Exemption under s 54B

Sale and purchase of agricultural land — Exemption under s 54B cannot be denied to assessee merely because he has used money in addition to money received from sale of land for purchase of another agricultural land — as held by DelTrib in Sita Jain and Anr v ACIT — In favour of: The Assessee ; ITA Nos. 4754, 4755/Del/10 : Assessment Year: 2007–2008

Exemption under s 54EC — The only condition for grant of exemption under s 54EC is that the funds used for the investment must be traceable to the sale proceeds.

Sita Jain and Anr. v ACIT 1

ITAT BENCH: ‘E’, DELHI

I.T.A Nos. 4754, 4755/Del/10

Assessment Year: 2007-08

Rajpal Yadav, JM

Decided on: 20 May 2011

Order

Per: Rajpal Yadav, JM:

ITA No. 4755/Del/1 0 and ITA No. 5036/Del/1 0, are the cross appeals at the instance of respective

parties against the order of Ld. CIT(A) dated 15th September, 2010 passed in asstt. year 2007-08

whereas ITA No. 4754/Del/10 is directed at the instance of assessee against the separate order of Ld.

CIT(A) dated 15th September, 2010 in asstt. year 2007-08. The issues agitated in all the appeals are

interconnected to each other, therefore, we heard them together and deem it appropriate to dispose off to them by this common order. Ld. Representatives have argued the appeal of Smt. Sita Jain

substantially. Therefore, for the facility of reference, we are taking up the facts mainly from this

appeal i.e. 4754/Del/10.

2. In ground No. 1, assessee has pleaded that order passed by the Ld. CIT(A) is not sustainable in the eyes of law. It is general ground of appeal and no arguments were advanced by the Ld. Counsel for the assessee. Hence, it is rejected.

3. In ground No. 2, the assessee has pleaded that notice u/s 143(2) has been served after a period of one year from the end of the month in which the return was filed. Therefore, asstt. order is not

sustainable in law. Ld. Counsel for the assessee, however, did not press this ground of appeal and it is rejected.

4. In ground No. 3 the appeal assessee has pleaded that Ld. CIT(A) has erred in confirming the

disallowance of Rs. 13,75,000/- which was disallowed by the AO out of the claim made u/s 54B of

the Income Tax Act.

5. The brief facts of the case are that assessee is a senior citizen and has shown income form the

interest derivatives and agricultural land. She has filed her return of income on 28.7.2007 declaring an income of Rs. 55,40,225/- which include agricultural income of Rs. 2,21,936/-. On scrutiny of the

accounts, it revealed to the AO that assessee had purchased agricultural land for a consideration of Rs. 1,30,840/- on 7th April, 1994 at Indore. She has sold this land vide registered sale deed bearing No. 8438, executed on 1 9th March, 2007, for a consideration of Rs. 81,50,000/- The assessee has

declared capital gain of Rs. 78,87,887/-. She had claimed exemption u/s 54B and 54F of the Income

Tax. While making the claim u/s 54B of the Income Tax Act, she contended that an agricultural land

for a consideration of Rs. 31,84,845/- has been purchased at Indore vide purchase deed No. 6590

dated 20th March, 2007.

___________________________________________________________________________

1

ACIT v Shri Mahavir Prasad Jain

I.T.A No. 5036/Del/1 0

Assessment Year: 2007-08

6. Ld. AO had noticed payments received by the assessee towards sale of agricultural land and paid by assessee towards purchase of agricultural land, which read as under :-

Sale of agriculture lands		Purchase of agriculture land		Shortfall
Date	Amount	Date	Amount
26.07.2006	1 ,25,000
14.08.2006	5,00,000	17.10.2006	20,00,000	13,75,000
02.11.2006	10,00,000
03.03.2007	35,00,000	07.03.2007	9,46,000
12.03.2007	30,25,000

7. According to the AO, as on 17.10.2006, assessee had paid an advance of Rs. 20 lac towards

purchase of the agricultural land. She had received only Rs. 6,25,000/- which indicate that sum of Rs. 13,75,000/- paid by the assessee to the vendors did not come from the sale proceeds of the earlier agricultural land. Hence, it cannot be construed that assessee had made investment in the purchase of new agricultural land out of the sale proceeds of the old agricultural land to this extent. He, thereafter discussed what section 54B contemplates and how it has been explained that exemption u/s 54B would not be available to the assessee on the utilization of pre existing funds. He disallowed the claim of assessee.

