’ own residence and has used them for such residence, and not for any other purpose, the capital gains arising on transfer of each of such house would qualify for exemption under s. 54 of the Act. The learned counsel submitted that the same anology will apply in relation to investment of the amount of capital gain for purchase of a residential house, which would include investment made for purchase/construction of any residential house. The word ’a residential house’ includes plural in view of the context in which such exemption has been provided particularly in the light of aforesaid circular issued by the Board.

9. The learned counsel drew our attention to a copy of account of the assessee in the books of M/s Samant Estates (P) Ltd. placed at pp. 28 to 30 of the paper book. This shows that the entire amount of Rs. 1,20,58,000 had been paid by the assessee to Samant Estates (P) Ltd. during the period from 25th April, 1994 to 6th April, 1995. The joint venture agreement was executed on 20th June, 1995. The due date for filing the return of income for asst. yrs. 1995-96 was 30th June, 1995. The assessee had deposited the entire amount of Rs. 1,20,58,000 being the investment made for acquiring construction of 7 row houses in accordance with the joint venture agreement well before the due date of filing of the return prescribed under s. 139(1) of the Act. Thus, the condition of utilising the amount of capital gain before the due date prescribed under s. 139(1) also stands fulfilled on the facts of the present case.

10. The learned counsel placed reliance on the decisions reported in CIT vs. Mrs. Hilla J.B. Wadia (1993) 113 CTR (Bom) 173 : (1993) 216 ITR 376 (Bom), Smt. Shashi Varma vs. CIT (1999) 152 CTR (MP) 227 : (1997) 224 ITR 106 (MP), Mrs. Seetha Subramanian vs. Asstt. CIT (1996) 56 TTJ (Mad) 417 : (1996) 59 ITD 94 (Mad) and CIT vs. Smt. Bharati C. Kothari (2000) 160 CTR (Cal) 165 : (2000) 244 ITR 352 (Cal).

11. The Bench required the learned counsel to state as to whether the clearance certificate/no objection certificate was obtained from the competent authority under Chapter XX-C of the IT Act, 1961. The learned counsel submitted that clearance/no objection certificate was not obtained as Chapter XX-C does not apply to joint venture transactions. He placed a copy of order dt. 5th Sept., 1995, passed by the Appropriate Authority in the case of one M/s Mantri Housing and Constructions Ltd. in which it was observed that the joint venture agreement for common exploitation of development rights do not constitute ‘transfer’ within the meaning of term ‘transfer’ as defined in s. 269UA(f) of the Act. The learned counsel also submitted that the TRO had initiated attachment proceedings and auction of these seven row houses for recovery of demand created against the assessee. Thus, the Department had accepted the assessee to be the owner of these row houses acquired in accordance with the terms and conditions mentioned in the joint venture agreement supported by further seven separate agreements executed in relation to each of those seven row houses.

12. The learned counsel thus strongly supported the assessee's claim for grant of exemption under s. 54 in respect of investment made for purchase/ construction of seven row houses.

