Important Case law on Section 54 F of Income Tax Act
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Section 54F of the Income-tax Act, 1961 - Capital gains - Exemption of, in
case of investment in residential house - Assessment year 1986-87 - Whether
section 54F emphasizes construction of residential house and such
construction must be real one and should not be a symbolic construction -
Held, yes - Whether mere construction by way of extension of old existing
house would not mean constructing a residential house as contemplated under
section 54F and such construction of existing building would not be exempted
under section 54F - Held, yes
Facts
The assessees who were individuals sold a house property on 22-6-1985 which
was jointly owned by them. They claimed exemption under section 54F in
respect of 50 per cent share of capital gain in the original returns
declaring their intention to construct a residential house within the
specified period of three years as per section 54F, i.e., before 21-6-1988.
The assessments were completed under section 143(1)(a). Later on, an enquiry
it was found that there was only an old building and there were no new
construction by the assessees. Consequently, the Assessing Officer holding
that the assessees were not entitled to exemption under section 54, reopened
the assessment under section 148 and taxed the entire capital gains of Rs.
8,25,957 . On appeal, the Commissioner (Appeals) confirmed the order of the
Assessing Officer. On further appeal, the Tribunal granted exemption to the
assessees under section 54F.
In reference, assessee's case was that there were new construction by both
the assessees but as they were unauthorized construction, same were
demolished later.
Held
The burden was on the assessees to prove that they had actually constructed
new residential houses for purpose of the exemption under section 54F. It
was stated by the assessees that the assessees had constructed new
residential houses, but they were unauthorised constructions and the same
unauthorised constructions were later demolished for purpose of
modernisation. In the instant case, there was no tangible material to even
infer that a residential house was constructed. One of the assessees said
that there was an extension to an existing structure and the other said that
the out-house was demolished; a new construction was put up in its place and
both being unauthorised, had been pulled down on their own voluntarily.
Section 54F emphasizes on construction of residential house. The said
construction must be real one. It should not be a symbolic construction.
Further, it was seen from the finding of the Tribunal that one of the
assessees had undertaken an extension work in the old building in the ground
floor and first floor. From the above finding it was clear that there was no
residential house and it was only an extension of the old building. A mere
extension of the existing building would not give benefit to the assessee as
contemplated under section 54F. In the case of another assessee, it was
stated by the Tribunal that he had constructed a small building measuring
382 sq. ft. by demolishing the existing A.C.C. roofed outhouse of 324 sq.
ft. There was no acceptable proof for such construction. Mere construction
by way of extension of the old existing house would not mean constructing a
residential house as contemplated under section 54F. The argument of the
assessees about the construction of residential houses was not based on any
valid material and the assessee was not entitled to the benefit of section
54F. Also, there was no evidence or contemporaneous documents available to
show that there were constructions. The assessees failed to satisfy the
conditions contemplated under section 54F. [Para 8]
In the instant case, the finding of the Tribunal was not based on any
evidence. The order of the Tribunal was perverse and it was patently
erroneous and unreasonable because it had overlooked the materials produced
by the Assessing Officer and in the absence of any material, the Tribunal
had come to an erroneous conclusion, and, hence, the Court could interfere
under reference. The documents relied on by the assessees before the
Tribunal were mere letters addressed by the architect. The said architect
had given a quotation and bill and his acknowledgement of the receipt of a
sum of Rs. 75,000 from each of those two assessees, which were not
sufficient to prove that there was construction of residential houses. The
said documents and other evidences were produced first time before the
Tribunal. But the revenue had relied on the inspection report and also
verified with the Corporation and further they had taken photographs of the
place and all those documents revealed that there was only an extension of
old building. In the instant case, there was no proof for the construction
of the residential houses and, hence, the assessees were not entitled to
relief under section 54F. [Para 9]
Cases referred to
CIT v. S.P. Jain [1973] 87 ITR 370 (SC) [Para 8], Omar Salay Mohamed Sait v.
CIT [1959] 37 ITR 151 (SC) [Para 8], CIT v. Coromandel Indag Products Ltd.
