1986 (1) TMI 137 - AT - Income Tax

Summary

Issues:
1. Exemption under section 54E of the Income Tax Act for capital gains tax on compensation received for acquired properties.
2. Interpretation of the requirement to invest sale proceeds in specified assets within a stipulated period.
3. Determining the date of transfer and the timeline for making the deposit for claiming exemption.

Analysis:
The judgment by the Appellate Tribunal ITAT Bangalore dealt with the issue of exemption under section 54E of the Income Tax Act concerning capital gains tax on compensation received for acquired properties. The assessee's shops near Devaraja Market, Mysore, were acquired by the City Improvement Trust Board, and the compensation was received after a significant delay. The Income Tax Officer (ITO) rejected the claim for exemption under section 54E as the proceeds were not invested in specified assets within the stipulated period. The Assessee's claim was also negatived by the Appellate Assistant Commissioner (AAC) based on the statutory timeline requirements.

The assessee contended that since the properties were tenanted, the physical possession was taken over by the Government upon finalization of the award, and the compensation was deposited in a nationalized bank within six months of receiving it. The argument was that the transfer took place before the specified date, and the deposit was made within the required timeframe, fulfilling the conditions of section 54E. The Departmental Representative, however, argued that physical possession by the Government was necessary for the transfer, and the deposit should have been made within six months from the date of transfer.

The Tribunal analyzed the arguments and held that legal ownership of the premises passed to the Government upon acquisition, and physical possession by the Government was not a prerequisite for the transfer. It was deemed unreasonable to expect the assessee to make a deposit within six months of the transfer when the compensation had not been received. The Tribunal noted that subsequent amendments in the Act regarding additional compensation supported the assessee's position. Consequently, the Tribunal set aside the lower authorities' findings and ruled in favor of the assessee, granting exemption from capital gains tax.

In conclusion, the Tribunal allowed the appeal, emphasizing that the assessee had met the requirements of section 54E by depositing the compensation within the stipulated period, despite the delay in receiving it, and the legal ownership had effectively transferred to the Government upon acquisition, irrespective of physical possession.