13. The learned Departmental Representative submitted that the flat at Bombay was sold vide agreement dt. 8th Sept., 1993, for total consideration of Rs. 1.45 crores. A perusal of the said agreement indicates that the assessee received Rs. 45 lakhs at the time of execution of the agreement for sale. The balance amount was to be paid by the buyers on completion of the same. The balance amount appears to have been received on or about 17th April, 1994. The amount given to M/s Samant Estates (P) Ltd. was an investment made for carrying out business under joint venture with Samant Estates (P) Ltd. Such business investments cannot be equated with purchase/construction of a residential house so as to qualify for grant of exemption under s. 54 of the Act. The assessee did not file any return of income under s. 139(1). The amount of capital gain derived on sale of flat at Bombay was therefore, rightly assessable as undisclosed income in the assessment made under s. 158BC of the Act for the block period. The assessee did not disclose such capital gain as income liable to tax even in the return for the block period. He only enclosed a computation of capital gains claiming it to be entirely exempt under s. 54 of the Act. The learned Departmental Representative submitted that if the assessee has to invest the amount of capital gains for purchase/construction of a residential house, there was no necessity of entering into a joint venture with the builders and/or contractors. The assessee could simply purchase a residential house or construct a residential house within the prescribed time limit for claiming exemption under s. 54 of the Act. Such investment made as capital contribution in joint venture cannot, therefore, be regarded as investment made for purchase/construction of residential house. The learned Departmental Representative pointed out that the assessee made initial deposit of Rs. 50 lakhs with Samant Estates (P) Ltd. on 25th April, 1994. The agreement for joint venture was executed on 20th June, 1995. A copy of one more agreement given by the assessee’s counsel is dt. 28th July, 1995. Copy of third agreement given by him is dt. 22nd July, 1995. In the joint venture agreement, it is provided that though amount of Rs. 1,20,58,000 has been paid for acquiring seven row houses in Yashodanandan, assessee shall not be liable for any losses nor he shall be entitled to any of the profits in said Yashodanandan project. In agreement dt. 28th July, 1995, it is inter alia mentioned at p. 5 of that agreement with M/s Samant Estates (P) Ltd. to give/allot seven row houses to the assessee in Yashodanandan project to be constructed on plot No. 27, Lohagaon, Pune, towards the share in the profits and investments made by him in the joint venture as mentioned above. In the original agreement it was stated that the assessee is not entitled to any share in the profits or losses of the joint venture. In this agreement dt. 28th July, 1995, it has been mentioned that all the seven row houses will be given/allotted towards share in the profit and investment made by him. A copy of agreement dt. 22nd July, 1995, inter alia, states that M/s Samant Estates (P) Ltd. (called promoter) have executed a joint venture with the assessee Mr. K.G. Nagpal to develop the property at village Yerawada, Tal. Haveli, Dist. Pune and they have completed the building under the name and style of ‘Janardhan’. Under this agreement it is mentioned that Samant Estates (P) Ltd. have agreed to give five row houses to the assessee in Yashodanandan project constructed on Plot No. 27 Lohagaon and one row house No. E-11 in Yashodanandan. The learned Departmental Representative on the strength of these different agreements executed between Samant Estates (P) Ltd. and the assessee, submitted that all these agreements clearly indicate that the assessee had entered into business agreements with M/s Samant Estates (P) Ltd. to develop the property and to deal in such real estate. He submitted that the intention and purpose of entering into the joint venture agreement should be seen. The agreements were for undertaking the work of development of the property jointly by the executants of joint venture agreement.

14. The learned Departmental Representative relied on the decision of the Tribunal Bombay in the case of Bombay Oil Industries Ltd. vs. Dy. CIT (2000) 82 ITD 626 (Bom) to support the contention that the IT authorities are empowered to go behind the apparent to find out the real facts and if the transaction on the basis of the evidence and the circumstances of the case, appears to them to be non-genuine or a facade or a make-believe affair, got up to evade the tax liability or if it appears that the series of steps taken to achieve the desired result is sham or collusive, they can ignore the transaction. Such power is not taken away by the provisions of s. 45 or 48.

15. The learned Departmental Representative submitted that the provisions of General Clauses Act cannot be applied in relation to interpretation of every provision contained in IT Act so as to mean that the single noun used anywhere and everywhere has to be taken as plural. It has to be understood in the context in which a particular legislative provision was introduced. The learned Departmental Representative also relied on the decision of Tribunal Delhi Bench in the case of Satish Chandra Gupta vs. AO (1995) 53 TTJ (Del) 578 : (1995) 54 ITD 508 (Del) in which the Tribunal held that the assessee’s claim for grant of deduction under s. 54 in respect of investment in construction of the Noida house property as also in purchase of flat at Kailash Hills was totally untenable. The Tribunal observed that the deduction for purchase or construction was to be allowed from the capital gain in respect of purchase or construction of only one house. The learned Departmental Representative also placed reliance on the decision of the Tribunal Bombay Bench in the case of Mrs. Gulshanbanoo R. Mukhi vs. Jt. CIT (2003) 78 TTJ (Bom) 768 : (2002) 83 ITD 649 (Bom), in which the Bombay Tribunal has held that the word is used in connection with purchasing or constructing ‘a residential house’. If the legislature intended to mean more than one residential units, it should have used simple words like residential house or house. The Tribunal rejected the assessee’s claim that expression "any residential use" would include more than one unit of residential house.