8. Appeal to the Ld. CIT(A) did not bring any relief to the assessee.

9. With the assistance of Ld. Representative, we have gone through the record carefully. There is no

dispute with regard to the facts on record. In our opinion, Ld. Revenue Authorities have failed to

construe the transaction. The actual date which gives rise a capital gain to the assessee is the date

when she sold the agricultural land i.e the day when she transferred the capital assets within the

meaning of section 2(47) of the Income Tax Act. Similarly, utilization of sale proceed would be

considered on the day when assessee has made investment from the sale proceeds. The AO interpreted  the transaction as if the currency notes which received by the assessee should be given to the vendor for the purchase of the land. The crucial date is the date i.e. 19th March, 2007 when assessee sold the land and 20th March, 2007 when assessee purchased the land. Prior to these two dates, any advance received by the assessee or paid by the assessee are meaningless. She is not supposed to reconcile the amount taken and paid. The AO at the most could have asked the  assessee to explain the source of Rs.13,75,000/- paid as an advance to her vendor. The situation can be analyzed with a different angle also. In the hands of the vendor, capital gain would accrue on 20th March 2007, when assessee purchased the land from the vendor. Can the AO argue that a sum of Rs. 20 lacs was received by the vendor of the assessee on 17.10.2006. Therefore, capital gain has accrued to him on this date. It was merely an advance, the capital asset was not transferred within the meaning of 2(47) of the Income Tax Act. Therefore, in our opinion, Ld. Revenue Authorities have given unnecessary weightage to the alleged advance given by the assessee, while computing her claim of exemption. The total amount otherwise paid by the assessee has been financed from the sale proceeds of her agricultural land. In view of the above discussion, we allow this ground of appeal and delete the disallowance made by the AO. We direct the Ld. AO to grant exemption u/s 54B of the Income Tax Act for a sum of Rs.13,75,000/-.

10. In the next ground of appeal, grievance of the assessee is that Ld. CIT (A) has earred in

confirming the disallowance of Rs. 17,40,318/-. The brief facts of the case are that out of the total

capital gain of Rs. . 78,87,887/-, a sum of Rs. 31,84,845/- was allocated towards purchase of

agricultural land and a deduction u/s 54B was claimed which we have discussed in the preceding

paragraph. The balance Rs. 47,03,042/- has been claimed on the ground that assessee has purchased a residential house for sum of Rs. 23,80,985/- and raised the construction over that by incurring a sum of Rs. 29,62,724/-. The AO has accepted the contention of assessee with regard to the expenditure incurred on construction amounting to Rs. 29,62,724/-. However, he rejected the contentions of the assessee with regard to the cost of land amounting to Rs. 23,80,985/-. He allowed the exemption u/s 54F to the extent of Rs. 29,62,724/- and the balance amount of Rs. 17,40,318/- has been added in the income of the assessee. The brief facts on this issue are that assessee had purchased half share of plot 9A, Model Town, Rewari on 23rd May, 1998 at a total cost of Rs. 1,03,600/-. The other half share was purchased by her husband. The assessee had purchased half share of her husband on 25th September, 2006 at a cost of Rs. 22,77,385/-. There is no dispute about these facts. It is also not in dispute that exemption u/s 54F will be available to an assessee, if he has purchased a residential house within a period of one year before or two years after the date on which the transfer of capital has taken place or within a period of 3 years after that date constructed a residential house. Meaning thereby, if an assessee has purchased a house within one year before the transfer of a capital asset giving rise to capital gain, then that assessee can claim exemption u/s 54F on account of utilization of capital gain purchase of a residential house. The purchase of the plot 9A Model Town Rewari is within one year from the transfer of an agricultural land by the assessee. The AO has also not disputed this aspect.

Rather while referring to the circular No. 667 he made the following observations:-

3.3. On being confronted, the assessee has referred to Circular No. 667 dated 18.10.1993 to contend

that the cost of land is an integral part of the cost of residential house. However, this office has no

difference of opinion with the assessee that the cost of land is to be included in the cost of residential house. What this office has objections to is the adjustment or application of the cost of an old or preexisting land towards the qualifying investment u/s 54F. On this issue, the quoted Circular of the Board does not help the assessee. On the other hand, the later part of the Circular supports the contention of the undersigned that the sales consideration of the original asset should  have beenutilized for constructing the house, including purchase of the land for such purposes, when the Circular clarifies as under:-

“Accordingly, if the amount of capital gain for the purpose of section 54F, is appropriated towards

purchase of a plot and also towards construction of a residential house thereon, the aggregate cost

should be considered for determining the quantum of deduction under section 54/54F, provided that

the acquisition of plot and also the construction thereon are completed within the period specified in

these sections.