[2004] 265 ITR 611/[2003] 128 Taxman 675 (Mad.) [Para 8], CIT v. T.N.
Aravinda Reddy [1979] 120 ITR 46/2 Taxman 541 (SC) [Para 9] , B.B. Sarkar v.
CIT [1981] 132 ITR 150/7 Taxman 239 (Cal.) [Para 9], Addl. CIT v. Vidya
Prakash Talwar [1981] 132 ITR 661 (Delhi) [Para 9], CIT v. P.V. Narasimhan
[1990] 181 ITR 101/[1989] 47 Taxman 89 (Mad.) [Para 9], CIT v. J.R.
Subramanya Bhat [1987] 165 ITR 571/[1986] 28 Taxman 578 (Kar.) [Para 9], CIT
v. Daulatram Rawatmull [1964] 53 ITR 574 (SC) [Para 9], J.J. Enterprises v.
CIT [2002] 254 ITR 216/122 Taxman 124 (SC) [Para 9] and CIT v. Cupre
Industrial Corpn. [1993] 202 ITR 728/[1992] 65 Taxman 405 (All.) [Para 9].
Mrs. Pushya Sitaraman for the Applicant. R. Venkataraman for the Respondent.
Judgment
P.P.S. Janarthana Raja, J. - The Income-tax Appellate Tribunal, Madras, ‘A’
Bench, referred the following question of law at the instance of Revenue,
under the direction of this Court in TCP Nos. 77 & 78 of 1998, dated
29-7-1998, for opinion of this Court:
“Whether on the facts and in the circumstances of the case, the Appellate
Tribunal had valid materials to give a finding that the assessee had
constructed a residential house before 21-6-1988 and thus eligible for
exemption under section 54F of the Income Tax Act?”
2. The facts leading to the above question of law are as under:
The relevant assessment year is 1986-87. The assessees are individuals,
assessed by the Income-tax Officer, City Ward III(4) on 22-6-1985. They sold
a house property at No. 40, Moore Street, Madras-1, which was jointly owned
by them and each claimed exemption under section 54F in respect of 50% share
of capital gain of Rs. 8,25,957 in the original returns which were filed on
12-9-1986 declaring their intention to construct a residential house within
the specified period of three years i.e., before 21-6-1988. The assessments
were completed under section 143(1)(a). Later on, they filed revised returns
admitting taxable capital gains of Rs. 1,63,487, each claiming partial
exemption under section 54F for the reason that they invested the capital
gains in the new residential houses to an extent of Rs. 7,65,470 only. The
assessments were reopened under section 148 in both cases and reassessments
were completed on 30-3-1990, under section 143(3) read with Section 147,
taxing the entire capital gains of Rs. 8,25,957 on the basis of the
materials collected by the Assessing Officer. Aggrieved by the order of the
Assessing Officer, the assessees filed appeals before the Commissioner of
Income-tax (Appeals). The Commissioner of Income-tax (Appeals) dismissed the
appeals and confirmed the order of the Assessing Officer. Aggrieved by the
same, the assessees filed appeals to the Income-tax Appellate Tribunal. The
Tribunal allowed the appeals filed by the assessees and granted exemption
under section 54F.
3. The learned Standing Counsel appearing for the Revenue submitted that
there were no new construction of residential houses by the assessees. It is
also brought to notice that there was an enquiry made by the Assessing
Officer with the Madras Corporation and found that the assessees applied for
approval of the plan for construction on 27-12-1989. Further the order of
approval for the construction was granted on 9-2-1990. Further the assessee
applied for approval for demolishing the above building on 27-12-1989 and
the same was granted only on 9-2-1990. Enquiry made by the Departmental
Inspector as well as the local enquiry, revealed that there was only an old
building and no new construction was built at all. Hence there were no new
construction by the assessees. Therefore the assessees are not entitled to
exemption under section 54F of the Act.
