The Commissioner of Income Tax and The Income Tax Officer vs Sri P.L. Mohan

B.V. Nagarathna, J.—The revenue has preferred this appeal by challenging the order dated 30.5.2005 passed in ITA. No. 252/Bang/2004 by raising the following substantial questions of law:

i) Whether the Tribunal was correct in holding that a sum of Rs. 5,50,000/- loan amount which was discharged by the assessees family can be treated as cost of acquisition of property bearing Sy. No. 36, Arekere Village, Begur Hobli, Bangalore South Taluk, u/s 48 of the Act when the said loan had been availed of to carry on business activity of the assessees family.

ii) Whether the Tribunal was correct in holding that a sum of Rs. 14,15,000/- an amount paid to Ashraff and Ors. in discharge of a liability of Rs. 8 lakhs received under an agreement to sell the property bearing No. 36, Arekere Village, Begur Hobli, Bangalore south Taluk, can be treated as an expenditure and deducted before computing the capital gains tax.

iii) Whether the tribunal is correct in holding that the 8 sites independently sold to different parties by the assessee will all be entitled to exemption u/s 54F of the Act instead of the 1st site as held by the Assessing Officer and confirmed by he Appellate Commissioner.

The facts leading to the filing of this appeal are, that the assessee who is in the status of an individual, for the assessment year 1997-98, filed his return of income which was processed u/s 143(1)(a) of the Income Tax Act. The assessee had claimed certain expenses as allowable before computing the capital gains tax. The Assessing Officer found that certain income had escaped assessment and notice u/s 148 of the Act was issued by holding that there had been escapement of income tax, he reopened the assessment by issuing a notice u/s 148 of the Act. On receipt of reply, the Assessing Officer found that the assessee had 1/8th share in the immovable property bearing No. 36 of Arakere Village, Begur Hobli, Bangalore South Taluk, totally measuring 1 acre 38 guntas and that he was co-owner along with his brothers, mother and others. According to the assessee, in respect of the said property, an expenditure of Rs. 5,50,000/- had been incurred by him and his family members, towards discharge of a mortgage debt and the said amount was claimed towards cost of acquisition of the property and for improvement thereon. According to the assessee, on 14.4.1992, the said property had been divided by metes and bounds into eight different sites. With regard to the claim of deduction of Rs. 5,50,000/- in respect of the share of the assessee is concerned, the Assessing Officer did not allow the said deduction. However, the Commissioner of Appeals as well as the Tribunal granted the said deduction.

As far as the agreement entered into with one Sri. Ashraff and others is concerned, it is the case of the assessee that a sum of Rs. 14,15,000/- had been paid as compensation on the said agreement as the same had not been concluded and for cancellation of the said agreement. The deduction by way of expenses while calculating tax on capital gains in respect of the said sum of Rs. 14,15,000/- was also sought. The Assessing Officer did not allow the said expenses. Also, the disallowance of expenses as deduction was also confirmed by the Commissioner of Appeals, but the tribunal has allowed the said deduction as expenses.

Further exemption u/s 54 of the Act was claimed with regard to reinvestment made out of the sale proceeds of the property in the matter of purchase of a residential property. The Assessing Officer had disallowed the said exemption u/s 54F which was also confirmed by the First Appellate Authority, but the Tribunal had granted the relief u/s 54F of the Act. Being aggrieved by the said order of the tribunal, the revenue has preferred this appeal by raising the aforementioned substantial questions of law.

We have heard the learned Counsel for the revenue and the learned Counsel for the assessee and perused the material as well as the relevant sections.

With regard to the claim of deduction of Rs. 5,50,000/- is concerned, it is the contention of the learned Counsel for the respondent-assessee that the said amount had to be deducted in view of Section 48 of the Act, as the amount was an expenditure for the purpose of improvement of the said property and this aspect has not been considered by the Assessing Officer and that the Tribunal had rightly granted the relief by applying Section 48 of the Act. On a reading of Section 48 as well as keeping in mind the facts of the present case, wherein the erstwhile HUF had borrowed a loan from Bank of Baroda and thereafter, pursuant to a compromise, a sum of Rs. 5,50,000/- was repaid as full and final settlement of the outstanding debt by virtue of compromise in O.S. No. 905/84. The Assessing Officer as well as the other authorities had to consider as to whether the said amount which had been paid by the assessee along with his brothers and mother could be claimed as an expenditure towards cost of acquisition or improvement of the property. Since there has been no application of mind by all the three authorities on this aspect of the matter, we find that the question has to be considered afresh by the Assessing Officer in the light of the facts of the present case and the scope of Section 48 of the Act.

With regard to the expenditure of Rs. 14,15,000/- claimed by the assessee as the money paid to one Ashraff and others for the purpose of cancellation of the agreement entered into with them and as to whether the same can be claimed as a deduction before computing of capital gains tax is concerned, we find that the Assessing Officer did not allow the said deduction by holding that the same cannot come within the scope of Section 48 of the Act as the same has no bearing with the acquisition and improvement of the property. Except stating this aspect, there has been no discussion as to whether the said expenditure can come within the scope of improvement of the property. The First Appellate Authority though confirmed the order on this aspect, the tribunal nevertheless granted relief by allowing deduction of Rs. 14,15,000/- by way of expenditure. But there has been no application of mind as to whether the compensation paid to Ashraff and others could be treated as cost for improvement of the property. Therefore, on this aspect of the matter also, the Assessing Officer has to reconsider the same and arrive at a conclusion in accordance with law by keeping in mind the position of law as well as Section 48 of the Act.

The next aspect is with regard to exemption u/s 54F of the Act. In this context, the submission of the learned Counsel for the respondent is that the two brothers viz., P.L. Mohan, the assessee herein and P. Ramesh had purchased two portions of the property having common katha number and that it was not two separate properties which had been purchased by them even though there were two separate sale deeds. It is his contention that the purchase was of one residential property and therefore, the benefit u/s 54F has to be extended to the assessee in this appeal. We find that the Assessing Officer has disallowed the exemption u/s 54F by holding that there were two separate sale deeds and therefore, there were two separate residential properties in respect of which Section 54F would not apply. The Assessing Officer did not apply his mind to the fact that the property had only one number and that the schedule of the properties has also not been considered in order to come to a conclusion whether only one residential property was purchased or two separate properties were purchased.

In view of the aforesaid reasons assigned by us, we deem it proper that the matter be remanded back to the Assessing Officer to reconsider the issues raised in the substantial questions of law in the light of the observations made above and in accordance with law. Hence, the substantial questions of law raised in this appeal need not be answered at this stage.

In the result, the matter is remanded back to the Assessing Officer to reconsider the issue of giving exemption u/s 54F of the Act by taking into consideration the sale deeds, the schedules of the properties and other details and then to arrive at a finding as to whether the benefit of exemption is allowable or not.