2009 (11) TMI 904 - HC - Income Tax

Exemption u/s 54F - intimation u/s 143(1)(a) - denial of deduction as assessee had not invested the sale consideration in full or part in any of the specified accounts prior to the date of filing return in terms of section 54F(4) - ITAT allowed deduction - HELD THAT - In order to qualify for exemption under section 54F(3) the assessee should have first deposited the sale proceeds of the property in any bank account and the construction of the house to qualify for exemption under section 54F should have been completed by utilising the sale proceeds also available with the assessee. In this case though the assessee constructed new building within the period of three years from the date of sale it was with funds borrowed from HDFC. Assessee is not entitled to exemption u/s 54F because the assessee neither deposited the sale proceeds for construction of the building in the bank in terms of sub-section (4) before the date of filing returns nor was the sale proceeds utilised for construction in terms of section 54F(3) - So much so the assessee was not entitled to claim exemption on capital gains under section 54F of the Act which the Assessing Officer rightly declined. Validity of intimation u/s 143(1)(a) denying exemption - Whether claim of exemption u/s 54F could be disallowed in the course of proceedings u/s 143(1)(a)? - It is settled position that the section authorises the AO to make disallowance of items which are prima facie inadmissible. It was the duty of the assessee to establish the eligibility for exemption from payment of tax on capital gains by production of documents in terms of the statutory provisions. According to the relevant provisions stated above in the first place it was the duty of the assessee to deposit the net sale proceeds in the bank before due date for filing return and furnish proof of the same along with the return filed which was admittedly not done. Secondly by allowing credit of value of transferred property in the capital account of the assessee in the firm the assessee concedes that the sale proceeds was neither received nor going to be utilised for construction or purchase of house. So much so in our view exemption claimed u/s 54F was prima facie inadmissible and therefore the officer was justified in making disallowance in the proceedings u/s 143(1)(a). Consequently the appeal is allowed vacating the order of the Tribunal and by restoring the assessment confirmed by the first appellate authority.

Summary

Issues:
1. Challenge to order granting exemption under section 54F of the Income-tax Act.
2. Interpretation of requirements for exemption under section 54F.
3. Disallowance of exemption under section 54F in section 143(1)(a) proceedings.

Analysis:

Issue 1:
The appeal challenges the order of the Income-tax Appellate Tribunal granting exemption under section 54F of the Income-tax Act to the respondent-assessee from paying tax on long-term capital gains. The assessee transferred land to a partnership firm as his capital contribution, availed a loan for house construction, and claimed exemption under section 54F in the assessment year 1995-96. The Assessing Officer denied the exemption, leading to appeals and ultimately the Tribunal canceling the assessment proceedings. The Revenue challenges this decision.

Issue 2:
The key contention revolves around the interpretation of section 54F requirements for exemption. The Revenue argues that the assessee must utilize sale proceeds for house purchase or construction within specified timelines and deposit the net sale consideration in a specified bank account before filing the return. The assessee's counsel counters that investing an equivalent amount in house construction within three years is sufficient, regardless of utilizing the sale consideration directly. The court analyzes section 54F(4) and emphasizes the necessity of depositing sale proceeds in a bank account before filing the return, which the assessee failed to do. The court concludes that the assessee did not meet the criteria for exemption under section 54F due to not depositing the sale proceeds or utilizing them for construction.

Issue 3:
Regarding the disallowance of exemption under section 54F in section 143(1)(a) proceedings, the court explains that the Assessing Officer can disallow prima facie inadmissible items. The assessee's failure to provide proof of depositing sale proceeds in a bank account and allowing the firm to credit the value of the property in the capital account without utilizing the sale proceeds for construction or purchase of the house led the court to deem the exemption claim as prima facie inadmissible. Consequently, the court allows the appeal, vacates the Tribunal's order, and restores the assessment confirmed by the first appellate authority.

In conclusion, the judgment highlights the strict requirements under section 54F for claiming exemption on capital gains, emphasizing the need to deposit sale proceeds in a bank account and utilize them for house construction within specified timelines. The court's decision underscores the importance of meeting statutory provisions to substantiate claims for tax exemptions.