Assistant Commissioner of Income Tax vs Kamlakar Moghe

B.P. Dharmadhikari, J.—After hearing Shri Parchure, learned counsel for the appellant-Revenue and Shri Bhattad, learned counsel for the respondent-assessee, it was felt that no substantial questions of law arise for determination in this appeal. In view of this, we have heard the respective counsel at length and disposed of the appeal by this judgment. The following two questions of law are sought to be raised by the Revenue in this appeal under section 260A of the Income-tax Act, 1961 (hereinafter referred to as "the Act").

"1. Whether, in the facts and in the circumstances of the case and in law, the Income-tax Appellate Tribunal was justified in allowing the deduction of Rs. 45 lakhs claimed under section 48(1) of the Act?

Whether, in the facts and in the circumstances of the case and in law, the Income-tax Appellate Tribunal was justified in allowing deduction of Rs. 22 lakhs claimed under section 54EC for investment in purchase of REC Bonds?"

The facts which are necessary for this adjudication can be briefly stated below. The mother of the assessee, viz., Mrs. Kamlabai Moghe, executed a will on December 17, 1978, and she expired on May 18, 1988. By that will she divided her residential bungalow in Ramdaspeth area of Nagpur into two parts. Ground floor, garage, garden and out house of her residential bungalow were given to her son--assessee while the first floor with staircase of the residential bungalow was given to her other son, Shri P.M. Moghe. Shri P.M. Moghe expired on March 20, 1996. He made a will and bequeathed his share, i.e., the first floor premises mentioned supra excluding the undivided share of land in the name of his sisters, viz., Mrs. Wadekar, Mrs. Sinha and Mrs. Kale. The assessee then purchased construction of the first floor for Rs. 90,000. This sale price did not include the value of the undivided share of land on which bungalow was built. As per clause No. 7 of the said will of Kamlabai Moghe, assessee, did not receive property absolutely. Kamlabai Moghe had provided a share for her daughters, i.e., sisters of the assessee if the assessee or his brother does not have a son alive at the relevant time. This clause is not in dispute. In that event she gave life interest to her two daughter-in-laws and it was thereafter to go to her daughters. The assessee had only one daughter while his brother, P.M. Moghe, had one son and three daughters. The said son, of P.M. Moghe, expired in the year 1985, i.e., before the death of Kamlabai Moghe. The assessee, therefore, received property with clause providing overriding title in favour of his three sisters. In this situation, the assessee decided to pay Rs. 15 lakhs each to his three sisters so that in future they should not claim any right in the property. He also paid an amount of Rs. 5 lakhs each to his three nieces, i.e., daughters of the late brother, P.M. Moghe. Those three nieces are Mrs. Deo, Ms. Moghe and Mrs. Jathar. Thus, he paid an amount of Rs. 45 lakhs + 15 lakhs, total amount of Rs. 60 lakhs and a family settlement was, accordingly, reduced into writing. The assessee, after the sale of the said property claimed an amount of Rs. 60 lakhs under section 49 of the Act and deducted it while working out capital gains. The assessee also invested an amount of Rs. 22 lakhs in Rural Electrification Corporation Limited Bonds (REC Bonds) and sought its deduction under section 54EC of the Act. The Assessing Officer does not accept these claims and the assessee, therefore, approached the Commissioner of Income-tax (Appeals). On November 4, 2010, the Commissioner of Income-tax (Appeals) partly allowed his appeal and the claim towards amount of Rs. 5 lakhs each, i.e., total Rs. 15 lakhs paid to three nieces was not accepted. Similarly, addition of Rs. 20 lakhs made under section 69 of the Income-tax Act by the Assessing Officer was sustained. However, the claim of the assessee for deducting the amount of Rs. 15 lakhs each paid to the three sisters under section 48(i) and an amount of Rs. 22 lakhs towards the REC Bonds in terms of section 54EC was accepted.

The assessee filed I.T.A. No. 9/NAG/2011 while the Revenue filed I.T.A. No. 20/Nag/2011 against this adjudication. The Income-tax Appellate Tribunal by the impugned order dated January 23, 2013, dismissed both the appeals. Thus, the Income-tax Department is before this court challenging the dismissal of its appeal. It has raised two questions mentioned supra as substantial questions of law.

