IN HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 210 of 2019 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE J.B.PARDIWALA Sd/- and HONOURABLE MR.JUSTICE A.C. RAO Sd/- 1 Whether Reporters of Local Papers may be allowed YES to see judgment ? 2 To be referred to Reporter or not ? YES 3 Whether their Lordships wish to see fair copy NO of judgment ? 4 Whether this case involves substantial question NO of law as to interpretation of Constitution of India or any order made thereunder ? HITESH MANSUKHLAL BAGDAI Versus ASSISTANT COMMISSIONER OF INCOME TAXCENTRAL CIRCLE- 1 Appearance: MR DARSHAN R. PATEL for Appellant(s)No. 1 MR M.R.BHATT, SR.ADVOCATE WITH MRS. MAUNA M. BHATT for Opponent(s)No. 1 CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA and HONOURABLE MR.JUSTICE A.C. RAO Date: 23/07/2019 ORAL JUDGMENT (PER: HONOURABLE MR.JUSTICE J.B.PARDIWALA) 1. This Tax Appeal under Section 260A of Income Tax Act, 1961, is at instance of assessee and is directed against Page 1 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT order passed by Income Tax Appellate Tribunal, Rajkot Bench, Rajkot, dated 11th December 2018 in IT(SS)A No.39/RJT/2013 for Assessment Year 2004-05. 2. This Tax Appeal came to be admitted vide order dated 25th June 2019 on following substantial question of law : Whether on facts and in law, Tribunal has substantially erred in law in confirming disallowance of Rs.14,78,092/- u/s.54B for year under consideration ? 3. facts giving rise to this Tax Appeal, as stated in memo of Appeal, are as follows : appellant is individual being regularly assessed to tax by income tax office at Rajkot. appellant is having income from business of petrol pump and income from other sources for year under consideration. appellant filed its original return of income u/s 139(1) on 29.10.2004 declaring total income at Rs.3,96,470/- and agricultural income (for rate purpose) of Rs.1,82,370/-. There was search action u/s 132 of Income Tax Act, 1961 at premises of appellant on 15.9.2009 during course of which certain material was found and impounded. statements of appellant were also recorded u/s 132(4) during course of search action as well as u/s 131(1A) during post search. Page 2 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT notice u/s 153A dated 10.6.2010 was issued on appellant requiring him to file return of income. appellant filed his return of income in response to notice u/s 153A on 16.7.2010 declaring total income of Rs.7,72,353/- and agricultural income (for rate purpose) of Rs.1,82,370/-. Assessing Officer has finalized assessment u/s 153A(a) on 28.12.2011 determining total income of appellant at Rs.22,50,445/- and agricultural income (for rate purpose) at Rs.1,82,370/-. Assessing Officer has made addition of Rs.14,78,092/- on account of long term capital gain on sale of agriculture land by withdrawing exemption u/s 54B. During year under consideration, appellant sold his agriculture land (being capital asset) situated at Raiya Survey No.312 on 1.12.2003 for consideration of Rs.20,00,000/- and accordingly, long term capital gain arising on sale thereof was chargeable to tax. appellant however, claimed exemption u/s54B from Long Term Capital Gain arising on sale of aforesaid capital asset as he purchased new agriculture land (not being capital asset) situated at Survey No.412, Khirsara on 4.10.2004 for consideration of Rs.15,00,000/-. During course of assessment proceedings, Assessing Officer observed that appellant has subsequently sold new asset vis. agriculture land at Khisara on 27.5.2005 i.e. within period of three years from its purchase and accordingly, he Page 3 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT asked appellant to show cause as to why exemption on capital gain should not be disallowed as per provisions of section 54B(ii). In response, appellant vide letter dated 6.10.2010 filed his reply to above show cause notice. However, Assessing Officer was not satisfied with reply furnished by appellant and therefore, he made addition of Rs.14,78,092/- disallowing exemption u/s 54B of Income Tax Act, 1961 claimed by appellant as long term capital gain to income of appellant for year under consideration. 4. assessee, being dissatisfied with order passed by Assessing Officer, preferred appeal before CIT(A). CIT(A) dismissed appeal and thereby affirmed order passed by Assessing Officer. assessee, being dissatisfied with order passed by CIT(A), preferred further appeal before Income Tax Appellate Tribunal, Rajkot Bench, Rajkot. Appellate Tribunal, by impugned order, dismissed appeal and thereby affirmed order passed by CIT(A). Being dissatisfied with order passed by Appellate Tribunal, assessee is here before this Court with present Tax Appeal. SUBMISSIONS ON BEHALF OF APPELLANT- ASSESSEE : 5. Mr.Darshan Patel, learned counsel appearing for appellant-assessee, has tendered his written submissions. written submissions are as under : Page 4 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT A. Interpretation of Section 54B : 1. Appellant respectfully submits that Departmental Authorities have made gross error in misinterpreting provisions of Section 54B, thereby denying exemption claimed by Appellant. 