No need to deposit in Capital Gain Scheme if house is purchased within time limit of section 54F

Ashok Kapasiawala v. ITO [2015] 63 taxmann.com 284 (Ahmedabad - Tribunal)
Issue:
 

Whether exemption under Section 54F could be denied to assessee who had purchased a new residential house within 2 years from the date of transfer of original asset on ground that he had not deposited the amount in capital gain account scheme before the due date of filing of return under section 139(1)


The tribunal held in favour of assessee as under-

• A combined reading of sections 54F(1) and 54F(4), makes it clear that the assessee would be entitled to exemption under section 54F in the event he purchases new asset within two years from the date of transfer of original asset or the amount is utilized before the date of furnishing the return under section 139. In a case it is not utilized for the purpose of aforesaid and within the period aforementioned, section 54F(4) mandates the assessee to deposit such amount in capital gain account scheme before due date of filing of return under section 139(1).
• Therefore, there is no ambiguity in the provision; so far deposit of the unutilized amount is concerned, it has to be deposited in a specified capital gain account before the due date of filing of return under section 139(1).
• In the instant case, the return was filed by assessee in response to a notice issued under Section 148 and not under section 139(1). Therefore, the contention of the assessee was that he should be allowed exemption under section 54F even if had not deposited the amount in capital account scheme.
• The Karnataka High Court in the case of CIT v. K. Ramachandra Rao [2015] 56 taxmann.com 163 held that when the assessee had invested the entire sale consideration in construction of a residential house within the three years from the date of transfer, he could not be denied exemption under section 54F on the ground that he did not deposit the said amount in capital gain account scheme before the due date prescribed under section 139(1).
• Under section 54F (1), the exemption would be available if the assessee purchased the residential house within two years after the date when transfer took place. Hence, as per judgment of Karnataka High Court, the provisions of section 54F(4) would not be attracted if assessee has purchased or constructed the residential house within period prescribed under section 54F(1).
• In the instant case, there was no dispute with regard to the fact that the assessee had purchased a new asset within two years from the date of transfer of the original asset. Therefore, following the ratio laid down by the Karnataka High Court in the case of K. Ramachandra Rao (supra), the court directed Assessing Officer to re-compute the assessed income after granting the benefit of section 54F to the assessee.

Mother can’t be deemed as owner of house purchased by minor-daughter out of her own income

SMT. S. UMA DEVI v. COMMISSIONER OF INCOME-TAX [2015] 62 taxmann.com 64 (Hyderabad - Tribunal)

Facts:

• Assessee had sold a capital asset and invested a part of sales consideration in a new residential house so as to claim exemption under section 54F.
• She owned more than one residential house on date of transfer of original asset. However, one residential house was owned by her minor daughter.
• Commissioner denied Section 54F exemption on the ground that assessee would be deemed as owner of house owned by her minor daughters. The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

• By virtue of fiction created by Section 64(1A), the incomes of properties owned by the two minor daughters were clubbed in the hands of the assessee since the date of purchase of the said properties.
• The investment for purchase of said properties has come from the independent sources of these daughters, which has been accepted by the department.
• Simply by virtue of inclusion of rental income of minor daughters under Section 64(1A) in the income of assessee, it could not be presumed that the assessee was owner of property purchased by minor daughters. Thus, the findings of the learned CIT were factually incorrect and legally unsustainable. Hence, assessee would be eligible for exemption under Section 54F.

Illegally encroached land is not a capital asset; profit arising on its sale is taxable as income from other source

ITO v Bhagwan T. Fatnani[2015] 58 taxmann.com 227 (Mumbai - Tribunal)

Property illegally encroached by assessee would not be considered as 'Capital asset' under section 2(14) and, consequently, gain arising from transfer of such property could not be assessed as capital gain but as income from other sources.

Facts:

• The assessee had shown long-term capital gain from sale of unauthorisedly encroached school land for which he had no title/right.
• The Assessing Officer held there was no capital asset owned by assessee as he did not have legal right or title over the asset and, therefore, the income declared was not chargeable under section 45 but under section 56 as income from other sources.
• On appeal, CIT (A) reversed the findings of AO. Aggrieved with the CIT(A) order, revenue filed the instant appeal before Tribunal.

The Tribunal held in favour of revenue as under:

• The assessee pleaded that the definition of capital asset under Section 2(14) has used words property of 'any kind' and it is not necessary that it should be lawfully acquired property. This proposition could not be accepted because the legislature in its wisdom has used this word for lawful property only.
• If the plea of the assessee was allowed, then any person will encroach upon a Government land by showing the same in his balance sheet and shall claim capital gains, which is not permissible.
• Under the charging section of capital gains, the crucial requirements are that there must be a transfer and such transfer must be of a capital asset. The primary school land was encroached upon/illegally occupied by the assessee and there was no transfer of any capital asset.
• Capital gains under section 45 accrue only if there is a sale or any transfer of the capital asset. But in the instant case, there was no transfer as such the assessee encroached upon the school land. Accordingly, the said land could not be called as capital asset owned by assessee.
• Since it was not a case of sale or transfer of capital asset, there was no question of capital gains. Hence, profit arising on sale of encroached land would be taxable as income from other source.

