1. S. 54F: Capital Gains – Investment in residential house- Exemption – Investment in four 4 flats – Held that exemption allowed as requirement of assessee family met-out only by enlarging residential unit by merging 4 flats and that too prior to handing over of the possession of said residential unit.
Reported in (2012) 52 SOT 327 (Mum.) (Trib.)
The assessee earned capital gain from sale of ancestral property. The assessee claimed exemption u/s 54F in respect of amount invested towards purchase of four flats which were converted into one residential unit. The AO allowed exemption only in respect one flat by holding that flat were separate and independent residential unit having separate kitchen and entrance and thus, according to him flat could not be said as adjacent flats even though builders had referred them as composite unit. It was held by the Tribunal that, if requirement of assessee family was met-out only by enlarging residential unit by merging 4 flats and that too prior to handing over of the possession of said residential unit, then said converted residential unit would be treated as a residential house as stipulated u/s 54F and thus, claim of the assessee was allowed. (AY 2007-08)
2. S. 48: Capital gains-Cost of improvement-PMS fee-Investment portfolio- PMS fee held to be deductible expenditure.(S.45 )
Reported in (2012) 6 TaxCorp (A.T.) 28128 (PUNE)
The assessee entered into an investment management (Portfolio Management Scheme) agreement with ENAM AMC pursuant to which it paid Rs. 2.11 crores as “performance fees/ maintenance fee”. This was treated as a cost of purchase of the shares. The AO disallowed the claim & the CIT (A) confirmed it on the basis that the as the PMS gains were assessable as “capital gains”, the expenditure was neither cost of investment or improvement nor an expenditure incidental to sale. Before the Tribunal, the assessee relied on its own case as reported in (2011) 5 TaxCorp (A.T.) 25069 (PUNE) where it had been held (dissenting from Davendra Kothari 136 TTJ 188 (Mum.)(Trib.) that as there was a nexus between the expenditure and the acquisition of shares, the same was allowable u/s 48. The department relied on case reported in (2011) 5 TaxCorp (A.T.) 26164 (MUMBAI) which had (dissenting from (2011) 5 TaxCorp (A.T.) 25069 (PUNE) ) held that PMS fees is not deductible against capital gains.
Held, The decision of the Pune Bench of the Tribunal in the case reported in (2011) 5 TaxCorp (A.T.) 25069 (PUNE) was not followed by the Mumbai Bench in the case of (2011) 5 TaxCorp (A.T.) 26164 (MUMBAI). The Mumbai Bench following other decisions of the coordinate Benches of the Tribunal declined to follow the decision in the case (2011) 5 TaxCorp (A.T.) 25069 (PUNE).
It is the settled proposition of law that when two view are possible on the same issue the view which is favourable to the assessee has to be followed. [CIT Vs. Vegetable Products 88 ITR 192 (SC)]. Further, in the instant case the Tribunal in assessee’s own case has already taken a view in favour of the assessee. Since the AO & CIT(A) have followed the order for earlier year in case of the assessee and since the order of CIT(A) for earlier year has been reversed by the Tribunal, therefore, unless and until the decision of the Tribunal is reversed by a higher court, the same in our opinion should be followed. In this view of the matter, we, respectfully following the order of the Tribunal in assessee’s own case reported in (2011) 5 TaxCorp (A.T.) 25069 (PUNE) for A.Y. 2004-05 allow the claim of the Portfolio Management fees as an allowable expenditure.
3. S. 50B: Capital Gains – Slump Sale- Lump-sum compensation received on transfer of business for discontinuance of business – Held to be long term capital gain.
Reported in (2012) 6 TaxCorp (A.T.) 27680 (DELHI)
The assessee was a proprietor of a going concern engaged in providing consultancy services. The concern was taken over by a company. The assessee received a compensation of Rs. 1,20,00,000 for discontinuance of the business. It was held that the lump- sum compensation so received was in nature of long term capital gain chargeable to tax as it was case of transfer of business was for lump-sum consideration. The intention of assessee was eloquently clear from the disclosure of accounting policies. (AY 2008-09)
4. S.54EC: Capital gains-Investment in bonds- Exemption- Fact that s. 54EC bonds were available during the 6 months & that there were alternative bonds available irrelevant if the bonds not available on the last date.
