Section 54 EC case laws

Beauty of case laws-

Whether its Direct tax law or Indirect tax law or corporate or allied laws, case laws are very important to digest the provisions of law conceptually. The beauty of case law is that it is not only interesting but also clarifies the provisions of law very conceptually. Further, these case laws sharpen our mind by enhancing our analyzing and thinking capacity. Such broad base thinking helps student community to handle subjects particularly Accounts, Costing and Audit. Therefore, we should make a habit to read and analyze the case laws which will create a super value to our professional career.

Realizing the importance of case laws, I am writing an article on a Income tax case.

Case law- Exemption not available on deemed gain calculated u/s 50C and other matters (as decided in the Income tax Appellate Tribunal (ITAT), Mumbai)

Parties to case-              

Mrs. Nila V Shah versus Commissioner of Income Tax( Appeals)

Before we go to the facts of the case let’s analyze its title “Exemption not available on deemed gain calculated u/s 50C”. Just have a quick recap of the following related terms and provisions-

1. Sec 54 EC- This section provides for exemption from tax on long-term capital gain arising from the transfer of long-term capital asset when the whole or part of capital gain is invested in the bonds issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation Ltd.(RECL) within the period of six months of the date of transfer.

2. Sec 50C-Sec 50C provides that in case of transfer of real estate (Land or Building) then the value of consideration i.e. Sale consideration is the value as adopted by stamp duty authorities for the purpose of charging stamp duty on the sale transaction.

Part A – Facts of the case –

The appellant (assessee) was having office premises (depreciable asset) of 225 sq Ft. at a Mantri Mansion (Such mansion is like a complex) in Mumbai on tenancy basis (on rent). This building belonged to ‘Shree Shyam Sunderlalji Temple Trust’. In this building several other tenants was having their business offices. As the building (Mantri Mansion) was 60 years old trust decided to sale the same on auction. The tenants wanted to purchase the property jointly but legally they could not do so because they have no legal association like Body of Individuals or Co-operative Society. Therefore, they made an arrangement with Shree Harkalal Ranka to bid at auction on their behalf. As such Shree Harkalal Ranka bided at the auction and being the highest builder the property was sold to him. Later on, all the tenants entered into an agreement on 10/06/1999, by which all the tenants formed a co-operative society (Maruti Housing Co-op society) and such society  purchased the property from Shree Harkalal Ranka. The said building was demolished and new building was new building was constructed. The total cost of purchase of the old property, demolishing charges and the construction of new property.

In the hands of the assessee came to Rs. 475000(as a proportionate share in the costs).

The new construction completed in the FY 2001-02 (AY 2001-02) and the possession was given to all the tenants of their respective share as they were holding as a tenant in the old building. Therefore , the assessee Mrs  Nila get a share of 225 Sq Ft.

Later on 17/09/2004 the assessee sold her 225 ft premises for a total consideration of Rs. 16, 00,000.

Part B- Contention of the assessee-

The assessee claimed that since she was tenant for the last 30yrs, therefore, the cost of premise has to be taken by including the tenancy right in the property as on the date of acquisition. Accordingly, she took the market value as on 10/06/1999 as the cost of acquisition, which has been estimated by the approved valuer as Rs. 10, 04,475/-.  

Part C- Contention of CIT (Appeal) –

 As regards cost of acquisition he held that , the same should be RS 4,75,000/- as the assessee’s share in the acquisition and reconstruction was Rs. 4,75,000/- only.

With regards to year of acquisition for the purpose of determining whether it is STCG or LTCG  , the CIT(A) held that since the property was constructed in the FY 2001-02(AY 2002-03) and possession was given in the same year and sale of new property was made in FY 2004-05, therefore, the period is of less than 3 yrs , hence it was a  STCG.

On the issue of applicability of Section 50 , the CIT(A) held that the same is not applicable in the case of the assessee  and therefore, the view taken by the Assessing Officer( ITO  at ward level) of taxing the gain as STCG with regard to depreciable nature of old property is not right. The sale is of new property which is not used for business purposes hence not depreciable and hence no STCG u/s 50.

(*Sec 50 provides that irrespective of period of holding, there will always be STCG  if the asset is depreciable.) However, proving one view of his junior Ito wrong, still CIT(A) taxed the transfer as STCG by taking another view(as given above) .

Part C- Judgment by ITAT, Mumbai-

ITAT held that, as per the agreement dated 10/06/1999 all the tenants themselves were the promoters who promoted a Co-operative Housing Society, wherein all the tenants become members. Thus, the agreement dated 10/06/1999 itself gave interest and right in that property to assessee on that dates onwards. Thus, the date of agreement can be safely held as date of acquisition. Thus, from the date 10/06/1999 till 17/09/2004, the period is of more than 36 months, hence the transaction is clearly a Long term Capital Gain.

However, ITAT rejected assessee’s claim that cost of acquisition for the exchange of tenancy right with the ownership right to be Rs. 10,04,475/-.. The ITAT, held that as per sec 2 (55) of the I.T. Act,1961 , the cost of acquisition of tenancy right is NIL.. Thus , the findings of CIT(A) in this matter was upheld and cost of acquisition to b e taken as Rs. 4,75,000.  

Lastly, the tribunal has touched an other point which was perhaps in no way a matter of dispute b/w assessee and CIT (A).The ITAT held that for the purpose of deduction u/s 54EC  the sale value to be taken as Rs. 16,00,000 only because  sec 54EC speaks of  actual capital gain which arises out of transfer of Long term Capital asset and not deeming amount. But in this case the assessee will not suffer because he has invested as sum of Rs. 16 lacs in 54EC bonds which are exactly equal to actual sale consideration.

So assessee has acted wisely, though not pre-planned by not investing any amount more than Rs. 16 lacs which would have otherwise not allowed for deduction.

For example, if assessee would have invested Rs. 17 lacs then investment of Rs. 1lacs i.e. investment in excess of actual sale consideration, then the Rs. 1lac would not have been available for deduction u/s 54EC

Summary-

1. The transaction of sale will amount to LTCG and not STCG.

2. Cost of acquisition to be taken as Rs. 4,75,000.

3. The sale value for the purpose of computing LTCG to be taken  at Rs. 24,48,128/-

Therefore the appeal filed by appellant is partly allowed.  

Your comments, criticism, suggestions on the article are most welcomed.

Saurabh Chokhra (Maheshwari)-saurabhchokhra92@gmail.com

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Ahmedabad