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Claiming exemption u/s 54B requires that assessee refrain from selling newly-acquired agricultural land within lock-in period of three years from date of its purchase: HC

2019-TIOL-1831-HC-AHM-IT

IN THE HIGH COURT OF GUJARAT

AT AHMEDABAD

R/Tax Appeal No. 210 Of 2019

HITESH MANSUKHLAL BAGDAI

Vs

ASSISTANT COMMISSIONER OF INCOME TAX
CENTRAL CIRCLE-1

J B Pardiwala & A C Rao, JJ

Dated: July 23, 2019

Appellant Rep by: Mr Darshan R Patel
Respondent Rep by: 
Mr M R Bhatt, Sr. adv. With Mrs Mauna M Bhatt

Income Tax – Section 54B

Keywords – Agriculture Land – LTCG – New asset

THE assessee, deriving income from petrol pump and other sources, declared agricultural income in his return for the relevant AY. Later, the Revenue conducted search on the assessee impounding certain materials. The statement of assessee was recorded. A notice u/s 153A was served on the assessee. The AO noted that the assessee had sold an urban agricultural land and claimed exemption benefit of section 54B. This was because the assessee purchased a rural agricultural land. The AO noted that within a period of year, the asset was sold of. Hence, the AO concluded the assessment making additions on account of LTCG and by withdrawing exemption u/s 54B. The CIT(A) and later the ITAT upheld the additions.

Having heard the parties, the High Court held that,

Whether to claim exemption u/s 54B, it is sine qua non for the assessee to refrain from selling the newly acquired urban or rural agricultural land within the lock-in period of 3 years from the date acquisition of such asset – YES: HC

++ in the event, the assessee seeks the benefit of Section 54B, the requirement is that the assessee, upon the sale of agricultural land is required to purchase within a period of two years therefrom, any other land for being used for agricultural purposes (be it rural or urban agricultural land). If these conditions are complied with, the capital gain is required to be dealt with in accordance with clause (i) or (ii) of Section 54B(1), as the case may be;

++ as per clause (ii), the computation has to take place if the amount of capital gain is equal to or less than the cost of the new asset, in that case the capital gain is not required to be charged u/s 45. The legislative intent as can be gathered from Sections 54 to 54GB is that upon a capital gain arising and in the event the consideration/gain is invested and kept in for a lock-in period, the assessee would get the benefit and not otherwise. The lock-in period is different in these sections;

++ in the event the assessee’s contention is accepted, the very intent and purpose of these beneficial provisions will be defeated. An assessee would sell an agricultural land, invest in a new asset which is not a capital asset (in the instant case agricultural land in rural area which is not exigible to capital gain tax) and sell the new asset immediately thereafter, and in such process, would render Section 54B otiose. The entire object of asking the assessee to hold the land for a particular period would be frustrated. After acquiring the new agricultural land (be it a rural agricultural land), if the new rural agricultural land is transferred within a period of three years from the date of purchase, then the tax exemption allowed earlier would be liable to be withdrawn. In such a case, the assessee is required to pay tax on the exemption claimed earlier.

++ the consequences on transfer of the newly acquired agricultural land (be it urban or rural) within a period of three years is that, while computing capital gain at the time of transfer of new agricultural land, the amount of capital gain which had been claimed as exemption under section 54B would be deducted from the cost of acquisition of new agricultural land and the new capital gain would be computed accordingly. Hence, the appeal fails and is dismissed.

Assessee’s appeal dismissed

JUDGEMENT

Per: J B Pardiwala:

1. This Tax Appeal under Section 260A of the Income Tax Act, 1961, is at the instance of the assessee and is directed against the order passed by the Income Tax Appellate Tribunal, Rajkot Bench, Rajkot, dated 11th December 2018 in the IT(SS)A No.39/RJT/2013 for the Assessment Year 2004-05.

2. This Tax Appeal came to be admitted vide order dated 25th June 2019 on the following substantial question of law :

“Whether on facts and in law, the Tribunal has substantially erred in law in confirming disallowance of Rs.14,78,092/- u/s.54B for the year under consideration ?”

3. The facts giving rise to this Tax Appeal, as stated in the memo of the Appeal, are as follows :

“The appellant is an individual being regularly assessed to tax by the income tax office at Rajkot. The appellant is having income from business of petrol pump and income from other sources for the year under consideration.

The appellant filed its original return of income u/s 139(1) on 29.10.2004 declaring total income at Rs.3,96,470/- and agricultural income (for rate purpose) of Rs.1,82,370/-.

There was a search action u/s 132 of the Income Tax Act, 1961 at the premises of the appellant on 15.9.2009 during the course of which certain material was found and impounded. The statements of the appellant were also recorded u/s 132(4) during the course of search action as well as u/s 131(1A) during post search.