Long-term Capital Loss On Tax Exempt Shares Can Be Set-Off Against Taxable Gains

Raptakos Brett & Co. Ltd vs. DCIT (ITAT Mumbai)

Though the LTCG on sale of equity shares (subject to STT) is exempt from tax u/s 10(38), the long-term capital loss on sale of such shares can be set-off against the taxable LTCG on sale of another asset. 

• The main issue is whether Long term capital loss on sale of equity shares can be set off against Long term capital gain arising on sale of land or not, as the income from Long term capital gain on sale of such shares are exempt u/s. 10(38). The nature of income here in this case is from sale of Long term capital asset, which are equity shares in a company and unit of an equity oriented fund which is chargeable to STT. First of all, Long term capital gain has been defined under section 2(39A), as capital gains arising from transfer of a Long term capital asset. Section 2(14) defines “Capital asset” and various exceptions and exclusions have been provided which are not treated as capital asset. Section 45 is the charging section for any profits or gain arising from a transfer of a capital asset in the previous year i.e. taxability of capital gains. Section 47 enlists various exceptions and transactions which are not treated as transfer for the purpose of capital gain u/s. 45. The mode of computation to arrive at capital gain or loss has been enumerated from sections 48 to 55. Further sub section (3) of section 70 and section 71 provides for set off of loss in respect of capital gain.

• The whole genre of income under the head capital gain on transfer of shares is a source, which is taxable under the Act. If the entire source is exempt or is considered as not to be included while computing the total income then in such a case, the profit or loss resulting from such a source do not enter into the computation at all. However, if a part of the source is exempt by virtue of particular “provision” of the Act for providing benefit to the assessee, then in our considered view it cannot be held that the entire source will not enter into computation of total income. In our view, the concept of income including loss will apply only when the entire source is exempt and not in the cases where only one particular stream of income falling within a source is falling within exempt provisions.

• Section 10(38) provides exemption of income only from transfer of Long term equity shares and equity oriented fund and not only that, there are certain conditions stipulated for exempting such income i.e. payment of security transaction tax and whether the transaction on sale of such equity share or unit is entered into on or after the date on which chapter VII of Finance (No.2) Act 2004 comes into force. If such conditions are not fulfilled then exemption is not given. Thus, the income contemplated in section 10(38) is only a part of the source of capital gain on shares and only a limited portion of source is treated as exempt and not the entire capital gain (on sale of shares). If an equity share is sold within the period of twelve months then it is chargeable to tax and only if it falls within the definition of Long term capital asset and, further fulfils the conditions mentioned in subsection (38) of section 10 then only such portion of income is treated as exempt. There are further instances like debt oriented securities and equity shares where STT is not paid, then gain or profit from such shares are taxable.

• Section 10 provides that certain income are not to be included while computing the total income of the assessee and in such a case the profit or loss resulting from such a source of income do not enter into computation at all. However, a distinction has been drawn where the entire source of income is exempt or only a part of source is exempt. Here it needs to be seen whether section 10(38) is source of income which does not enter into computation at all or is a part of the source, the income in respect of which is excluded in the computation of total income. For instance, if the assessee has income from Short term capital gain on sale of shares; Long term capital gain on debt funds; and Long term capital gain from sale of equity shares, then while computing the taxable income, the whole of income would be computed in the total income and only the portion of Long term capital gain on sale of equity shares would be removed from the taxable income as the same is exempt u/s 10(38). This precise issue had come up for consideration before the Hon’ble Calcutta High Court in Royal Calcutta Turf Club v. CIT (1983) 144 ITR 709 (Cal).

• Though in CIT vs. Hariprasad & Company Pvt. Ltd. (1975) 99 ITR 118 (SC), the Supreme Court opined that if loss was from the source or head of income not liable to tax or congenitally exempt from income tax, neither the assessee was required to show the same in the return nor was the Assessing Officer under any obligation to compute or assess it much less for the purpose of carry forward, the ratio and the principle laid down by the Apex Court would not apply here in this case, because the concept of income includes loss will apply only when entire source is exempt or is not liable to tax and not in the case where only one of the income falling within such source is treated as exempt. The Hon’ble Apex Court on the other hand, itself has stated that if loss from the source or head of income is not liable for tax or congenitally exempt from income tax, then it need not be computed or shown in the return and Assessing Officer also need not assess it. This distinction has to be kept in mind. Hon’ble Calcutta High Court in Royal Turf Club have discussed the aforesaid decision of the Hon’ble Supreme Court and held that the same will not apply in such cases.