4. The learned Counsel appearing for the assessees submitted that there were
new construction by both the assessees but they were unauthorized
construction and the same were demolished later. Further it was submitted
that the buildings were constructed and plan was also made. Subsequently,
they were demolished for the purpose of modernisation. Since the buildings
were constructed and substantial amount of money was spent, the Revenue was
not justified in bringing the whole amount of capital gain tax. Further it
was contended that the Tribunal had given a factual finding that there were
construction of new buildings and hence this Court should not interfere with
the factual finding of the Tribunal under reference. It is also emphasized
that section 54F is a beneficial provision and hence the Court should
construe the said provision liberally.
5. We heard the arguments of both the sides. Certain dates are very much
important for this case, which are as below:
V. Pradeep Kumar V. Praveen Kumar
(1) Date of sale of property in Moore Street 22-6-1985
(Purchase & construction to be completed before 22-6-1988)
(2) Date of purchase of property at Giri Road 9-3-1988 6-4-1988
(3) Date of construction of two individual property started from
15-4-1988 15-4-1988
(4) Date of payment made to Contractor 10-6-1988 & 10-6-1988 & 20-6-1988
20-6-1988
(5) Date of completion of construction by Contractor 20-6-1988 20-6-1988
(6) Date of inspection by the valuer to the two separate building
29-6-1988 29-6-1988
(7) Date of cost of construction and valuation report 30-6-1988 30-6-1988
6. Section 54F deals with capital gain on transfer of certain capital assets
not to be charged in case of investment in residential house. The section
reads as follows:
“54F. Capital gain on transfer of certain capital assets not to be charged
in case of investment in residential house.—(1) Subject to the provisions of
sub-section (4), where, in the case of an assessee being an individual or a
Hindu undivided family, the capital gain arises from the transfer of any
long-term capital asset, not being a residential house (hereafter in this
section referred to as the original asset), and the assessee has, within a
period of one year before or two years after the date on which the transfer
took place purchased, or has within a period of three years after that date
constructed, a residential house (hereafter in this section referred to as
the new asset), the capital gain shall be dealt with in accordance with the
following provisions of this section, that is to say,-
(a) if the cost of the new asset is not less than the net consideration
in respect of the original asset, the whole of such capital gain shall not
be charged under section 45;
(b) if the cost of the new asset is less than the net consideration in
respect of the original asset, so much of the capital gain as bears to the
whole of the capital gain the same proportion as the cost of the new asset
bears to the net consideration, shall not be charged under section 45:
Provided that nothing contained in this sub-section shall apply
where the assessee owns on the date of the transfer of the original asset,
or purchases, within the period of one year after such date, or constructs,
within the period of three years after such date, any residential house, the
income from which is chargeable under the head ‘Income from house property’,
other than the new asset.”
The above section was inserted by the Finance Act of 1982 with effect from
1st March, 1983. The conditions precedent for getting exemption are:
1. Transfer of any long-term capital assets not being a residential
house.
2. The assessee purchases within a period of one year before or two
years after the date on which the transfer took place or construct within a
period of three years after the date of transfer, any residential house.
7. From a reading of the above, what we have to see in this case is whether
the assessees had constructed residential houses within a period of three
years after the date of transfer or not. From the above tabular column, it
is clear that the date of sale of property was on 22-6-1985 and the date of
purchase of property was on 9-3-1988 in the case of Sri V. Pradeep Kumar in
Tax Case No. 31 of 2001 and 6-4-1988 in the case of Sri V. Praveen Kumar in
Tax Case No. 32 of 2001. The assessees stated that they commenced the
construction of new residential houses from 15-4-1988 and completed the
construction on 20-6-1988. The due date for completing the construction was
on 20-6-1988. The findings given by the Tribunal for each construction of
new houses are as below:
“Actually the assessees applied to the Corporation of Madras vide their
letter dated 23-12-1989. Along with this letter, they enclosed photostat
copy of the sale deed, copy of property transfer issued by the Corporation,
seven copies of the demolition plan, seven copies of construction plan and
indemnity bond and affidavit. In one blue print, the plan of the proposed
new construction of 5085 sq.ft. was exhibited. The said building was
proposed to be constructed in ground floor as well as first floor. In this
plan, the Architect Savitha Chowdhry put the date as 4-12-1989. In another
blue print the building to be demolished was shown. The total area to be
demolished was shown at 1852 sq.ft. In the said blue print, the Architect
Savitha Chowdhry put the date as 17-10-1989. In the said blue print for
which demolition was applied for, the old building as it existed as per the
sale deed dated 9-3-1988 was shown. The actual claim of these assessees is
that Shri Pradeep Kumar had undertaken some new construction by way of
extension to the old existing building both in the ground floor and in the
first floor. This can be seen at pages 71 and 71A in coloured portion in
paper book No. 1 filed by Shri Pradeep Kumar. Shri Praveen Kumar claimed to
have constructed a small building of 382 sq.ft. by demolishing the old
existing A.C.C. Roofed outhouse of 324 sq.ft. described in the sale deed
dated 6-4-1988. They further claimed that they were unauthorised
constructions/extensions and that there were no applications for approval to
the Corporation of Madras and that they were later pulled down to enable
them to go in for an approval and authorised construction.”