2. Appellant respectfully submits that section 54B of Income-tax Act, 1961 is divided into 2 parts. First part deals with exemption of capital gains from transfer of Agricultural Land (Original Asset) and conditions thereto and Second part deals with computation of gain from transfer of Agricultural Land purchased to claim exemption u/s. 54B of act (New Asset). Thus First part deals with transfer of Original Asset and second part deals with transfer of New Asset. 3. Appellant respectfully states that w.r.t First Part i.e. Exemption of capital gain from transfer of agricultural land (Original Asset), there are several conditions, conditions are as under: a. Original Asset must be capital asset. If it is not capital asset there is no question of charging tax thereon as no capital gain is attracted on non-capital asset. b. Original Asset must be used for agricultural purpose by assessee or his parents for atleast 2 years, prior to its sale. c. capital gain earned from sale of Original Asset must be, invested in New Asset within 2 years from date Page 5 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT of sale of Original Asset. d. If amount of Capital Gain is equal to or less than cost of New Asset then, as per Section 548 (ii), Capital Gain shall not be charged under Section 45. 4. Appellant respectfully submits that w.r.t Second Part i.e. Computation of gain from transfer of New Asset, conditions are as under: a. This part is operational only if New Asset is transferred within period of 3 years from date of its purchase. If transfer of New Asset takes place after 3 years from date of its purchase, then section 54(1)(i) and 54(1)(ii) of act will have no application. b. This part is applicable for relevant year in which New Asset has been transferred. It has nothing to do with Original Asset and gain arising on Original Asset. c. If New Asset is transferred within period of 3 years then gain would be worked out as under: Sale price of New Asset : XXXX Less :Cost of acquisition of New Asset YYYY Add :Exemption claimed in respect of Original Asset ZZZZ -------- Gain.... AAAA d. gain so worked out as above, would be charged to tax in year in which New Asset has been transferred. Page 6 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT 5. Appellant respectfully submits that in present case, appellant had purchased Urban agricultural land (Capital Asset) on 25/10/2001 (AY 2002-03) for Rs.5,21,908/- (Original Asset), same was sold on 01/12/2003 (AY 2004-05) for Rs.20,00,000/- resulting into Capital Gain of Rs.14,78,092/-. Thereafter on 04/10/2004, (i.e. within 2 years from sale of Original Asset), Appellant purchased Rural agricultural land (New Asset) for Rs.15,00,000/- and thereby claimed exemption u/s. 54B of Act. Appellant sold New Asset on 27/05/2005 (AY 2006-07) for Rs.15,00,000/-. 6. Appellant respectfully submits that Assessing Officer denied claim of exemption u/s. 54B in AY 2004-05 by contending that in order to claim exemption u/s. 54B of act, New Asset must be Capital Asset and since Appellant sold New Asset within 3 years from date of purchase, exemption under Section 54B is to be withdrawn. Appellant respectfully submits that finding of Assessing Officer that New Asset sold has to be Capital Asset (para 3 of Assessment order @ pg. 20) is contrary to scheme of Act because as per Section 54B of Act, Assessee is required to purchase New Agricultural Land. Section does not state that New Land has to be Capital Asset. 7. Appellant respectfully submits that in view of provisions of section 54B of act, working of gain Page 7 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT would be as under: Sl. Particulars AY 2004-05 AY 2006-07 A. Capital Gains for Original Asset: 1. Sale Price of Original Asset 20,00,000/- Less : Cost of acquisition of 5,21,908/- Original Asset 2. Capital Gain 14,78,092/- 3. Exemption u/s.54B to 15,00,000/- extent Cost of New Asset 4. Capital gain chargeable to tax Nil B. Capital Gains for New Asset : 5. Sale Price of New Asset 15,00,000/- Less: Cost of acquisition of New 15,00,000/- Asset Add: Exemption claimed on 14,78,092/- transfer of Original Asset 6. Gain 14,78,092/- 8. Thus, Capital Gains is worked out at Rs.14,78,092/- for AY 2006-07. However, same cannot be taxed as New Asset is non-capital, asset within meaning of provision of section 2(14) of Act. 9. Appellant respectfully submits that if at all gain is to be taxed, it has to be in year of transfer of New Asset. Learned CIT(A) also confirms same in CIT(A) order (@ pg 50). B. Capital Gains to be charged on transfer of Capital Assets only: Page 8 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT 1. Appellant respectfully submits that Capital Gains can only be charged on transfer of Capital Asset. Since, new asset is not capital asset within meaning of Section 2(14), Capital Gains cannot be charged on transfer of New Agricultural Land situated in rural area as same is not covered under definition of Section 2(14), this fact is not denied by Revenue authorities, which is clearly evident from orders passed by learned Assessing Officer and Hon ble ITAT [para 5 (ii) at page 18, para 5 (iii) at page 19, para 5 (vi) at page 21 of assessment order, para 8 at page 64 of ITAT s order]. 