Reported in (2012) 6 TaxCorp (DT) 52215 (BOMBAY)
The assessee sold factory building on 22.3.2006 and earned LTCG of Rs.49.36 lakhs. The LTCG was invested in s. 54EC bonds of Rural Electrification Corporation (“REC Bonds”) on 31.1.2007, beyond the period of 6 months (21.9.2006) specified in s. 54EC. The assessee claimed that the delay was due to the fact that for the period from 4.8.2006 to 22.1.2007, the bonds were not available and the investment was made when available. The Tribunal allowed the assessee’s claim (included in file). Before the High Court, the department argued that (a) even if the bonds were not available for a part of the period, they were available for some time in the period after the transfer (1.7.2006 to 3.8.2006) and the assessee ought to have invested then & (b) the s. 54EC bonds issued by National Highway Authority (NHAI) were available and the assessee could have invested in them. Held by the High Court dismissing the appeal:
(i) The department’s contention that the assessee ought to have invested in the period that the S. 54EC bonds were available (1.7.2006 to 3.8.2006) after the transfer is not well founded. The assessee was entitled to wait till the last date (21.9.2006) to invest in the bonds. As of that date, the bonds were not available. The fact that they were available in an earlier period after the transfer makes no difference because the assessee right to buy the bonds upto the last date cannot be prejudiced. Lex not cogit impossibila (law does not compel a man to do that which he cannot possibly perform) and impossibilum nulla oblignto est (law does not expect a party to do the impossible) are well known maxims in law and would squarely apply to the present case;
(ii) The department’s contention that the assessee ought to have purchased the alternative s. 54EC NHAI bonds is also not well founded because if s. 54EC confers a choice investing either in the REC bonds or the NHAI bonds, the revenue cannot insist that the assessee ought to have invested in the NHAI bonds.
5. S. 54EC: Capital Gains – Investment in bonds- Exemption-– Purchase of REC Bond prior to sale of property – Exemption disallowed as the investment was made before the date of transfer.
Reported in (2012) 52 SOT 212 (Ahd.) (Trib.)
As per Section 54EC of the Act the investment in specified bond is to be made ‘within specified six months after date of such transfer’. Thus, exemption claimed on the ground that assessee had purchased REC bonds prior to sale of property was disallowed as the investment was made before the date of transfer.(A.Y.2008-09)
6. S. 54EC: Capital Gains – Investment in bonds- Exemption – Investment out of total capital gains in REC bonds, deduction cannot be denied on the ground that the assessee has availed the exemption u/s 54F also against a part of the capital gain. (S.54F )
Reported in (2012) 52 SOT 327 (Mum.) (Trib.)
As per Section 54EC, expression ‘the whole or any part of capital gains in long term specified assets’ makes it clear that the exemption u/s 54EC is available even when the part of capital gain is invested in specified long term asset. There is no dispute that the assessee has invested out of total capital gain in REC bonds within the prescribed period of time as provided u/s 54EC. Therefore, once the conditions as prescribed u/s 54EC are complied with, then the deduction cannot be denied on the ground that the assessee has availed the exemption u/s 54F also against a part of the capital gain. (AY 2007-08)
7. S. 54EC: Capital Gains – Investment in bonds- Exemption-Beneficial owners-Clubbing of income- Separate exemption is available in respect of income clubbed under section 64. (S.64 )
Reported in (2012) 52 SOT 335 (Kol.) (Trib.)