• Thus, we hold that section 10(38) excludes in expressed terms only the income arising from transfer of Long term capital asset being equity share or equity fund which is chargeable to STT and not entire source of income from capital gains arising from transfer of shares. It does not lead to exclusion of computation of capital gain of Long term capital asset or Short term capital asset being shares. Accordingly, Long term capital loss on sale of shares would be allowed to be set off against Long term capital gain on sale of land in accordance with section 70(3) (Schrader Duncan Ltd (2012) 50 SOT 68 distinguished; Kishorebhai Bhikhabhai Virani vs. Asst. CIT (2014) 367 ITR 261 (Guj) not followed)

ITAT unsettles the settled law; allows set-off of long term capital loss arising from sale of STT paid equity shares

RAPTAKOS BRETT & CO. LTD. V. DCIT (2015) 58 taxmann.com 115 (Mumbai - Tribunal)

Facts:

• Assessee filed its return of income wherein it claimed set-off of long term capital loss arising from sale of shares (STT paid) against the long term capital gain arising from sale of land.
• The Assessing Officer (AO) denied setting off of such loss by relying upon the verdict of Apex Court in case of CIT vs. Hariprasad & Company Pvt. Ltd. (1975) 99 ITR 118. He was of the view that income includes loss and, therefore, if the long-term capital gain arising from sale of shares (STT paid) does not form part of the total income as per section 10(38), then the loss arising from such shares would also not form part of the total income.
• The CIT(A) confirmed the order of the AO. Aggrieved by the order of CIT(A), assessee filed the instant appeal before the Tribunal.

The Tribunal held in favour as assessee as under:

• The ratio and the principle laid down by the Hon'ble Apex Court in the case of Hariprasad (Supra) would not apply in the instant case, as the concept that 'income will include loss' would apply only when entire source is exempt from tax and not when only one of the income falling within such source is exempt.
• Section 10(38) provides for exemption from capital gains only on transfer of Long term equity shares with certain conditions, wherein one of conditions of exemption was payment of security transaction tax (STT). Thus, the income contemplated under section 10(38) is only a part of the source of capital gain and only a limited portion of such source is treated as exempt.
• From the conjoint reading and plain understanding of sections 2(14), 45, 47, 70 and 71 it can be seen that,
• Firstly, shares in the company are treated as capital asset and no exception has been carved out in section 2(14), for excluding the equity shares and unit of equity oriented funds that they are not treated as capital asset;
• Secondly, any gains arising from transfer of Long term capital asset is treated as capital gain which is chargeable u/s. 45;
• Thirdly, section 47 does not enlist any such exception that transfer of long term equity shares/funds are not treated as transfer;
• Lastly, section 70 & 71 elaborates the mechanism for set off of capital gain. Nowhere, any exception has been made/ carved out with regard to Long term capital gain arising on sale of equity shares.

Thus, whole genre of income under the head capital gain on transfer of shares is a source, which is taxable under the Act. If the entire source is exempt or is considered as not to be included while computing the total income then in such a case, the profit or loss resulting from such a source do not enter into the computation at all. However, if a part of the source is exempt by virtue of particular "provision" of the Act for providing benefit to the assessee, then in our considered view it cannot be held that the entire source will not enter into computation of total income. Hence, Long term capital loss on sale of shares could be set off against Long term capital gain on sale of land.

Section 54 relief allowed on capital gain from land, viz, long-term asset, though flat that existed on it was short-term asset

C.N. ANANTHARAM V. ASSISTANT CIT [2015] 55 taxmann.com 282 (Karnataka High Court)

Where assessee constructed a building on land, which was long-term capital asset even though said building was short-term capital asset, assessee was entitled to claim benefit of section 54 to the extent capital gain attributable to land.

Facts:

• Assessee transferred a building (used for residential purposes) within 3 years of its purchase which was constructed on a land, viz, long-term capital asset.
• Assessee claimed exemption under Section 54 in respect of investment made by him in another residential house to the extent capital gain attributable to sale of land.
• The Assessing Officer (AO) opined that capital gain as was attributable to long-term capital asset, viz, land would not qualify for relief under section 54 as the building which existed on the same was a short-term capital asset.
• The appellate authorities upheld the order passed by the AO. Aggrieved-assessee filed the instant appeal before the High Court. 

The High Court held in favour of assessee as under:

• The legislature has defined the meaning of house property as ‘building or land appurtenant thereto’. In view of the aforesaid definition of house property, a land appurtenant to a residential house is entitled to benefit under Section 54. Therefore, if a land appurtenant to a residential house could be entitled to benefit under Section 54, it was difficult to accept that the land on which the residential building was constructed would not be entitled to the said benefit.
• When a property, i.e., residential house is sold, the sale consideration includes the value of the land and the value of the construction. The AO treated the capital gain on sale of land (on which the residential house was constructed) as a long-term capital gain while the capital gain on sale of building was treated as a short-term capital gain. Therefore, if, for levying tax under the Act, such a distinction could be made, one failed to understand why that distinction would not be kept in mind in extending the benefit under section 54.
• Therefore, the assessee was entitled to the benefit of section 54 to the extent capital gain attributable to land.