16. The learned Departmental Representative contended that if any exemption under s. 54 is allowable, it can be allowed only in respect of cost of acquisition of one row house and not on the investment made for acquiring seven different row houses. He also pointed out that seven row houses cannot be treated as forming part of one composite unit. It is well known that row house is a separate and independent house. The row houses are divided by a partition wall. No one would ever imagine that seven different row houses can be treated as ‘a residential house’. It is true that s. 54 is a beneficial provision but exemption can be granted only to the extent it is specifically provided in s. 54. The learned Departmental Representative further placed strong reliance on the judgment of the Bombay High Court in the case of K.C. Kaushik vs. P.B. Rane, ITO in which the Hon’ble Bombay High Court has clearly held at p. 503 that the capital gains can be adjusted against only one of the two flats. This clinches the issue. The Bombay Tribunal in the case of Ratanchand Murarka on which assessee’s counsel has placed heavy reliance has grossly erred in observing that the facts in the case of K.C. Kaushik before the Hon’ble High Court are distinguishable. The High Court has given a clear and categorical finding that exemption under s. 54 cannot be granted in relation to investment made for purchase of more than one residential house. The learned Departmental Representative also placed reliance on judgment reported in (2002) 82 ITD 626 (Bom) and (2002) 83 ITD 649 (Bom). The learned Departmental Representative thus strongly supported the order of the AO.

17. In his rejoinder the learned counsel submitted that the facts of the case before the Bombay High Court in (1990) 84 CTR (Bom) 62 : (1990) 185 ITR 499 (Bom) has been very aptly distinguished by the Bombay Tribunal in the case of Ratanchand Murarka. The question before the Bombay High Court was as to whether the assessee had a choice to opt for one of the two residential houses purchased by him within the time specified in s. 54. The assessee did not claim that investment made in both the residential houses should be considered for exemption under s. 54. Likewise the decision reported in (2002) 82 ITD 626 (Bom) was also different and distinguishable as in that case the principles laid down in the case of McDowell were applied in view of the multiplicity of the transactions involved therein. The facts of all those judgments relied upon by the learned Departmental Representative are clearly distinguishable.

18. The learned counsel was fair enough to state that the assessee did not file the return of income for asst. yr. 1995-96 under s. 139(1). Therefore, the income from long-term capital gain relating to sale of flat at Bombay, if it is liable to tax, it would form part of computation of total undisclosed income of the block period under s. 158BB while making an assessment under s. 158BC.

19. The learned counsel further draw our attention to application for additional ground submitted during the course of hearing. He submitted that the tax on capital gains should be levied at the rate of 20 per cent as prescribed in s. 112 and not 60 per cent as prescribed in s. 113. He placed reliance on the decision of Tribunal Cochin Bench in the case of P.A. Chandran vs. IAC (2000) 69 TTJ (Coch) 566 in which it was held that tax on capital gain forming part of block assessment is leviable at 20 per cent as provided in s. 112. The learned counsel was fair enough to state that he is of the view that since the income from capital gain is includible in the block assessment, the rate of 60 per cent has to be applied in view of clear provision contained in s. 113. Since there is conflict between s. 112 and 113, the view which is favourable to the assessee should be adopted, says the learned counsel. He submitted that he has raised this additional ground with a view to keep this issue alive.