A notice u/s 153A dated 10.6.2010 was issued on the appellant requiring him to file return of income.

The appellant filed his return of income in response to notice u/s 153A on 16.7.2010 declaring total income of Rs.7,72,353/- and agricultural income (for rate purpose) of Rs.1,82,370/-.

The Assessing Officer has finalized the assessment u/s 153A(a) on 28.12.2011 determining total income of the appellant at Rs.22,50,445/- and agricultural income (for rate purpose) at Rs.1,82,370/-. The Assessing Officer has made addition of Rs.14,78,092/- on account of long term capital gain on sale of agriculture land by withdrawing exemption u/s 54B.

During the year under consideration, the appellant sold his agriculture land (being a capital asset) situated at Raiya Survey No.312 on 1.12.2003 for a consideration of Rs.20,00,000/- and accordingly, long term capital gain arising on sale thereof was chargeable to tax. The appellant however, claimed exemption u/s54B from the Long Term Capital Gain arising on sale of aforesaid capital asset as he purchased a new agriculture land (not being a capital asset) situated at Survey No.412, Khirsara on 4.10.2004 for a consideration of Rs.15,00,000/-. During the course of assessment proceedings, the Assessing Officer observed that the appellant has subsequently sold the new asset vis. agriculture land at Khisara on 27.5.2005 i.e. within the period of three years from its purchase and accordingly, he asked the appellant to show cause as to why the exemption on capital gain should not be disallowed as per provisions of section 54B(ii).

In response, the appellant vide letter dated 6.10.2010 filed his reply to the above show cause notice. However, the Assessing Officer was not satisfied with the reply furnished by the appellant and therefore, he made an addition of Rs.14,78,092/- disallowing the exemption u/s 54B of the Income Tax Act, 1961 claimed by the appellant as long term capital gain to the income of the appellant for the year under consideration.”

4. The assessee, being dissatisfied with the order passed by the Assessing Officer, preferred an appeal before the CIT(A). The CIT(A) dismissed the appeal and thereby affirmed the order passed by the Assessing Officer. The assessee, being dissatisfied with the order passed by the CIT(A), preferred further appeal before the Income Tax Appellate Tribunal, Rajkot Bench, Rajkot. The Appellate Tribunal, by the impugned order, dismissed the appeal and thereby affirmed the order passed by the CIT(A). Being dissatisfied with the order passed by the Appellate Tribunal, the assessee is here before this Court with the present Tax Appeal.

SUBMISSIONS ON BEHALF OF THE APPELLANTASSESSEE :

5. Mr.Darshan Patel, the learned counsel appearing for the appellant-assessee, has tendered his written submissions. The written submissions are as under :

“A. Interpretation of Section 54B :

1. The Appellant respectfully submits that the Departmental Authorities have made a gross error in misinterpreting the provisions of Section 54B, thereby denying the exemption claimed by the Appellant.

2. The Appellant respectfully submits that section 54B of the Income-tax Act, 1961 is divided into 2 parts. First part deals with the exemption of capital gains from transfer of Agricultural Land (Original Asset) and conditions thereto and Second part deals with the computation of gain from transfer of Agricultural Land purchased to claim exemption u/s. 54B of the act (New Asset). Thus the First part deals with transfer of the Original Asset and the second part deals with transfer of the New Asset.

3. The Appellant respectfully states that w.r.t the First Part i.e. Exemption of capital gain from transfer of agricultural land (Original Asset), there are several conditions, the conditions are as under:

a. The Original Asset must be capital asset. If it is not the capital asset there is no question of charging tax thereon as no capital gain is attracted on non-capital asset.

b. The Original Asset must be used for agricultural purpose by the assessee or his parents for atleast 2 years, prior to its sale.

c. The capital gain earned from the sale of Original Asset must be, invested in New Asset within 2 years from the date of sale of Original Asset.

d. If the amount of Capital Gain is equal to or less than the cost of the New Asset then, as per Section 548 (ii), the Capital Gain shall not be charged under Section 45.

4. The Appellant respectfully submits that w.r.t the Second Part i.e. Computation of gain from the transfer of New Asset, the conditions are as under:

a. This part is operational only if the New Asset is transferred within a period of 3 years from the date of its purchase. If the transfer of New Asset takes place after 3 years from the date of its purchase, then section 54(1)(i) and 54(1)(ii) of the act will have no application.

b. This part is applicable for the relevant year in which the New Asset has been transferred. It has nothing to do with the Original Asset and gain arising on Original Asset.

c. If the New Asset is transferred within a period of 3 years then the gain would be worked out as under:

Sale price of New Asset :XXXX
Less :Cost of acquisition of New AssetYYYY
Add :Exemption claimed in respect of Original AssetZZZZ
 ——–
Gain….AAAA

d. The gain so worked out as above, would be charged to tax in the year in which the New Asset has been transferred.

