Kerala H.C : issues raised in the appeals are likely to arise in the case of other assessees and so much so department seeks a decision by this Court

High Court Of Kerala

CIT, Trichur vs. Thomy P. Chakola

Assessment Year : 1993-94

Section : 54B, 48, 143, 154

C.N. Ramachandran Nair And B.P. Ray, JJ.

IT Appeal Nos. 188, 347 And 471 Of 2009

November 12, 2010

JUDGMENT

C.N. Ramachandran Nair, J. – Under the relevant instruction issued by the Board of Direct Taxes, these appeals filed by the Revenue in February, 2004 are not maintainable for the reason that tax effect is much below the minimum required for the revenue to file appeal, that is Rs. 2 lakhs. We therefore dismiss all the appeals as not maintainable.

2. However, standing counsel for the revenue submitted that both the issues raised in the appeals are likely to arise in the case of other assessees and so much so department seeks a decision by this Court on the questions raised. We therefore proceed to consider the questions raised by the revenue which are substantial questions of law.

3. The assessees who were owners of agricultural land within the municipal limits sold the same in the year relevant for the assessment year 1991-92. However, assessees did not pay any tax on capital gain but claimed exemption under section 54B(2) of the I.T. Act, which provides for exemption from payment of tax on capital gains, if the same is deposited in specified Bank Account before the due date and utilised within two years from the date of transfer for purchase of a new asset which again has to be agricultural land. Assessments of all the assessees were completed for the assessment year 1991-92 granting exemption. However, assessees did not purchase agricultural land within the period of two years utilising the capital gain in terms of the declaration furnished for the assessment year 1991-92 and therefore they became liable to pay tax on such capital gains under section 54B(2)(i) of the Act for the assessment year 1993-94. This position was conceded by all the assessees in the returns filed by each of them for the assessment year 1993-94. However, for payment of tax on capital gains for the assessment year 1993-94, the assessees once again computed capital gains on the same transaction by applying the amended provisions of section 48 which provides for deduction of indexed cost of acquisition and indexed cost of improvement in the computation of long-term capital gain. The amendment to section 48 introducing the above method of computation of capital gains came into force only from 1-4-1993 onwards. The Assessing Officer rejected the assessees’ claim and processed the returns by just demanding tax on the capital gain that was carried over to the assessment year 1993-94, but not utilised for the purchase of agricultural land in terms of section 54B(2) of the Act. While in the case of two assessees tax demands were raised by processing returns under section 143(1)(a), in the case of other assessee the proceedings issued by the Assessing Officer under section 143(1)(a) was rectified under section 154 of the Act and the capital gain held by the assessee was brought to tax for the assessment year 1993-94.

4. In the appeals filed before the CIT (Appeals), assessees raised two issues, namely, (1) the assessment of tax on capital gains in the case of one set of assessees by way of prima facie adjustments in the returns under section 143(1)(a) is illegal and (2) the rectification of order issued in the case of the other set of assessees to levy tax is also not permissible as it is not an apparent mistake that could be corrected under section 154 of the Act. Besides jurisdictional issue, the other question raised is on merits, that is, whether the assessees are entitled to the benefit of amended provisions of section 48 which came into force from 1-4-1993 onwards in the computation of capital gain.

5. Standing counsel appearing for the revenue relied on the decision of this Court in CIT v. Kerala Solvent Extractions Ltd. [2008] 173 Taxman 155 and contended that assessment of capital gain under clause (i) of the proviso to section 54B(2) is permissible in the course of processing of returns under section 143(1)(a) as it is a case of prima facie adjustment, which is only demand of tax on taxable income. On the merits, standing counsel submitted that Tribunal held against the assessees. However, senior counsel Sri. Joseph Markose appearing for the legal heirs of the deceased assessees contended that assessment of capital gain cannot be made through prima facie adjustment in the course of processing returns under section 143(1)(a) of the Act and the Tribunal’s finding against the assessees that the amended provisions of section 48 which came into force with effect from 1-4-1993 are not applicable is also not correct. In other words, according to him, even though capital gain on sale of agricultural land is assessable in the assessment year 1993-94 on account of non-utilisation of capital gain within two years from the date of sale, still the assessees are entitled to recomputation of capital gains by deducting indexed cost of acquisition and indexed cost of improvement in terms of the amended provisions of section 48 which came into force in the year 1993-94 onwards.