20. The learned counsel submitted without prejudice to the various, arguments submitted by him that if the Tribunal is not inclined to grant exemption in respect of total investment made for construction of seven row houses, deduction in respect of investment made for one row house should be allowed. The learned counsel also submitted that the AOP has already been assessed to tax in respect of profit derived in the aforesaid joint venture. A copy of the assessment order in the case of M/s Samant Estates (P) Ltd. and others for asst. yr. 1997-98 has been placed at pp. 35 to 38 of the paper book which shows that the AOP was assessed at a total income of Rs. 86,29,481 as against declared income of Rs. 62,63,550. That assessment pertains to asst. yr. 1997-98 and it has no relevant bearing on the issue relating to assessability of capital gain in the case of the assessee for asst. yr. 1995-96.

21. The learned counsel also pointed out that the assessee has derived rental income from one of these seven row houses which was declared in asst. yr. 1998-99. One of the row house was let out to M/s L&T and rental income of Rs. 41,310 was derived by the assessee. This fact was stated with a view to support that the assessee had acquired right, title and interest over the said row house even without obtaining any clearance certificate under Chapter XX-C.

22. The learned counsel has also placed reliance Tribunal Pune Bench decision in the case of Rakeshkumar Vasantkumar Navkhandelwala (HUF) in ITA No. 1262/Pn/1995, wherein it was held that the condition laid down in s. 54, will be treated as fully complied with, as there is no condition to the effect that purchase of house must be out of sale proceeds of the plot. It is not even possible particularly when the house was purchased before the date of sale of plot as the house was purchased within a period of one year before the date of sale. One of the basis of rejection of assessee’s claim under s. 54 in the present case was that sale proceeds as such were not utilised for investment made for acquiring those seven row houses. Such a view of the AO is incorrect in view of the decision of the Tribunal, Pune. The learned counsel thus once again strongly supported the assessee’s claim for grant of exemption under s. 54 in respect of total investment made for purchase/construction of seven row houses.

23. We have carefully considered the rival submissions and have gone through the orders of the learned AO; we have also carefully gone through all the judgments cited by the learned representatives of both the sides. In order to properly appreciate the facts and submissions made by the learned representatives, it would be relevant here to reproduce the relevant extract from s. 54 of the Act.

"Profit on sale of property used for residence.

"54(1) Subject to the provisions of sub-s. (2), where, in the case of an assessee being an individual or a HUF the capital gain arises from the transfer of a long-term capital asset being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head "income from house property" (hereinafter in this section referred to as the original asset) and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house, then instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say:

(i) if the amount of the capital gain is greater than the cost of the residential house so purchased or constructed (hereafter in this section referred to as the new asset) the difference between the amount of the capital gain and the cost of the new asset shall be charged under s. 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or

(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under s. 45, and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain."

It is clear from the plain language of s. 54(1) that in order to attract the applicability of the aforesaid provisions following conditions should be fulfilled.

(a) capital gains arises from transfer by the assessee (an individual) HUF

(b) the transfer is of one or more building or land appurtenant thereto income wherefrom is chargeable under the head ‘income from house property’

(c) such building, etc. transferred by the assessee, is a residential house,

(d) such a residential house constitutes a long-term capital asset i.e, the house was held by the assessee for a period of more than 36 months within the meaning of s. 2(42A)

(e) the assessee has within a period of one year before or two years after the date on which transfer took place purchased or has within a period of three years after that date constructed, ‘a residential house’.