2. Appellant respectfully submits that Hon ble Supreme Court has rejected SLP filed by Department in Commissioner of Income tax v. Venkateshwar Hospital reported at [2019] taxmann.com 283 (SC), whereby Hon ble Supreme Court has upheld finding of Hon ble Madras High Court by observing that since land in question 'fell for exclusion from definition of Capital Asset under Section 2(14), SLP filed by department was to be dismissed. In Commissioner of Income Tax v. Rajshibhai Odedra, reported at [2014] 42 taxmann.com 497 (Gujarat), Hon ble Gujarat High Court has dismissed appeal filed by Department by observing that since land in question was situated beyond 8 kms from municipal limits, no error has been committed by Learned Tribunal in not considering land in question as capital asset (para 3.4). Page 9 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT In Commissioner of Income Tax v. Shabbir Hussain Pithawala, reported at [2014] 50 taxmann.com 39 (Madhya Pradesh), Hon ble Madras High Court has also observed that Land was situated outside 8 kms from municipal limit in terms of approach by road, same would be entitled for deduction under section 54B. 3. Appellant respectfully submits that in Bharat s Taxation on Capital Gains, 7th Edition 2010, written by Dr.Girish Ahuja and Dr.Ravi Gupta, it has been observed that if agricultural land acquired by assessee is rural agricultural land, there will be no capital gain even if it is sold within period of 3 years because rural agricultural land is not 'Capital Asset'. (@ pg 282). In Sampath Iyengar s Law Of Income Tax, 12th Edition, 2016, it is stated that where land is situated outside notified periphery of 8 kms, capital gains thereon would not be assessable at all, so that question of applicability of Section 54B should not arise. (@ pg 6073). 4. Appellant therefore submits that since land in present case does not fall within definition of Section 2(14), capital gains cannot be charged on same. 5. Appellant further relies on Section 2(47), where in 'transfer' has been defined under Act. Appellant submits that transfer is always in relation to capital asset, and when asset is non-capital asset, capital gains cannot be charged on transfer of non-capital asset. Page 10 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT 6. Appellant respectfully states that even as per Section 45 of Act, any profits or gains arising from transfer of capital asset shall be deemed to be income of previous year in which transfer took place. Hence, in present case since New Asset was transferred on 27/05/2005, Capital gains, if any has to charged in year of transfer i.e. A.Y. 2006-07. 7. Appellant therefore submits that withdrawing of exemption under Section 54B is contrary to law and Assessee should be granted deduction under Section 54B of Act as New Land which was sold was rural agricultural land falling outside purview of Section 2(14). SUBMISSIONS ON BEHALF OF REVENUE : 6. Mr.M.R.Bhatt, learned senior standing counsel appearing for Revenue, has vehemently opposed both Appeals. Mr.Bhatt submitted that no error, not to speak of any error of law, could be said to have been committed by Appellate Tribunal in passing impugned order. According to Mr.Bhatt, all Revenue authorities have correctly interpreted provisions of Section 54B of Act, keeping in mind facts of present case. 7. Mr.Bhatt submitted that Section 54B of Act itself provides for consequences of new asset being transferred within three years of its purchase. If new asset is transferred by assessee within period of three years from date of its purchase, then cause of acquisition of new asset, for Page 11 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT purposes of determining capital gains arising on transfer thereof, will be determined as follows : (i) If amount of capital gains arose on transfer of original asset was greater than cost of new asset, then cost of new asset for computing capital gains will be nil. (ii) If amount of capital gain arose on transfer of original asset was equal to or less than cost of new asset, then cost of new asset for computing capital gains will be amount arrived after deducting capital gain from transfer of original asset from cost incurred for acquiring asset. 8. Mr.Bhatt submitted that principal argument canvassed on behalf of assessee that if agricultural land acquired by assessee is rural agricultural land, there will be no capital gain even if it is sold within three years, because rural agricultural land is not 'capital asset', is without any merit. According to Mr.Bhatt, if such argument is accepted, it will render Section 54B practically otiose. To put it in other words, according to Mr.Bhatt, entire object of exemption as provided under Section 54B of Act would get frustrated. Mr.Bhatt laid much stress on fact that one of objects of exemption under Section 54B of Act was stated to be to encourage cultivation or actual utilization of land for agricultural purposes. According to Mr.Bhatt, assessee would sell his urban agricultural land, and then, for purpose of capital gains, would invest in new asset which may not be capital asset being agricultural land in rural area, and immediately thereafter sells new asset, then very intent and purpose of beneficial provision would be lost. Page 12 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT 9. In such circumstances referred to above, Mr.Bhatt prays that there being no merit in submissions canvassed on behalf of assessee, Appeals may be dismissed and question of law as formulated may be answered in favour of Revenue and against assessee. ANALYSIS : 10. Before adverting to rival submissions canvassed on either side, we may look into few relevant provisions of Income Tax Act, 1961. Section 2(14)(iii) of Act reads as follows : 2. In this Act, unless context otherwise requires.