2020 (10) TMI 1163 - HC - Income Tax

Writ appeal by revenue - Claim of the Assessee was allowed in the writ petition - Revision u/s 264 - CIT rejected the claim for deduction u/s 54 - Assessee deposited partial amount in the capital gain deposit account with State Bank of India, and partial spent on construction activity - Writ Appeal filed by the revenue has become infructuous owing to the fact that the 1st appellant has passed an order u/s 264(7) dated 20.02.2020 and granted relief to the assessee - HELD THAT - Order passed by the 1st appellant dated 20.02.2020 that it has not been passed without prejudice to the rights of the department in pursuing the Writ Appeal against the order in the writ petition. In fact, the 1st appellant records in the order that taking cognizance of the direction issued by the High Court, assessee was heard and in pursuant to the Court's decision, the additional cost of construction incurred by the assessee for claiming deduction under Section 54 of the Act was allowed and then, relief has been granted. Revenue cannot pursue this appeal after implementing order passed in the writ petition. However, we take note of the argument of Mr. Prabhu Mukunth Arunkumar, learned standing counsel for the appellant with regard to the legal issue, which has been decided by Writ Court by following the decision in K.Ramachandra Rao 2015 (4) TMI 620 - KARNATAKA HIGH COURT . On that issue, we are of the primafacie view that finding rendered in Humayun Suleman Merchant, appears to reflect the correct position of law.

Issues Involved:
1. Interpretation and application of Section 54 and Section 54F of the Income Tax Act, 1961.
2. Requirement to deposit unutilized capital gains in a specified account under Section 54(2) and Section 54F(4).
3. Validity of the Karnataka High Court's decision in the case of K. Ramachandra Rao.
4. Impact of procedural non-compliance on the eligibility for tax exemption.
5. Implementation of the order passed by the Principal Commissioner of Income Tax under Section 264(7).

Detailed Analysis:

1. Interpretation and Application of Section 54 and Section 54F of the Income Tax Act, 1961:
The core issue revolves around whether the assessee is entitled to additional exemption under Section 54 for the assessment year 2014-2015. The assessing officer denied the exemption on the grounds that the assessee did not deposit the additional amount in the capital gains account scheme. The court examined the legal provisions under Section 54 and Section 54F, emphasizing that the intention of the legislature was to provide relief to taxpayers investing in residential property within the stipulated time.

2. Requirement to Deposit Unutilized Capital Gains in a Specified Account:
The revenue argued that the assessee failed to comply with Section 54(2), which mandates depositing unutilized capital gains in a specified account to claim exemption. The court referenced the Karnataka High Court's decision in K. Ramachandra Rao, which held that if the entire sale consideration is invested in constructing a residential house within three years, the exemption cannot be denied solely for not depositing the amount in the capital gains account before the due date.

3. Validity of the Karnataka High Court's Decision in K. Ramachandra Rao:
The court considered the Karnataka High Court's decision, which was pivotal to the assessee's argument. The revenue contended that the decision was rendered sub-silentio and did not address the requirement of depositing the amount in a notified account. The court noted that the Bombay High Court in Humayun Suleman Merchant had criticized this decision, emphasizing strict interpretation of exemption provisions.

4. Impact of Procedural Non-Compliance on Eligibility for Tax Exemption:
The court discussed whether non-compliance with procedural requirements under Section 54(2) could bar the assessee from claiming exemption if the substantive requirement under Section 54(1) was met. The single judge opined that procedural non-compliance should not hinder the assessee from obtaining benefits if the substantive requirements were satisfied within the prescribed time.

5. Implementation of the Order Passed by the Principal Commissioner of Income Tax:
The revenue's appeal became infructuous as the Principal Commissioner had already granted relief to the assessee under Section 264(7). The court directed the revenue to implement the order within four weeks, noting that pursuing the appeal was futile after the relief had been granted.

Conclusion:
The court dismissed the revenue's appeal as infructuous but vacated the single judge's finding on the legal question, leaving it open for future adjudication. The court emphasized the necessity of strict interpretation of exemption provisions as per the Supreme Court's decision in Dilip Kumar. The Principal Commissioner was directed to give effect to the order dated 20.02.2020 within four weeks.

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