The assessee earned long term capital gain on sale of shares. The two children of assessee, being beneficial owners also earned LTCG on sale of beneficial shares. The assessee along with his minor children invested amount of long term capital gain in REC bonds and claimed deduction u/s 54EC. The AO clubbed the income of the minor children in the hands of the assessee but disallowed the claim of deduction on account of minor children. It was held that the in case of clubbing of minor/ spouse, all deductions are to be allowed while computing income of minor/spouse and only net taxable to be clubbed u/s 64. Therefore, where income of assessee’s minor children was clubbed with his income, assessee was eligible for deduction u/s 54EC on investment in REC capital gain bonds on account of minor’s income from long-term capital gains separately. (AY 2007-08)
8. TDR Premium is exempt on ground of Mutuality
Reported in 320 ITR 414 (Bom)
TDR Premium received by Co-op Hsg Society from its members is exempt on ground of “mutuality”
The assessee, a Co-operative Housing Society formed of plot owners, passed a resolution to the effect that if any member desired to avail of the benefit of Transferable Development Rights (TDR) for carrying out construction or additional construction on his plot, he should apply for a No Objection Certificate which would be granted on payment of a premium calculated at the rate of Rs.250 per sq.ft. The Society received a premium of Rs.18.75 lakhs from its members for this purpose and claimed that the receipt was not chargeable to tax on the grounds of mutuality. The AO rejected this plea on the ground that the TDR premium was in reality a “profit sharing arrangement of commercial nature” and was chargeable to tax. The CIT (A) & Tribunal upheld the assessee’s plea. On appeal by the department to the High Court, HELD dismissing the appeal:
In it was held in the context of non-occupancy charges that the principle of mutuality would apply to a co-op society. The same principle applies to the TDR premium paid by a member to the Society of which he is a member as consideration for being permitted to make an additional utilization of FSI on the plot allotted by the Society. There is a complete mutuality between the Society and its members and the TDR premium is not chargeable to tax.
9. Capital Gains exempted on purchase of residential property before furnishing Income-tax Return under section 139(4).
(2011) 5 TaxCorp (DT) 49763 (PUNJAB & HARYANA)
Hon`ble high court gave a very interesting decision which may be of benefit to the tax payers having long-term Capital Gain. In this case the brief facts were that the assessee sold her house property for Rs. 45 lakhs and claimed deduction under section 54 of the Income-tax Act, 1961. The assessee was served with a notice under section 142(1) of the Act, as to why the amount deducted be not added to her income as long-term capital gain, as the assessee failed to deposit the amount in the capital gain account scheme and also failed to purchase house property before the due date of filing the return of income. The assessee contested the claim of the Revenue and asserted that she is not liable to deposit the amount in the capital gain deposit scheme and that the due date of filing the return of income is not as specified in section 139(1) but as specified in section 139(4) of the Act. The Assessing Officer declined the claim of the assessee and returned finding that the assessee has concealed her particulars of income and initiated proceedings for penalty as well.
The appeal against the said order was accepted by the Commissioner of Income-tax (Appeals). It was found that the appellant has purchased a new residential property on January 2, 2007, and the due date as per section 139(4) is March 31, 2007, and, thus, the assessee has complied with the provisions of section 54 of the Act. It was held that section 139 includes sub-section (4) as well. The Honourable judges finally opined that it may be noted that the assessee sold her residential house on January 13, 2006, for a sum of Rs. 45 lakhs and purchased another property jointly with Mr. D. P. Azad, her father-in-law on January 2, 2007 for a consideration of Rs. 95 lakhs. The due date of filing of return as per section 139(1) of the Act was July 31, 2006, but the assessee filed her return on March 28, 2007, and that the extended due date of filing of return as per section 139(4) is March 31, 2007. Finally it was held that in the instant case the due date of furnishing the income-tax return as provided in terms of section 139(1) of the Income-tax Act was subject to the extended period provided under section 139(4) of the Income-tax Act, 1961. Hence, the assessee had purchased the property within the time period as contemplated under section 139(4) and thus, the investment in new residential property was made before the date of filing income-tax return and hence, the benefit of such investment was granted to the assessee.
10. Bifurcation and apportionment of Sale Consideration between land and factory building
(2012) 6 TaxCorp (DT) 50148 (DELHI)
Whether Income Tax Tribunal is right in holding that the Assessing Officer could have re-examined and re-computed the value of the sale consideration received by the appellant/assessee for transfer of property.
The only dispute raised is regarding allocation of sale value towards land and the factory building, as it was a case of composite sale. The assessee has allocated Rs.5 lacs towards the sale value of the land whereas the A.O. has estimated the same at Rs. 15 lacs and the balance amount has been taken as sale consideration for building. The estimates made by both the parties are not supported by any evidence. This is a technical matter which has to be resolved after obtaining opinion of a valuer who is a specialist in the matter. We, therefore, consider it appropriate to set aside the issue and restore the matter to the file of the A.O. for passing a fresh order after getting valuation report from the valuer and after allowing opportunity of being heard to the assessee. As the issue is open before the A.O., he will also examine and tax the gain from the sale of building, which is a depreciable asset under the correct provisions of law."
