Income Tax OFFICER vs S. M. LAKSHMANA PILLAI.

This appeal is by the revenue and is against the order of the A. A. C. cancelling a penalty imposed u/s 271(1) (c) of Rs. 13,909. The A. A. C.

has written an elaborate order setting out in detail the facts and the law on the point. It is, therefore, superfluous for me to dwell in detail since the

reasoning of the A. A. C. could not be assailed with reference to any interpretation of statutory provisions or otherwise by any argument on behalf

of the Revenue.

Briefly put, the assessee sold jewellery as under :-

15-2-1978 for Rs. 26,945

4-3-1978 for Rs. 30,656

8-3-1978 for Rs. 20,448

Rs. 78,049

The assessee made a fixed deposit with the State Bank of India, Tuticorin on 9-3-1978 vide FD No. 653499 of Rs. 1 lakh. Thus, more than the

full consideration received was placed in a fixed deposit.

In the return filed, capital gains were neither shown nor any capital gain was brought to tax in the assessment of the year 1978-79.

In the next year, in the statement filed, the assessee had stated that a loan had been availed of against the fixed deposit. The I. T. O. took the

view that the assessee forfeited the exemption from capital gains and what is more, the non-furnishing of particulars in the assessment year 1978-

79 was wanton and merited imposition of penalty. He, therefore, imposed a penalty of Rs. 13,909 for this year of course mentioning that the

assessee had co-operated with the Departmental in furnishing the particular and return at a later stage and the concealment had been detected from

account copy filed by the assessee for the next assessment year which indicated, according to the I. T. O., a change of mind on the part of the

assessee after committing the act of concealment.

The A. A. C. has cancelled the penalty on the short ground that the fixed deposit was made on 9-3-1978. At the time the fixed deposit was

made, there was no bar in law to the taking of any loan against such fixed deposit which would have resulted in the assessee being disentitled to the

exemption from capital gain. The Explanation which was introduced with effect from 1-4-1978 to visit an assessee with the withdrawal of

exemption where loan is taken, reads as under :-

Where the assessee deposits after the 27th day of April, 1978, the full value of the consideration or any part thereof received or accruing as a

result of the original asset in any new asset, being a deposit referred to in clause (vi) of Explanation 1 below sub-section (1), and such assessee

takes any loan or advance on the security of such deposit, he shall be deemed to have converted otherwise than by transfer, such deposit into

money on the date on which such loan or advance is taken.

It is clear the Explanation applies only to deposits made after the 27th April, 1978. In the present case, the deposit was made on 9-3-1978 and

the assessees case goes outside the purview of the Explanation. The exemption granted could have been withdrawn in terms of section 54E (2)

only ""where the new asset is transferred, or converted (otherwise than by transfer) into money, within a period of three years from the date of its

acquisition, the amount of capital gain arising from the transfer of the original asset not charged u/s 45 on the basis of the cost of such new asset as

provided in clause (a) or, as the case may be, clause (b), of sub-section (1) shall be deemed to be income chargeable under the head ""Capital

gains"" relating to capital assets other than short-term capital assets of the previous year in which the new asset is transferred or converted

(otherwise than by transfer) into money."" The language of the section is explicit and unambiguous to exclude from its purview taking of a loan

against a fixed deposit. What is more, the Boards Circular No. 229 dated 9-8-1977 stated in para 17.3 (to reproduce from the order of the A. A.

C.) :

It may be noted that the provisions of sub-section (2) of section 54E for forfeiture of capital gains will not be attracted in cases where the

specified asset is pledged as a security without effecting a transfer of the asset. Cases where a specified asset in the form of fixed deposit with any

bank referred to in clause (vi) of paragraph 17.1 is used as a security for obtaining a loan or overdraft from the bank, will also not fall within the

expression converted (otherwise than by transfer) into money.

The language of the circular is clear. The exemption got by the assessee by making the fixed deposit on 9-3-1978 could not withdrawn on the

ground that he took a loan against the fixed deposit. He continued to be entitled to the exemption. Therefore, not only there has been no

concealment on the part of the assessee but even the bringing to tax of the amount as capital gains for assessment purposes is itself contrary to the

specific statutory provision. The conclusion of the A. A. C. that the penalty has to be cancelled is unexceptionable and is accordingly upheld.

Inasmuch as, the facts in the present case have been processed at two appellate levels and it would appear that bringing the amount of capital

gains to tax itself is now seen to be contrary to the statutory provision. It is a case of hardship. In an appeal in penalty proceedings, the question of

giving any directions pertaining to the assessment cannot arise. However, there have been cases in the past where, to quote from the decision of

the Madras High Court in Seth Lunidaram Tikamdas Vs. Commissioner of Income Tax, , ""taking note of this hardship"", the Tribunal satisfied its

judicial conscience by expressing a pious hope that ""the department should consider the case of the assessee sympathetically if and when any

application for sympathetic consideration is made to it"", which was endorsed by the Madras High Court in the following terms :

The learned counsel for the assessee says that he has already filed a petition for settlement before the Central Board of Direct Taxes. If that is so,

the Board will consider the case of the assessee sympathetically and we endorse the observation made by the Tribunal in its order which has been

extracted earlier.

It is hoped in the present case also, should the assessee make any application for consideration for exemption of the amount taxed from

assessment, the matter, even though belated, will be considered with sympathy. The result is the appeal of the department would fall to be

dismissed.