2006 (7) TMI 166 - HC - Income Tax

Summary

Issues:
Challenge to disallowance of Rs. 10 lakhs in computation of capital gain for assessment year 1992-93. Interpretation of section 54E of the Income-tax Act regarding exemption from capital gains.

Analysis:
The appellant challenged the disallowance of Rs. 10 lakhs in the computation of capital gain for the assessment year 1992-93. The appellant sold a flat and received a net consideration of Rs. 52 lakhs, out of which Rs. 40 lakhs was invested in specified assets as per section 54E of the Income-tax Act. The appellant claimed exemption for the entire deposit of Rs. 50 lakhs, but the exemption was denied for the investment of Rs. 10 lakhs on the ground that it did not form part of the net consideration. The question raised was whether the net consideration itself should be invested in specified assets or if raising funds from any source and depositing the equivalent sum of net consideration within six months would suffice for claiming exemption under section 54E. It was noted that the source of Rs. 9.4 lakhs raised by the appellant was not part of the net consideration, and the balance Rs. 60,000 was withdrawn from the appellant's S.B. account. The court emphasized that the net consideration should be invested within the stipulated time under section 54E, and any diversion of the sale consideration would disentitle the assessee from exemption. The judgment clarified that the advance income generated on investment cannot be treated as net consideration for reinvestment, as once part of the net consideration is spent, it is not available for reinvestment. The court held in favor of the Department, dismissing the appeal and limited the decision to the facts of the case, excluding situations where the net consideration was not received by the assessee.

In conclusion, the court's interpretation of section 54E of the Income-tax Act emphasized strict compliance with the provision, requiring the net consideration to be invested within the specified time for claiming exemption from capital gains. The judgment clarified that diversion or application of the sale consideration would disentitle the assessee from exemption and that advance income generated on investments cannot be considered as part of the net consideration for reinvestment. The decision highlighted the importance of adhering to the provisions of the Act to qualify for exemptions and cautioned against using accruals to make up for any shortfall in net consideration invested in specified assets.