24. It is true that the decision of the Tribunal Bombay in the case of Ratanchand Muraraka supports the assessee’s contention that exemption in respect of investment made for more than one residential house will also be covered within the ambit of s. 54. This decision was rendered by the Bombay Tribunal on 12th Sept., 2001. The other Bench of Bombay Tribunal in the case of Mrs. Gulshanbanoo R. Mukhi vide their judgment dt. 16th Jan., 2002 have taken a contrary view and have held that expression ‘any residential house’ used in s. 54 cannot be interpreted to mean more than one residential house in view of unambiguous and clear language used in s. 54(1)(i)(ii). The learned counsel placed reliance on s. 13 of the General Clauses Act which was also relied upon by the Bombay Tribunal in the case of Ratanchand Muraraka. The provisions of s. 13(2) of General Clauses Act are reproduced below:

"13. In all Central Acts and Regulations, unless there is anything repugnant in the subject or context,

(1) words importing the masculine gender shall be taken to include females; and

(2) words in the singular shall include the plural, and vice versa."

It is clear from a plain reading of the aforesaid provision that s. 13(1) and (2) have been made subject to the expression "unless there is anything repugnant in the subject or context". It will, therefore, be necessary to examine the subject or context in relation to which the expression ‘a residential house’ has been used in s. 54 of the Act. It is not correct to say for all the words in the singular appearing in any Central Act the plural shall be substituted. All that s. 13 means is that the word need not be considered as a ‘singular’ under all circumstances, but it merely indicates the intention of the legislature that the words may be interpreted in the plural wherever the circumstances required that it should be so construed. In order to get its true import, it is necessary to view the enactment in retrospect, the reasons for enacting it, the evils it was to end and the objects it was to serve. The Act has, therefore, to be viewed as a whole and its intention determined by construing all the constituent parts of the Act together and not be taking one word here and another from there from particular enactment. It will therefore, be imperative to examine the context and subject dealt with by s. 54 of the Act.

25. Prior to asst. yr. 1983-84 the provisions of s. 54(1), inter alia, provided the condition of residence by the assessee or his parents in the property which was transferred as also the residence by the assessee, in the new property purchased or constructed by him. This condition was removed by the Finance Act, 1982 applicable from asst. yr. 1983-84. The circular of the Board relied upon by the learned counsel relates to the old provision of s. 54 where emphasis was laid on the user of the property mainly for the purpose of assessee or his parents’ own residence and that clarification was given in relation to transfer of one or more building, that if more than one house was retained by the assessee for the purpose of his own or parent’s own residence, the capital gain on sale of such houses will be entitled for exemption under s. 54 of the Act. That circular does not in any manner support the assessee’s contention that the investment made for purchase or construction of more than one residential house, should be considered for the purpose of grant of exemption under s. 54.

26. The reliance placed by the learned counsel on the decision of the Tribunal Pune Bench in the case of Rakeshkumar Vasantkumar Navkhandelwala (HUF), holding that investment need not be made out of sale proceeds of the plot as the house could be purchased before one year of the transfer of the land in availing the benefit of s. 54F. There is no quarrel about the principles laid down in this decision but this decision also does not support the assessee’s contention for grant of exemption in relation to investment made for acquiring seven row houses under s. 54(1).

27. After a careful consideration of the judgments cited by the learned representatives of the parties, we are of the considered opinion that the point in issue is squarely covered by the judgment of the Hon’ble Bombay High Court in (1990) 84 CTR (Bom) 62 : (1990) 185 ITR 499 (Bom). The assessee in that case was in service of Bank of Baroda. He purchased a flat in Suvarnadeep Co-op. Housing Society Ltd. (for short ‘Suvarnadeep’), Santacruz, Bombay, on 21st March, 1973, for a sum of Rs. 49,140 for the purpose of his residence. He was residing in that flat. On 24th Oct., 1979, he sold the said flat for Rs. 1,25,000 and on the same date purchased another flat in Jai Priyadarshini Co-op. Housing Society Ltd. at Khar, Bombay (for short ‘Priyadarshini’) for a sum of Rs. 1,11,000. He resided in the Khar flat from 24th Oct., 1979, to 25th July, 1980. On 26th July, 1980, he sold the Khar flat also for a sum of Rs. 1,20,000 and purchased another flat on the same date in Kalpana Co-op. Housing Society Ltd. (for short ‘Kalpana’), Santacruz, Bombay. Thereafter, he started residing in this flat. However, he vacated the flat on 16th May, 1981, on being transferred to Baroda, From 27th May, 1981 to 1st July, 1983, the flat in Kalpana was let out to the Bank of Baroda, his employers. For asst. yr. 1980-81, the assessee claimed that the surplus of Rs. 75,860 arising on the sale of the flat in Survarnadeep on 24th Oct., 1979, was not taxable as he had invested more than the said amount in the purchase of a flat in Kalpana on 26th July, 1980, for his residence. The ITO partly accepted the claim and held that the surplus was invested in the purchase of flat in Priyadarshini on 24th Oct., 1979, and not in the purchase of flat in Kalpana on 26th July, 1980, as claimed. The question in that case was whether the petitioner had a choice to choose the property against which capital gain which had arisen on the transfer of a capital asset are to be adjusted. There were other questions also with which we are not presently concerned. The Hon’ble Bombay High Court while dealing with the aforesaid question relating to interpretation of s. 54 has held as under:

"Evidently, relief is not available under the section in respect of capital gains arising on the transfer of any and every capital asset. Relief is available only if the capital asset is such that its income is chargeable under the head ‘Income from house property’ and which in the two years immediately preceding the transfer was being used by the assessee or a parent of his for the purpose of his own or the parent’s own residence. There is no dispute that this condition is satisfied in the present case as the flat in Survarnadeep was used by the petitioner from 1973 to 1979 for his own residence and income from it, if any, would have been chargeable under the head ‘Income from house property’. The second condition for availing of the relief is that the assessee must within a period of one year before or after the date of transfer of such a capital asset, purchase or within a period of two years after that date, construct a house property for his own residence. In this case, both the house properties, i.e., the flat in Priyadarshini and the flat in Kalpana, were purchased by the petitioner within one year of the date of the sale of the flat in Survarnadeep and both the flats were purchased for the purpose of residence. In the absence of any provision to the contrary, in my judgment, the petitioner is entitled to avail of the relief in respect of the capital gain arising on the sale of his flat in 1979 against the flat purchased in that year as also against the flat purchased in that year as also against the flat purchased on 26th July, 1980, it has, of course to be adjusted against one of the flats only. The petitioner has chosen to seek that relief against the purchase of the flat on 26th July, 1980, and, as held by the CIT in his order under s. 264 of the IT Act for the asst. yr. 1980-81, I am inclined to hold that it is for the petitioner to claim relief under this section against the purchase of any one of the flats........"

28. It is clear from the aforesaid judgment of the Hon’ble Bombay High Court that the Hon’ble High Court has specifically given a finding in relation to interpretation of s. 54 that investment made for acquiring only one of the flats would be eligible for grant of exemption under s. 54 of the Act. The decision of the Hon’ble Jurisdictional High Court in relation to interpretation of this very provision viz. s. 54 holding that benefit under s. 54 can be allowed only in respect of one of the flats purchased by the assessee, is binding and this in our humble view clinches and concludes the point in issue.

29. Let us look at some of the provisions relating to exemption in respect of capital gains arising from transfer of house properties contained in IT Act. Sec. 53 as it exited upto 1993-94 provides that long-term capital gain arising from the transfer of a residential house will be exempt from tax in cases where the consideration received on such transfer does not exceed Rs. 2 lakhs. In cases where such consideration exceeds Rs. 2 lakhs, the capital gain would be exempt proportionately. The exemption under this section was not available if the assessee owns any other residential house on the date of such transfer.