-- (1) to (13) xxx xxx xxx (14) 'capital asset' means-- (i) and (ii) xxx xxx xxx (iii) agricultural land in India, not being land situate - (a) in any area which is comprised within jurisdiction of municipality (whether known as municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or cantonment board and which has population of not less than ten thousand ; or (b) in any area within distance, measured aerially,- Page 13 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT (I) not being more than two kilometres, from local limits of any municipality or cantonment board referred to in item (a) and which has population of more than ten thousand but not exceeding one lakh; or (II) not being more than six kilometers, from local limits of any municipality or cantonment board referred to in item (a) and which has population of more than one lakh but not exceeding ten lakh; or (III) not being more than eight kilometers, from local limits of any municipality or cantonment board referred to in item (a) and which has population of more than ten lakh. Explanation.- for purposes of this sub-clause, 'population' means population according to last preceding census of which relevant figures have been published before first day of previous year; 11. Section 2(24) of Act defines term 'income'. It reads as follows : 'income' includes - (i) profits and gains; (ii) to (ve) xxx xxx xxx (vi) any capital gains chargeable under section 45; 12. Section 45 of Act is with regard to capital gains. Section 45 states that income, profits or gains arising from transfer of capital asset....be chargeable to income tax Page 14 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT under head 'capital gains'...Capital gains would arise from transfer of capital asset. 13. Section 45 of Act provides that any profits or gains arising from transfer of capital asset effected in previous year shall, save as otherwise provided in Sections 33, 54 and 54B, be chargeable to income-tax under head 'capital gains', and shall be deemed to be income of previous year in which transfer took place. Section 2(14)(iii) defines what is meant by 'capital assets' and it says that 'capital assets' means property of any kind held by assessee whether or not connected with his business or profession, but does not include various types of properties. Till amendment by Act 19 of 1970, that is, till April 1, 1970, agricultural land in India was not included within definition of 'capital assets' and, therefore, any capital gains arising from transfer of agricultural land was not capital gains for purposes of Section 45 and could not be deemed to be income of previous year. It may be noticed that at time when proposed amendment was introduced by Finance Bill, 1970, it was pointed out that it was proposed to extend levy of income-tax to capital gains arising from transfer of agricultural lands situated in urban areas. Memorandum explaining provisions of Finance Bill, 1970, pointed out in paragraph 24 : Presently, capital gains arising from transfer of capital asset are chargeable to income-tax. definition of 'capital asset' excludes from its scope, inter alia, agricultural land in India. Accordingly, no liability to tax arises on gains Page 15 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT derived from transfer of agricultural land in India. This exemption of agricultural land from scope of levy of tax on capital gains has historical origin and is not due to any bar in Constitution on competence of Parliament to legislate for such levy. Agricultural land situated in municipal and other urban areas is essentially similar to non-agricultural land in such areas in its potentialities for use due to progress of urbanisation and industrialisation. 14. In view of aforesaid, it was proposed to bring, within scope of taxation, capital gains arising from transfer of agricultural lands situated within limits of any municipality or cantonment board which has population of not less than 10,000 according to latest census for which relevant figures have been published. power was also being given to Central Government to bring within scope of levy (by notification in Official Gazette), capital gains arising from transfer of agricultural lands situated outside limits of any such municipality or cantonment board upto minimum distance of 8 kilometers, where this was considered necessary having regard to extent of scope of land for urbanization of that area and other relevant considerations. It was pointed out in Memorandum that agricultural land which was situated in rural areas would continue to be outside scope of provisions regarding tax on capital gains and hence no liability to tax would arise in respect of gains derived from transfer of agricultural land in rural areas. Under Section 2, sub-section (47) of Income-tax Act, 1961, term 'transfer', in relation to capital asset, Page 16 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT includes compulsory acquisition of capital asset under any law. Therefore, whenever compensation is received in respect of any capital asset at time of compulsory acquisition, amount thus received would be considered for ascertaining profits or gains arising from transfer of its capital asset and by virtue of Section 45 it would be deemed to be income of previous year in which transfer took place. Under Section 47 of Income-tax Act nothing contained in Section 45 applies to various types of transfers mentioned in Section 47 and by clause (viii), which was introduced by Act 19 of 1970, any transfer of agricultural land in India effected before 1st day of March, 1970, is not transfer of capital asset for purposes of capital gains. Analysis of Section 54B of Income Tax Act, 1961. 