8. We have gone through all the materials available on record and we find
that there was an inspection on 14-2-1990 by the Assessing Officer and
contemporary photographs of the existing buildings were taken on 16-2-1990
and in consequence of the above, the Revenue rightly established that there
were not in existence of any such constructed house properties, instead the
old building from which the doors and windows have been removed as could be
seen from the photographs which are in possession of the Department. It is
clear from the contemporaneous evidence available on record that there were
no new residential houses exhibited on the plot in question. Further, we
have also seen that the assessees got approval from the Corporation of
Madras only on 9-2-1990 for demolishing the old existing building at the
said plot, and the completion of the full demolition has been carried out by
the assessee only at the end of March 1990. This evidence clearly go to
prove that the existing old building which was purchased, was completely
demolished in March 1990 only. The burden is on the assessees to prove that
they had actually constructed new residential houses for purpose of the
exemption under section 54F of the Income-tax Act. It is stated by the
counsel for the assessees, that the assessees had constructed new
residential houses, but they were unauthorised construction and the same
unauthorised construction were later demolished for purpose of
modernisation. In this case, there is no tangible material to even infer
that a residential house was constructed. One of the assessees say there was
an extension to an existing structure and the other says the out-house was
demolished; a new construction was put up in its place and both being
unauthorised, have been pulled down on their own voluntarily. Section 54F
emphasises construction of residential house. The said construction must be
real one. It should not be a symbolic construction. Further it is seen from
the finding of the Tribunal that the assessee Sri Pradeep Kumar had
undertaken an extension work in the old building in the ground floor and
first floor. From the above finding it is clear that there is no residential
house and it is only an extension of the old building. A mere extension of
the existing building will not give benefit to the assessee as contemplated
under section 54F of the Act. In the case of Sri Praveen Kumar, it was
stated by the Tribunal that he had constructed a small building measuring
382sq.ft. by demolishing the existing A.C.C. roofed out-house of 324 sq.ft.
We have already noted that there is no acceptable proof for such
construction. Mere construction by way of extension of the old existing
house would not mean constructing a residential house as contemplated under
section 54F of the Act. The argument of the counsel for the assessees about
the construction of residential houses is not based on any valid material
and is not entitled to the benefit of section 54F of the Act. Also, there is
no evidence or contemporaneous documents available to show that there were
construction. In our opinion, the assessees failed to satisfy the conditions
contemplated under section 54F of the Act. The other argument of the counsel
is that, when the Tribunal had come to a conclusion based on evidence, this
Court normally will not interfere under reference. In this case, the finding
of the Tribunal was based on no material and evidence. The Tribunal had
considered only irrelevant materials and the order of the Tribunal is a
perverse one. In such circumstance, the Court can interfere under reference.
