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Category: Miscellaneous
No denial of sec. 54 relief just because purchase agreement specifies delivery of flat after 3 yrs
Where substantial amount of capital gain has been invested by assessee for purpose of purchasing a new house, deduction under section 54 cannot be denied for reason that construction was not completed within three years or house was not purchased within two years.
Refer full Judgement:
[2017] 82 taxmann.com 306 (Chandigarh – Trib.)
IN THE ITAT CHANDIGARH BENCH
Bhavna Cuccria
v.
Income-tax Officer, Ward 4 (1), Chandigarh*
SANJAY GARG, JUDICIAL MEMBER
AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER
AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER
IT APPEAL NO. 341 (CHD.) OF 2017
[ASSESSMENT YEAR 2013-14]
[ASSESSMENT YEAR 2013-14]
MAY 23, 2017
Section 54 of the Income-tax Act, 1961 – Deductions – Profit on sale of property used for residence (Construction) – Assessment year 2013-14 – whether where substantial amount of capital gain has been invested by assessee for purpose of purchasing a new house, deduction under section 54 cannot be denied for reason that construction was not completed within three years of house was not purchased within two years – Held, yes [Para 11.4] [In favour of assessee]
Section 54 of the Income-tax Act, 1961 – Deductions – Profit on sale of property used for residence (Construction) – Assessment year 2013-14 – During revelant year, assessee earned long time capital gain from sale of residential house – She entered into purchase agreement with a builder in terms of which flat would be delivered to her within a period of 36 months with a grace period of six months from date of actual start of construction – Assessee Officer concluded that said flat could not be handed over to assessee by builder within prescribed period of 3 years from date of transfer of original asset – He thus rejected assessee’s claim – Whether as per section 54(2), exemption to extent of amount utilized for construction is to be granted in year of transfer of asset and condition of completion of construction is to be looked into only after window period provided by act of three years expires – Held, yes – Whether, therefore, impugned order rejecting assessee’s claim for deduction in year of filing return itself, was to be set aside – Held, yes [Para 11.5] [In favour of assessee]
FACTS
| ■ | During the relevant year the assessee had shown long-term capital gain arising from sale of a residential house. The assessee claimed deduction under section 54 on the ground that a part of said gain had been invested in a flat. | |
| ■ | The Assessing Officer noted that assessee entered into agreement with ‘A’ builders for purchase of flat in housing project developed by them. | |
| ■ | As per terms of the said agreement the flat would be delivered to the assessee within a period of 36 months with a grace period of six months from the date of actual start of construction. The Assessing Officer concluded that the said flat could not be handed over to the assessee by the builder within a period of 3 years from the date of transfer of the original asset and therefore issued a show-cause notice to the assessee to explain as to why the exemption claimed under section 54 should not be withdrawn. | |
| ■ | The assessee submitted that since full/substantial consideration had been paid by her, she was entitled to benefit of deduction on account of the investment in the flat under section 54. The assessee submitted that legal title was not necessary for claiming deduction. The Assessing Officer rejected the assessees submissions and held that the assessee had not purchased the flat within two years from the date of transfer of the capital asset and was fully aware that she would not get possession of the flat in three years from the date of transfer and had therefore failed to fulfil the basic conditions of section 54. Accordingly, assessee’s claim for deduction was rejected. | |
| ■ | The Commissioner (Appeals) upheld the order of Assessing Officer. | |
| ■ | On second appeal: |
HELD
| ■ | The sole reason for denying deduction under section 54 to the assessee is that, she had not complied with the condition stipulated in the section of purchase/construction of new house within the stipulated period of two or three years respectively since as per the agreement for purchase of new house/flat , the construction of the said house could not have been completed within the said period. [Para 8] | |
| ■ | The contention of the assessee is that since the assessee had invested substantial amount for the purchase of the said flat and has been allotted a flat, she was entitled to exemption under section 54 even if the construction of the said flat was not completed or was not possible to be completed within the period of two/three years from the date on which she had earned capital gain on account of transfer of its original asset. [Para 9] | |
| ■ | There is merit in the contention of the assessee. It has been decided in number of cases that for the purpose of claiming exemption under section 54, investment of substantial amount in the new asset, is sufficient compliance. It has been held by various courts that in such circumstances the assessee is entitled to claim exemption despite the fact that the construction is not completed within three years. This issue was addressed by the Delhi High Court in the case of CIT v. R.L. Sood [2000] 245 ITR 727/108 Taxman 227 wherein the High Court held that the assessee having invested substantial amount in the purchase of a new asset, thus acquiring substantial domain over the new flat within the specified period, could be said to have complied with requirement of section 54 and merely because possession of the flat was not handed over to the assessee within the specified period, the said benefit could not be denied. [Para 11] | |
| ■ | Thus it is evident that if substantial amount of capital gain has been invested by the assessee for the purpose of purchasing a new house, deduction under section 54 cannot be denied for the reason that construction was not completed within three years or house was not purchased within two years. In the present case the capital gain earned by the assessee is Rs.74,33,137/- and the amount invested in the new house before the due date of filing of return of income for the impugned year is Rs.62,10,000/-. Undeniably the assessee has invested substantial amount for purchasing the new asset and thus she is entitled to claim deduction under section 54. [Para 11.4] | |
| ■ | Even otherwise section 54 gives a window period of three years from the date of transfer of original asset, for the construction of a new house and two years for purchasing a new house. Further as per the section the amount utilized for the said purpose along with the amount deposited in a specified bank account for the purpose, before the date of filing of return of income, is treated as cost of construction of the new asset and exemption granted thereof. The fulfilment of the condition of completion of construction or purchase of house is to be looked into only in the year in which the window period ends and if it is then found that the assessee has not constructed/purchased the house, to the extent the amount deposited in specified bank account is not utilized for the said purpose, it is treated as capital gains of the previous year in which the period of three years expires. | |
| ■ | Thus clearly, as per section 54(2), exemption to the extent of amount utilized for construction is to be granted in the year of transfer of asset and the condition of completion of construction is to be looked into only after the window period provided by the Act of three years expires. [Para 11.5] | |
| ■ | In view of above, it is clear that for the purpose of claiming exemption under section 54 the assessee is only required to invest the amount for the purpose of purchase or construction of a property without completing the same in the impugned year and all amount advanced for the said purpose would be treated as being utilized for the purpose of section 54. [Para 12] | |
| ■ | In view of the above it is held that the assessee is entitled to claim deduction for the amount invested in the purchase of a new asset amounting to Rs. 62,10,000 and the Assessing Officer is directed to grant the same. [Para 13] | |
| ■ | In the result, appeal of the assessee is allowed. [Para 15] |
CASE REVIEW
Fibre Boards (P.) Ltd. v. CIT [2015] 62 taxmann.com 135 (SC) (para 12) followed.
CASES REFERRED TO
CIT v. Kuldeep Singh [2014] 226 Taxman 133/49 taxmann.com 167 (Delhi) (para 3), Smt. Ranjeet Sandhu v. Dy. CIT [2011] 16 taxmann.com 210/[2012] 49 SOT 7 (URO) (Chd.) (para 4), Smt. Usha Vaid v. ITO [2012] 25 taxmann.com 188/53 SOT 385 (Asr.) (para 4), CIT v. Smt. B.S. Shanthakumari [2015] 60 taxmann.com 74/233 Taxman 347 (Kar.) (para 4), Kishore H. Galaiya v. ITO [2012] 137 ITD 229/24 taxmann.com 11 (Mum.) (para 4), Fibre Boards (P.) Ltd. v. CIT [2015] 376 ITR 596/62 taxmann.com 135 (SC) (para 4), ITO v. Narayana Rao [2016] 46 ITR (Trib.) 178 (Hyd.) (para 4) and CIT v. R.L. Sood [2000] 245 ITR 727/108 Taxman 227 (Delhi) (para 11).
