2020 (1) TMI 54 - HC - Income Tax

Exemption u/s 54F - Single Judge held that the appellant was entitled to withdraw the amount deposited in the Capital Gains Account subject to deduction of tax applicable to the case in hand - HELD THAT - The proviso to sub-section (4) of Section 54F carves out an exception to sub-section (4) of Section 54F of the said Act which deals with two contingencies - (i) where the amount deposited in Capital Gain Scheme Account is wholly utilized for the purchase or construction of a new asset within the period specified in sub-section (1) of Section 54F of the said Act; and (ii) where only a part of the said amount is utilized for the purchase or construction of a new asset. The next part of the proviso itself lays down that when the amount deposited in the Scheme is utilized only partly for the purchase or construction of a new asset, the amount by which the amount of Capital Gains arising from the transfer of the original asset not charged under Section 45 on the basis of the cost of the new asset as provided in clause (a), or as the case may be, of clause (b) of sub-section (1), exceeds the amount that would not have been so charged, had the amount been actually utilized by the assessee for the purchase or construction of a new asset within the period specified in sub-section (1) of Section 54F been the cost of the new asset, shall be chargeable under Section 45 as income of the previous year in which the period of three years from the date of transfer of the original asset expires. If only a part of the amount deposited in the Capital Gains Account Scheme is utilized for the construction or purchase of a new asset within the specified time, income tax is chargeable on the unutilized amount. That is why the learned Single Judge, by the impugned order, has directed that the appellant is entitled for withdrawal of the amount deposited under sub-section (4) of Section 54F of the said Act subject to deduction of tax applicable. No error in the view taken by the learned Single Judge as, on its plain reading, the interpretation of the proviso to sub-section (4) of Section 54F of the said Act made by the learned Single Judge is correct.

Summary

Issues:
Challenge to rejection of writ petition concerning tax liability on unutilized capital gains under Section 54F of the Income Tax Act, 1961.

Analysis:
1. The appellant filed a return of income for the assessment year 2016-17 and deposited a portion of the sale consideration from an immovable property into the Capital Gain Account Scheme, 1988. A notice was issued under Section 142(3) of the Income Tax Act based on admitted facts, aiming to tax the unutilized capital gains under Section 54F.

2. The appellant acquired a new property before the expiry of three years from the original asset's transfer date. The notice sought to tax the unutilized amount after deducting the cost of the new asset. The Single Judge held that the appellant could withdraw the deposited amount subject to applicable tax deductions.

3. The appellant contended that as he partially utilized the amount by purchasing a new property, the remaining sum in the Capital Gain Account should be refunded entirely. He relied on the proviso to Section 54F(1) of the Act, arguing that if the amount is used partly, it should not be taxed under Section 45.

4. The Court examined Section 54F(4) of the Act, emphasizing that unutilized amounts deposited in the Capital Gain Account Scheme are taxable if not fully utilized for a new asset within the specified period. The Court noted that under Section 45(1), the deposited amount is taxable as income in the year of transfer.

5. The proviso to Section 54F(4) carves out exceptions for full and partial utilization of deposited amounts. It specifies that if only a part is used for a new asset, the excess unutilized amount is chargeable under Section 45. The Single Judge's interpretation of this provision was upheld, allowing the appellant to withdraw the deposited amount subject to tax deductions.

6. The Court found no error in the Single Judge's interpretation of the law. The appeal challenging the rejection of the writ petition was dismissed, affirming the tax liability on unutilized capital gains under Section 54F of the Income Tax Act, 1961.