2025 (6) TMI 699 - AT - Income Tax

Deduction/exemption u/s 54B and 54F denied - investments were not made within the prescribed time limits and the property purchased in the name of the assessee s brother does not qualify for exemption u/s 54B of the Act. As argued AR clearly demonstrates that the capital gains were genuinely reinvested in qualifying assets thereby fulfilling the substantive conditions for claiming exemptions - AR emphasized that minor procedural lapses in timing or ownership structure should not result in denial of exemptions particularly when the fundamental requirement of reinvestment has been met. HELD THAT - We find merit in the assessee s contention that the purpose of Sections 54F and 54B is to promote reinvestment in qualifying assets rather than to impose rigid procedural constraints. It is settled legal principle that a beneficial provision should be construed liberally in favour of the taxpayer provided that the underlying purpose of the statute is fulfilled and the taxpayer has acted in good faith and has substantially complied with the law. In the present case it is undisputed that the assessee received the sale proceeds in a staggered manner over multiple years from 2012 to 2016 and accordingly reinvested the capital gains in a residential property and agricultural land as and when funds were available. The delay in reinvestment was not due to any intentional non-compliance but was a consequence of the phased receipt of sale consideration which directly influenced the timing of investments. Given these circumstances we find that the delay in reinvestment is merely procedural and not substantive as the intent and purpose of the law to encourage reinvestment of capital gains into specified assets have been duly fulfilled. Therefore the investment made by the assessee should not be disallowed merely on technical grounds of timing particularly when the capital gains have ultimately been utilized for the intended purpose. Accordingly we hold that the exemption under Sections 54F and 54B of the Act cannot be denied solely on the ground of non-adherence to strict time limits and the assessee is entitled to claim the deduction in respect of investments made beyond the prescribed time period. We direct the AO to re-compute the assessee s taxable capital gains by allowing proportionate exemption under Sections 54F and 54B of the Act for the investments made beyond the statutory time limits as discussed above. The AO shall recalculate the long-term capital gains accordingly ensuring that the correct quantum of deduction is granted in light of the revised working. Exemption u/s 54B in respect of the agricultural land purchased in the name of his brother - AO disallowed the claim on the ground that the new agricultural land was not purchased in the name of the assessee - HELD THAT - The Hindu Succession Act 1956 (as amended in 2005) grants a widowed daughter equal inheritance rights in the property of her father and husband because she is classified as a Class I legal heir. In contrast a brother is not a Class I heir in Hindu succession unless the property is inherited jointly under HUF law or through a will. The principle of family ownership in succession law does not override the explicit ownership requirement under Section 54B of the Act which mandates that the land must be purchased in the name of the assessee himself. Therefore we hold that the assessee cannot claim the exemption under Section 54B of the Act for land purchased in the name of his brother as the statute does not recognize such an arrangement for the purpose of exemption. Nowhere in the agreement is it stated that the agricultural land was purchased on behalf of the assessee nor does it establish that the capital gains were intended to be utilized for his benefit instead of his brother s. In the absence of any concrete documentary evidence supporting the claim that the land was beneficially owned by the assessee we cannot accept the argument that the rectification of the brother s assessment automatically entitles the assessee to the exemption. We hold that the assessee is not entitled to claim exemption under Section 54B for the land purchased in the name of his brother as the statute specifically requires ownership in the name of the assessee and the judicial precedents have consistently upheld this requirement. Accordingly we uphold the disallowance u/s 54B in respect of the land purchased in the name of the brother and dismiss this ground of appeal.

Summary

Issues Presented and Considered

The core legal questions considered by the Tribunal in this appeal are:

• Whether the assessee is entitled to claim deduction under Section 54F of the Income Tax Act, 1961, for investment in a residential house, despite the investment being made partly outside the prescribed time limits.
• Whether the assessee is entitled to claim deduction under Section 54B of the Act for investment in agricultural land, particularly when part of the land was purchased beyond the statutory time limit and part of it was purchased in the name of the assessee's brother.
• Whether the delay in reinvestment of capital gains and minor deviations in ownership structure should disentitle the assessee from claiming exemptions under Sections 54B and 54F.
• The correctness of the Assessing Officer's enhancement of Long Term Capital Gains (LTCG) based on the District Valuation Officer's (DVO) report and disallowance of deductions claimed by the assessee.

Issue-wise Detailed Analysis

1. Deduction under Section 54F of the Act - Timing of Investment in Residential Property

Legal Framework and Precedents: Section 54F provides exemption from capital gains if the net sale consideration is invested in a residential house within one year before or two years after the date of transfer of the original asset. The CBDT Circular No. 359 dated 10.05.1983 clarifies that investment made even before the date of transfer can qualify for exemption if it meets the prescribed conditions. The Hon'ble Bombay High Court in Mrs. Parveen P. Bharucha vs. DCIT emphasized substantial compliance over rigid timing.

Court's Interpretation and Reasoning: The Tribunal acknowledged that the purpose of Section 54F is to encourage reinvestment of capital gains in residential property rather than to impose harsh procedural restrictions. The assessee received sale proceeds in a staggered manner over 2012-2016 and invested accordingly. The delay in investment was not deliberate but a consequence of phased receipt of funds.

