2018 (6) TMI 885 - AT - Income Tax

Disallowance of exemption u/s 54F - can the assessee be denied the exemption u/s 54F when assessee failed to deposit unutilized funds in a capital gains account scheme before filing the return of income u/s 139(1)? - reopening of assessment - Held that - As assessee has not filed the return of income and filed the return of income only after receipt of notice u/s 148 of the IT Act but he has filed the return of income within the time allowed u/s 139(4) - As decided in KAREEMSONS PVT. LIMITED VERSUS COMMISSIONER OF INCOME-TAX 1991 (8) TMI 28 - KARNATAKA HIGH COURT it is a right given to the assessee u/s 139(4) by the Act cannot be lost merely because proceedings were initiated u/s 147 of the Act. Thus assessee has filed return u/s 139(1) within the time allowed u/s 139(4) - at the time of filing of return, assessee has already utilized the funds in construction of the building - therefore, as per the conditions laid down u/s 54F (4) of the Act, assessee should deposit unutilized funds in bank whereas assessee has already utilized portion of the sale consideration in construction of the house before filing return of income - hence the claim u/s 54F cannot be denied under these circumstances - Decided in favor of assessee.

Summary

Issues Involved:
1. Validity of the exemption claim under section 54F of the Income Tax Act, 1961.
2. Admissibility of additional evidence submitted by the assessee.
3. Compliance with the procedural requirements under section 54F(4) regarding the deposit of unutilized funds.

Issue-wise Detailed Analysis:

1. Validity of the exemption claim under section 54F of the Income Tax Act, 1961:
The assessee sold land to DLF and did not initially file a return of income. Upon receiving a notice under section 148, the assessee filed a return declaring the sale consideration and claimed an exemption under section 54F for the construction of a residential house. The Assessing Officer (AO) allowed the deduction for the cost of the plot but disallowed the construction expenditure due to lack of supporting documents. The CIT(A) confirmed the AO's order. The ITAT remitted the matter back to the CIT(A) for fresh consideration based on additional evidence. The CIT(A), after receiving a remand report from the AO, still found discrepancies and upheld the disallowance. The ITAT, however, found that the assessee had indeed constructed a residential house and invested a significant portion of the sale consideration, thus allowing the exemption claim under section 54F.

2. Admissibility of additional evidence submitted by the assessee:
The assessee submitted bills and vouchers as additional evidence before the CIT(A) and the ITAT. The CIT(A) directed the AO to verify these documents. The AO and Additional CIT confirmed the existence of the residential house and the investment made by the assessee. Despite this, the CIT(A) raised doubts about the reliability of the bills and vouchers due to discrepancies in dates and the absence of certain approvals. The ITAT, however, considered the additional evidence and found that the AO and Additional CIT had verified the documents and confirmed the construction of the house. The ITAT concluded that minor discrepancies should not invalidate the exemption claim.

3. Compliance with the procedural requirements under section 54F(4) regarding the deposit of unutilized funds:
The CIT(A) observed that the assessee did not deposit the unutilized funds in a specified account before filing the return of income under section 139(1). The ITAT noted conflicting judicial views on this issue. The Karnataka High Court in CIT v. K. Ramachandra Rao held that the exemption should not be denied if the entire sale consideration was invested in the construction of a house within the stipulated period, even if the funds were not deposited in a specified account. The Bombay High Court in Humayun Suleman Merchant v. CCIT held that the deposit of unutilized funds is mandatory. The ITAT, following the Karnataka High Court's view, held that the assessee's failure to deposit the unutilized funds should not deny the exemption, especially since the return was filed within the time allowed under section 139(4) and the funds were utilized for construction.

Conclusion:
The ITAT allowed the assessee's appeal, granting the exemption under section 54F. The Tribunal emphasized the beneficial nature of section 54F and the need to interpret it liberally to serve its legislative purpose. The ITAT also highlighted the importance of considering the assessee's circumstances, such as illiteracy and lack of awareness of statutory requirements, in deciding the case. The judgment underscores the principle that procedural lapses should not overshadow substantive compliance with the law.