Tej Mohan Singh for the Appellant. S.K. Mittal for the Respondent.
ORDER
Ms. Annapurna Gupta, Accountant Member – This appeal has been filed by the assessee against the order of the ld. CIT(A)-2, Chandigarh, dt. 20/01/2017. The assessee has raised the following grounds of appeal:
| 1. | That the ld. Commissioner of Income Tax (Appeals) has erred in law and facts in upholding the disallowance of deduction claimed under section 54 in utter disregard of the explanation filed and various judicial precedents which is illegal, arbitrary and unjustified. | |
| 2. | That the ld. Commissioner of Income Tax (Appeals) has erred in failing to appreciate that the assessee had fulfilled all the statutory requirements for availing deduction under section 54 of the Act and as such the disallowance of deduction upheld is illegal, arbitrary and unjustified. |
2. Briefly stated the facts relating to the case are that during the relevant year the assessee had shown long-term capital gains of Rs. 12,23,137/- from sale of a residential house in Shimla in her return filed on 04/08/2013. The said property was sold on 06/11/2012 and sale consideration received was Rs. 1 crore, being 20% share of the assessee in the property. After taking benefit of indexed cost of acquisition, long-term capital gains of Rs. 74,33,137/- was computed, against which exemption u/s 54 of the Act, was claimed by the assessee, on the ground that amount of Rs. 62,10,000/- had been invested in a flat. The Assessing Officer, on perusal of the agreement for the purchase of flat with M/s ATS Estates Pvt. Ltd. New Delhi dt.15-04-2013,found that the agreement had been drawn for buying apartment in the project “ATS Golf Meadows Lifestyle at village Madhavpur, Derabassi, Mohali and as per Clause 14 of the said agreement the flat would be delivered to the assessee within a period of 36 months with a grace period of six months from the date of actual start of construction of the said tower. The AO concluded that the said flat could not be handed over to the assessee by the builder within a period of 3 years from the date of transfer of the original asset i.e. 06/11/2012, and therefore issued a show-cause notice to the assessee to explain as to why the exemption claimed u/s 54 should not be withdrawn. The assessee submitted that since full/substantial consideration had been paid by her she was entitled to benefit of deduction on account of the investment in the flat u/s 54 of the Act. The assessee submitted that legal title is not necessary for claiming deduction. The AO rejected the assesses submissions and held that the assessee has not purchased the flat within two years from the date of transfer of the capital asset and was fully aware that she would not get possession of the flat in three years from the date of transfer and had therefore failed to fulfil the basic conditions of section 54, thus becoming ineligible for claiming exemption u/s 54 of the Act. The Assessing Officer therefore, disallowed exemption claimed u/s 54 of Rs. 62,10,000/-.
3. Before the ld. CIT(A) the assessee contended that she had invested capital gain earned to the extent of Rs. 62,10,000/- on 15/04/2013 i.e; before due date of filing of return of income and on payment thereof had been allotted and granted title, possession and ownership rights for the said apartment. The assessee submitted that exemption could not be denied merely because payment was made but possession not obtained and relied upon the decision of the Delhi High Court in the case of CIT v. Kuldeep Singh [2014] 226 Taxman 133/49 taxmann.com 167. The ld. CIT(A) after considering the assessee’s submission held that as per the facts of the case the assessee could not be said to have purchased a house within two years or even constructed a house within three years from the date of sale i.e; 06/11/2012 since as per the assessee’s own admission the flat would become livable only in May 2016 i.e beyond three years from the date of transfer of the original asset on 06-11-12. The ld. CIT(A) held that as a matter of fact even after three years from the date of sale of the original asset, the new house had not came into existence and therefore the assessee had not fulfilled the conditions specified under section 54 for claiming exemption under it. He therefore, upheld the order of the Assessing Officer denying claim of deduction under section 54 of the Act amounting to Rs. 62,10,000/-.
4. Before us ld. Counsel for the assessee reiterated the contention made before lower authorities and stated that in view of the fact that the substantial amount had been invested in purchase of a new flat before the due date of filing of return of income as specified under section 54 and the flat had been allotted to it also, the assessee was eligible to claim deduction under section 54 of the Act. ld. Counsel for the assessee relied upon a number of case laws in this regard, which are as under:
| 1. | Smt. Ranjeet Sandhu v. Dy. CIT [2011] 16 taxmann.com 210/[2012] 49 SOT 7 (URO) (Chandigarh) | |
| 2. | Smt. Usha Vaid v. ITO [2012] 25 taxmann.com 188/53 SOT 385 (Asr.) | |
| 3. | CIT v. Smt. B.S. Shanthakumari [2015] 60 taxmann.com 74/233 Taxman 347 (Karn) | |
| 4. | Kishore H. Galaiya v. ITO [2012] 137 ITD 229/24 taxmann.com 11 (Mum.) | |
| 5. | Fibre Boards (P.) Ltd. v. CIT (2015) 376 ITR 596/62 taxmann.com 135 (SC) | |
| 6. | ITO v. Narayana Rao [2016] 46 ITR (Trib) 178 (Hyd) |
5. Ld. DR on the other hand relied upon the order of the ld. CIT(A) and stated that since the assessee had not complied with basic condition specified under section 54 i.e; purchase of house within two years or construction of a house within three years from the date of transfer of the original asset, the assessee had been righty denied deduction under section 54 of the Income-tax Act, 1961.
6. We have heard the rival contentions, gone through the orders of the authorities below and perused the material placed on record before us.
7. The issue before us relates to claim of deduction under section 54 of the Income-tax Act,1961. The fact that the assessee had sold a residential house on 06-11-12 and earned long-term capital gains thereon amounting to Rs.74,33,137/- is not disputed. Also not in dispute is the fact that the assessee had invested a sum of Rs.62,10,000/- on 15-04-13, i.e; before the filing of return of income on 04/08/2013 for purchase of a residential house vide agreement of the same date entered into with ATS Estates Private Limited, Delhi and had been allotted apartment No. 6154 15th Floor Tower No. 6 ATS Golf Tower, Mohali. It is also not disputed that as per clause 14 of the agreement the possession of the house/apartment was to be delivered within a period of 36 months from the date of start of actual construction, with a grace period of six months.
8. The sole reason for denying exemption u/s 54 to the assessee is that, the assessee had not complied with the condition stipulated in the section of purchase/construction of new house within the stipulated period of two and three years respectively since as per the agreement for purchase of new house/flat, the construction of the said house could not have been completed within the said period and even as a matter of fact has not been completed within the stipulated period.
9. The contention of the ld. Counsel is that since the assessee had invested substantial amount for the purchase of the said Flat and has been allotted a flat, she was entitled to exemption under section 54 even if the construction of the said Flat was not completed or was not possible to be completed within the period of two/three years from the date on which the assessee had earned capital gain on account of transfer of its original asset.
10. Ld. DR on the other hand has contended that completion of construction within three years or purchase of a Flat within two years is an essential condition for claiming deduction under section 54 which being not possible in the present case, the assessee had been rightly denied exemption u/s 54 of the Act.