15. Section 54B of Act reads as follows : 54B. Capital gain on transfer of land used for agricultural purposes not to be charged in certain cases.- (1) [Subject to provisions of sub-section (2), where capital gain arises] from transfer of capital asset being land which, in two years immediately preceding date on which transfer took place, was being used by assessee being individual or his parent, or Hindu undivided family for agricultural purposes (hereinafter referred to as original asset), and assessee has, within period of two years after that date, purchased any other land for being used for agricultural purposes, then, instead of capital gain being charged to income-tax as income of previous year in which transfer took place, it shall be Page 17 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT dealt with in accordance with following provisions of this section, that is to say,- (i) if amount of capital gain is greater than cost of land so purchased (hereinafter referred to as new asset), difference between amount of capital gain and cost of new asset shall be charged under section 45 as income of previous year; and for purpose of computing in respect of new asset any capital gain arising from its transfer within period of three years of its purchase, cost shall be nil; or (ii) if amount of capital gain is equal to or less than cost of new asset, capital gain shall not be charged under section 45; and for purpose of computing in respect of new asset any capital gain arising from its transfer within period of three years of its purchase, cost shall be reduced by amount of capital gain. (2) amount of capital gain which is not utilised by assessee for purchase of new asset before date of furnishing return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than due date applicable in case of assessee for furnishing return of income under sub-section (1) of section 139] in account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which Central Government may, by notification in Official Gazette, frame in this behalf and such return shall be Page 18 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT accompanied by proof of such deposit; and, for purposes of sub-section (1), amount, if any, already utilised by assessee for purchase of new asset together with amount so deposited shall be deemed to be cost of new asset : Provided that if amount deposited under this sub-section is not utilised wholly or partly for purchase of new asset within period specified in sub-section (1), then,- (i) amount not so utilised shall be charged under section 45 as income of previous year in which period of two years from date of transfer of original asset expires; and (ii) assessee shall be entitled to withdraw such amount in accordance with scheme aforesaid. 16. Section 54B provides for exemption in respect of capital gains accruing on transfer of land which was being used for agricultural purposes by assessee or his parents for period of two years provided assessee has purchased any other agricultural land within period of two years from date of such transfer. Scheme of Section 54B 17. Section 54B provides for exemption in respect of capital gains arising to assessee on transfer of land used for agricultural purposes. exemption is subject to certain conditions as to use of land and acquisition of land. Page 19 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT Further, amount of exemption depends upon fact, whether cost of new land is greater or less than amount of capital gains. assessee is also provided with option to deposit amount of gain remaining unutilised in capital gains account scheme before due date for furnishing return of income to be utilised from acquisition of new asset within specified period. Conditions precedent for exemption. 18. With view to availing of benefits of this section following conditions are required to be fulfilled : (i) gain should arise from transfer of capital asset being land. (ii) land transferred should have been used by assessee or his parents for at least two years immediately before transfer for agricultural purposes. (iii) assessee should purchase, within period of two years after date of transfer, other land for being used for agricultural purposes. Amount of exemption. 19. amount of exemption will be as under : (i) If amount of capital gain arising on transfer of original asset is greater than cost of new asset, then exemption will be to extent of cost of new asset and amount over and above cost of new asset will be Page 20 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT taxable as capital gains under section 45 during year in which transfer took place. (ii) If amount of capital gains arising on transfer of original asset is equal to or less than cost of new asset then exemption will be to tune of cost of new asset. Consequences of new asset being transferred within 3 years of its purchase. 