5. The Appellant respectfully submits that in the present case, the appellant had purchased an Urban agricultural land (Capital Asset) on 25/10/2001 (AY 2002-03) for Rs.5,21,908/- (Original Asset), the same was sold on 01/12/2003 (AY 2004-05) for Rs.20,00,000/- resulting into Capital Gain of Rs.14,78,092/-.

Thereafter on 04/10/2004, (i.e. within 2 years from the sale of Original Asset), the Appellant purchased a Rural agricultural land (New Asset) for Rs.15,00,000/- and thereby claimed exemption u/s. 54B of the Act.

The Appellant sold the New Asset on 27/05/2005 (AY 2006-07) for Rs.15,00,000/-.

6. The Appellant respectfully submits that the Assessing Officer denied the claim of exemption u/s. 54B in the AY 2004-05 by contending that in order to claim the exemption u/s. 54B of the act, the New Asset must be a Capital Asset and since the Appellant sold the New Asset within 3 years from the date of purchase, exemption under Section 54B is to be withdrawn. The Appellant respectfully submits that the finding of the Assessing Officer that the New Asset sold has to be a Capital Asset (para 3 of the Assessment order @ pg. 20) is contrary to the scheme of the Act because as per Section 54B of the Act, the Assessee is required to purchase a New Agricultural Land. The Section does not state that the New Land has to be a Capital Asset.

7. The Appellant respectfully submits that in view of the provisions of section 54B of the act, the working of the gain would be as under:

Sl.ParticularsAY 2004-05AY 2006-07
A.Capital Gains for Original Asset:  
1.Sale Price of Original AssetLess : Cost of acquisition of Original Asset20,00,000/-5,21,908/- 
2.Capital Gain14,78,092/- 
3.Exemption u/s.54B to the extent Cost of New Asset15,00,000/- 
4.Capital gain chargeable to taxNil 
B.Capital Gains for New Asset :  
5.Sale Price of New AssetLess: Cost of acquisition of New AssetAdd: Exemption claimed on transfer of Original Asset 15,00,000/-15,00,000/-14,78,092/-
6.Gain 14,78,092/-

8. Thus, the Capital Gains is worked out at Rs.14,78,092/- for the AY 2006-07. However, the same cannot be taxed as the New Asset is non-capital, asset within the meaning of provision of section 2(14) of the Act.

9. The Appellant respectfully submits that if at all the gain is to be taxed, it has to be in the year of transfer of the New Asset. The Learned CIT(A) also confirms the same in the CIT(A) order (@ pg 50).

B. Capital Gains to be charged on transfer of Capital Assets only:

1. The Appellant respectfully submits that Capital Gains can only be charged on the transfer of a Capital Asset. Since, the new asset is not a capital asset within the meaning of Section 2(14), Capital Gains cannot be charged on the transfer of the New Agricultural Land situated in a rural area as the same is not covered under the definition of Section 2(14), this fact is not denied by the Revenue authorities, which is clearly evident from the orders passed by the learned Assessing Officer and the Hon’ble ITAT [para 5 (ii) at page 18, para 5 (iii) at page 19, para 5 (vi) at page 21 of the assessment order, para 8 at page 64 of the ITAT’s order].

2. The Appellant respectfully submits that the Hon’ble Supreme Court has rejected the SLP filed by the Department in Commissioner of Income tax v. Venkateshwar Hospital reported at [2019] taxmann.com 283 (SC), whereby the Hon’ble Supreme Court has upheld the finding of the Hon’ble Madras High Court by observing that since the land in question ‘fell for exclusion from the definition of a Capital Asset under Section 2(14), SLP filed by the department was to be dismissed.

In Commissioner of Income Tax v. Rajshibhai Odedra, reported at [2014] 42 taxmann.com 497 (Gujarat), the Hon’ble Gujarat High Court has dismissed the appeal filed by the Department by observing that since the land in question was situated beyond 8 kms from the municipal limits, no error has been committed by the Learned Tribunal in not considering the land in question as “capital asset” (para 3.4).

In Commissioner of Income Tax v. Shabbir Hussain Pithawala, reported at [2014] 50 taxmann.com 39 (Madhya Pradesh), the Hon’ble Madras High Court has also observed that the Land was situated outside 8 kms from municipal limit in terms of approach by road, the same would be entitled for deduction under section 54B.

