TMI Blog1993 (8) TMI 144X X X X Extracts X X X X X X X X Extracts X X X X ..... agent. This deed receited that the assessee had appointed M/s. Alsa Properties to construct a multi-storeyed shopping complex called "Khaleeli Centre" with 73,485 sq. ft. of super built-up area and 34 garages under stilts, that the guaranteed selling agent shall sell the area at Rs. 285 per sq. ft. for office space, Rs. 360 per sq. ft. for shops and Rs. 25,000 for each garage or buy at the same rate, provide the finance without interest for constructing the complex and out of the sale proceeds after paying out Rs. 170 per sq. ft. to the contractor, pay the balance of Rs. 115 per sq. ft. for office space and Rs. 15,000 for garage to the assessee, his wife and sons as consideration for conveying the proportionate undivided share in the land. It was also provided that if there is escalation in the cost, it shall be borne by the guaranteed selling agent, who had the right to any sum realised over and above the price fixed. It was further provided that the vendors shall be owners of the terrace of the building and that the guaranteed selling agent alone shall be liable for the payment of any tax such as sales-tax etc. arising from the agreement. In pursuance of this agreement, Alsa Inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ----------- ------------ ------------ 11,77,280.00 13,17,095.00 24,94,375.00" --------------------------------------------------------------------------------------- 2. In computing the total income, the Assessing Officer added the amount attributable to the assessee's wife to the total income of the assessee under section 64(1)(iv) of the Income-tax Act, 1961 for the assessment year 1989-90. This was confirmed on appeal. In computing the income for the assessment year 1990-91 the Assessing Officer repeated the same addition and also denied the relief under section 54F in respect of capital gains. This was also confirmed on appeal. 3. In the further appeals before us the application of section 64 to the income arising subsequent to the construction of the building was contested. It was submitted that even though capital gains may be exigible to tax under section 64, the income arising by investment of the capital gains would not be subject to section 64. It was also submitted that the assessee having reinvested the amount in the construction of another property, relief under section 54 should be allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 18-6-1990. According to the assessee, even though the building was constructed over a period of three years, the deposit of the money in the business amounted to utilisation of the funds for the construction of the property and the assessee was entitled to the deduction under section 54F. According to the revenue, the deposit in the assessee's own business meant that the amount was available for the use of the assessee otherwise than for the construction of the house and thus defeated the claim for deduction. In order to understand the purpose of this condition that the unutilised funds should be deposited in a bank account, we looked into the legislative history. 6. Section 54F was introduced by the Finance Act, 1982 permitting the reinvestment of the proceeds received by transfer of a capital asset in the purchase within a year or construction within three years of a residential house to avoid payment of capital gains tax. The Memorandum explaining this provision stated in Circular No. 342, dated 30-6-1982 that this was with a view to encouraging house construction. Sub-section (4) introduced by Finance Act, 1987 by which it was provided that the unutilised funds should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided that if the tax-payer takes a loan on the security of the specified asset, he would forfeit the exemption from capital gains. In the present section there is no such provision and hence in our considered opinion the purpose of section 54F(4) requiring the deposit of unutilised funds is not for depriving the assessee of the use of the funds but only for avoiding the rectification of the assessment by bringing to tax the amount which had been earlier claimed as exempt by reason of re-investment. Furthermore, on the peculiar facts of the present case it is clear that by depositing the funds in the housing division of the assessee's contract business, the assessee was actually utilising the funds for the purpose of building a residential house. Even if he had entrusted the funds to an independent contractor, there is no guarantee that every pie given by the assessee will be utilised only for the purchase of materials for the construction of a house for the assessee alone as such funds would be part of the circulating capital of the contractor's house building business. In such an event, the assessee cannot be denied the exemption merely because the contractor had the use of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined by the fact that the assessee was not selling every inch of the floor space and the guaranteed selling agent was also not entitled to insist on selling every inch of the floor space. So far as the guaranteed selling agent is concerned, the profit earned may be a business profit in the sense that finance was provided and the profit was realised. But as far as the assessee and his family are concerned, they were only creating a capital asset which was sold within the year thereby making a short-term capital gains. However, this makes no difference to the tax impact as short-term capital gains is assessed as if it is a business profit. We are stating this only to keep the record straight. 8. The third point in dispute is with reference to the share of the assessee's wife which was added to the income of the assessee under section 64(1)(iv). The case of the revenue is that the capital gains in respect of the land as well as the short-term capital in respect of the floor space accrued to the wife from the land which was transferred by the assessee without consideration and, therefore, it was to be added back under section 64(1)(iv) of the Act. The case of the assessee is that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not be an addition of the amount received therefrom under section 64(1)(iv). On the other hand, the case of the revenue was that since the construction could not take place without the availability of the undivided share of the wife, the amount realised should be treated as indirectly arising from the asset transferred by the assessee. In this connection reference was made to the judgment of the High Court in the case of Sevantilal Maneklal Sheth v. CIT [1965] 57 ITR 45 (Bom.). In that case the assessee made a gift of shares in a limited company worth Rs. 69,730 at the time of the gift. She sold the shares for Rs. 1,54,800 and made capital gains of Rs. 70,860. The entire sale proceeds were deposited and fetched an interest of Rs. 9,288 annually. The High Court held that the capital gains of Rs. 70,860 could be added under section 16(3)(a)(iii) of the Indian Income-tax Act, 1922 [equivalent to section 64(1)(iv) of the Income-tax Act, 1961]. But such portion of the interest as attributable to the original gift of Rs. 69,730, namely Rs. 4,184 alone could be treated as income arising from the assets transferred. On the same analogy, the present case only the profit which was earned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed asset. In the circumstances it is necessary to apportion the income attributable to the floor space between the undivided share in the land retained by her and the undivided share of land sold away by her. As pointed out by the assessee this exercise has already been carried out in the wealth-tax proceedings and the WTO in the assessment for the assessment year 1990-91 had accepted that the undivided share of land retained by the wife was only 1,411 sq. ft. out of 5,878 sq. ft. which was the undivided share transferred by the assessee to his wife. In the circumstances, the income proportionate to that ratio of 1,411/5,878 alone can be added under section 64(1)(iv). We direct the Assessing Officer to restrict the addition to that extent. 12. The next point relates to the disallowance of the collection charges from the rental income derived by the assessee in respect of the space let out to M/s. Indian Explosives Ltd. Section 24(1)(viii) provides for deduction of any sums spent to collect the rent from the property, not exceeding six per cent of the annual value of the property. Admittedly, the assessee had not spent any amount for collection of the rent which was paid by cheque ..... 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