20. If new asset is transferred by assessee within period of 3 years from date of its purchase then cost of acquisition of new asset, for purposes of determining capital gains arising on transfer thereof, will be determined as follows : (i) If amount of capital gains arose on transfer of original asset was greater than cost of new asset, then cost of new asset for computing capital gains will be nil. (ii) If amount of capital gain arose on transfer of original asset was equal to or less than cost of new asset, then cost of new asset for computing capital gains will be amount arrived after deducting capital gain from transfer of original asset from cost incurred for acquiring asset. FINDINGS OF AUTHORITIES : 21. Assessing Officer took view as under : (i) basic intention of statute is to make it Page 21 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT mandatory to hold new asset for period exceeding 3 years. Thus prime condition to avail exemption is holding of new asset for period of 3 years and more than that. In present case it is undisputed fact that new asset was transferred before completion of 3 years from date of its purchase. Thus basic condition to avail exemption has not been fulfilled by assessee. There is no relevance of fact that new asset was capital asset or non-capital asset. assessee was to hold asset for more than 3 years to claim exemption. (ii) provision of section 54B(ii) clearly stipulates that if new asset is transferred before 3 years of its purchase capital gain is worked out after deducting exemption out of such gain so benefited on transfer of old asset. This further stipulates that there should be capital gain on transfer of such land. Hence assessee has invested in land which will not be further taxable to capital gain as land is rural agricultural land, which is not capital asset. (iii) It is important to mention that assessee has merely made literal interpretation of provisions of section 54B, ignoring rules of interpretation prescribed by Hon'ble Courts. section provides for investment in new asset and holding it for three years by assessee. It further provides that for purpose of computing in respect of new asset any capital gain arising from its transfer within period of three years of its purchase, cost shall be reduced, by amount of capital gain. This, apparently, implies that new asset has to be eligible asset transfer of which could be subjected to charging of Page 22 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT capital gain. This is not possible if new asset is asset transfer of which is exempt from charging of capital gain. In other words, even if new asset is sold within period less than stipulated period there would not arise any capital gain because of it being exempt from such taxation. Hence, new asset has to be asset transfer of which could be subjected to charging of capital gain. Not reading provisions in this way would lead to redundancy of condition in respect of period of holding of new asset. statute cannot be interpreted in manner that may lead to friction, inconsistency or redundancy of any part of statute. (iv) assessee's interpretation of relevant provision is against legislative intent. If Legislature intended that new assets can be asset transfer of which is exempt from charging as capital gain then there was no requirement to provide that for purpose of computing in respect of new asset any capital gain arising from its transfer within period of three years of its purchase, cost shall be reduced, by amount of capital gain. It would have been sufficient to say that consideration/capital gain arising from transfer be used in manner prescribed without prescribing for any period of holding for same. (v) Rules of interpretation require that meaning should be given to each and every word used in statute as Legislature is deemed not to waste its words and say Page 23 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT anything in vain. Assessee's interpretation makes condition in respect of period of holding redundant in this section. (vi) Further, assessee's interpretation would lead to misuse of Section 54B, which provides that benefit of this section would be available if assessee holds new asset for period of three years. This requirement can be by-passed when new asset is asset not chargeable to capital gain tax. assessee's interpretation flouts well accepted rule that Act must be read as whole to make consistent enactment of whole statute not in parts. 22. CIT(A) took view as under : (ii) From reading of above provisions it is clear that if assessee has earned capital gain on sale of capital asset which was used for agricultural purpose in last two immediate preceding years, then assessee is entitled for claiming exemption from capital gain tax if sale consideration is utilized for making investment in another land being used for agricultural purposes. agricultural purposes. Therefore, it is clear that first capital gain arising to appellant on account of sale of "original asset" constitute taxable income. Normally, assessee is required to pay capital gain tax on such capital gains earned on sale of capital assets used for agricultural purpose. However, with intention to encourage investment in land being used for agricultural purposes, legislature has provided this exemption u/s 54B of Act. Page 24 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT (iii) AO has rightly noted that if assessee has sold "new asset" within three years of date of purchase then he is required to pay taxes on gains arising