3. The Appellant respectfully submits that in Bharat’s Taxation on Capital Gains, 7th Edition 2010, written by Dr.Girish Ahuja and Dr.Ravi Gupta, it has been observed that if the agricultural land acquired by the assessee is a rural agricultural land, there will be no capital gain even if it is sold within a period of 3 years because rural agricultural land is not a ‘Capital Asset’. (@ pg 282).

In Sampath Iyengar’s Law Of Income Tax, 12th Edition, 2016, it is stated that where the land is situated outside the notified periphery of 8 kms, capital gains thereon would not be assessable at all, so that the question of applicability of Section 54B should not arise. (@ pg 6073).

4. The Appellant therefore submits that since the land in the present case does not fall within the definition of Section 2(14), capital gains cannot be charged on the same.

5. The Appellant further relies on Section 2(47), where in ‘transfer’ has been defined under the Act. The Appellant submits that transfer is always in relation to a capital asset, and when the asset is a non-capital asset, capital gains cannot be charged on the transfer of a non-capital asset.

6. The Appellant respectfully states that even as per Section 45 of the Act, any profits or gains arising from the transfer of a capital asset shall be deemed to be the income of the previous year in which the transfer took place. Hence, in the present case since the New Asset was transferred on 27/05/2005, the Capital gains, if any has to charged in the year of transfer i.e. A.Y. 2006-07.

7. The Appellant therefore submits that withdrawing of exemption under Section 54B is contrary to law and the Assessee should be granted deduction under Section 54B of the Act as the New Land which was sold was a rural agricultural land falling outside the purview of Section 2(14).”

SUBMISSIONS ON BEHALF OF THE REVENUE :

6. Mr.M.R.Bhatt, the learned senior standing counsel appearing for the Revenue, has vehemently opposed both the Appeals. Mr.Bhatt submitted that no error, not to speak of any error of law, could be said to have been committed by the Appellate Tribunal in passing the impugned order. According to Mr.Bhatt, all the Revenue authorities have correctly interpreted the provisions of Section 54B of the Act, keeping in mind the facts of the present case.

7. Mr.Bhatt submitted that Section 54B of the Act itself provides for the consequences of the new asset being transferred within three years of its purchase. If the new asset is transferred by the assessee within a period of three years from the date of its purchase, then the cause of acquisition of the new asset, for the purposes of determining the capital gains arising on transfer thereof, will be determined as follows :

“(i) If the amount of capital gains arose on transfer of original asset was greater than the cost of new asset, then cost of new asset for computing capital gains will be nil.

(ii) If the amount of capital gain arose on transfer of original asset was equal to or less than the cost of new asset, then cost of new asset for computing capital gains will be the amount arrived after deducting capital gain from transfer of original asset from the cost incurred for acquiring the asset.”

8. Mr.Bhatt submitted that the principal argument canvassed on behalf of the assessee that if the agricultural land acquired by the assessee is rural agricultural land, there will be no capital gain even if it is sold within three years, because the rural agricultural land is not a ‘capital asset’, is without any merit. According to Mr.Bhatt, if such argument is accepted, it will render Section 54B practically otiose. To put it in other words, according to Mr.Bhatt, the entire object of exemption as provided under Section 54B of the Act would get frustrated. Mr.Bhatt laid much stress on the fact that one of the objects of the exemption under Section 54B of the Act was stated to be to encourage cultivation or actual utilization of land for the agricultural purposes. According to Mr.Bhatt, an assessee would sell his urban agricultural land, and then, for the purpose of capital gains, would invest in a new asset which may not be a capital asset being agricultural land in rural area, and immediately thereafter sells the new asset, then the very intent and purpose of the beneficial provision would be lost.

9. In such circumstances referred to above, Mr.Bhatt prays that there being no merit in the submissions canvassed on behalf of the assessee, the Appeals may be dismissed and the question of law as formulated may be answered in favour of the Revenue and against the assessee.

ANALYSIS :

10. Before adverting to the rival submissions canvassed on either side, we may look into few relevant provisions of the Income Tax Act, 1961.

Section 2(14)(iii) of the Act reads as follows :

“2. In this Act, unless the context otherwise requires.–

(1) to (13) xxx xxx xxx

(14) ‘capital asset’ means–

(i) and (ii) xxx xxx xxx

(iii) agricultural land in India, not being land situate –

(a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand ; or

(b) in any area within the distance, measured aerially,-

(I) not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten thousand but not exceeding one lakh; or

(II) not being more than six kilometers, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than one lakh but not exceeding ten lakh; or

(III) not being more than eight kilometers, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten lakh.

