Section 50C can be applied after claiming exemption u/s 54EC of the Income Tax Act. Any other interpretation would render the provisions redundant – High Court
ABCAUS Case Law Citation:
ABCAUS 2836 (2019) (03) HC
Important Case Laws Cited/relied upon by the parties
CIT Vs. Amarchand N. Shroff, (1963) 48 ITR 59 (SC)
CIT Vs. Vadilal Lallubhai (1972) 86 ITR 2 (SC)
K.P. Verghese Vs. Income Tax Officer, as reported in 131 ITR 597 (SC)
The instant appeal was filed by the individual assessee to challenge the Judgment of the Income Tax Appellate Tribunal (‘Tribunal’) in reversing the order of CIT(A) and confirming the action of the Assessing Officer (AO) in taxing capital gain, to the extent of the enhanced and notional sale consideration under section 50 C of the Income Tax Act, 1961 (the Act).
The assessee was a joint owner of a plot of land having 25% undivided share in the plot. The assessee and other co-owners transferred the plot in favour of the purchaser under a sale deed pursuant to which the assessee received a sum of Rs. 25 lakhs byway of sale consideration.
The assessee invested entire amount in the bond of ‘Rural Electrification Corporation Ltd.’ as specifiedu/s 54 EC of the Act.
In the return of income, the assessee declared the long term capital gain on transfer of land and claimed full exemption of such capital gain, under section 54 EC of the Act.
The Stamp Duty Authorities however valued the land for the purpose of levying stamp duty at a higher amount. Accordingly, the AO determined the long term capital gain attributable to the share of assessee by applying the provisions of section 50C of the Act.
The assessee filed Appeal against the order of Assessment, before CIT (Appeals). The assessee contended that since the entire sale consideration was invested in the specified bond, the assessee must get full exemption from capital gain, irrespective of the computation of the deemed sale consideration under section 50C of the Act.
The CIT Appeals allowed the assessee’s appeal, upon which the revenue filed appeal before the Tribunal. The Tribunal by the impugned judgment allowed the revenue’s Appeal.
The tribunal was of the opinion that for the purpose of exemption under section 54EC of the Act, deeming fiction contained in section 50C of the Act cannot be ignored as the assessee could claim exemption only in relation to the investment made in the specified bond and not qua the entire capital gain.
Aggrieved, the assessee approached the Hon’ble High Court.
The assessee contended that the deeming fiction contained in section 50C of the Act, would have no applicability while computing the exemption as provided in section 54EC of the Act as section 45 which is a charging provision, is made subject to various exemption provisions, including section 54EC of the Act.
Relying on the judgment of the Hon’ble Supreme Court, it was also submitted that section 50C of the Act creates a deeming fiction for the purpose of computation of capital gain under section 48 of the Act. Such fiction would have no applicability for the purpose of charging capital gain as per section 45 or for computing exemption under section 54EC of the Act. It was contended that the effect of the deeming provision would be limited to the purpose for which the same has been enacted.
It was further contended that the legislature would not expect a person to perform an impossible task i.e the assessee could not be expected to invest any amount in access of the amount actually received, for claiming full exemption under section 54EC of the Act.
It was contended that to avoid absurdity and incongruent consequences, the Court would adopt an interpretation not emerging from the plain language of a statute.
The Hon’ble High Court observed that the deeming fiction under Subsection (1) of section 50C provides the stamp valuation assessment by the stamp duty officer of the State Government would be deemed to be the sale consideration of capital asset, replacing the declared sale consideration, if it happens to be less than stamp duty valuation. For the purpose of charging capital gain in view of section 45, to be computed as provided in section 48, this deemed consideration would be applied.
The Hon’ble High Court observed that section 54EC which is an exemption section, have limit of Rs. 50 lakhs specified in the further proviso for investment in the specified asset.
The Hon’ble High Court opined that there is no conflict or any incongruent consequences of applying the provisions of section 50C for the purpose of computation of capital gain tax after claiming exemption under section 54EC of the Act. The deeming fiction under section 50C of the Act, must be given its full effect and the Court should not allow to boggle the mind while giving full effect to such fiction.
The Hon’ble High Court clarified that it was not opposing the proposition canvassed by the assessee that deeming fiction must be applied in relation to the situation for which it is created. However, while giving full effect to the deeming fiction contained under section 50C of the Act for the purpose of computation of the capital gain under section 48, for which section 50C is specifically enacted, the automatic fallout thereof would be that the computation of the assessee’s capital gain and consequently the computation of exemption under section 54EC, shall have to be worked out on the basis of substituted deemed sale consideration of transfer of capital asset in terms of section 50C of the Act.
The Hon’ble High Court further clarified that any other interpretation, particularly one canvassed by the Assessee, would render the provisions of section 50C redundant. In a situation like the one on hand, even if for the purpose of section 48, in terms of section 50C of the Act, the sale consideration deemed to have been received by the assessee may be much higher than one declared in the sale deed, the Assessee would claim no further capital gain tax liability by simply claiming to have made investment in specified asset the full declared sale consideration.
Accordingly, the appeal was dismissed.