Where the sale consideration was accepted by the Assessing Authority and the Income-tax Appellate Tribunal referred back question of bifurcation and apportionment of sale consideration between land and factory building. Hence, in such situation the Assessing Officer while re-examining enhancing sale consideration already accepted would not be justified to re-examine the sale consideration and the quantum.
11. Purchase and Sale of Share not Capital Gain but Business Income.
(2012) 6 TaxCorp (DT) 50264 (AP)
The transaction relating to purchase and sale of shares would constitute business income of the assessee and not Capital Gain and this finding was based on the frequency, magnitude and the volume of the transaction. While deciding this important point the Honourable judges of the High Court were of the opinion that in deciding the question whether the shares of a company held by a person constitute his capital assets or they constitute his stock in trade various factors have to be taken into consideration to find out the exact character of the transaction. It was also held that the magnitude, the frequency and the ratio of sales to purchases and the total holding would be the evidence from which the Income-tax Appellate Tribunal can come to a conclusion to find out the true nature of the activities of the assessee.
Finally it was held that the voluminous share transactions were in the ordinary line of the appellants’ business ; purchase of shares by them was not for the purpose of earning dividend but with the dominant intention of resale in order to earn profits; the profit made by them is not of mere enhancement of value of the shares, but in a profit made in the carrying on of a business scheme or profit making ; huge volume of share transactions, the repetition and continuity of the transactions, give them a flavour of “trade”; the magnitude, frequency and the ratio of sales to purchases on the total holdings is evidence that the appellants had not purchased the shares as an investment, but with the intention to trade in such scrips. Thus, the profits on sale and purchase of share in the instant case was taxable as Business Income and not Capital Gains.
12. Purchase and Sale of Shares within a short period would be Capital Gain:
(2011) 5 TaxCorp (DT) 48829 (DELHI)
In a case where the assessee purchased shares of ONGC and sold such shares by holding it for a short span of time only, it was held by the Honourable judges of the High Court that the surplus would be treated as short-term Capital Gains. In this case the Assessing Officer was of the view that the transaction would be in the nature of business transaction as the assessee itself had stated that it has the basis of investment and dealing in shares and most of the shares were immediately sold after their purchase. Hence, the Assessing Officer treated the income as business income.
Finally, when the matter went to the Honourable judges of the High Court, it was held that the shares of ONGC were purchased by the assessee when it was a manufacturing company and the aforesaid shares were not purchased as a part of any business activity of dealing in shares at the time of such purchase. The assessee was neither in the business of investment nor dealing in shares although it had shares of different companies at the beginning of the relevant previous year. The assessee had acquired those shares in a public issue and had, in fact shown them in the books of account as investment and were booked under the Head Non-Trade and Not Trading Investment. The Honourable judges further were of the view that the intention to acquire those shares in investment can be reflected from the fact that it was holding most of the shares of other companies since long period of time and was not entering into frequent business of sale and purchase of the shares. Hence, it was finally held that the mere fact that certain shares were sold in a short span of time of its acquisition due to stiff and unanticipated rise in the stock market does not mean that the intention of the assessee at the time of purchase of shares was not to hold them for a long period of time or to deal with them. Hence, it was finally held that the profit arising from the sale of the shares of ONGC during the relevant previous year was to be treated under the Head Capital Gain and not Profit or gain of Business or Profession.
13. Profit on Sale of Shares treated as Capital Gain as Shares not treated as Stock in trade:
(2011) 5 TaxCorp (DT) 48489 (DELHI)
Where the assessee maintain two separate portfolio accounts one for the purpose of investment and the other for the purpose of business, in such situation the shares were purchased with predominantly the intention of investment and that the objective was clear that these shares/securities would be investment and would enjoy as the income there from would be enjoyed by the assessee and that these shares were not held as a stock in trade with the intention to trade in them. Hence, it was finally held that the income arising on sale of these shares would be treated as Capital Gain specially because of the fact that right from the very beginning the assessee had been valuing its shares held in the investment account on cost basis and not on the basis of cost or market price which was lower at the end of each relevant accounting year.
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