Key Evidence and Findings: The assessee submitted purchase deeds, construction bills, and bank statements evidencing investments in the residential property. The AO disallowed Rs. 5,91,036/- on account of investment made before the prescribed period.

Application of Law to Facts: The Tribunal held that minor deviations in timing should not disentitle the assessee from exemption if the fundamental purpose of reinvestment is fulfilled. The CBDT Circular and judicial precedents support a liberal interpretation favoring the assessee.

Treatment of Competing Arguments: While the AO and CIT(A) strictly applied the statutory time limits, the Tribunal favored a purposive approach, emphasizing the substantive compliance and genuine reinvestment.

Conclusion: The Tribunal directed the AO to allow proportionate exemption under Section 54F for investments made beyond the prescribed time limits and recompute taxable capital gains accordingly.

2. Deduction under Section 54B of the Act - Investment in Agricultural Land

Legal Framework and Precedents: Section 54B allows exemption on reinvestment of capital gains in agricultural land purchased within two years from the date of sale of the original agricultural land. The statute mandates that the new land must be purchased by the assessee himself. The CBDT Circular No. 359 and ITAT decisions such as Ramesh Narhari Jakhadi vs. ITO were cited by the assessee to support liberal interpretation.

Court's Interpretation and Reasoning: The Tribunal found that the language of Section 54B is clear and unambiguous requiring ownership in the name of the assessee. The purchase of land in the name of the assessee's brother does not satisfy this mandatory condition. The Tribunal distinguished the status of a brother from that of spouse or minor child, noting that under Hindu succession law, a brother is not automatically part of the family or coparcenary for such purposes.

Key Evidence and Findings: The AO disallowed Rs. 87,11,000/- claimed under Section 54B due to (a) purchases beyond the two-year limit, (b) purchases before the prescribed period, and (c) purchase in the brother's name. The brother had also claimed exemption on the same land, raising issues of double deduction. The assessee relied on a family agreement (Samjuti Karar) and a rectification order reducing the brother's exemption, but these were found insufficient to establish beneficial ownership or entitlement.

Application of Law to Facts: The Tribunal held that the exemption under Section 54B cannot be extended to land purchased in the name of another person, even if a close relative, absent joint ownership or explicit statutory recognition. The rectification order in the brother's case was considered an afterthought and did not affect the assessee's entitlement.

Treatment of Competing Arguments: The assessee's argument for beneficial ownership and family arrangement was rejected due to lack of concrete evidence. The Department's strict interpretation of ownership requirement was upheld.

Conclusion: The Tribunal upheld the disallowance of Rs. 52,60,000/- under Section 54B in respect of land purchased in the brother's name and disallowed the entire exemption claimed under Section 54B.

3. Enhancement of Long Term Capital Gains and Valuation Issues

Legal Framework: Section 55A empowers the AO to refer the matter to the District Valuation Officer to determine fair market value for capital gains computation. The DVO report is binding unless rebutted by the assessee with cogent evidence.

Court's Interpretation and Reasoning: The Tribunal accepted the DVO's valuation report determining the indexed cost of acquisition at Rs. 15,25,760/-, which was higher than the assessee's initial claim. The AO's enhancement of LTCG based on this valuation was found justified.

Key Evidence and Findings: The assessee did not successfully challenge the DVO's valuation. The revised computation of LTCG was based on the DVO report and accepted by the Tribunal.

Conclusion: The enhancement of LTCG by the AO was upheld.

Significant Holdings

"It is settled legal principle that a beneficial provision should be construed liberally in favour of the taxpayer, provided that the underlying purpose of the statute is fulfilled and the taxpayer has acted in good faith and has substantially complied with the law."

"The delay in reinvestment is merely procedural and not substantive, as the intent and purpose of the law-to encourage reinvestment of capital gains into specified assets-have been duly fulfilled."

"The language of Section 54B of the Act is clear and unambiguous, requiring that the land must be purchased by the assessee himself. When the statute mandates that an asset must be purchased in the name of the assessee, courts cannot extend the benefit to purchases made in the name of another person."

"A brother is not automatically treated as a part of a coparcenary unless specifically provided for in law. The principle of family ownership in succession law does not override the explicit ownership requirement under Section 54B of the Act."

"The rectification order passed under Section 154 of the Act in the case of the brother appears to be an afterthought, lacking any legal basis, and does not entitle the assessee to claim exemption for land purchased in the brother's name."

"The assessee is entitled to claim exemption under Sections 54F and 54B of the Act for investments made beyond the prescribed time limits, subject to recomputation of taxable capital gains accordingly."

Final Determinations

• The appeal was partly allowed.
• The Tribunal directed the Assessing Officer to allow proportionate exemption under Sections 54F and 54B for investments made beyond the statutory time limits, recognizing the substantive compliance by the assessee.
• The disallowance of exemption under Section 54B for agricultural land purchased in the name of the assessee's brother was upheld, as ownership in the name of the assessee is a mandatory condition.
• The enhancement of Long Term Capital Gains based on the DVO's valuation report was upheld.