11. Ld. CIT(A) concur with this view of the AO.

12. With the assistance of Ld. Representative, we have gone through the record carefully. It appears

that Ld. AO failed to appreciate the true controversy. He has intermingled the assessee and her

husband, whereas for the purpose of income tax Act, both of them are independent identity. The

observation of the AO is that assessee has been trying to adjust the capital gain against the cost of old or pre existing land towards the qualifying investment u/s 54F, while making this observation he lost sight that prior to 25th September, 2006 assessee was owner to the extent of half share of plot No. 9A, Model Town, Rewari. The other half share has been acquired through registered sale deed on 25th September, 2006. If that be so, then how the AO can say that capital gain is being adjusted towards the cost of old and pre existing assets. Assessee and her husband are separate incomes tax assesses. She has purchased the plot from her husband. This stand of the assessee can be tested with a different angle also. Her husband received sale proceed of Rs. 22,77,385/- and made investment in the REC bond . He claimed exemption u/s 54EC. Meaning thereby, a capital gain on sale of the plot had arisen to him. He has offered capital gain for tax but claimed exemption u/s 54EC on the ground that he has made investment in the REC bond. In the hands of her husband, department is taxing capital gain arisen on sale of the plot. Therefore, the revenue is accepting their independent identity. In view of the above discussion, we allow this ground of appeal and direct the AO to allow deduction u/s 54F on the cost of purchase of the plot No. 9A upon which assessee has raised the construction and the cost of construction had already been allowed her for claiming exemption u/s 54F of the Act.

13. In the result, appeal of the assessee is partly allowed.

14. The assessee has pressed only ground No. 3 which relates to disallowance of Rs. 13,75,000/- from grant of exemption u/s 54B. The facts and circumstances are identical to the case of Smt. Sita Jain which we have discussed while disposing off her ground No. 3. The 50% share was claimed in the hands of Smt. Sita Jain and the rest in the hands of her husband. In view of our discussion made in the case of Smt, Sita Jain, this ground of appeal is allowed and AO is directed to grant the exemption u/s 54B of the Income Tax Act to the assessee. Appeal of the assessee is allowed.

15. In this appeal of revenue ,it has been pleaded that Ld. CIT(A) has erred in deleting the addition f

Rs. 11,93,488/- which was disallowed by the AO from an exemption u/s 54 EC. The facts have been

discussed in the case of Smt. Sita Jain. Assessee had sold plot of land bearing 9A ,Model Town,

Rewari for a consideration of Rs. 22,50,500/-. He has shown capital gain on this sale at Rs.

18,05,154/-. The capital gain has been claimed exempt u/s 54EC of the Income Tax Act by

reinvestigating the capital gain in the purchase of REC bonds amounting to Rs. 50,000/- and Rs.

17,60,000/-. According to the AO, on perusal of the REC bond it reveals that the bond of Rs. 50,000/-

is in the joint name of Shri Mahavir Prasad Jain and Rajiv Jain. Another REC bond is of Rs.

17,60,000/- ( 176 x 10000) is in the joint name of Sh. Mahavir Prasad Jain, Sita Jain and Preeti Jain.

The AO has observed that the bonds are in the joint names and no identifiable shares of co-owner is

discernable. He invited the explanation of assessee as to why exemption of bond should not be

restricted to one third or half of the value of the bond as the case may be. Because one bond was in the name of two persons namely Shri Mahavir Prasad Jain and Shri Rajiv Jain. The other was in the name of three persons. In response to the query of AO, it was contended by the assessee that he is 72 years of age. In order to safeguard the future complication, the other names have been added to the bonds as nominee. The bonds are absolute property of the assessee and the other named persons have no right or claim on the bonds. The AO did not accept this contention. He observed that by introduction of the other co owners in the bonds, the assessee has diluted his ownership to half or one third of the bonds and accordingly exemption also ought to be restricted to the extent of his ownership in the bonds so acquired. The AO also observed that by adding names of other family member as co-owners, the assessee has in fact given a gift without consideration to the other co-owners, which cannot be the intention of law, when it allowed the assessee, benefit of section 54EC. The AO in this way disallowed the exemption of capital gain of Rs. 11,93,488/-.

16. Dissatisfied with the action of AO, assessee carried the matter in appeal before Ld. CIT(A). Ld.

CIT(A) has accepted the claim of assessee on the strength of ITAT order passed in the case of ITO v.

Smt. Saraswati Swaminathan reported in 116 ITD 234.