11. We find merit in the contention of the ld. Counsel for the assessee. It has been decided in number of cases that for the purpose of claiming exemption under section 54, investment of substantial amount in the new asset, is sufficient compliance. It has been held by various courts that in such circumstances the assessee is entitled to claim exemption despite the fact that the construction is not completed within three years. This issue was addressed by the Delhi High Court in the case of CIT v. R.L. Sood [2000] 245 ITR 727/108 Taxman 227 wherein the Hon’ble High Court held that the assessee having invested substantial amount in the purchase of a new asset, thus acquiring substantial domain over the new flat within the specified period, the assessee could be said to have complied with requirement of section 54 and merely because possession of the Flat was not handed over to the assessee within the specified period the said benefit could not be denied. The relevant findings of the Hon’ble High Court at paras 6, 7 and 8 of the order are as under:
6. We may note that realizing the practical difficulty faced by the assessees in such situations, the Central Board of Direct Taxes issued Circular No. 471 (see [1986] 162 ITR (St.) 41), dated October 15, 1986, clarifying that when the DDA issues the allotment letter to an allottee under its self-financing scheme, on payment of the first instalment of the cost of construction, the allottee gets title to the property and such allotment should be treated as cost of construction for the purpose of capital gains. On the same analogy, the assessee having been allotted the flat ; he having paid a substantial amount towards its cost within the stipulated period of one year, he cannot be denied the benefit of the said Section because the flat purchased by him had come into his full domain within the period of one year, though the sale deed in his favour was registered subsequently.
7. In the light of the said circular and keeping in view the spirit of Section 54 of the Act, we decline the request of the Revenue to call for a reference on the proposed question.
8. Consequently, the petition is dismissed.
11.1 This proposition has been reiterated in a number of judgments referred to before us by the ld. Counsel for the assessee. In case of Smt. Ranjeet Sandhu (supra) the assessee had sold her agricultural land for Rs.1.5 crores and out of the same purchased a residential plot and started construction of a new house and claimed exemption u/s 54F.However the same was denied by the AO since he noted that the construction had not been completed. The CIT(A) confirmed the order of the AO. On second appeal to the Tribunal, it was held that completion of construction was not an essential condition for claiming exemption u/s 54, the thrust being on investment of the consideration received on sale of asset in construction of a new house. The relevant findings of the ITAT at para 11 of the order is as under:
“11. In the facts of the present case, the assessee had invested the full sale consideration received on the sale of original asset in the purchase of the plot of land at Gurgaon. Thereafter the assessee had invested Rs. 10,75,000 in the construction of the building. The construction was in progress and was not complete and in view thereof, the benefit of exemption claimed under s. 54F of the Act was rejected by the authorities below. However, following the ratio laid down by the Hon’ble Madhya Pradesh High Court in the case of Smt. Shashi Varma (supra), we find that there is no merit in the plea of the authorities in denying the exemption under s. 54F of the Act on the ground that the construction of the house has not been completed. The requirement of ss. 54 and 54F of the Act is for the assessee to have either purchased a residential house being a new asset within the stipulated period or construct a residential house within a period of three years from the date of transfer. The section does not prescribe the completion of the construction of the residential house and the thrust is on the investment of the net consideration received on sale of original asset and the start of construction of a new residential asset (sic—house). In view thereof, where the assessee had invested the consideration received on sale of original asset in the purchase of the plot of land and started construction though not completed, the assessee had complied with the provisions of s. 54F of the Act and hence was entitled to the benefit of exemption claimed. Accordingly, we set aside the order of the CIT(A) and direct the AO to allow the claim of the assessee in respect of the benefit of exemption claimed under s. 54F of the Act. The grounds of appeal raised by the assessee are thus allowed”
11.2 The Amritsar Bench of the ITAT on identical set of facts in the case of Smt. Usha Vaid (supra) reiterated the above proposition holding as under:
“We have heard the rival contentions and perused the facts of the case. There is no dispute to the fact that the assessee had purchased the property in 1987. On verification by the Inspector, the boundary wall and gate was also found, is also not under dispute. The assessee had claimed vide letter dated 02.06.2008 exemption under section 54F of the Act during the assessment proceedings before the AO is also not under dispute. The sale consideration has been invested in the construction of the house has been explained by the assessee before both the authorities below. Though house was not completed before the expiry of three years from the sale of the plot at Faridabad, but the same was completed immediately after few days of the expiry of three years. As per section 54F, if the assessee being an individual, the capital gain which arises from the transfer of any long-term capital asset, not being a residential house and the assessee had 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, referred to as the new asset, then the capital gain is exempt, if whole of the net consideration of the original asset is invested in the new asset i.e. residential house. Now the question arises in the present case whether the assessee had fulfilled the conditions under section 54F or not, has to be perused. In the present case, the assessee had invested the total sale consideration (net consideration) within three years after the transfer of the original asset. The words mentioned in section 54F are that the amount should be invested in the construction of a residential house. Therefore, once the assessee having been invested total sale consideration into construction of a residential house, then it is not necessary that the residential house should have been completed within three years of the transfer of the original asset. The residential house may be completed even after completion of three years of the transfer of the original asset. In such a situation, when a house is completed after expiry of three years from the transfer of the original asset, the assessee is entitled to exemption under section 54F of the Act. This view is supported by the decision of the Hon’ble Madras High Court in the case of CIT v. Sardar Mal Kuthari 302 ITR 286. The ld. counsel for the assessee has also placed reliance on the following decisions :
| (i) | Mrs. Seetha Subramanian v. ACIT 56 TTJ 417 (Mad) | |
| (ii) | Smt. Ranjit Sandhu v. Dy. CIT [2010] 133 TTJ (Chd)(UO) 46. |
5.1. The assessee had submitted application under Rule 46A on having completed the house, after the expiry of three years from the transfer of the original asset along with electricity bill which was not accepted by the ld. CIT(A), which in fact, could not be submitted by the assessee before completion of the assessment. The same should have been accepted by the ld. CIT(A). Therefore, as held hereinabove, the assessee having sold an asset which is not a residential house being a long-term capital asset had invested the net sale consideration into the construction of a residential house and therefore, claim of the assessee u/s 54F is allowable. Accordingly, all other claims of the assessee are allowable. The addition made by the AO. is directed to be deleted and the order of the ld. CIT(A) is reversed. Thus, all the grounds of appeal of the assessee are allowed.”
11.3 In the case of Kishore H. Galaiya (supra) also, on identical facts, the ITAT, Mumbai bench held that since the assessee had made investment within the period of three years, exemption under section 54 could not be denied merely because possession had not been taken within three years. The relevant findings of the ITAT in the case of Kishore H Galaiya (supra), at paras 6.1 and 6.2 of the order are as under:
“6.1 In the present case, the assessee sold the old residential house on 7.3.2006 and the long-term capital gain arising on this account was Rs. 9,98,411/-. The assessee had booked a new residential flat with the builder jointly with is wife for a sum of Rs. 35,00,000/-. The assessee had paid booking amount of Rs. 1,00,000/- to the builder before the due date of filing of the return of income u/s 139(1) for the assessment year 2006-07 and the balance amount had been paid in instalments after the said date. The total amount paid by the assessee to the builder was Rs. 14,62,500/- till 16.2.2009. In the backdrop of this factual position, it is required to be seen whether the assessee had fulfilled the conditions of section 54 of the Act so as to make him eligible for claim of exemption u/s 54 of the Act. The first condition is that the capital gain should have been invested in the purchase of new residential house within a period of two years from the date of transfer or for construction of new residential house within a period of three years from the date of transfer. In the present case, the assessee had booked the new flat with the builder and as per agreement, the assessee was to make payment in instalments and the builder was to handover the possession of the flat after construction. It has therefore to be considered as a case of construction of new residential house and not purchase of flat. This position has been clarified by the CBDT in circular No.472 dated 16.12.1993 in which it has been made clear that the earlier circular No. 471 dated 15.10.1986 in which it was stated that acquisition of flat through allotment by DDA has to be treated as a construction of flat would apply to co-operative societies and other institutions. The builder would fall in the category of other institutions as held by Mumbai Bench of Tribunal in the case Smt. Sunder Kaur Sujan Singh Gadh (supra) and therefore booking of the flat with the builder has to be treated as construction of flat by the assessee. Thus, in the present case, the period of three years would apply for construction of new house from the date of transfer of the old flat.