Explanation.- for the purposes of this sub-clause, ‘population’ means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year;”

11. Section 2(24) of the Act defines the term ‘income’. It reads as follows :

“‘income’ includes – (i) profits and gains;

(ii) to (ve) xxx xxx xxx

(vi) any capital gains chargeable under section 45;”

12. Section 45 of the Act is with regard to the capital gains. Section 45 states that the income, profits or gains arising from the transfer of a capital asset….be chargeable to income tax under the head ‘capital gains’…Capital gains would arise from the transfer of capital asset.

13. Section 45 of the Act provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 33, 54 and 54B, be chargeable to the income-tax under the head ‘capital gains’, and shall be deemed to be the income of the previous year in which the transfer took place. Section 2(14)(iii) defines what is meant by ‘capital assets’ and it says that ‘capital assets’ means property of any kind held by an assessee whether or not connected with his business or profession, but does not include various types of properties. Till the amendment by Act 19 of 1970, that is, till April 1, 1970, the agricultural land in India was not included within the definition of ‘capital assets’ and, therefore, any capital gains arising from the transfer of the agricultural land was not capital gains for the purposes of Section 45 and could not be deemed to be the income of the previous year. It may be noticed that at the time when the proposed amendment was introduced by the Finance Bill, 1970, it was pointed out that it was proposed to extend the levy of the income-tax to the capital gains arising from the transfer of the agricultural lands situated in the urban areas. The Memorandum explaining the provisions of the Finance Bill, 1970, pointed out in paragraph 24 :

“Presently, capital gains arising from the transfer of a capital asset are chargeable to income-tax. The definition of ‘capital asset’ excludes from its scope, inter alia, agricultural land in India. Accordingly, no liability to tax arises on gains derived from transfer of agricultural land in India. This exemption of agricultural land from the scope of the levy of tax on capital gains has a historical origin and is not due to any bar in the Constitution on the competence of Parliament to legislate for such levy. Agricultural land situated in municipal and other urban areas is essentially similar to non-agricultural land in such areas in its potentialities for use due to the progress of urbanisation and industrialisation.”

14. In view of the aforesaid, it was proposed to bring, within the scope of taxation, the capital gains arising from the transfer of the agricultural lands situated within the limits of any municipality or cantonment board which has a population of not less than 10,000 according to the latest census for which the relevant figures have been published. The power was also being given to the Central Government to bring within the scope of the levy (by notification in the Official Gazette), capital gains arising from the transfer of the agricultural lands situated outside the limits of any such municipality or cantonment board upto a minimum distance of 8 kilometers, where this was considered necessary having regard to the extent of the scope of land for the urbanization of that area and other relevant considerations. It was pointed out in the Memorandum that the agricultural land which was situated in the rural areas would continue to be outside the scope of the provisions regarding the tax on capital gains and hence no liability to tax would arise in respect of the gains derived from the transfer of the agricultural land in the rural areas. Under Section 2, sub-section (47) of the Income-tax Act, 1961, the term ‘transfer’, in relation to a capital asset, includes the compulsory acquisition of the capital asset under any law. Therefore, whenever compensation is received in respect of any capital asset at the time of the compulsory acquisition, the amount thus received would be considered for ascertaining the profits or gains arising from the transfer of its capital asset and by virtue of Section 45 it would be deemed to be the income of the previous year in which the transfer took place. Under Section 47 of the Income-tax Act nothing contained in Section 45 applies to the various types of transfers mentioned in Section 47 and by clause (viii), which was introduced by Act 19 of 1970, any transfer of the agricultural land in India effected before the 1st day of March, 1970, is not a transfer of a capital asset for the purposes of capital gains.

Analysis of Section 54B of the Income Tax Act, 1961.

15. Section 54B of the Act reads as follows :

“54B. Capital gain on transfer of land used for agricultural purposes not to be charged in certain cases.- (1) [Subject to the provisions 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 being an individual or his parent, or a Hindu undivided family 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 the 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 purposes 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 this 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.”

16. Section 54B provides for exemption in respect of capital gains accruing on transfer of land which was being used for the agricultural purposes by the assessee or his parents for a period of two years provided the assessee has purchased any other agricultural land within a period of two years from the date of such transfer.

Scheme of Section 54B

17. Section 54B provides for the exemption in respect of the capital gains arising to an assessee on the transfer of the land used for the agricultural purposes. The exemption is subject to certain conditions as to use of land and acquisition of land. Further, the amount of exemption depends upon the fact, whether the cost of new land is greater or less than the amount of capital gains. The assessee is also provided with an option to deposit the amount of gain remaining unutilised in capital gains account scheme before the due date for furnishing return of income to be utilised from acquisition of new asset within the specified period.

Conditions precedent for exemption.

18. With a view to availing of the benefits of this section the following conditions are required to be fulfilled :

(i) The gain should arise from transfer of a capital asset being land.