30. Sec. 54 provides for exemption of long-term capital gains arising from the sale of a residential house in a case where the capital gain is used for construction or purchase of another residential house. Sec. 54 was not applicable in relation to a long-term capital asset to which the provision of s. 53 are applicable. Sec. 54F provides for exemption in relation to capital gains arising from the transfer of any long-term capital asset, not being residential house in a case where the assessee, has within the period of one year before or two years after the date on which the transfer took place purchased or has within a period of three years, after the date constructed a residential house. Exemption under s. 54F was not available in a case where the assessee owned on the date of transfer of the original asset any residential house. Sec. 54F has been amended by the Finance Act, 2000 with effect from 1st April, 2001 which now provides that exemption under s. 54F will not be available in a case where the assessee owns more than one residential house on the date of transfer. Thus with effect from asst. yr. 2001-02 a person who already owns one residential house sells any capital asset other than the residential house and utilizes such capital gain for purchase of one more residential house he will be eligible for exemption under s. 54F. The expression ‘a residential house’ used in all these provisions would clearly mean that such exemption is available only in respect of investment made for purchase/construction of one house. An assessee who has purchased seven row houses cannot be said to have purchased/constructed ‘a residential house’. The provisions of s. 13 of General Clauses Act cannot therefore, be invoked in relation to interpretation of s. 54.

31. It will also be relevant here to state that s. 54 is not a provision meant for providing incentives in respect of profits and gains derived by the assessee from the execution of a housing project. It is meant for providing benefit to a person deriving capital gain enabling him to invest the capital gain derived from transfer of capital asset for purchase of a residential house. Sec. 54 is not similar to a provision like s. 80HHBA which provides for deduction in relation to profits and gains derived from the business of execution of a housing project subject to fulfilment of various conditions mentioned in s. 80HHBA. We are, therefore, of considered view that the assessee is entitled to investment made for purchase of ‘a residential house’ only i.e., investment made in respect of purchase/ construction of only one row house subject to fulfilment of other conditions prescribed in s. 54.

32. The contention of the learned Departmental Representative that the amounts given by the assessee to Samant Estates (P) Ltd. was a capital contribution for business of joint venture would not disentitle the assessee to get deduction under s. 54 in respect of investment made for purchase/ construction of one row house as the possession over row houses constructed by the assessee was obtained well before the period prescribed under s. 54. Sec. 54 nowhere places a restriction about the mode of acquisition of a residential house property. It does not provide that if the residential house is acquired/constructed within period specified in s. 54 as a result of business agreement like the joint venture agreement in the present case, the assessee would not be entitled to get benefit under s. 54. It is further provided in s. 54 that if the new asset viz. a residential house purchased by the assessee is transferred before the period of three years, the cost of acquisition of such new asset will be reduced by the amount of capital gain treated as exempt. If the new residential house is transferred before the expiry of three years, the assessee would be liable to pay tax on the amount of capital gain by deduction of equivalent amount from cost of acquisition of the new residential house. We, are therefore, of the considered opinion that the assessee is entitled to grant of deduction under s. 54 in respect of the cost of only one of the seven row houses under s. 54 of the Act.

33. One of the grounds by the assessee is that the capital gain on sale of flat at Bombay should not be considered as undisclosed income of the appellant under Chapter XIV-B, is devoid of any merit. The learned counsel himself conceded that such income will form part of total income to be computed in accordance with s. 158BB in an assessment made under s. 158BC as the assessee did not file any return of income under s. 139(1) for asst. yr. 1995-96. The provision of s. 158BB clearly supports the action of the AO of including such income from capital gain in the block assessment made under s. 158BC.

