Delhi High Court in a latest judgment has upheld ITAT in confirming CIT(A) order that assessee was already not a fractional or co-owner of the property and therefore, eligible for deduction under Section 54 F of the Income Tax Act, 1961

Case Details:
ITA-609/2014
Commissioner of Income Tax (Appellant) vs Kapil Nagpal (Respondent)
Date of Decision: 11-09-2015

Facts of the case:
The Assessing Officer on scrutiny of the case for AY 2007-08 noticed that for AY 2006- 07 the assessee had claimed a deduction u/s 54F against the long term capital gains (LTCG) arising from the sale of share of M/s. Perfect Buildwell Pvt. Ltd.(VPPL) by investing an amount of Rs. 63 lakhs in the purchase of residential building at Village Fatehpur Beri, Tehsil Hauz Khas, New Delhi by an agreement to sell dated 22 ^nd  July 2006. The Assessee was also having a residential house  property at Gadaipur, Mehrauli, value of which was shown as Rs. 60,000.

The Assessee had again sold 5,000 shares of VPPL on 08-11-2006 and claimed exemption under Section 54F for purchase of another residential house property at Gadaipur for Rs. 2.20 crores on 10th April 2007 from Mr. Prem Nath Nagpal.

According to Assessing Officer, since the assessee had already two house properties (i) at Gadaipur, value of which was at Rs. 60,000 and one at Village Fatehpur Beri purchased on 22nd July 2006 for Rs. 63 lakhs, the purchase of yet another property at Gadaipur on 10-04-2007 was within two years from the date of shares of VPPL on 08-11-2006 was in violation of the conditions for claiming exemption under Section 54F of the Act and therefore, show cause notices was issued for denial of Section 54F exemption and initiation of penalty u/s 271(1)(c).

The assessee contended that on the date of the transfer of the shares of VPPL on  08-11-2006, the assessee had only one house at Village Fatehpur Beri and had only 15% ownership of the residential house at Gadaipur and was only a co-owner along with his father.

CIT(A) examined the genuineness of the transactions and came to the following conclusions:

(a) the sale of shares to the Assessee is evidenced by the entries in the share transfer register, the copy of transfer deed, the copy of share certificate and annual return filed with the ROC.
(b) since the share certificate by which the shares were transferred in the name of the Assessee was dated 25th October 2005, there could be no doubt that it was the date of acquisition notwithstanding that the duty was paid by using revenue stamps. While this may be a non-compliance with the requirements of the Companies Act, 1956, it was the relevant date of delivery in terms of the Sale of Goods Act, 1930.
(c) Considering that the transfer deed was executed by both the parties on 25th October 2005 and the shares were registered in the name of the Appellant on that date, it was established beyond doubt that the Assessee had purchased the shares on that date.
(d) As regards the sale of shares again the confirmation certificate showed that the shares were in fact delivered by the Assessee to Mrs. Falguni Nayar on 8th November 2006. In view of the decision of the Supreme Court in V.R. Shelat v. P.J. Thakar 1974 AIR 1728 and certain other judgments of the High Courts and of the Tribunal, the conclusion was that the sale of shares took place only on 8th November 2006 and therefore, the nature of capital gain was long term capital gain.
(e) As regards the ownership of Gadaipur house in terms of the sale deed dated 13th March 1996 the property under transfer was only a small piece of agricultural land (1 bigha) in Khasra Nos. 75 and 90. There was nothing in the sale deed which suggested that any structure existed on the said land.
(f) The sale deed in favour of Mr. Prem Nath Nagpal, father of the Assessee showed that he had purchased land in Khasra Nos. 75, 76 and 90. The vendor had got the building plan for the farm house sanctioned on 2nd August 1989 and thereafter, it constructed the farm house on the said land. Therefore, the constructed portion was purchased only by the father of the Assessee and not the Assessee.
(g) The AO had not brought any evidence to disapprove such fact. Khasra Girdawri was additional evidence which showed that the land in Khasra Nos. 75 and 90 was used only for growing vegetables. It also showed that a „kothi‟ (residential house) existed on the portion of land „Khasra No. 76‟ exclusively owned by Mr. Prem Nath Nagpal, father of the Assessee.
(h) Consequently, the claim of the Assessee under Section 54F could not be rejected on the ground that he was an owner of more than one residential house as on 8th November 2006.
(i) In view of the decision of the Supreme Court in CIT v. Podar Cements (P) Limited [1997] 226 ITR 625 (SC), the Assessee could claim exemption on the basis of the agreement to sell only without it being registered. The agreement to sell showed that a substantial payment of Rs. 2 crores was made on the date of the agreement itself. The balance payment of Rs. 22 lakhs was made on 17th April 207 and the possession was simultaneously handed over to the Appellant.
(j) The share of 15% was determined mutually by the parties “just for sharing the rental income from the letting out of the entire property along with adjoining land.” The Abhibhog certificate issued by the MCD only showed that there were two independent units meant for use by the Appellant and his father. It did not prove the Appellant to be owner of any of these units.

