2024 (7) TMI 285 - HC - Income Tax

Validity of the Settlement Commission's order u/s 245D(4) - Rejection of exemption u/s 54 on the cash portion of the investment made by the petitioner to purchase the property after sale of the property - claim denied as not been made in return of income, secondly claim of exemption is not allowed on the concealed transaction and thirdly that the applicant has not deposited the amount of capital gain in the capital gain deposit scheme under Section 54(2) of the Act - as submitted that the petitioner has claimed exemption u/s 54 in the return of income, however so far as undisclosed income is concerned, obviously the petitioner would not have made such claim in the return of income - HELD THAT - On perusal of the above provisions of Section 54 of the Act, which does not stipulate that the petitioner is required to disclose the amount of sale consideration received in cash while claiming exemption under Section 54 of the Act, in the return of income filed by the petitioner. The very basis of such reason denying deduction under Section 54 of the Act is contrary to the application filed by the petitioner for settlement of the tax dues vis-a-vis the undisclosed income. Settlement Commission/ Board is required to pass order in accordance with the provisions of the Act. Therefore, the grounds for rejection given by the board for denying the deduction under Section 54 of the Act apparently are not in accordance with the provisions of Section 54 of the Act. Therefore, exercising the scope of judicial review against the order of the Board as held in case of Jyotendrasinhji 1993 (4) TMI 1 - SUPREME COURT wherein it is held that writ jurisdiction of the High Court is not barred and the Hon ble Supreme Court has further observed that the judicial review flowing from the exercise of such powers should be restricted to considering whether the order of Settlement Commission is contrary to the provisions of Income Tax Act. Not in dispute that the transactions reflected in excel sheet are pertaining to the cash portion received by the petitioner on sale of Sahajanand Bungalow and payment of cash for purchase of Sahajanand Villa. Therefore, the contention raised on behalf of respondent that there is no correlation between the receipt and payment of cash for sale and purchase of the property is without any basis. The petitioner is accordingly entitled to the benefit of deduction under Section 54 of the Act with regard to the cash transaction of sale and purchase of the property even if the petitioner did not disclose such cash portion of transaction in the return of income filed or that the petitioner did not deposit the said amount in the bank account when it is apparent from the seized materials that the cash transaction has been carried out of sale and purchase of the properties by receipt and payment of cash is carried out on the same dates as stated herein above. Therefore the grounds on which the deduction under Section 54 of the Act is denied by the board are not tenable, as none of the three grounds on which the deduction under Section 54 of the Act is denied can be said to be contrary to the provisions of the Act and that such contravention has prejudiced the appellant and the petitioner is entitled to get the deduction under Section 54 of the Act also qua the amount paid in cash to purchase the property as amount received in cash by the petitioner is considered as part of undisclosed income of the petitioner, then once the same is considered as undisclosed income, the petitioner is also entitled to deduction under Section 54 of the Act when it is also not in the dispute that the such amount has been invested for purchase of the property by payment of cash. Thus order of the Settlement Commission to the extent of denial of deduction u/s 54 of the Act in respect of cash portion is quashed and set aside - Decided in favour of assessee.

Issues Involved:
1. Validity of the rejection of exemption under Section 54 of the Income Tax Act, 1961.
2. Compliance with the procedural requirements under Section 54.
3. Correlation between cash received from the sale and investment in the new property.
4. Scope of judicial review under Article 227 of the Constitution of India.

Detailed Analysis:

1. Validity of the rejection of exemption under Section 54 of the Income Tax Act, 1961:
The petitioner sought to set aside the impugned order passed by the Interim Board for Settlement, which rejected the claim for exemption under Section 54 of the Income Tax Act, 1961, amounting to Rs. 2,40,14,000/- for the Assessment Year 2016-17. The rejection was based on three grounds: the claim was not made in the return of income, exemption is not allowed on concealed transactions, and the petitioner did not deposit the amount of capital gain in the capital gain deposit scheme under Section 54(2) of the Act.

2. Compliance with the procedural requirements under Section 54:
The petitioner argued that the exemption claim under Section 54 was valid despite not being made in the return of income, as the undisclosed income was brought to tax by the Settlement Commission. The petitioner contended that the investment in the new property should be considered for granting the benefit of Section 54. The court noted that Section 54 does not stipulate that the petitioner must disclose the amount of sale consideration received in cash in the return of income to claim exemption. The court found that the grounds for rejection were contrary to the application filed by the petitioner for the settlement of tax dues.

3. Correlation between cash received from the sale and investment in the new property:
The petitioner provided details of the sale and purchase transactions, showing the correlation between the cash received from the sale of the property and the investment in the new property. The court found that the transactions of sale and purchase were carried out on the same dates, as reflected in the seized documents. The court concluded that there was a clear correlation between the receipt and payment of cash for the sale and purchase of the property.

4. Scope of judicial review under Article 227 of the Constitution of India:
The court referred to the decision of the Hon'ble Supreme Court in Jyotendrasinhji vs. S.I. Tripathi, which held that judicial review is permissible to consider whether the order of the Settlement Commission is contrary to the provisions of the Income Tax Act. The court found that the grounds for rejection given by the Interim Board for denying the deduction under Section 54 were not in accordance with the provisions of the Act. The court exercised its power of judicial review and set aside the order of the Settlement Commission to the extent of denial of deduction under Section 54 in respect of the cash portion of Rs. 2,40,14,000/-.

Conclusion:
The court concluded that the petitioner is entitled to the benefit of deduction under Section 54 of the Income Tax Act for the cash portion of the sale consideration. The order of the Settlement Commission was modified to grant the deduction as claimed by the petitioner. The rule was made absolute to the extent of allowing the deduction under Section 54 for the cash portion of the sale consideration.

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