Shri Parchure, learned counsel submitted that the payment made to the sisters was not necessary and it cannot be treated as cost for acquiring the title to the property. It is not an expenditure which can be connected with the transfer of property. He has taken us through the reasons recorded by the Assessing Officer as also by the Commissioner of Income-tax (Appeals) and by the Income-tax Appellate Tribunal for the said purpose. In so far as the claim under section 54EC of the Act is concerned, he submits that the amount has not been invested within the prescribed period of six months and as such the purchase of REC Bonds could not have been looked into and section 54EC of the Act was not applicable in the present facts.

Shri Bhattad, learned counsel, on the other hand, submits that in view of the will of the late mother, Smt. Moghe, and, thereafter, the will of P.M. Moghe, three sisters had a right in the property and without extinguishing it or without providing for its adjustment, the assessee could not have sold the property. As such, the amount of Rs. 45 lakhs paid to the three sisters is correctly found to be an expenditure incurred in connection with the transfer of property. He submits that the issue has been correctly appreciated by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal has upheld it. The arrangement worked out by the three sisters and brothers as also the three daughters of the deceased, Shri P.M. Moghe, is bona fide one and the Revenue, therefore, cannot question it. The order of the Income-tax Appellate Tribunal does not give rise to any substantial question of law in this connection and, hence, the appeal to that extent is liable to be dismissed.

In so far as the investment under section 54EC of the Act is concerned, Shri Bhattad, learned counsel, points out that, vide cheque issued on January 24, 2007, REC Bonds were purchased on January 27, 2007. The assessee had received the sale consideration on July 7, 2006, and the period of six months available for such investment, therefore, expired on January 6, 2007. From that date onwards till January 24, 2007, REC Bonds were not available, as such the purchase, vide cheque dated January 24, 2007, is in accordance with law. He has invited our attention to the provisions of section 54EC of the Act to urge that the said provision even contemplates this situation and enables the extension of time for purchase of such bonds. He has placed reliance upon a Division Bench judgment of this court in Income Tax Appeal No. 3731 of 2010 decided on July 27, 2012 (CIT v. Cello Plast).

The facts noted supra show a provision in will by the original owner and the mother of the assessee, Smt. Kamlabai Moghe, which gave only the ground floor to the assessee. The first floor was given to his brother, Shri P.M. Moghe. Shri P.M. Moghe was not alive when the property was sold on July 7, 2006, for Rs. 1,30,00,000. Smt. Kamlabai had provided an overriding title in favour of her daughters, i.e., three sisters of the assessee. Kamlabai expired on May 18, 1988, and her will dated December 17,1978, became effective. The owner of first portion Shri P.M. Moghe had a son who expired in 1985, i.e., before death of Kamlabai. Thus, on the date of death of Kamlabai, P.M. Moghe had only three daughters surviving him. Shri P.M. Moghe in turn made a will and bequeathed is share in the name of his sisters. The assessee only had one daughter. Clause No. 7 in the will dated December 17, 1978, executed by Smt. Kamlakar is reproduced in paragraph 4 of the assessment order. It reads as under:

"7. The house is apportioned between Shri Purushottam and Shri Kamlakar as detailed above and, accordingly, they will become the owner of their respective portions. Each one will take care of his portion and will maintain the said property. The portion owned by each of them can be sold to third party for Rs. 50,000. No one out of these two sons should mortgage his portion without the consent of other son. Finally, I sincerely desire that this property which is constructed by my husband, Dr. Mahadeo Atmaram Moghe, out of his hard earned money should go to only my two sons, namely, Shri Purushottam and Shri Kamlakar and their sons. If anybody out of both the sons does not have son or if son is not alive, then his portion will go to the other brother. If both of them do not have any son and if their son is not alive, then my daughter-in-law, Mrs. Usha, w/o. Purushottam Moghe and Mrs. Leela, w/o. Kamlakar Moghe, will enjoy the property. But they will never get ownership of property. My daughters-in-law will not have any right to mortgage, sale or gift such property. This property should be given to my legal heirs - two sons, their sons or to my daughters. On this condition, this property is apportioned by me by this will."

