IN THE ITAT HYDERABAD BENCH ‘A’
J.V. Krishna Rao
Deputy Commissioner of Income-tax, Circle 3(3), Hyderabad
IT APPEAL NOs. 1866 & 1867 (HYD.) OF 2011 [ASSESSMENT YEAR 2008-09]
D. Karunakara Rao, Accountant Member
These two appeals filed by the assessees, who are related to each other, are directed against separate orders of the Commissioner of Income-tax (Appeals)-IV, Hyderabad both dated 30.9.2011 for the assessment year 2008-09. Since common issues are involved, these two appeals are being disposed off together by this common order for the sake of convenience.
2. Effective grounds of appeal of the assessee, as taken from appeal ITA No. 1866/Hyd/2011, read as follows-
“(1) The learned Commissioner of Income-tax(Appeals) is not justified in sustaining the disallowance of Rs. 50,05,530 made by the Assessing officer.
(2) The learned First Appellate Authority is not justified in sustaining the disallowance of the deduction U/s. 54F in relation to the amounts deposited in capital accounts scheme out of the borrowed funds.
(3) The learned First Appellate Authority failed to appreciate the fact that the provisions of U/s. 54F do not require the same sale proceeds to be utilized to claim deduction U/s. 54F.
(4) The learned Commissioner of Income-tax (Appeals) is not justified in not following the decision rendered by the jurisdictional Income Tax Appellate Tribunal in the case of Muneer Khan v. ITO Ward 7(2), Hyderabad 41 SOT 504 Hyd.
In ITA No. 1867/Hyd/2011 filed by Smt. J. Sri Lakshmi also, but for the amount involved in ground No.1 above, which in that case is Rs. 32,95,525, grounds taken by the assessee are identical. Thus, the only issue involved in both these appeals relates to disallowances made out of the assessees’ claims for relief under S. 54F of the Income-tax Act, 1961.
3. Brief facts of the case are that the assessees, as taken from ITA No. 1866/Hyd/2011, are that the assessee, Shri J.V. Krishna Rao, sold 26,200 shares of M/s. Swagath Seeds P. Ltd. @ Rs. 396.46 per share for a total consideration of Rs. 1,03,87,252/- during the year. After deducting the indexed cost, the assessee had shown long term capital gains at Rs. 99,96,867. The assessee claimed the entire capital gains as exempt under S. 54F, on the ground that he has deposited the net consideration with State Bank of India, under Capital Gains Account Scheme, 1988. On verification of details, the assessing officer noticed that the assessee’s deposit in the ‘Capital Gains Accounts Scheme’ included borrowed funds to the extent of Rs. 52,01,000/- It was submitted by the assessee before the assessing officer that the said funds had been borrowed by him from Shri J.V. Laxman Rao for depositing the same under the Capital Gains Account Scheme, 1988. On consideration of the provisions of the Act, the assessing officer opined that as per sub-section (1) and sub-sec. (4) of S. 54F of the Act, in order to avail the benefit under S. 54F, an assessee is required either to purchase a residential house out of the sale proceeds of the long term capital asset within a period of one year before or two years after the date on which transfer took place, or within a period of three years after that date construct a residential house. The assessing officer further noted that when the sale proceeds or the capital gain accruing to the assessee is not wholly appropriated towards the purchase of the residential house within the specified period, he is required to deposit the same in the Capital Gains Account Scheme, 1988, before the due date of filing of return of income. She felt that the residential property should either be acquired or constructed, or else the unappropriated proceeds should be deposited in such account as such or the deposit should be made out of personal funds of the assessee. She opined that if the residential house is acquired or constructed or if the deposits in the specified account are made out of borrowed funds, the assessee would not be eligible for deduction u/s. 54F. In this view of the matter and placing reliance on the decisions of the Mumbai Benches of the Tribunal in Milan Sharad Ruparel v. Asstt. CIT  27 SOT 61, the assessing officer concluded that since the net consideration in the instant case had not been so utilized or appropriated by the assessee, the exemption claimed u/s. 54F was required to be curtailed to the corresponding amount utilized and that the borrowed funds of Rs. 52,01,000 did not deserve consideration for exemption u/s. 54F of the Act.
4. On appeal, the CIT(A) confirmed the disallowance made by the assessing officer out of the assessee’s claim for exemption under S. 54F of the Act, in respect of long term capital gains realised during the year.
5. But for the number of shares and amounts involved, facts involved in the case of Smt. Sri Lakshmi [IT Appeal No.1867 (Hyd.) of 2011] are identical to those discussed above. In her case, number of shares of M/s. Swagath Seeds P. Ltd. sold are 78,000 and sale consideration received on sale of the said shares at Rs. 396.46 per share was Rs. 3,09,23,880, and the long term capital gains disclosed after deducting incidental expenditure, etc. is Rs. 3,03,77,343. Out of this amount of Rs. 3,03,77,543/-, the assessing officer noticed borrowed funds to the extent of Rs. 33,46,333/- having been deposited by the assessee in the Capital Gains Account Scheme, 1988, which was claimed to have been borrowed by the assessee from Shri J.V. Laxman Rao. In these facts of the case, the assessing officer restricted the assessee’s claim for relief under S. 54F to the amount of Rs. 2,70,82,018, disallowing the balance claim of Rs. 32,95,555 invested in the Capital Gains Account Scheme, 1988 by borrowing the same from Shri J.V. Laxman Rao. On appeal, the CIT(A) upheld the disallowance made by the assessing officer.