34. The learned counsel had made a casual mention during the course of hearing that seven row houses have a common roof and they should be treated as one composite residential house. The learned counsel did not invite our attention to any of the documentary evidence to support this contention. However, on a perusal of the paper book we found that a copy of the possession letter dt. 31st March, 1997, from Samant Estates (P) Ltd. to the assessee has been placed in the paper book. This possession letter shows that the possession of row house Nos. E-10, 11, 12, 13, 14 D-15 was given pursuant to the deed of joint venture executed on 20th June, 1995, for construction of row houses. It is further, mentioned in this certificate that these row houses are interlinked and having one common entrance. A copy of letter dt. 31st March, 1997, from Samant Estates (P) Ltd. relating to handing over possession of row house B-16 pursuant to the joint venture agreement dt. 20th June, 1995, has also been separately submitted. It is well known that row house constructed by any builder are separate and independent house. When somebody purchases seven row houses it cannot be said that the person concerned has purchased "a residential house". The assessee has entered into separate agreement with M/s Samant Estates (P) Ltd. in respect of all the seven row houses. Each house is independent and separate. Some of the row houses situated adjacent to each other are also divided by a partition wall. The assessee has himself let out only one out of seven row houses to M/s L&T in asst. yr. 1998-99. This clearly shows that each row houses was capable of being used as one house independently of other row houses. It is beyond comprehension that seven row houses acquired by the assessee pursuant to seven separate agreement in furtherance to the joint venture agreement can be treated as ‘a residential house’. In our view each row house is a separate and distinct residential house. The assessee is entitled to grant of deduction in respect of investment made in only one out of seven row houses acquired/constructed by him. A perusal of the assessment order shows that cost of row house No. B-16 is the maximum cost which is Rs. 21,78,000. The cost of other row houses as per the details mentioned hereinbefore is less than that. Since the assessee has a choice of adopting the most beneficial recourse, we direct the AO to consider investment made in acquiring/construction of row house No. B-16 costing Rs. 21,78,000 as qualifying for exemption under s. 54 of the Act while computing the long-term capital gain arising out of sale of flat at Bombay for a total consideration of Rs. 1,45,00,000. The AO will compute the amount of long-term capital gain accordingly.

35. The assessee has raised an additional ground stating that the long-term capital gain should be taxed in the hands of the assessee at the rate prescribed in s. 112 of the Act. Reliance was placed on the decision of the Cochin Bench reported in (2000) 69 TTJ (Coch) 566. It is true that s. 112 provides that where the total income of an assessee includes any income arising from the transfer of a long-term capital asset, which is chargeable under the head ‘capital gain’ it should be taxed at 20 per cent. The mode and manner of calculation of tax has further been elaborately expressed in s. 112. This provision was inserted by the Finance Act, 1992, w.e.f. 1st April, 1993. Sec. 113 was inserted by the Finance Act, 1995, w.e.f. 1st July, 1995. This clearly provides that the total undisclosed income of the block period determined under s. 158BC shall be chargeable to tax at 60 per cent. This is special provision prescribing levy of tax at 60 per cent on the total undisclosed income determined in an assessment made under s. 158BC of the Act. This being the special provision will prevail over the general provision relating to tax on long-term capital gain. It may also be relevant here to mention that the maximum rate of tax in the cases of individual and income assessable under various other rates was 30 per cent in most of the years under consideration. The tax in the normal assessment in relation to long-term capital gain was to be charged at 20 per cent as per s. 112. The assessee was also liable to pay interest under ss. 234A, 234B and 234C on the amount of tax payable apart from penalties imposable under various other provisions of law. The legislature in its wisdom considered it fit to provide that in search cases, the tax on the total undisclosed income assessable under s. 158BC should be charged at 60 per cent and no other levy like interest or penalty will be imposable in respect of searches conducted prior to 1st April, 1997. In the present case, the proceedings of search was conducted on 9th June, 1996. The assessee may perhaps derive advantage by paying tax on capital gain at 60 per cent instead of tax at normal rate along with interest and penalties imposable under other relevant provisions of the Act. On a careful consideration of the relevant provisions of law, we are of the considered opinion that the clear provisions of s. 113 which are provisions of special nature dealing with tax in the case of block assessment of search cases will prevail over other general provisions contained under the IT Act. On a careful consideration of entire relevant facts we are of the opinion that the additional ground raised by the assessee which involves consideration of a legal point should be entertained. We accordingly entertain the said additional ground. However, in view of the aforesaid facts and discussions, we are of the opinion that the additional ground so raised by the assessee is devoid of any merit and is accordingly rejected.

36. In the result, the appeal is partly allowed.

 

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