6.2 The old flat had been sold on 7.3.2006 and therefore the assessee was required to construct a new residential house by 6.3.2009. The purpose of section 54 is to allow exemption to the assessee of long-term capital gain arising from sale of residential house if the capital gain is invested in construction of new residential house within a period of three years from the date of transfer and, therefore, in case, the assessee had invested the capital gains in construction of a new residential house within a period of three years, this should be treated as sufficient compliance of the provisions, of the flat It is not necessary that the possession of the flat should also be taken within the period of three years. The taking of the possession may be delayed because of many factors not under the control of the assessee due to default on the part of the builder and therefore merely because the possession had not been taken within the period of three years, the exemption cannot be denied. This aspect had also been considered by the Hon’ble High Court of Bombay in the case of Mrs. Hilla J.B. Wadia (supra) in which the Hon’ble High Court held that in case the assessee entered into an agreement with the society for purchase of flat and paid almost the entire consideration within a period of two years, the assessee would be entitled to exemption under section 54 of the Act. The Hon’ble High Court also held that the material test was the domain over the property and the investment and, therefore, in case, the assessee had made substantial investment within the prescribed period which entitled the assessee to take possession of the flat, the claim of the exemption u/s 54 had to be admitted. In the present case, within the period of three years, the assessee had invested Rs. 14,62,500/- which was more than the amount of capital gain in the construction of new residential house within the period of three years and the possession of the house had also been ultimately taken on 31/08/2009. Therefore, in our view, the claim of the exemption in this case cannot be denied on the ground that the possession of the flat had not been taken within the period of three years.”
11.4 Thus it is evident from the above that if substantial amount of capital gain has been invested by the assessee for the purpose of purchasing a new house, exemption u/s 54 cannot be denied for the reason that construction was not completed within three years or house was not purchased within two years. In the present case the capital gain earned by the assessee is Rs.74,33,137/- and the amount invested in the new house before the due date of filing of return of income for the impugned year is Rs.62,10,000/-.Thus undeniably the assessee has invested substantial amount for purchasing the new asset and following the decisions of the coordinate bench and the Hon’ble High Court, cited above, we hold that the assessee is entitled to claim deduction u/s 54 of the Income-tax Act,1961.
11.5 Even otherwise we find that section 54 gives a window period of three years, from the date of transfer of original asset, for the construction of a new house and two years for purchasing a new house. Further as per the section the amount utilized for the said purpose along with the amount deposited in a specified bank account for the purpose, before the date of filing of return of income, is treated as cost of construction of the new asset and exemption granted thereof. The fulfilment of the condition of completion of construction or purchase of house is to be looked into only in the year in which the window period ends and if it is then found that the assessee has not constructed/purchased the house, to the extent the amount deposited in specified bank account is not utilized for the said purpose, it is treated as capital gains of the previous year in which the period of three years expires. The provisions of section 54 are reproduced hereunder for clarity:
“54. Profit on sale of property used for residence.-(1) Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset , being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head “Income from house property” (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, then, instead of the capital gain being charged to income tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—
| (i) | if the amount of the capital gain is greater than the cost of the residential house so purchased or constructed (hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; 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 nil; or | |
| (ii) | if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; 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. |
(2) The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139 in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme 11 which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset :
Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,—
| (i) | the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and | |
| (ii) | the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.” |
Thus clearly, as per section 54(2), exemption to the extent of amount utilized for construction is to be granted in the year of transfer of asset and the condition of completion of construction is to be looked into only after the window period provided by the Act of three years expires . The Hon’ble Supreme Court in the case of Fibre Boards (supra), has interpreted identically worded provisions of section 54G, which grants exemption on account of investment of capital gain earned from sale proceed of industrial undertaking, in another industrial undertaking, and has held that “advance” paid for the purpose of acquiring plant and machinery, land and building would amount to utilization by assessee of capital gain made by him for the purpose of purchasing or acquiring aforesaid assets. The Hon’ble Supreme Court has held that as per section 54G the assessee has been given a window of three years after the date on which transfer takes place, to purchase a new machinery or plant or acquire building. The Hon’ble Supreme Court has further held that section 54G(2) states that amount which is not “utilized” for the said purpose is to be denied exemption. The Hon’ble Supreme Court held that the assessee is entitled to avail exemption under the said section if it utilizes the amount of capital gain for purchase or acquisition of new plant and machinery and buildings and the said condition would be fulfilled when advances are paid for the purpose of purchase or acquisition of assets. The relevant findings of the apex court in the case of Fibre Boards (supra) is as under:
’36. A reading of Section 54G makes it clear that the assessee is given a window of three years after the date on which transfer has taken place to “purchase” new machinery or plant or “acquire” building or land. We find that the High Court has completely missed the window of three years given to the assessee to purchase or acquire machinery and building or land. This is why the expression used in section 54G(2) is “which is not utilized by him for all or any of the purposes aforesaid….”. It is clear that for the assessment year in question all that is required for the assessee to avail of the exemption contained in the Section is to “utilize” the amount of capital gains for purchase and acquisition of new machinery or plant and building or land. It is undisputed that the entire amount claimed in the assessment year in question has been so “utilized” for purchase and/or acquisition of new machinery or plant and land or building.
37. The High Court is not correct when it states:-
“31. The word ‘purchase’ is not defined under the Act and therefore, has to be construed in the commercial sense. In many dictionaries, the word ‘purchase’ means the acquisition of property by party’s own act as distinguished from acquisition by act of law. In the context in which the expression issued by the Legislature requires first to be understood and interpretation that suits the context requires to be adopted. Exemption of capital gains under Section 54G of the Act can be claimed on transfer of assets in cases of shifting of industrial undertaking from urban area to any other non-urban area. This exemption may be claimed if the capital gains arising on transfer of any of assets of existing industrial unit is utilized within one year or three years after the date on which the transfer took place for purchase of new machinery or plant for the purposes of the business of the industrial undertaking in the area to which the said undertaking is shifted. The Legislature consciously has not used the expression ‘towards the purchase of plant and machinery’ as in Section 54(4) of the Act in contrast to Section 54(2) of the Act wherein the words ‘towards’ is used before the word ‘purchase’. The expression ‘purchased’ used in sub-clause (a) of section 54G of the Act requires to be understood as the domain and control given to the assessee. In the present case, it is not in dispute that the assessee has paid advance amount for acquisition of land, plant, building and machinery, etc., within the time stipulated in the Section, but it is not the case of the assessee that after such payment of advance amount, it has taken possession of land and building, plant and machinery. In our view, if the argument of the learned Senior Counsel for the assessee is accepted, it would defeat the very purpose and object of the Section itself. By merely paying some amount by way of advance towards the cost of acquisition of land for shifting its industrial unit from urban area to non-urban area, an assessee cannot claim exemption from payment of tax on capital gains. This cannot be the intention of the Legislature and an interpretation, which would defeat the very purpose, and the object of the Act requires to be avoided.” (at para 31 of the impugned judgment)
38. We are of the view that the aforesaid construction of Section 54G would render nugatory a vital part of the said Section so far as the assessee is concerned. Under sub-section (1), the assessee is given a period of three years after the date on which the transfer takes place to purchase new machinery or plant and acquire building or land or construct building for the purpose of his business in the said area. If the High Court is right, the assessee has to purchase and/or acquire machinery, plant, land and building within the same assessment year in which the transfer takes place. Further, the High Court has missed the key words “not utilized” in sub-section (2) which would show that it is enough that the capital gain made by the assessee should only be “utilized” by him in the assessment year in question for all or any of the purposes aforesaid, that is towards purchase and acquisition of plant and machinery, and land and building. Advances paid for the purpose of purchase and/or acquisition of the aforesaid assets would certainly amount to utilization by the assessee of the capital gains made by him for the purpose of purchasing and/or acquiring the aforesaid assets. We find therefore that on this ground also, the assessee is liable to succeed. The appeals are, accordingly, allowed and the judgment of the High Court is set aside.’
