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TMI Blog1996 (9) TMI 93X X X X Extracts X X X X X X X X Extracts X X X X ..... ed May 17, 1981, another property was purchased for an amount of Rs. 1,75,000. This was again sold by sale deed dated February 25, 1983, for an amount of Rs. 2,30,000. The question was of the assessability of the capital gains with reference to these transactions. In the proceedings before the tax authorities---Income-tax Officer, Salary Circle, Trivandrum, the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal, Cochin Bench---the claims of the assessee with regard to the particulars such as expenses, improvements, came to be modified both by the first appellate authority as well as by the Tribunal. However, the factual undisputed and final matrix is available in the order of the Tribunal in the following manner by way of a tabulation : Rs. Rs. A. Sale proceeds of Trivandrum house 1,60,000 Less : Cost of acquisition 54,250 Cost of improvements as determined by us 40,000 94,250 --------------------- ------------------------- Long-term capital gains 65,750 -------------------------- B. Sale proceeds of Madras property 2,30,000 Less : Expenses on sale 6,000 2,24,000 --------------------- Less : Cost of acquisition and improvement : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital gains relatable to the old asset only. The first appellate authority reached the conclusion that if the new property was sold after three years of its acquisition, then and then alone no capital gains either of the old or of the new property would come up for computation. The Trivandrum property was acquired in 1966 and was sold in 1980. The Income-tax Appellate Tribunal considered the same question and in fact if the reasoning of the Tribunal in paragraphs 9 and 10 of its order are seen, the Tribunal also did not find difficulty in regard thereto. The Tribunal has considered the provisions of section 54 of the Act as dealing with the question of profit on the sale of property used for residence. The reasoning proceeds further to note the first condition as the requirement of the capital gains in question necessary to be arising from the transfer of a long-term capital asset. For the purpose of benefit of section 54 of the Act, the second condition requires that the assessee has, within a period of one year before or after the date on which the transfer took place, either purchased or constructed a residential house in regard thereto and, if it is constructed, it has to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 65,750 are the capital gains that were available and would have to be treated in the process of logic as liable to forfeiture. However, even after reaching the above conclusion, the new asset having been sold within 36 months being a short-term capital gain, the Tribunal proceeds that when this new asset at Madras is sold within 36 months, the original exemption in relation to the capital gains of the old asset cannot be understood as could be brought to tax because the long-term capital gains --- its character --- cannot stand obliterated. In other words, although the Tribunal proceeded in the right direction at the end, the sale of the Madras asset within 36 months of its purchase is considered by the Tribunal as a short-term capital gain, not to be controllable by the provisions of section 54 of the Act. The question is as to whether this last somersault is correct and legal. The assessee had not engaged any advocate. Learned senior tax counsel stated before us that this provision has not come up for consideration hitherto either in this court or any other court. Counsel submitted before us that the statutory provision speaks of a situation of forfeiture of a benefit earned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 54(1)(ii) of the Act---"the cost shall be reduced by the amount of the capital gain"---will have to be read only in the event of the new asset being of the character of a long-term capital asset only. Learned counsel relied on the Explanation to section 54 in the light of the definition of "short-term capital asset" as available in section 2(42A) of the Act meaning that if any capital asset is held by an assessee for not more than 56 months immediately preceding the date of its transfer, it would be a short-term capital asset. Learned counsel for the assessee contended that the sale transaction of the Madras property dated February 25, 1983, satisfying the requirements would have to be understood as a short-term capital asset taking the situation out of the clutches and rigor of section 54 of the Act. Learned counsel for the assessee also made submissions on the above basis with regard to the question of direction as available under the provisions of section 80T of the Act. The question of capital gains is understandable by reference to its initial introduction of section 45 of the Act. "Capital gains" would mean "any profits or gains arising from the transfer of a capital asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a period of three years. A perusal of section 54(1)(i) of the Act would show that it would arise for consideration and consequent operation only in a situation relating to a transfer within a period of three years as specified therein and when the conditions stated therein are applicable as governing the situation. Section 54(1)(ii) of the Act provides another and independent consequence with reference to a situation relating to the transfer within a period of three years of its purchase or the construction of a residential house as it is. It is specifically enacted that in a situation if the amount of a capital gain is equal to or less than the cost of the new asset, obviously the capital gain shall not be charged under section 45. It is in this context the latter part of the statutory provision provides a situation. This latter part of the statutory provision is as follows : ".......and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain. " In the event of any capital gains relatable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom its transfer within a period of three years of its purchase or construction, the said statutory provision provides that the cost shall be reduced by the amount of the capital gains. In the process, reading the statutory provisions of section 80T of the Act, it will be seen that the provision also is referable to capital assets other than short-term capital assets. The above process of reasoning makes it more than difficult to appreciate the reasoning of the Tribunal in the context, in an effort to have harmonious construction. In our judgment, the plain statutory language presents no difficulty. The factual consequence is that the amount of Rs. 65,750 would get revived as a result of the forfeiture. The factual matrix discussed and specified hereinbefore as undisputedly appearing in paragraph 10 of the order of the Tribunal reproduced at the outset would show that the Madras property was purchased for an amount of Rs. 1,75,000 by the document dated May 17, 1981. The Tribunal has computed the sale proceeds of the Madras property at Rs. 2,24,000, thus obviously leaving a difference of Rs. 49,000 arising therefrom as capital gains out of the transaction. This amount of Rs. 49,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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