6. Since our decision on the issues raised will depend upon the scope and meaning of section 54B, we extract hereunder the said section for easy reference :

“54B. Capital gain on transfer of land used for agricultural purposes not to be charged in certain cases.—(1) Subject to the provision of sub-section (2), where the capital gain arises from the transfer of a capital asset being land which, in the two years immediately preceding the date on which the transfer took place, was being used by the assessee or a parent of his for agricultural purposes (hereinafter referred to as the original asset) and the assessee has, within a period of two years after that date, purchased any other land for being used for agricultural purposes, 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 land so purchased (hereinafter 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, 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, the cost shall be reduced by the amount of the capital gain.

(2) The amount of the capital gain which is not utilised by the assessee for the purchase 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 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 purpose of sub-section (1), the amount, if any, already utilised by the assessee for the purchase 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 sub-section is not utilised wholly or partly for the purchase 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 two 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.”

What is clear from sub-section (2) above is that an assessee who wishes to avail exemption under the said provision should deposit the capital gain arising on sale of agricultural land in deposits with such Banks or institutions as prescribed by the Central Government. Admittedly assessees have done this and so much so, if the deposits were utilised within two years for the acquisition of agricultural land, they would not have been liable to pay any tax. However, the admitted position is that assessees did not utilise the deposited capital gains on which exemption was claimed and allowed in the year in which it was assessable, that is the assessment year 1991-92, within two years for acquisition of agricultural land. So much so by virtue of clause (i) of the proviso to section 54B(2), the unutilised capital gain shall be deemed to be income chargeable to tax under section 45 as the income of the previous year in which the period of two years from the date of transfer of original asset expires. The contention raised on behalf of the legal heirs of the deceased assessees that assessees are entitled to computation of capital gain by availing deduction of indexed cost of acquisition and indexed cost of improvement introduced by amendment to section 48 with effect from 1-4-1993 cannot be accepted because what is provided in clause (i) of the proviso to section 54B(2) is to treat the capital gain retained in deposit, and in respect of which exemption was claimed, as income chargeable under section 45 of the relevant year in which the assessee failed to utilise the fund for acquisition of agricultural land. In fact, the scheme of the Act is to compute the capital gain on sale of agricultural land in the assessment for the assessment year relevant to the previous year in which the sale took place. If the assessee claims exemption from payment of tax in that year, then assessee has to deposit capital gain in specified Bank accounts in terms of sub-section (2) of section 54B. In other words, assessee need not deposit the full consideration or net consideration, obtained on sale of agricultural land, but what is required to be deposited is only capital gain arising for the assessee on the sale of agricultural land. However, what is provided in clause (i) of the proviso to section 54B(2) is that if the assessee does not utilise the capital gain so deposited in respect of which exemption was claimed in the assessment year in which the amount was assessable, but for the claim of exemption made in that year, the same will be treated as income chargeable to tax under section 45 of the Act. In other words, no computation or recomputation of capital gain is required to be made in the year in which capital gain obtained on sale of agricultural land is assessable by virtue of the proviso to section 54B(2) of the Act. So much so an assessee who claims exemption by deposit of capital gain for two years will automatically be liable to pay tax in the assessment year immediately following the expiry of the period of two years, if the capital gain deposited and in respect of which exemption was claimed, was not utilised for acquisition of agricultural land. Therefore, what is required is only to assess and demand tax on the deposited capital gain which the assessee failed to utilise for acquisition of agricultural land. Since no computation of capital gain is required to be made in the year 1993-94, in our view, the Assessing Officer rightly treated the capital gain as income assessable under section 45 of the Act in terms of specific provision contained in clause (i) of the proviso to section 54B(2) of the Act. Therefore recomputation of capital gain based on the amended provisions does not arise at all. Since computation or recomputation of capital gain was not required, and the capital gain deposited by the assessees was not utilised by them for purchase of agricultural land, the Assessing Officer rightly processed the returns for the year 1993-94 demanding tax on the same under section 143(1)(a) of the Act. So much so in principle we declare that Assessing Officer was competent to demand tax on capital gain in terms of clause (i) of proviso to section 54B(2) through prima facie adjustment in the processing of return under section 143(1)(a) of the Act. If the Assessing Officer fails to do so while issuing proceedings under section 143(1)(a), he is free to rectify it through proceedings under section 154 and demand tax as the mistake is patent on account of non-application of mandatory provisions of clause (i) of the proviso to section 54B(2) of the Act.

7. We therefore answer both the questions raised in favour of the revenue and against the assessees.

[Citation : 338 ITR 8]

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