(ii) The land transferred should have been used by the assessee or his parents for at least two years immediately before the transfer for agricultural purposes.

(iii) The assessee should purchase, within a period of two years after the date of transfer, other land for being used for agricultural purposes.

Amount of exemption.

19. The amount of exemption will be as under :

(i) If the amount of capital gain arising on transfer of the original asset is greater than the cost of new asset, then the exemption will be to the extent of cost of new asset and the amount over and above the cost of new asset will be taxable as capital gains under section 45 during the year in which transfer took place.

(ii) If the amount of capital gains arising on transfer of the original asset is equal to or less than the cost of new asset then the exemption will be to the tune of the cost of new asset.

Consequences of new asset being transferred within 3 years of its purchase.

20. If the new asset is transferred by the assessee within a period of 3 years from the date of its purchase then the cost of acquisition of the new asset, for the purposes of determining capital gains arising on transfer thereof, will be determined as follows :

(i) If the amount of capital gains arose on transfer of original asset was greater than the cost of new asset, then cost of new asset for computing capital gains will be nil.

(ii) If the amount of capital gain arose on transfer of original asset was equal to or less than the cost of new asset, then cost of new asset for computing capital gains will be the amount arrived after deducting capital gain from transfer of original asset from the cost incurred for acquiring the asset.

FINDINGS OF THE AUTHORITIES :

21. The Assessing Officer took the view as under :

“(i) The basic intention of the statute is to make it mandatory to hold the new asset for a period exceeding 3 years. Thus the prime condition to avail the exemption is holding of the new asset for a period of 3 years and more than that. In the present case it is undisputed fact that the new asset was transferred before completion of 3 years from the date of its purchase. Thus the basic condition to avail the exemption has not been fulfilled by the assessee. There is no relevance of the fact that the new asset was capital asset or non-capital asset. The assessee was to hold the asset for more than 3 years to claim the exemption.

(ii) The provision of section 54B(ii) clearly stipulates that if the new asset is transferred before 3 years of its purchase the capital gain is worked out after deducting the exemption out of such gain so benefited on the transfer of old asset. This further stipulates that there should be a capital gain on transfer of such land. Hence the assessee has invested in a land which will not be further taxable to capital gain as the land is rural agricultural land, which is not a capital asset.

(iii) It is important to mention that the assessee has merely made a literal interpretation of the provisions of section 54B, ignoring the rules of interpretation prescribed by Hon’ble Courts. The section provides for investment in new asset and holding it for three years by the assessee. It further provides that 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. This, apparently, implies that the new asset has to be an eligible asset transfer of which could be subjected to charging of capital gain.

This is not possible if the new asset is an asset transfer of which is exempt from charging of capital gain. In other words, even if the new asset is sold within a period less than the stipulated period there would not arise any capital gain because of it being exempt from such taxation. Hence, the new asset has to be an asset transfer of which could be subjected to charging of capital gain. Not reading the provisions in this way would lead to redundancy of the condition in respect of period of holding of the new asset. A statute cannot be interpreted in a manner that may lead to friction, inconsistency or redundancy of any part of the statute.

(iv) The assessee’s interpretation of the relevant provision is against legislative intent. If the Legislature intended that new assets can be an asset transfer of which is exempt from charging as capital gain then there was no requirement to provide that 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. It would have been sufficient to say that the consideration/capital gain arising from transfer be used in the manner prescribed without prescribing for any period of holding for the same.

(v) Rules of interpretation require that meaning should be given to each and every word used in the statute as the Legislature is deemed not to waste its words and say anything in vain. Assessee’s interpretation makes the condition in respect of period of holding redundant in this section.

(vi) Further, assessee’s interpretation would lead to misuse of Section 54B, which provides that the benefit of this section would be available if the assessee holds the new asset for a period of three years. This requirement can be by-passed when the new asset is an asset not chargeable to capital gain tax. The assessee’s interpretation flouts the well accepted rule that the Act must be read as a whole to make a consistent enactment of the whole statute – not in parts.”

22. The CIT(A) took the view as under :

“(ii) From the reading of above provisions it is clear that if assessee has earned capital gain on sale of capital asset which was used for agricultural purpose in last two immediate preceding years, then assessee is entitled for claiming exemption from capital gain tax if the sale consideration is utilized for making investment in another land being used for agricultural purposes. agricultural purposes. Therefore, it is clear that the first capital gain arising to the appellant on account of sale of “original asset” constitute taxable income. Normally, the assessee is required to pay capital gain tax on such capital gains earned on sale of capital assets used for agricultural purpose. However, with an intention to encourage investment in land being used for agricultural purposes, the legislature has provided this exemption u/s 54B of the Act.