This situation, therefore, shows that after the expiry of Shri P.M. Moghe on March 20, 1996, the assessee and his three daughters were faced in a peculiar position. They resolved the situation and a family settlement was reduced into writing. It was agreed that at the time of sale, each sister shall be given Rs. 15 lakhs and each niece shall be given Rs. 5 lakhs. Accordingly, when the property was sold on July 7, 2006, this family settlement has been given effect to. It is, therefore, obvious that in the absence of such family settlement and payment, the sale of property on July 7, 2006, by the assessee could not have materialised. The Commissioner of Income-tax (Appeals) in the appeal filed by the assessee has not accepted the payment of Rs. 5 lakhs each given to three nieces and that finding has been maintained even by the Income-tax Appellate Tribunal. The assessee has not questioned it in further appeal. As such, the only question is whether the amount of Rs. 45 lakhs paid to his sisters has been rightly accepted as expenditure in connection with the transfer of property. The sisters had a title in the property and without their co-operation there could not have been any sale. In this situation, we do not find any error in the concurrent findings reached by the Commissioner of Income-tax (Appeals) as also by the Income-tax Appellate Tribunal. In the light of the arguments advanced before us, we find that question No. 1 attempted to be raised by the Revenue before us does not arise here for determination as the substantial question of law.

Section 54EC of the Act needs to be looked into while considering the second question sought to be raised by the Revenue. A substantive provision under section 54EC(1) mandates investment within a period of six months after the date of transfer. Its sub-section (3) Explanation (b) defines long-term specified assets for making investment for the period from April 1, 2006, till March 31, 2007. The National Highway Authority Bonds and bonds issued by the Rural Electrification Corporation Limited are specified to be such assets. The assessee has transferred the premises on July 7, 2006, and, therefore, was duty bound to invest within six months, i.e., by January 6, 2007. Thus, statutorily, he had time of six months to make investment and the fact that he did not make this investment at any time during this period when bonds were available is, therefore, not relevant. The law gives the assessee right to choose. Here, the assessee wanted to invest in the REC Bonds and has in fact invested in those bonds on January 24/27, 2007. His specific stand that bonds were not available during this period, is not found to be incorrect or false by any of the authorities.

A show-cause notice dated December 3, 2009, was issued to the assessee in connection with this investment and to it the assessee replied on December 15, 2009, stating that the issue No. VI of the said bonds was on top from July 1, 2006, to August 2, 2006. Issue No. VIA opened on January 22, 2007, and the assessee who was waiting for making investment in the REC Bonds only, invested Rs. 22 lakhs on the opening date, i.e., on January 22, 2007. It is claimed that the assessee was thus prevented by reasonable cause from making investment within six months. Though the issue has been looked into by the Assessing Officer, he has not found the statement that the issue No. VIA opened on January 22, 2007, incorrect.

The Division Bench of this court at Bombay, while deciding Income-tax Appeal No. 3731 of 2010 (supra) has considered almost identical facts. Those facts are given in paragraph 9 of the said judgment. The period of six months in the said matter expired on September 21, 2006. The bonds were purchased by the assessee on January 31, 2007. As this investment was beyond the period of six months, the Assessing Officer disallowed it on September 26, 2008. The Commissioner of Income-tax (Appeals) by the order dated February 5, 2009, maintained this order. The Income-tax Appellate Tribunal on June 19, 2010, allowed the assessee''s appeal. This order of the Income-tax Appellate Tribunal was questioned before the High Court. In paragraph 17, this court has observed. "Thus, the availability of the bonds only for a limited time during this period cannot prejudice the assessee''s right to exercise the same up to the last date. The bonds were admittedly not available except during the said period". More reasons are given in paragraph 21 by the Division Bench.

Shri Parchure, learned counsel, has, however, argued that the bonds issued by the National Highway Authority of India were available and, hence, the assessee ought to have invested in those bonds within the stipulated period of six months. We find this contention difficult to accept. Section 54EC gives the assessee an option to invest either in bonds of the National Highway Authority of India or then in bonds of the Rural Electrification Corporation Limited. The said provision does not stipulate that the investment has to be in any bond whichever is available. Both bonds carry different benefits and, hence, deliberately Parliament has given option to the assessee to invest in any one out of two as per his choice. In a given case, the assessee may choose to invest in both. However, discretion is conferred upon the assessee, who is the best judge of his own needs and interests. He cannot be forced to invest in the bond whichever is available because the period of six months is about to expire. This option or discretion given by Parliament to the assessee needs to be honoured here. If the said option was available when the period of six months was to expire and could have been expressed by the assessee when the said period was about to expire, the situation would have been otherwise. In the present matter, the REC Bonds became available in VIA issue on January 22, 2007, and, therefore, investment made therein cannot be said to be after an undue or unreasonable delay. The investment has been made at the earliest possible opportunity. We, therefore, do not find that question No. 2 sought to be raised also arises in the present matter as a substantial question of law. In the light of this discussion, we find no merit in this appeal. It is, accordingly, dismissed. However, without any orders as to costs.