from transfer thereof. (iv) If assessee's are given liberty to invest in agricultural land, which is not capital asset, gains arising from transfer of chargeable capital asset then, if contention of appellant is accepted, this would make provisions redundant as all assessee's would convert their taxable gain into non-taxable capital gain by misusing provisions of section 54B of Act. Clearly this interpretation is against legislative intent. As per provisions, if new asset is transferred within three years of its purchase then assessee is supposed to disclose capital gain on this transaction by taking cost of new asset at NIL'. (v) claim of appellant that capital gain, if any, on transfer of new asset should be taxed in year of transfer of new asset i.e. A.Y.2006-07 is in line with provisions but cannot be accepted as appellant himself has not disclosed any capital gain in A.Y.2006-07. (vi) Lastly, appellant has claimed exemption u/s 54B in AY 2004-05 on taxable capital gains arising from transfer of "original asset" and then subsequently in AY 2006-07 he has not shown any taxable capital gain while transferring new asset' on pretext that new asset is not capital asset. This claim of appellant cannot be accepted as by using this method appellant has Page 25 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT disposed his capital asset and as earned profit on sale thereof without paying single paisa of tax. (vi) Reliance of appellant on decision of Hon'ble Chandigarh Bench of ITAT in case of Kaushlya Dev Patiala ITA N0.1300/CHD/2010 is not correct as in that case agricultural land was sold by assessee in AY.2004- 05 and then another agricultural land was purchased and subsequently sold in AY.2006-07. In case of appellant, appellant has not sold any agricultural land and original asset in case of appellant was capital asset, therefore, facts of case are distinguishable. 23. Appellate Tribunal, in its impugned order, observed as under : We have heard rival submissions and perused material on record. It is seen that assessee has transferred agricultural land and resultant capital gain thereon has been claimed exemption on account of purchase of new asset. However, new asset being non-capital asset has been transferred within period of 3 years i.e. 25.07.2005. Therefore, cost of new asset for computing capital gain u/s.45 of Act would be considered as nil as per provisions of section 54B(1)(2) of Act. Since assessee has not satisfied basic condition to avail exemption u/s.54B(1) of Act as new asset is transferred before 3 years of its purchase, capital gain is worked out after deducting exemption out of such gains Page 26 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT so benefited on transfer of old asset. This, further stipulates that there should be capital gain of transfer of such land, hence assessee has invested in his land it will not be further taxable to capital gain as land is rural agricultural land, it is not capital asset. We also find that basic condition to avail exemption has not been fulfilled by assessee, therefore there is no relevance of fact that new asset was capital asset or non-capital asset. Further, there is no specific provision in section 54B of Act as mentioned in section 54F(3) of Act. Therefore, withdrawal of exemption would be made in respect of long term capital gain chargeable on old assets sold during relevant assessment year. decision in case of DCIT vs. Kaushalya Devi (supra) has already been distinguished by CIT(A) as in that case AO sought to tax capital gain arising on transfer of new asset in year in which new asset was transferred. Therefore, Tribunal has come to finding that new asset so transferred is not capital asset, hence no capital gain chargeable on same. In view of these facts, we are of considered opinion that Lower Authorities have justified in withdrawing exemption claim u/s.54B of Act as basic conditions stipulated u/s.54B(1)(2) has not been satisfied. Therefore, this grounds of appeal of assessee are dismissed. 24. Our final conclusion is as under : 1. relevant dates for purpose of adjudication are as under: Page 27 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT 01.12.2003 Assessee sold urban agricultural land (relevant to AY 2004-05) 04.10.2004 Assessee purchased agricultural land situated in rural area (not capital asset within meaning of 2(14) of Act) 27.05.2005 Assessee sold new asset (rural agricultural land) 2. In our opinion, Assessing officer and appellate authorities have properly analyzed provisions of Section 54B of Act, as also factual aspects 3. In event, assessee seeks benefit of Section 54B, requirement is that assessee, upon sale of agricultural land is required to purchase within period of two years therefrom, any other land for being used for agricultural purposes (be it rural or urban agricultural land). If these conditions are complied with, capital gain is required to be dealt with in accordance with clause (i) or (ii) of Section 54B(1) of Act, as case may be. 4. As per Clause (i), if capital gain is more than cost of new asset, difference between these two is to be charged under Section 45 as income. This completes first part of computation. After words .....income of previous year , significant words are and for purpose of computing in respect of new asset. ... . second part of computation is when new asset is Page 28 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT transferred within period of 3 years of its purchase. In this eventuality, as per section 48 of Act, cost of acquisition is to be treated as NIL and entire sale consideration will be taken for purpose of computing capital gain. Thus, word 'and' postulates computation of capital gain if new asset is sold within period of three years. This does not alter computation in first part. 5. Similarly, as per clause (ii), computation has to take place if amount of capital gain is equal to or less than cost of new asset, in that case capital gain is not required to be charged under Section 45. Even in this clause after first part, 'and' postulates above referred situation of new asset being sold within 3 years of its purchase. 