(iii) The AO has rightly noted that if the assessee has sold the “new asset” within three years of the date of purchase then he is required to pay the taxes on the gains arising from transfer thereof.

(iv) If the assessee’s are given liberty to invest in agricultural land, which is not capital asset, the gains arising from transfer of chargeable capital asset then, if the contention of the appellant is accepted, this would make the provisions redundant as all the assessee’s would convert their taxable gain into non-taxable capital gain by misusing the provisions of section 54B of the Act. Clearly this interpretation is against the legislative intent. As per the provisions, if the new asset is transferred within three years of its purchase then the assessee is supposed to disclose capital gain on this transaction by taking cost of new asset at ‘NIL’.

(v) The claim of the appellant that the capital gain, if any, on transfer of new asset should be taxed in the year of transfer of new asset i.e. A.Y.2006-07 is in line with the provisions but cannot be accepted as appellant himself has not disclosed any capital gain in the A.Y.2006-07.

(vi) Lastly, the appellant has claimed exemption u/s 54B in AY 2004-05 on the taxable capital gains arising from transfer of “original asset” and then subsequently in AY 2006-07 he has not shown any taxable capital gain while transferring ‘new asset’ on the pretext that new asset is not a capital asset. This claim of the appellant cannot be accepted as by using this method the appellant has disposed his capital asset and as earned profit on sale thereof without paying a single paisa of tax.

(vi) Reliance of the appellant on the decision of Hon’ble Chandigarh Bench of ITAT in the case of Kaushlya Dev Patiala ITA N0.1300/CHD/2010 is not correct as in that case agricultural land was sold by the assessee in AY.2004- 05 and then another agricultural land was purchased and subsequently sold in AY.2006-07. In the case of the appellant, the appellant has not sold any agricultural land and the original asset in the case of the appellant was a capital asset, therefore, the facts of the case are distinguishable.”

23. The Appellate Tribunal, in its impugned order, observed as under :

“We have heard the rival submissions and perused the material on record. It is seen that the assessee has transferred agricultural land and resultant capital gain thereon has been claimed exemption on account of purchase of new asset. However, the new asset being a non-capital asset has been transferred within the period of 3 years i.e. 25.07.2005. Therefore, the cost of new asset for computing the capital gain u/s.45 of the Act would be considered as nil as per provisions of section 54B(1)(2) of the Act. Since the assessee has not satisfied the basic condition to avail the exemption u/s.54B(1) of the Act as the new asset is transferred before 3 years of its purchase, the capital gain is worked out after deducting the exemption out of such gains so benefited on the transfer of old asset. This, further stipulates that there should be a capital gain of transfer of such land, hence the assessee has invested in his land it will not be further taxable to capital gain as the land is rural agricultural land, it is not a capital asset. We also find that the basic condition to avail the exemption has not been fulfilled by the assessee, therefore there is no relevance of the fact that new asset was capital asset or non-capital asset. Further, there is no specific provision in section 54B of the Act as mentioned in section 54F(3) of the Act. Therefore, the withdrawal of exemption would be made in respect of long term capital gain chargeable on old assets sold during the relevant assessment year.The decision in the case of DCIT vs. Kaushalya Devi (supra) has already been distinguished by the CIT(A) as in that case the AO sought to tax the capital gain arising on transfer of new asset in the year in which the new asset was transferred. Therefore, the Tribunal has come to a finding that new asset so transferred is not a capital asset, hence no capital gain chargeable on the same. In view of these facts, we are of the considered opinion that the Lower Authorities have justified in withdrawing the exemption claim u/s.54B of the Act as basic conditions stipulated u/s.54B(1)(2) has not been satisfied. Therefore, this grounds of appeal of the assessee are dismissed.”

24. Our final conclusion is as under :

1. The relevant dates for the purpose of adjudication are as under:

01.12.2003 Assessee sold the urban agricultural land (relevant to AY 2004-05)

04.10.2004 Assessee purchased the agricultural land situated in rural area (not a capital asset within the meaning of 2(14) of the Act)

27.05.2005 Assessee sold the new asset (rural agricultural land)

2. In our opinion, the Assessing officer and the appellate authorities have properly analyzed the provisions of Section 54B of the Act, as also the factual aspects

3. In the event, the assessee seeks the benefit of Section 54B, the requirement is that the assessee, upon the sale of agricultural land is required to purchase within a period of two years therefrom, any other land for being used for agricultural purposes (be it rural or urban agricultural land). If these conditions are complied with, the capital gain is required to be dealt with in accordance with clause (i) or (ii) of Section 54B(1) of the Act, as the case may be.

