2014 (11) TMI 1190 - HC - Income Tax

Long term capital gain exemption u/s 54F - Held that - Section 54F(4) is pari materia with Section 54(2). Therefore, what follows is that when the statute prescribes expressly when the capital gain is to be offered to tax. It shall be treated 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 u/s 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. 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. 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 law and therefore, it requires to be set aside. - Decided in favour of the assessee.

Summary

Issues involved:
Challenging order on capital gains tax exemption under Section 54F for assessment year 2005-06.

Analysis:
1. The appellant challenged the order passed by the Income Tax Appellate Tribunal, which upheld the tax levy on capital gains for the assessment year 2005-06. The appellant had claimed long term capital gain exemption under Section 54F of the Income Tax Act, 1961. The Assessing Authority recalculated the income and disallowed the exemption, imposing interest under Sections 234B and 234C of the Act. The Commissioner of Income Tax (Appeals) partly allowed the appeal, granting a minimal exemption. The Tribunal dismissed the appeal, leading to the current challenge.

2. The substantial questions of law raised in the appeal included whether the appellant was entitled to exemption under Section 54F(1) as the amount deposited in the capital gains account is deemed to be the cost of the new asset. The appellant argued that the authorities erred in assessing the income for the assessment year 2005-06 when the property was sold in 2005 but the capital gain was offered for tax in 2007-08. The appellant contended that the amount deposited in the capital gain account should be treated as an investment in a new asset, and the unutilized capital gain should be taxed only after three years from the date of the original asset's transfer.

3. The Court referenced a previous case involving Section 54(2) of the Act to clarify that the statute prescribes when the capital gain should be offered for tax. If the amount is deposited in a Nationalized Bank as required, the unutilized capital gain should be taxed only after three years from the transfer of the original asset. The Court held that assessing the income for the assessment year 2005-06 when the property was sold in 2005 and the capital gain was offered for tax in 2007-08 was erroneous. The Court ruled in favor of the appellant, setting aside the impugned orders passed by the authorities below.

Conclusion:
The High Court allowed the appeal, overturning the orders of the lower authorities and ruling in favor of the appellant regarding the capital gains tax exemption under Section 54F for the assessment year 2005-06. The Court held that the appellant was entitled to exemption as per the provisions of the Income Tax Act, and the authorities erred in assessing the income in the incorrect assessment year.