17. Ld. DR while impugning the order of Ld. CIT(A), submitted that in the case of Smt. Saraswati

Swaminathan relied upon by the Ld. CIT(A), it was found that the son did not contribute anything to

the investment and this finding is not in dispute. The Tribunal has upheld the order of the Ld. CIT(A)

for allowance of exemption u/s 54EC on the ground that sale proceeds of the capital asset were found to be invested in the bonds specified by the Act. According to the Tribunal, the only condition for grant of exemption u/s 54EC is that the funds used for the investment must be traceable to the sale proceeds. She pointed out that section 54EC contemplate that capital gain arisen to the assessee from the transfer of a long term capital asset should be invested by the assessee, as whole or any part in the bonds. The emphasis is on the expression of “assessee” and the assessee does not include other names, namely sons, wife and daughter. She in this way, contended that exemption u/s 54EC can be allowed to the assessee to the extent of % in relation to one bond and to the extent of half share in relation to the other bond. On the other hand, Ld. Counsel for the assessee relied upon the order of Ld. CIT(A). We have confronted the Ld. Counsel with regard to the decision of Hon’ble Punjab & Haryana High Court rendered in the case of Jai Narayan v Income Tax Officer reported in 306 ITR 335. In this case, an assessee has claimed exemption u/s 54B. He has capital gain arisen on transfer of long term capital asset. He invested the capital gain and purchased the land in the name of his son and claimed deduction u/s 54B. The dispute traveled upto the Hon’ble High Court and the Hon’ble High Court has upheld the disallowance of such exemption. The observation made by the Hon’ble High Court in paragraph No. 10 are worth to note in this connection :-

10. “In interpreting the words contained in a statute, the court has not only to look at the words but

also to look at the context and the object of such words relating to such matter and interpret the

meaning intended to be conveyed by the use of the words under the circumstances. The word

“assessee” occurring in s. 54B must be interpreted in such a manner as to accord with the context

and subject of its usage. A reading of s. 54B of the Act nowhere suggests that the legislature intended to advance the benefit of the said section to an assessee who purchased the agricultural land even in the name of a third person. Where ever the legislature intended it to be so, it had specifically provided under the provision. The term “assessee” is qualified by the expression “purchased any other land for being used for agricultural purposes”, which necessarily means that the new asset which is purchased has to be in the name of the assessee himself for seeking exemption under s. 54B of the Act. The purchase of agricultural land by the assessee in his son or grandson’s name, therefore, cannot be held entitled to exemption under s. 54B of the Act.”

18. Ld. Counsel for the assessee pointed out that a similar issue arose in the case of CIT v Gurnam

Singh reported in 327 ITR 278. The assessee has invested the gain arisen on transfer of a long term

capital asset in agricultural land. The land was purchased in the joint name. The exemption u/s 54B

was allowed to the assessee by the ITAT and the Hon’ble High Court has upheld the allowance of

such exemption. This decision has been rendered on 1st April 2008 whereas the earlier decision was

delivered on 13th August, 2007. The subsequent decision is in favour of the assessee. Though both the decisions are from the jurisdictional High Court, the decision which is in favour of the assessee

deserves to be followed. The language section 54B and 54EC for the purpose of identifying the

assessee who made investment of capital gain are identical. Apart from this, he also pointed out that assessee had written a letter to Rural Electrification Corporation Ltd. and enquired what is the status of second and third name available in the bonds. Corporation has intimated to the assessee that the purpose of mentioning second and third holder only for succession in case of death of first holder. He also brought it to our notice the guidelines issued by the corporation while inviting investment, and under the head transmission /succession, it has been pointed out that only first name is to be recognized as holder of the bond.

19. We have duly considered the rival contention and gone through the record carefully. The Hon’ble

Punjab & Haryana High Court in the subsequent decision has upheld grant of exemption u/s 54B in a

case where land was purchased in the joint name. The ITAT had discussed this issue in the case of

Smt. Saraswati Swaminathan reported in 116 ITD 234 and has observed that the object of section

54EC is to utilize the sale proceed of long term capital gain in the purchase of specified bonds. The

Tribunal has considered the scheme of such investment in paragraph 3 and thereafter upheld the

allowance of exemption u/s 54EC. The third circumstance which goad us not to interfere in the order

of Ld. CIT(A) is the letter dated 11th May, 2011 whereby REC Ltd. had given a clarification

regarding joint holding of REC bonds. The corporation has pointed out that second and third holder is

only for succession purpose in case of death of first holder. The cumulative setting of all these three

factors persuade us not to take a different opinion than the one taken by the Ld. CIT(A). In view of

the above discussion, we do not find any merit in this appeal of the revenue.

20. In the result, both the appeals of assessee are partly allowed whereas appeal of the revenue is

dismissed.