Demolition/destruction of house not necessarily results in transfer u/s 2(47) by extinguishment of capital assets rights for capital gain purpose

ITAT Mumbai, in a recent case has stated that demolition/destruction of house not necessarily results in transfer u/s 2(47) by extinguishment of rights in a capital assets for capital gain purpose.

Case Law Details:
I.T.A. No. 6169/Mum/2013  Assessment Year : 2007-08
Dilip Manhar Parekh vs.  Dy. Commissioner of Income Tax
Date of Judgment/Order: 15/04/2016

Brief Facts of the Case:
The assessee’s case was reopened u/s 147/148. During the course of re-assessment proceedings the A.O. observed that the assessee had claimed capital gain exemption u/s 54F  for the sale of shops and garage, sale proceeds being invested in 1/2 share purchase of a bungalow (new assets). The AO further observed that shop/garage sold were not in the name of the assessee but in the name of M/s. Parekh Brothers (AOP consisting of the assessee and his sister in-law. The A.O. was of the opinion that the assessee intentionally treated the ownership of the shop and garage of his own to claim the exemption u/s. 54F which was available only to HUF and individual assessees and not to Association of Persons (AOP).

The AO assessed capital gains in the hands of the assessee holding that AOP stood dissolved but disallowed the claim u/s 54F on two counts:
(a) that the claim of the assessee in his individual capacity was erroneous.
(b) The Bungalow (new asset) had been demolished after purchase within 2 years purchase whereas as per section 54F(3), it should not had been transferred within 3 years.

On appeal, CIT(A) allowed the claim on the ground that in the year under consideration there was no such demolition. However, ITAT set aside the order to the file of the CIT(A) for de-novo consideration.

In denovo- proceedings,before CIT(A), the assessee submitted that the issue was squarely covered by the judgment of Hon’ble jurisdictional Bombay High Court dated 24.1.2013 in ITA(L) no. 1583 of 2012 in the case of coowner Smt. Chhaya B. Parekh wherein the Hon’ble Bombay High Court had held that demolition would not amount to transfer. In fact the Bombay High Court in the above said case, had even refused to admit the question of law referred by the Revenue and dismissed the appeal of the Revenue. 

However, CIT(A) rejected the claim of the assessee on the following ground:
(a) Juhu bungalow(new asset) was never occupied by the assessee and it was a ‘symbolic purchase of residential property’ not a ‘real purchase of residential house property’.
(b) demolition of the bungalow took place at the behest of the assessee and it was not an act of god and hence demolition of the bungalow within three years amount to transfer in view of decision of Hon’ble Supreme Court in the case of Grace Collis
(c) The decision in the case of co-owner Smt. Chhaya B. Parekh by Bombay High Court had been done without consideration of the later decision of the Apex Court in Grace Collis and others whereby the decision in Vania Silk Mills Pvt. Ltd. had been overruled by the Supreme Court.

The matter reached ITAT again which obeserved that CIT(A) committed error by holding that judgment of Apex Court in the case of Grace Collins was not brought to the notice of jurisdictional Bombay High Court. In fact ITAT stated that the Madras High Court in the case of Neelamalai Agro Industries Limited in para no. 20 of the judgment held as under:

The law laid down in Vania Silk Mills (P.) Ltd.’s case (supra), that extinguishment of rights in a capital asset as a necessary consequence of destruction of the asset does not amount to transfer, has not been overruled by the Apex Court in the case of Mrs. Grace Collis (supra).

ITAT observed that Judicial discipline and rule of law demand and requires that lower judicial authorities should and must follow the decisions/judgment of higher judicial authorities on identical facts and CIT(A) was bound by law to follow the jurisdictional High Court judgment in the case of Mrs Chhaya B. Parekh