6. Aggrieved by the disallowances out of the claims for exemption under S. 54F of the Act in respect of capital gains realized by the assessees, sustained by the CIT(A), assessees preferred these second appeals before us.
7. At the outset, the learned counsel for the assessee submitted that the law permits utilization of capital gains received within the specified time for other purposes, and that the assessee may use such funds for other purposes and may find sources from other sources for investments qualifying for exemption under S. 54F of the Act, whenever the same are made within the time specified by the statute. In support of this proposition, he reiterated the contentions urged before the lower authorities and placed reliance on the decision of the Hyderabad Bench of the Tribunal in the case of Muneer Khan v. ITO  41 SOT 504, which according to him squarely covers the issue in favour of the assessee. He also placed reliance on the decisions of the Delhi Bench decision of the Tribunal in the case of Sita Jain v. Asstt. CIT [IT Appeal Nos. 4754, 4755 & 5036/Del/10 dated 20.5.2011]; and of the Mumbai Bench of the Tribunal in the case of Bombay Housing Corpn. v. Asstt. CIT  81 ITD 545; and of the Mumbai Bench of the Tribunal in Mrs. Prema P. Shah v. ITO  100 ITD 60, duly furnishing a copy each thereof in the paper-book filed before us.
8. The Learned Departmental Representative, per contra, strongly relied on the orders of the Revenue authorities.
9. We heard both the parties and perused the orders of the lower authorities. We have also perused the case-law relied upon by the learned counsel for the assessee. The point in dispute before us is when the assessee undisputedly earned capital gains and when the deposited equivalent amount in the bank under Capital Gains Accounts Schemes, whether the assessing officer is justified in denying benefit of S. 54F on the ground that part of such deposit has source in borrowal of funds and part of such gains are diverted elsewhere for other purposes. On this, we find that this issue is covered by the decision of the Hyderabad Bench of Muneer Khan’s case (supra), wherein it has been held that money has no colour and all that is required to be eligible for relief under S. 54F of the Act is compliance with the condition of investment within the specified time. We also find support for this view from the decision of the Delhi Bench of the Tribunal in the case of Sita Jain (supra), wherein it was held that one to one correlation between the sale proceeds of agricultural lands and utilisation of such proceeds for purchase of land is not necessary. In the case of Bombay Housing Corpn. (supra), the Mumbai Bench of the Tribunal held that even if an assessee borrows required funds and satisfied conditions relating to investment in specified assets, he is entitled to exemption. The later decision of the Mumbai Bench of the Tribunal in the case of Mrs. Prema P. Shah (supra) is also to the same effect, and it in fact followed the earlier decision of the Mumbai bench in the case of Bombay Housing Corpn. (supra). We have perused the decision of the Hon’ble Kerala High Court in the case of CIT v. V.R. Desai  197 Taxman 52/ 8 taxmann.com 185, relied upon by the learned CIT(A), and find that it is distinguishable on facts in as much as in that case the assessee has failed to make investment in eligible asset within the specified period, and therefore, in our opinion, the CIT(A) erred in following that decision in the impugned order.
10. In the light of the above discussion, following the Hyderabad Bench of the Tribunal in the case of Muneer Khan (supra) and also the other decisions of the Tribunal relied upon by the learned counsel for the assessees before us, we hold that the capital gains earned by the assessee can be utilised for other purposes, and as long as the assessee fulfils the condition of investment the equivalent amount in the asset qualifying for relief under S. 54F, by securing the money spent out of the capital gains from other sources available to it either by borrowal or otherwise, it is eligible for relief under S. 54F of the Act in respect of the entire amount of capital gains realised. In the circumstances, we find merit in the contentions of the assessees that inasmuch as they have made deposits of the amounts equivalent to the capital gains realized in the Capital Gains Investments Accounts, even though part of those capital gains have been utilized for other purposes, borrowing amounts equivalent to such utilised funds from Shri J.V. Laxman Rao. The assessees are entitled to relief under S. 54F of the Act, as ultimately the assessees deposited the requisite amounts in the Capital Gains Accounts Schemes for exemption under S. 54F of the Act within the time stipulated by the statute. We accordingly, set aside the orders of the lower authorities on this issue, and direct the assessing officer to delete the disallowance made by the assessing officer in this regard. Grounds of the assessees in these appeals are consequently allowed.
11. In the result, both the appeals of the assessees are allowed.