12. In view of the interpretation given to the word “utilized” used in section 54G of the Act by the Supreme Court and considering that the condition specified in section 54G(2) are identical to that in section 54(2) it is clear that for the purpose of claiming exemption under section 54 the assessee is only required to invest the amount for the purpose of purchase or construction of a property without completing the same in the impugned year and all amount advanced for the said purpose would be treated as being utilized for the purpose of section 54.
13. In view of the above we hold that the assessee is entitled to claim deduction for the amount invested in the purchase of a new asset amounting to Rs. 62,10,000 and the AO is directed to grant the same.
14. The order of the ld. CIT(A) is therefore set aside and the appeal of the assessee is allowed in above terms.
15. In the result, appeal of the assessee is allowed.
In favour of assessee.
Bhagavad Gita : Kingdom of God (Text 72, Contents of the Gita Summarized)
esa brahmi sthitih partha nainam prapya vimuhyati
sthitvasyam anta-kale pi brahma -nirvanam rcchati
(Text 72, Contents of the Gita Summarized)
Meaning: That is the way of the spiritual and godly life, after attaining which a man is not bewildered. If one is thus situated even at the hour of death, one can enter into the kingdom of God.
Bhagavad Gita : Attain Real peace (Text 71, Contents of the Gita Summarized)
vihaya kaman yah sarvan pumams carati nihsprhah
nirmamo nirahankarah sa santim adhigacchati
(Text 71, Contents of the Gita Summarized)
Meaning: A person who has given up all desires for sense gratification, who lives free from desires, who has given up all sense of proprietorship and is devoid of false ego-he alone can attain real peace.
GST: FAQs Series 22 : Returns Process and matching of Input Tax Credit (Updated Statutory provisions & Rules 03 June 2017)
Returns Process and matching of Input Tax Credit
(Updated Statutory provisions & Rules 03 June 2017)
(Updated Statutory provisions & Rules 03 June 2017)
Continue…
Q 11. What will be the legal position in regard to thereversed input tax credit if the supplier later realizes the mistake and feeds the information?
Ans. At any stage, but before September of the next financial year, supplier can upload the invoice and pay duty and interest on such missing invoices in his GSTR-3 of the month in which he had earlier failed to upload the invoice. The recipient shall be eligible to reduce his output tax liability to the extent of the amount in respect of which the supplier has rectified the mis-match. The interest paid by the recipient at the time of reversal will also be refunded to the recipient by crediting the amount in corresponding head of his electronic cash ledger.
Q 12. What is the special feature of GSTR-2?
Ans. The special feature of GSTR-2 is that the details of supplies received by a recipient can be auto populated on the basis of the details furnished by the counterparty supplier in his GSTR-1.
Q 13. Do tax payers under the composition scheme also need to file GSTR-1 and GSTR-2?
Ans. No. Composition tax payers do not need to file any statement of outward or inward supplies. They have to file a quarterly return in Form GSTR-4 by the 18th of the month after the end of the quarter. Since they are not eligible for any input tax credit, there is no relevance of GSTR-2 for them and since the credit of tax paid under Composition Levy is not eligible, there is no relevance of GSTR-1 for them. In their return, they have to declare
summary details of their outward supplies along with the details of tax payment. They also have to give details of their purchases in their quarterly return itself, most of which will be auto populated.
Q 14. Do Input Service Distributors ( ISDs) ne ed to file separate statement of outward and inward supplies with their return?
Ans. No, the ISDs need to file only a return in Form GSTR- 6 and the return has the details of credit received by them from the service provider and the credit distributed by them to the recipient units. Since their return itself covers these aspects, there is no requirement to file separate statement of inward and outward supplies.
Q 15. How does a taxpayer get the credit of the tax deducted at source on his behalf? Does he need to produce TDS certificate from the deductee to get the credit?
Ans. Under GST, the deductor will be submitting the deductee wise details of all the deductions made by him in his return in Form GSTR-7 to be filed by 10th of the month next to the month in which deductions were made.
The details of the deductions as uploaded by the deductor shall be auto populated in the GSTR-2 of the deductee.
The taxpayer shall be required to confirm these details in his GSTR-2 to avail the credit for deductions made on his behalf. To avail this credit, he does not require to produce any certificate in physical or electronic form.
The certificate will only be for record keeping of the tax payer and can be downloaded from the Common Portal.
Q 16. Which type of taxpayers need to file Annual Return?
Ans. All taxpayers filing return in GSTR-1 to GSTR-3, other than ISD’s, casual/non-resident taxpayers, taxpayers under composition scheme, TDS/TCS deductors, are required to file an annual return. Casual taxpayers, nonresident taxpayers, ISDs and persons authorized to
deduct/collect tax at source are not required to file annual return.
Q 17. Is an Annual Return and a Final Return one and the same?
Ans. No. Annual Return has to be filed by every registered person paying tax as a normal taxpayer. Final Return has to be filed only by those registered persons who have applied for cancellation of registration. The Final return has to be filed within three months of the date of cancellation or the date of cancellation order.
Q 18. If a return has been filed, how can it be revised if some changes are required to be made?
Ans. In GST since the returns are built from details of individual transactions, there is no requirement for having a revised return. Any need to revise a return may arise due to the need to change a set of invoices or debit/ credit notes. Instead of revising the return already submitted, the system will allow changing the details of those transactions (invoices or debit/credit notes) that are required to be amended. They can be amended in any of the future GSTR- 1/2 in the tables specifically provided for the purposes of amending previously declared details.
Q 19. How can taxpayers file their returns?
Ans. Taxpayers will have various modes to file the statements and returns. Firstly, they can file their statement and returns directly on the Common Portal online. However, this may be tedious and time consuming for taxpayers with large number of invoices. For such taxpayers, an offline utility will be provided that can be used for preparing the statements offline after downloading the auto populated details and uploading them on the Common Portal. GSTN has also developed an ecosystem of GST Suvidha Providers (GSP) that will integrate with the Common Portal.
Q 20. What precautions, a taxpayer is required to take for a hassle free compliance under GST?
Ans. One of the most important things under GST will be timely uploading of the details of outward supplies in Form GSTR-1 by 10th of next month. How best this can be ensured
will depend on the number of B2B invoices that the taxpayer issues. If the number is small, the taxpayer can upload all the information in one go. However, if the number of invoices is
large, the invoices (or debit/ credit notes) should be uploaded on a regular basis. GSTN will allow regular uploading of invoices even on a real time basis. Till the statement is actually submitted, the system will also allow the taxpayer to modify the uploaded invoices.