4. As per Clause (i), if the capital gain is more than the cost of the new asset, the difference between these two is to be charged under Section 45 as the income. This completes the first part of computation. After the words “…..income of the previous year”, the significant words are “and for the purpose of computing in respect of the new asset. …”. The second part of the computation is when the new asset is transferred within a period of 3 years of its purchase. In this eventuality, as per the section 48 of the Act, the cost of acquisition is to be treated as NIL and the entire sale consideration will be taken for the purpose of computing the capital gain. Thus, the word ‘and’ postulates the computation of capital gain if the new asset is sold within a period of three years. This does not alter the computation in the first part.

5. Similarly, as per clause (ii), the computation has to take place if the amount of capital gain is equal to or less than the cost of the new asset, in that case the capital gain is not required to be charged under Section 45. Even in this clause after the first part, ‘and’ postulates the above referred situation of the new asset being sold within 3 years of its purchase.

6. The legislative intent as can be gathered from Sections 54 to 54GB is that upon a capital gain arising and in the event the consideration/gain is invested and kept in for a lock-in period, the assessee would get the benefit and not otherwise. The lock-in period is different in these sections. In the event the assessee’s contention is accepted, the very intent and purpose of these beneficial provisions will be defeated. An assessee would sell an agricultural land, invest in a new asset which is not a capital asset (in the instant case agricultural land in rural area which is not exigible to capital gain tax) and sell the new asset immediately thereafter, and in such process, would render Section 54B of the Act otiose. The entire object of asking the assessee to hold the land for a particular period would be frustrated.

7. After acquiring the new agricultural land (be it a rural agricultural land), if the new rural agricultural land is transferred within a period of three years from the date of purchase, then the tax exemption allowed earlier would be liable to be withdrawn. In such a case, the assessee is required to pay tax on the exemption claimed earlier.

The consequences on transfer of the newly acquired agricultural land (be it urban or rural) within a period of three years is that, while computing capital gain at the time of transfer of new agricultural land, the amount of capital gain which had been claimed as exemption under section 54B would be deducted from the cost of acquisition of new agricultural land and the new capital gain would be computed accordingly.

We may give one simple illustration :

Suppose Mr.A has transferred his urban agricultural land in May, 2017. The urban agricultural land has been transferred for an amount of say Rs.50,00,000/-. The capital gain arising on the transfer of the said urban agricultural land is say Rs.10,00,000/-.

Mr.A, in order to claim exemption under Section 54B of the Income Tax Act, purchases another rural agricultural land by investing Rs.35,00,000/- in December, 2017. Since the entire amount is re-invested, the capital gain of Rs.10,00,000/- is claimed as exemption as per the provisions of Section 54B of the Income Tax Act.

In March, 2018, Mr.A transfers the newly acquired rural agricultural land for an amount of say Rs.80,00,000/-.

In the above example, since the newly acquired rural agricultural land has been transferred before the expiry of the lock-in period of three years, the capital gain will be Rs.50,00,000/- (minus) Zero, since in that eventuality, the cost of acquisition of the first asset will be treated as Nil. The difference between Rs.80,00,000/- and Rs.35,00,000/- would be treated as income from business/from other sources, as the case may be. In any event, in respect of the first transaction, the assessee would not have the benefit of cost of acquisition, since the same is taken at ‘Nil’.

8. We fail to understand why lot of emphasis has been put on the fact that as the rural agricultural land does not constitute a capital asset, the capital gain tax is not levied on the sale of such rural agricultural land. There need not be any debate on this issue. No capital gains will arise on the sale of the agricultural land situated in a rural area as it is specifically excluded from the definition of the term ‘capital asset’. However, the capital gains will arise on the sale of the agricultural land situated in a non-rural area.

In the case on hand, we are concerned with the capital gains with respect to the first transaction, i.e. the sale of urban agricultural land. We are not concerned with the second transaction of the sale of the rural agricultural land. In such circumstances, after acquiring the new agricultural land (rural or urban), if the new agricultural land is transferred within a period of three years from the date of the purchase, then the tax exemption allowed earlier (i.e. with respect to the first transaction of sale or urban agricultural land) would be withdrawn. In such a case, the assessee would be required to pay tax on the exemption claimed earlier.

9. The other contention of the assessee that the capital gain is required to be taxed in A.Y 2006-07 is also wholly untenable. The charge of capital asset is on the transfer effected on 01.12.2003 for which the relevant year is A.Y 2004-05. The charge is not in respect of the transfer of the new asset.

25. In view of the aforesaid discussion, we have reached to the conclusion that no error, not to speak of any error of law, could be said to have been committed by the Appellate Tribunal in passing the impugned order.

26. The Appeal fails and is hereby dismissed. The question of law is answered in favour of the Revenue and against the assessee.

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