The Revenue filed an appeal before the ITAT. The ITAT concurred with the decision of the CIT (A) that the transfer of shares resulted in long term capital gain and that CIT (A) was right in upholding that the Assessee was not a fractional owner of the property at Gadaipur and therefore, eligible for deduction under Section 54 F of the Act.

Questions of law  The following questions were framed by the High Court:

(i) Did the Income Tax Appellate Tribunal fall into error in law in holding that the exemption under Section 54 could be availed for by the Assessee in view of the fact that the Assessee owned a residential house and was also owner of another residential house?

(ii) Whether under the circumstance of the case Income Tax Appellate Tribunal was correct in holding that sale of shares constitute long term capital gain?

Excerpts from the High Court Judgment:

The conclusion of the AO was that sale of the shares took place at a time earlier 8th November 2006 since 60% of the consideration was already paid by them is inconsistent with the legal position. In V.R. Shelat v. P.J. Thakar (supra) it was emphasized that there was a distinction between „the title to get on the register‟ and „the full property in the shares in a company.‟ The first was acquired by mere delivery, with the required intention of the share certificate and a blank form signed by the transferor. The second was only obtained when the transferee, in exercise of his right to become a shareholder, gets his name on the register in place of the transferor.

Turning to question (i) whether the exemption under Section 54F could be availed of by the Assessee, it requires to be first noticed that in light of the decision of the Supreme Court in CIT v. Podar Cements (P) Limited (supra), CIT v. T.N. Aravinda Reddy (supra) and Balraj v. CIT (2002) 254 ITR 22 (Del), in order to constitute purchase for the purpose of Section 54 and Section 54F of the Act it is not necessary that there should be registered sale deed. This Court in Balraj v. CIT (supra) noticed the decisions in Mysore Minerals Ltd. v. CIT (1999) 239 ITR 775 (SC) and CIT v. R.L. Sood (2000) 245 ITR 727 (Del) and held that “for the purpose of attracting the provisions of Section 54 of the IT Act, it is not necessary that the Assessee should become the owner of the property. Section 54 of the said Act speaks of purchase. Moreover, the ownership of the property may have different connotation in different statutes.” It was concluded that the Tribunal in that case “went wrong in holding that for the purpose of applicability of Section 54, registration of document is imperative.” In Dr. P.K. Vasanthi Rangarajan v. CIT (2012) 252 CTR 336 the Assessee and her husband were co-owners to the extent of 50% share in a building that had a clinic and a residential house. It was held that since the entire property was not an exclusive residential property and 50% of the ownership was with reference to the clinic on the ground floor, the harshness of the proviso to Section 54 F cannot be applied “unless and until there are materials to show that the Assessee is the exclusive owner of the residential property.”

The explanation by the Assessee that only the rental income from letting out the constructed portion property was being shared between him and the father in the ratio of 15%: 85% appears to be a plausible one. Unless there is document to show that the Assessee was a co-owner of the said building to the extent of even 15%, there cannot be an inference in that regard. As explained by Umacharan Shaw & Bros v. CIT (1959) 37 ITR 271 (SC) suspicion howsoever strong cannot partake the character of evidence.

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