Therefore, it would always be beneficial for the taxpayers to regularly upload the invoices.
Last minute rush will make uploading difficult and will come with higher risk of possible failure and default.
The second thing would be to ensure that taxpayers follow up on uploading the invoices of their inward supplies by their suppliers. This would be helpful in ensuring that the input tax
credit is available without any hassle and delay. Recipients can also encourage their suppliers to upload their invoices on a regular basis instead of doing it on or close to the due date.
The system would allow recipients to see if their suppliers have uploaded invoices pertaining to them.
The GSTN system will also provide the track record about the compliance level of a tax payer, especially about his track record in respect of timely uploading of his supply invoices giving details about the auto reversals that have happened for invoices issued by a supplier.
The Common Portal of GST would have pan India data at one place which will enable valuable services to the taxpayers. Efforts are being made to make regular uploading of invoices as easy as possible and it is expected that an enabling ecosystem will be developed to achieve this objective. Taxpayers should make efficient use of this ecosystem for easy and hassle free compliance under GST.
Refer extract of Chapter IX (Sec 37 to 48) of CGST Act (Return provisions) on following link:
http://gstindia1.blogspot.in/p/37.html
Refer Income tax, GST & Company Law daily updates on link
http://knowledgedailyrefresher.blogspot.in
Disclaimer:
This FAQ on GST compiled by NACEN and vetted by the Source Trainers is based on the CGST/SGST/UTGST/IGSTAct(s). This FAQ is for training and academic purposes only.
The information in this blogger is reproduced from FAQ on GST publised by CBEC updated on 31 March 2017 and is not intended to be treated as legal ad vice or opinion. For greater details, you are requested to refer to the respective CGST/SGST/UTGST/IGST Acts.
The FAQs refer to CGST and SGST Acts as CGST/SGST as CGST Act and SGST Act are identical in most of the provisions. CGST Act has been introduced in the Parliament. The SGST Acts will be passed by respective state legislatures. A few provisions may be specific to state and may not be in CGST Act.
Transfer of shares by company in pursuance of family settlement isn’t exempt from capital gains
Where assessee company was under control of members of a family, who were a part of a family settlement, but was a separate legal entity being incorporated as a limited company, transaction of transfer of shares by assessee-company amounted to transfer and would be covered within meaning of section 2(47) so as to be assessable to capital gains tax.
Refer full judgement:
[2017] 82 taxmann.com 397 (Bombay)
HIGH COURT OF BOMBAY
B.A. Mohota Textiles Traders (P.) Ltd.
v.
Deputy Commissioner of Income-tax, Maharashtra
M.S. SANKLECHA AND MANISH PITALE, JJ.
IT APPEAL NO. 73 OF 2002
JUNE 12, 2017
C.J. Thakkar and S.C. Thakkar, Advocates for the Appellant. B.N. Mohta, Advocate for the Respondent.
JUDGMENT
M.S. Sanklecha, J. – This appeal under Section 260A of the Income Tax Act, 1961 (Act) challenges the order dt.23.4.2002 of the Income Tax Appellate Tribunal, Nagpur (Tribunal) relating to Assessment Year 1995-96.
2. This appeal was admitted on 23 March, 2007 on the following substantial questions of law :
| (a) | Whether in the facts and circumstances of the case and in law the Tribunal was right in holding that the transaction of transfer of shares by the assessee company in pursuance of family arrangement amounted to transfer and was exigible to capital gains tax ? | |
| (b) | Whether in the facts and circumstances of the case and in law the Tribunal was right in not accepting the fact that the transfer of shares by the assessee company being only incidental and in consequence of allotment and control of management of companies in pursuance of family arrangement, took the transaction out of purview of Section 2 (47) of I.T. Act, 1961 ? | |
| (c) | Whether in the facts and circumstances of the case and in law merely because the assessee/company has a corporate veil, will it make the transfer of shares by it assessable to capital gains tax even though such transaction is in pursuance of family arrangement ? |
3. It is agreed between the parties that Question (a) above brings out the real controversy between the parties, Questions (b) and (c) are mere facets of Question (a).
4. This appeal relates to A.Y. 1995-96.
5. The brief facts leading to this appeal are as under :
| (a) | The appellant is a Private Limited Company. Over 80 % of it’s share capital is held by the family members of Mr.Girdhardas Mohota, Mr.Gwaldas Mohota and Mr.Ranchhoddas Mohota referred to by the Tribunal as Groups ‘A’, ‘B’ and ‘C’ respectively. The Mohota family, besides holding a majority stake in the appellant/Company, had joint interest in various other Limited Companies and Partnership Firms, besides the family also owned immovable properties jointly. | |
| (b) | Disputes and differences arose between three groups of Mohota family i.e. Groups A, B and C. Consequently, with a view to settle the differences between them and restore family peace and harmony, it was decided by the three groups to refer their dispute by an agreement dt.15.1.1994 to the sole arbitration of Mr. Justice S.W.Puranik. The scope of reference to the Arbitration were as under : |
| (a) | Allotment and/or division of properties mentioned in schedule ‘B’ and related matters; | |
| (b) | Allotment, management and control of partnership firms and limited companies mentioned in schedule ‘A’ and related matters; | |
| (c) | All matters connected with or related to or ancillary to the above referred matters; and | |
| (d) | To give suitable orders and directions for implementation thereof . |
| (c) | On 30.4.1994, Justice Puranik rendered his Arbitration Award by way of family settlement. The Arbitration Award thereafter became decree of the Court dt.7.11.1994 under the erstwhile Arbitration Act, 1940. The above Award distributed the properties belonging to Mohota family amongst it’s three groups. The Appellant/assessee was allotted to Group ‘B’. M/s.R.S.Rekchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. were allotted to Groups ‘A’ and “C’ collectively. | |
| (d) | Thus, the settlement inter alia required members of Group ‘B’ (Mr.Gwaldas Mohta group), who were in control of appellant/assessee, to transfer the shares held by the appellant/assessee in M/s.R.S.Rekhchand Mohta Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Mills Ltd. in favour of members of Groups ‘A’ and ‘C’ collectively i.e. Mr.Girdhardas Mohota and Mr.Ranchhoddas Mohota. The Award directed the transfer of shares at a consideration of Rs.225/- per share of M/s.R.S.Rekchand Mohota Spinning and Weaving Mills Ltd. and at a consideration of Rs.10/- per share of M/s. Vaibhav Textiles Mills Ltd. | |
| (e) | Therefore, the appellant/assessee in terms of the Award transferred 25,650 shares held by it in M/s.Rekhchand Mohta Spinning and Weaving Mills Ltd. and 1,22,000 shares held by it in M/s. Vaibhav Textiles Pvt. Ltd. to the members of the family of Group ‘A’ and Group ‘C’. | |
| (f) | On 30.11.1995, the appellant/assessee filed return of income for the Assessment Year 1995-96 declaring an income of Rs.58.35 Lakhs. During the Assessment proceedings, the appellant/assessee contended that transfer of shares in M/s.Rekhchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. to members of Group ‘A’ and ‘C’ was done in pursuance of family arrangement/settlement as reflected in the Arbitration Award dt.30.4.1995. Therefore, it was contended that no Capital gains would be attracted as there was no transfer as it was working out of family settlement/arrangement. However, the Assessing Officer, by order dt.7.4.1997, negatived the same and inter alia held that the Company being a separate legal entity distinct from it’s share holders, cannot be as part of family settlement/arrangement. Thus, transfer of shares done by independent entity such as the Appellant/assessee would not be covered by the ‘Family Settlement’ and consequently, brought the transfer of 25,650 shares for consideration of Rs.225/- per share of M/s.Rekhchand Mohota Spinning and Weaving Mills Ltd. and 1,22,000 shares for consideration of Rs.10/- per share of M/s.Vaibhav Textiles Pvt. Ltd. to Capital Gains Tax. Resultantly, it determined the total income of the appellant for the Assessment Year 1995-96 at Rs.66.80 Lakhs. | |
