2024 (11) TMI 644 - HC - Income Tax

Revision u/s 263 - Tribunal confirmed the position that the assessing officer had failed to apply his mind to the assessment in regard to the first two issues i.e. the rental income and the consultancy charges paid to Ernst and Young confirmed the order of the CIT to that extent and as regards the deduction under Section 54EC, the Tribunal allowed the same - HELD THAT - The date of receipt of advances is contemporaneous with the execution of the sale agreement that is dated 02.01.2003. The investments have been made only thereafter and hence it is clear that the source for the investments are the advances received from the purchasers. The respondent has also explained that the advances were initially deposited in mutual funds and the maturity amounts had been credited to its bank account from out of which the investment in bonds had been made. The mere fact that the advances had been deposited in mutual funds would not, in our view, militate against the claim under Section 54EC as the investments in bonds had been made from out of the proceeds of the mutual funds. There is no dispute, rather it is admitted, that there were no other funds available with the assessee from out of which the investment in bonds could have been made. The nexus between the advances and the amounts invested in bonds is clear, directly traceable to the advances received. In light of this admitted position, we return a finding based on the materials available on record that the source of the investment in bonds are the advances that has been received by the assessee in relation to the subject transaction. In fact, this aspect of the matter has not been lost sight of by the assessing authority. Under notice dated 01.12.2006, the assessee has been called upon to furnish various details prior to finalisation of assessments. A perusal of the above notice informs us that the claim of capital gains has not escaped the attention of the assessing officer. Necessary documents including the agreement have been called for and an explanation has been sought from the assessee that has been duly tendered. Argument of the revenue is that Section 54EC requires the investments to be made only subsequent to the date of transfer - Section 54 and the provisions thereafter, from Section 54A to Section 54 GB, provide for an exemption from the levy of capital gains in various stipulated circumstances. Section 54E states that the capital gain arising on the transfer of a capital asset prior to 01.04.1992, is not to be charged in certain cases. Similarly, Section EA and EB, applicable in the event of the transfer of a long-term capital asset before 01.04.2000, grants an exempts from capital gain if the gain is invested in specified securities in the manner provided under those sections. The exemption granted u/s 54EA and EB in respect of transfers prior to 01.04.2000, has been continued by Section 54EC, and is applicable to transfers post 01.04.2000. The scheme of capital gains exemption is thus seen to have envisaged a seamless sequence, from Section E dealing with transfers prior to 01.04.1992 to the present-day Section EC applicable to transfers post 01.04.2000, without interruption. There are, by and large, no major differences in the ingredients of the scheme itself. Hence, in our considered view, there should be no differences in the interpretation of those provisions, barring those areas where the provision itself makes a patent distinction. The Circular issued in the context of Section 54E is thus applicable in the context of Section 54EC as well as the scheme of exemption under erstwhile Section 54E continues in 54EC in one continuous progression. The Delhi High Court has, however, in the case of Bhupendra Kumar Bhaumik v. Union of India 2002 (10) TMI 67 - DELHI HIGH COURT considered a similar case albeit in the context of Section 54E, holding in favour of the assessee. The ratio of the judgment of the Supreme Court in the case of Malabar Industrial Co. Ltd. 2000 (2) TMI 10 - SUPREME COURT would also fully support us in our conclusion that there is no error in the order of the assessing officer warranting intervention under Section 263 of the Act. In light of the detailed discussion above, the substantial questions of law are answered in favour of the respondent-assessee

Summary

Issues Involved:

1. Omission of agreed rental income in the assessment.
2. Disallowance of consultancy charges paid to Ernst and Young.
3. Eligibility for deduction under Section 54EC of the Income Tax Act regarding investments in NABARD and REC Bonds.

Issue-wise Detailed Analysis:

1. Omission of Agreed Rental Income:

The Commissioner of Income Tax (CIT) issued a show cause notice under Section 263 of the Income Tax Act, 1961, asserting that the assessment order was erroneous and prejudicial to the interests of the revenue. The CIT noted that the agreed rental income of Rs. 75,000/- was omitted from the assessment. The Tribunal confirmed the CIT's view that the assessing officer failed to apply his mind to this issue, thus affirming the CIT's order for revision of the assessment.

2. Disallowance of Consultancy Charges:

The CIT also identified that consultancy charges of Rs. 45 lakhs paid to Ernst and Young were claimed against the capital gains of Rs. 12.50 Crores. The CIT argued that these expenses were not wholly and exclusively incurred in connection with the transfer, thus not allowable. The Tribunal agreed with the CIT's findings, maintaining that the assessing officer did not adequately scrutinize this claim, thereby upholding the CIT's decision to revise the assessment.

3. Deduction under Section 54EC:

The primary contention revolved around the eligibility for deduction under Section 54EC concerning investments in NABARD and REC Bonds. The CIT contended that the investments were made prior to the date of transfer and from the redemption of securities, not from the advances received, thus disqualifying the exemption. However, the Tribunal allowed the deduction under Section 54EC, which was contested by the Revenue, arguing that the Tribunal's order was non-speaking and lacked a detailed discussion.

The High Court examined the sequence of events, noting that the sale agreement was executed on 02.01.2003, with the transfer completed on 16.12.2003. The assessee had invested in bonds from the advances received, which were initially placed in mutual funds. The Court found a clear nexus between the advances and the bond investments, concluding that the investments were indeed made from the sale proceeds. The Court also addressed the applicability of a CBDT Circular issued in the context of Section 54E, ruling that the principles of the Circular extend to Section 54EC due to the continuity in the capital gains exemption scheme.

The Court considered various precedents, including the Bombay High Court's decision in Subhash Vinayak Supnekar, which supported the assessee's position. The Court distinguished the facts of the present case from those in R.Krishnaswamy, noting that the latter involved different issues related to the timing of capital gains recognition.

Ultimately, the Court concluded that there was no error in the assessing officer's original order concerning the Section 54EC deduction, negating the need for revision under Section 263. Consequently, the substantial questions of law were answered in favor of the respondent-assessee, and the Tax Case (Appeals) were dismissed.