The Supreme Court judgments in the case of CIT v. S.P. Jain [1973] 87 ITR
370 and in the case of Omar Salay Mohamed Sait v. CIT [1959] 37 ITR 151 held
that the High Court has undoubted jurisdiction to interfere with the
findings of the Tribunal if it appears that either the Tribunal has arrived
at a finding based on no evidence or its finding is inconsistent with the
evidence on record or it has acted on material partly relevant and partly
irrelevant or it draws upon its own imagination and imports facts and
circumstances not apparent from the record or it bases its conclusion on
mere conjectures or surmises or no person judicially acting or properly
instructed as to the relevant law could have come to the determination
reached by the Tribunal. This Court, in the case of CIT v. Coromandel Indag
Products Ltd. [2004] 265 ITR 611, considered the scope of reference under
section 256 of the Act and held as follows:
“As far as the decisions of the Supreme Court in Badal Ram Laxmi Narain v.
CIT [1991] 191 ITR 296 and CIT v. Cellulose Products of India Ltd. [1991]
192 ITR 155 are concerned, it is axiomatic that the High Court should not
interfere with the Tribunal’s finding of fact even if another view is
possible. The Supreme Court has also held that the High Court hearing a
reference under the Income-tax Act does not exercise appellate or revisional
or supervisory jurisdiction over the Appellate Tribunal and that it acts in
a purely and advisory capacity. We are of the view that if the Tribunal,
after considering the evidences produced before it on a question of fact,
records the finding, this Court will not interfere with such a finding
unless the said finding is not supported by any evidence or is perverse or
patently unreasonable. . . .” (p. 620)
9. In the present case, the finding of the Tribunal is not based on any
evidence. The order of the Tribunal is perverse and it is patently erroneous
and unreasonable, because it has overlooked the materials produced by the
Assessing Officer and in the absence of any material, the Tribunal had come
to an erroneous conclusion, and hence the Court can interfere under
reference. The documents relied on by the assessees before the Tribunal were
mere letters addressed by Y.R. Srinivasan, who is the architect. The said
architect had given a quotation and bill dated 27-6-1988 and his
acknowledgement of the receipt of a sum of Rs. 75,000 from each of these two
assessees, which are not sufficient to prove that there were construction of
residential houses. The said documents and other evidences were produced
first time before the Income-tax Appellate Tribunal. But the Revenue had
relied on Inspection Report and also verified with the Madras Corporation
and further they have taken photographs of the place and all these documents
reveal that there were only an extension of old building. Further the
learned counsel submitted that section 54F is a beneficial provision and the
same should be construed liberally. For the purpose of exemption under
section 54F, the assessees must construct residential houses within three
years from the date of transfer. The question here is whether the assessees
constructed residential houses or not. In this case, there is no proof for
the construction of the same and hence the assessees are not entitled to
relief under section 54F of the Act. The argument that construing the
provision liberally does not arise here when we are concerned with the
factual issue. The learned counsel for the assessees relied on a number of
judgments to support his arguments and they are as under:
(a) Supreme Court judgment in the case of CIT v. T.N. Aravinda Reddy
[1979] 120 ITR 46
(b) Calcutta High Court judgment in the case of B.B. Sarkar v. CIT [1981]
132 ITR 150
(c) Delhi High Court judgment in the case of Addl. CIT v. Vidya Prakash
Talwar [1981] 132 ITR 661
(d) Madras High Court judgment in the case of CIT v. P.V. Narasimhan
[1990] 181 ITR 101
(e) Karnataka High Court judgment in the case of CIT v. J.R. Subramanya
Bhat [1987] 165 ITR 571
(f) Supreme Court judgment in the case of CIT v. Daulatram Rawatmull
[1964] 53 ITR 574.
(g) Supreme Court judgment in the case of J. J. Enterprises v. CIT [2002]
254 ITR 216
(h) Allahabad High Court judgment in the case of CIT v. Cupre Industrial
Corpn. [1993] 202 ITR 728.
10. We have gone through the above judgments and they are not relevant to
the facts of this case and hence we are not dealing with the same.
11. In the foregoing reasons, we are of the opinion that there were no
construction and the claims made by the assessees for exemption under
section 54F were factually unacceptable. Hence we answer the question in
favour of the Revenue and against the assessees. No costs.
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Source : SC judgments -
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