| (g) | Being aggrieved, the appellant carried the issue in appeal to the Commissioner of Income Tax (Appeals) {CIT(A)}. By an order dt.17.6.1998, the CIT accepted the position in law that family settlement cannot amount to transfer or create any interest and it is binding upon all the members of the family. However, the same can only be applied to members of the family who are parties to the settlement. In this case, the appellant/assessee was a Company incorporated under the Companies Act having a distinct and independent entity from it’s share holders. Thus, while holding that the Award dt.30.4.1994 is a family settlement, the same can only be applied to members of Mohota family, who were party to the proceedings before the Arbitrator and not to a Limited Company such as Appellant/Company. Therefore, notwithstanding the fact that the Appellant/assessee was under control and management of the members of Mohota family, who were part of family settlement, yet the transfer of shares by the Company would be covered within the meaning of Section 2(47) of the Act so as to be assessable to Capital Gains Tax. Thus, the appeal of Appellant/assessee was dismissed by the order dated 17.6.1998 of the CIT (A). | |
| (h) | Being aggrieved with the order dated 17.6.1998 of the CIT(A), the Appellant/assessee preferred an appeal to the Tribunal. The impugned order dtd. 23 April, 2003 upheld the view of the lower Authorities by holding that a family settlement would not amount to transfer as it only recognizes pre-existing rights. However, it held that the Appellant/assessee (even if controlled by members of a family), on incorporation as a Limited Company becomes a separate legal entity and the members who own shares in the Company and the Company are in law different persons. It held that there exists a veil between the members of the Company and the Company. Thus, the family settlement arrived at between the members of a family will not inure to the benefit of the Appellant/assessee as it is not a member of the family. Consequently, the impugned order dated 23.4.2002 of Tribunal dismissed the appellant/assessee’s appeal. |
6. Being aggrieved with the impugned order, the Appellant/assessee is in appeal before us on the substantial questions of law as reproduced above.
7. Mr.S.C.Thakkar, learned Counsel for the appellant/assessee in support of the appeal submits as under :
| (a) | It is undisputed position as settled by the Apex Court that a family settlement/arrangement would not give rise to any transfer. The transfer of shares by the Appellant/assessee was in pursuance of and to give effect to the family arrangement as reflected in the Award dt.30.4.1994. There was no choice with the Appellant/assessee not to transfer the shares and such transfer of shares cannot be seen de hors the family arrangement. Thus, it is submitted that the entire transaction has to be looked at wholistically. | |
| (b) | The corporate veil can be lifted to ascertain the real nature of the transaction and the person behind the transfer. In support, reliance is placed upon the decision of the Calcutta High Court in the case of Shaw Wallace and Company Ltd. v. Commissioner of Income Tax reported in 119 ITR 399. | |
| (c) | The transfer of shares was mere adjustment of rights between the parties and no consideration has been received by the appellant/assessee The fair market value attributed to the shares by the Arbitrator was only for ascertaining and adjusting the rights of the parties to reach a family settlement. |
8. As against this, Mr.Mohta, learned Counsel appearing for the Revenue submits as under :
| (a) | The appellant/assessee is a Company incorporated under the Companies Act having a separate and independent existence, different from that of it’s share holders/members. Thus, the distinction between the incorporated Company and it’s members cannot be ignored. | |
| (b) | It is undisputed that the appellant/assessee who has transferred the shares of M/s.R.S.Rekhchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. are not members of Mohota family and therefore, they were not part of family settlement. Consequently, the Arbitration Award dt.30.4.1994 arrived at as a family settlement cannot, in any manner, have any impact on the appellant/assessee’s liability to tax under the Act. | |
| (c) | Transfer done by the appellant/assessee of it’s shares in M/s.R.S.Rekhchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. to members of Groups ‘A’ and ‘C’ is a transfer within the meaning of Section 2(47) of the Act. It does not fall under any of the exclusions provided in Section 47 of the Act. Thus, the impugned order dated 23 April, 2002 calls for no interference. |
9. We have considered the rival submissions. There is no dispute before us that a family arrangement/settlement would not amount to a transfer. In fact, all the three Authorities under the Act have not disputed the aforesaid position in law. So far as the members of Mohota family are concerned, who are parties to the family settlement, any transfer inter se between them on account of family settlement would not result in a transfer so as to attract the provisions of the Capital gain tax under the Act. However, in the present case, we are not concerned with the members of Mohota family who were parties to the family settlement, but with transfer of share done by the Company incorporated under the Companies Act having separate/independent corporate existence, perpetual succession and common seal. This Company is independent and distinct from it’s members. In fact, this principle dates back to the decision of House of Lords in Saloman .vs. Saloman & Co. Ltd., 1897 AC 22. Our Court in T.R. Pratt (Bombay) Ltd. v. E.D. Sassoon and Co. Ltd., AIR 1936 (Bombay) 62 has observed as under :
” As held in 1897 A.C. 22 (23), under the law, an incorporated Company is a distinct entity and although shares may be practically controlled by one person, in law a Company is a distinct entity and it is not relevant to enquire whether the directiors belonged to the same family or whether it is compendiously described ‘a one-man Company’.
10. However, the Courts have permitted the lifting of corporate veil to prevent injustice. One such class of cases, where the Court has disregarded the corporate entity is where it is used for tax evasion. A classic illustration of this is found In Re. Dinshaw Maneckjee Petit, AIR 1927 (Bombay) 371, where the Court lifted the corporate veil as it found that “the Company in this case was formed by the assessee purely and simply as a means of avoiding super tax and that the Company was nothing more than the Assessee himself. It did no business but was created purely and simply as a legal entity to ostensibly receive dividends and interest and handed them over to the assessee as pretended loan”. In the present case, the Revenue does not seek to lift the corporate veil. It is not the case of the Revenue that the Corporate identity is a sham and it has been formed only to circumvent the law. In this case, it is the Assessee which seeks to lift the corporate veil so as to identify the members of the Assessee/Company as those who entered into family settlement as reflected in the Arbitration Award dt.30.4.1994 and call upon the authority to ignore the corporate existence of the Appellant. This lifting of the corporate veil is not allowed when it is not for the benefit of the Revenue. The Apex Court in the case of M/s. Bacha F. Guzdar v. CIT, 27 ITR 1 has inter alia observed that “A shareholder has no interest in the property of the Company….. It has only a right to participate in the profits of the Company as and when the Company decides to divide them. The Company is a juristic person and is distinct different from it’s share holders. It is the Company which owns the property and not the share holders.” Therefore, the attempt of the share holder to lift the corporate veil at the instance of the share holder was rejected. In this case also, shares in M/s.R.S.Rekhchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. are held by the appellant/assessee and not it’s members. The members, therefore, cannot claim any rights to the property of appellant/assessee Company i.e. shares of M/s.R.S.Rekhchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. as rightly held by the Authorities under the Act.
