No exemption allowed for failure to deposit the consideration towards purchase of new flat

The High Court of judicature at Mumbai recently in the case of ITA No.545 of 2002, Humayun Suleman Merchant (Appellant) vs. The Chief Commissioner of Income Tax Mumbai City, XVII, Mumbai and another (Respondents) has held that no exemption allowed for failure to deposit the consideration towards purchase of new flat.

Lawyers engaged in the appeal:

Mr. B. M Chatterji, Senior Advocate along with Ms.Shilpa Goel, Mr.Ranit Basu and Mr. G.S.Pikale for M/s S.V.Pikale & Company appeared for the Appellant. On the other hand, Mr. A. R. Malhotra together with Mr. N. A. Kazi appeared on behalf of the Respondents.

The bench:

Honorable Justice M. S. Sanklecha and Honorable Justice A.K. Menon passed the said judgment on 18.8. 2016.

Backgrounds of the appeal:

This appeal was filed under Section 260A of the Income Tax Act, 1961 challenging the order dated 17.5. 2002 passed by the Income Tax Appellate Tribunal.

The impugned order was passed in connection with the Assessment Year 1996-97. The appeal was admitted on 25.8.2004.

Issues raised in the appeal:

The following substantial questions of law were raised in the appeal:

(a) Whether on the facts of the case, the Tribunal was justified in applying the provisions of Section 54(F) of the Act?

(b) Whether on the facts of the case, the Tribunal was right in holding that the Assessing Officer has rightly computed the deduction claimed under the provisions of section 54F of the Income Tax Act, 1961, restricting the exemption under section 54F of the Act proportionately to the amount that was invested by the assessee?

Facts and circumstances of the case:

The facts resulting in the appeal were as follows:

On 29.4.1995, the appellant conveyed a plot of land in Mumbai for a total consideration of Rs.85,33,250/-. On 16.7.1996, the appellant entered into an agreement for sale to purchase a flat at the total consideration of Rs.69,60,000/-.

The appellant paid two installments of Rs.10, 00,000/- each on 17.7. 1996 and 23.10.1996 to the developer before the due date for filing of return under Section 139(1) of the Act i.e. before 31s.10. 1996.

On 1.11.1996 the petitioner paid to the developer another installment amounting to Rs.15, 00,000/- for purchase of the flat according to the terms of the agreement dated 16.7. 1996.

On 4.11.1996 the appellant filed his return for the Assessment year 1996-97 i.e. after the due date of filing the return.

On 13.3.2001 the Assessing Officer passed an Assessment Order under Section 143(3) read with Section 147 of the Income Tax Act.

The Order determined the net consideration at Rs.75.39 lakhs. The Assessing Officer allowed a proportionate exemption of Rs.31.55 lakhs from Capital Gain Tax as per Section 54F of the Income Tax Act.

The balance consideration of Rs.43, 84,334/- which was payable for purchase of the flat was brought under the tax net under the head ‘Capital Gains’.

The failure on the part of the appellant to deposit the unused consideration for purchase of the flat in specified bank accounts as per the norms of the scheme of Central Government under Section 54F(4) of the Act made the balance amount taxable.

Being aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). By an order dated 19.10. 2001, the CIT (A) noted the fact that the appellant had obtained possession of the new flat on 27.1. 1997.

But the order of the Assessing Officer dated 13.3. 2001 was not set aside. Being aggrieved, the appellant carried the matter before the Tribunal.

By the impugned order, the Tribunal concluded that the appellant had only utilized Rs.35, 00,000/- out of the total consideration received on sale of land towards purchase of a flat before the due date of filing the return.

Further, the balance of the total consideration was not deposited in the specified bank account as was required by Section 54F (4) of the Act. Thus the appeal of the appellant-assessee was dismissed.

The assessee filed further appeal to the Honorable High Court.

Points of law raised before the Honorable High Court:

In the above facts two substantial questions of law arose for consideration:

• No submissions were made by the appellant to support the question rose relating to applicability of Section 54F (4) of the Act to the present case. It was agreed between Counsel for the parties that Section 54F (4) of the Act was applicable to the present facts. The only issue for consideration was its interpretation.
• In view of the above, issue no.1 was answered in favour of the respondent i.e. revenue and against the appellant.

Arguments of the appellant:

The Appellant placed reliance upon the decision of this Court in Commissioner of Income Tax vs. Mrs. Hilla  J.B. Wadia [1995] 261 ITR 376 to contend that similar issue was concluded in favour of the appellant-assessee.

It was urged that that the Circular issued by the CBDT dated 15.10.1986 relating to construction of a home by Delhi Development Authority should be extended to cities like Mumbai.

The reliance was placed upon the decision of the M. P. High Court in Smt. Shashi Varma vs. Commissioner of Income Tax [1997] 224 ITR 106.

The judgment:

The High Court dismissed the appeal and held that Section 54F (1) of the Act which grants exemption from Capital gain tax in case a flat is purchased within a year before the sale of capital asset or within a period of two years after the date of the sale or where a house is constructed within a period of three years from the date of sale of the capital asset, is subject to the provisions of Section 54F (4).

Hence, where the consideration received is not appropriated or utilized , the same would be subject to the charge of capital gain tax, unless it is deposited in specified bank account as per Section 54F(4) of the Act.

Also read:

Tax Exemptions of Educational institutions under section 10(23C) (iiiad)