11. The submission of learned Counsel Mr.Thakkar that the entire transaction should be looked at wholistically bearing in mind the purpose and object of the settlement as recorded in the Arbitration Award dt.30.4.1994 so as to settle the dispute between members of the family and it was to achieve aforesaid objective that the shares in the appellant/assessee were directed to be transferred. The objective/purpose of family settlement would restrict itself only to the persons who entered into the family arrangement and are part of the settlement. It cannot extend to the persons who are strangers to the settlement. In this case, admittedly, the Appellant/assessee is not a member of Mohota family so as to be a part of the family settlement. The appellant/assessee having been formed under the Companies Act have certain advantages and disadvantages attached to it. But once a Company comes into existence under the provisions of the Companies Act and it is considered to be an independent entity, then it’s obligation under the law as a separate legal entity has to be complied with and settlement arrived at between it’s members cannot discharge the appellant/assessee from complying with it’s obligations under the Law. It was also contended that the Appellant/assessee had no volition in transferring the shares. This submission overlooks the fact that an artificial entity such as a Company only acts through it’s Directors and in no case, does the Company has a mind of it’s own to decide the course of action to be adopted.
12. It was also submitted that no consideration was received by the Appellant/assessee for the transfer of shares. It is submitted that the fair market value of M/s.R.S.Rekhchand Mohota Spinning and Weaving Mills Ltd. arrived at Rs.225/- per share and that of M/s. Vaibhav Textiles Pvt. Ltd. arrived at Rs.10/-per share by the Arbitrator was only for the purposes of adjustment of rights amongst the parties. This submission overlooks the fact that the Arbitration Order annexed to the decree (Page 62 of the Appeal memo) itself records that the shares in M/s.R.S.Rekhchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. are to be transferred at a consideration of Rs.225/- and Rs.10/- per share respectively. Thus, the consideration has been determined and accepted by the members of the family, who are in management of the Assessee/Company.
13. Mr.Thakkar, learned Counsel also placed reliance upon the decision of the Calcutta High Court in the case of Shaw Wallace and Co. Ltd. (supra) in support of the submission that one is entitled to lift corporate veil and look behind to find out who are the real persons in control of the incorporated Company. In the aforesaid case, the issue was with regard to amalgamation of 100% subsidiary company to it’s holding company. The question which arose for consideration before the Calcutta High Court was whether an amalgamation between holding and subsidiary Companies would amount to transfer of capital asset in terms of Section 45 r/w. 2 (47) of the Act. The Calcutta High Court specifically referred to Section 47 of the Act and in particular, to Section 47, sub-clause (v) of the Act to hold that a transfer by a subsidiary company to the holding Company of the whole of it’s share capital will not be regarded as transfer for the purposes of computing capital gains under Chapter IV-E of the Act. Further observations made by the Calcutta High Court to the effect that, on looking behind the facade of the Company, one would notice that all the assets of the subsidiary company are held by it’s parent company which owns 100 % of it’s shares. The aforesaid observations of the Calcutta High Court seems to provide the rationale for Section 47(v) of the Act in excluding a transfer of the entire share capital of a subsidiary to it’s holding company which owns 100% of it’s shares from being considered a transfer. In the present facts, we are not concerned with transfer between holding and subsidiary companies. It is not the case of the appellant that Section 47 of the Act is applicable.
14. Further, lifting of corporate veil at the instance of the assessee would mean that it is denying it’s corporate existence. This, after taking advantage of the separate existence of a Company under the Act. Therefore, after having incorporated the Limited Company and given it separate existence from it’s share holders, it is not open to the Company to urge “Please ignore my separate existence and look at the persons behind me.” If that be so, the Appellant/Company must opt for voluntarily winding up and then the shares being allotted to the individual members on liquidation would be governed by the family arrangement/settlement.
15. In the above view, the Tribunal was correct in holding that the transaction of transfer of shares by the independent corporate entity was assessable to capital gain tax. Therefore, the substantial questions of law which arise for our consideration are all decided in favour of the respondent/revenue and against the appellant/assessee. Accordingly, the appeal is dismissed. No order as to costs.
Bhagavad Gita: How to achieve peace (Text 70, Contents of the Gita Summarized)
apuryamanam acala-pratistham
samudram apah pravisanti yadvat
tadvat kama yam pravisanti sarve
sa santim apnoti na kama-kami
(Text 70, Contents of the Gita Summarized)
Meaning: A person who is not disturbed flow of desires–that enter like rivers into the ocean, which is ever being filled but is always still–can alone achieve peace, and not the man who strives to satisfy such desires.
GST: EVC and OTP mode for authentication of documents under GST (N/No 06/2017 dated 19 June 2017))
[TO BE PUBLISHED IN THE GAZETTE OF INDIA, EXTRAORDINARY, PART II, SECTION 3, SUB-SECTION (i)]
GOVERNMENT OF INDIA
MINISTRY OF FINANCE
DEPARTMENT OF REVENUE CENTRAL BOARD OF EXCISE AND CUSTOMS
Notification No. 6/2017 – Central Tax
New Delhi, the 19th June, 2017
29 Jyaistha, 1939 Saka
G.S.R. (E).- In exercise of the powers conferred by sub-rule (1) of rule 26 of the Central Goods and Services Tax Rules, 2017 (hereinafter referred to as the said Rules), the Central Board of Excise and Customs hereby notifies the following modes of verification, for the purpose of the said rule, namely:-
(i) Aadhaar based Electronic Verification Code (EVC);
(ii) Bank account based One Time Password (OTP):
Provided that where the mode of authentication of any document is through any of the aforesaid modes, such verification shall be done within two days of furnishing the documents.
2. This notification shall come into force on the 22nd day of June, 2017.
[F. No. 349/72/2017-GST]
(Dr. Sreeparvathy.S.L.) Under Secretary to the Government of India
Happy Yoga Day 21 June 2017
Happy Yoga Day 21 June 2017
Yoga-sthah Kuru Karmani
Sangam tyaktva dhananjaya
Siddy-asiddyoh samo bhutva
Samatvam yoga ucyate (Text 48, Ch2, Contents of Gita Summarized)
Meaning: Perform your duty equipoised, O Arjuna, abandoning all attachment to success or failure, such equanimity is called yoga.
(Bhavavad Gita)
Yoga:
-Yoga
-is merger
-is unification of Atman with Brahman
-is one who has integarated himself with the Totality
-is the one who has achieved the highest purpose of life
-is the one who is merged with the Lord. He is óne with the Lord
-is one who has reached the highest state of consciousness, the real Self
-knows everything ‘As it is’-that everything is only an extension of himself as Brahman
-is the one who has reached the Summit (the highest level or degree attainable; the highest stage of development)
(Ashtavakra Gita)
Bhagavad Gita: Introspective sage(Text 69, Contents of the Gita Summarized)
Ya nisa sarva-bhutanam tasyam jagarti samyami
yasyam jagrati bhutani sa nisa pasyato muneh
(Text 69, Contents of the Gita Summarized)
Meaning: What is night for all beings is the time of awakening for the Self controlled; and the time of awakening for all beings is night for the Introspective sage.
**
There are two classes of intelligent men.One is intelligent in material activities for sense gratification, and the other is Introspective and awake to the cultivation of self realization. Activities of the Introspective sage, or thoughtful man, are night for persons materially absorbed. The sage feels transcendental pleasure in the gradual advancement of spirtual culture, whereas the man in materialistic activities, being asleep to Self-realization, dreams of varieties of sense pleasure, feeling sometimes happy and sometimes distress in his sleeping condition.The Introspective man is always indifferent to materialistic happiness and distress.He goes on with his self realization activities undisturbed by material reactions.
Business So Simple 