6. legislative intent as can be gathered from Sections 54 to 54GB is that upon capital gain arising and in event consideration/gain is invested and kept in for lock-in period, assessee would get benefit and not otherwise. lock-in period is different in these sections. In event assessee s contention is accepted, very intent and purpose of these beneficial provisions will be defeated. assessee would sell agricultural land, invest in new asset which is not capital asset (in instant case agricultural land in rural area which is not exigible to capital gain tax) and sell new asset immediately thereafter, and in such process, would render Section 54B of Act otiose. entire object of asking Page 29 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT assessee to hold land for particular period would be frustrated. 7. After acquiring new agricultural land (be it rural agricultural land), if new rural agricultural land is transferred within period of three years from date of purchase, then tax exemption allowed earlier would be liable to be withdrawn. In such case, assessee is required to pay tax on exemption claimed earlier. consequences on transfer of newly acquired agricultural land (be it urban or rural) within period of three years is that, while computing capital gain at time of transfer of new agricultural land, amount of capital gain which had been claimed as exemption under section 54B would be deducted from cost of acquisition of new agricultural land and new capital gain would be computed accordingly. We may give one simple illustration : Suppose Mr.A has transferred his urban agricultural land in May, 2017. urban agricultural land has been transferred for amount of say Rs.50,00,000/-. capital gain arising on transfer of said urban agricultural land is say Rs.10,00,000/-. Mr.A, in order to claim exemption under Section 54B of Income Tax Act, purchases another rural agricultural land by investing Rs.35,00,000/- in December, 2017. Since Page 30 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT entire amount is re-invested, capital gain of Rs.10,00,000/- is claimed as exemption as per provisions of Section 54B of Income Tax Act. In March, 2018, Mr.A transfers newly acquired rural agricultural land for amount of say Rs.80,00,000/-. In above example, since newly acquired rural agricultural land has been transferred before expiry of lock-in period of three years, capital gain will be Rs.50,00,000/- (minus) Zero, since in that eventuality, cost of acquisition of first asset will be treated as Nil. difference between Rs.80,00,000/- and Rs.35,00,000/- would be treated as income from business/from other sources, as case may be. In any event, in respect of first transaction, assessee would not have benefit of cost of acquisition, since same is taken at 'Nil'. 8. We fail to understand why lot of emphasis has been put on fact that as rural agricultural land does not constitute capital asset, capital gain tax is not levied on sale of such rural agricultural land. There need not be any debate on this issue. No capital gains will arise on sale of agricultural land situated in rural area as it is specifically excluded from definition of term 'capital asset'. However, capital gains will arise on sale of agricultural land situated in non-rural area. In case on hand, we are concerned with capital gains with respect to first transaction, i.e. sale of Page 31 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 C/TAXAP/210/2019 JUDGMENT urban agricultural land. We are not concerned with second transaction of sale of rural agricultural land. In such circumstances, after acquiring new agricultural land (rural or urban), if new agricultural land is transferred within period of three years from date of purchase, then tax exemption allowed earlier (i.e. with respect to first transaction of sale or urban agricultural land) would be withdrawn. In such case, assessee would be required to pay tax on exemption claimed earlier. 9. other contention of assessee that capital gain is required to be taxed in A.Y 2006-07 is also wholly untenable. charge of capital asset is on transfer effected on 01.12.2003 for which relevant year is A.Y 2004-05. charge is not in respect of transfer of new asset. 25. In view of aforesaid discussion, we have reached to conclusion that no error, not to speak of any error of law, could be said to have been committed by Appellate Tribunal in passing impugned order. 26. Appeal fails and is hereby dismissed. question of law is answered in favour of Revenue and against assessee. (J. B. PARDIWALA,J.) (A. C. RAO,J.) /MOINUDDIN Page 32 of 32 Downloaded on : Wed Dec 11 15:21:29 IST 2019 Hitesh Mansukhlal Bagdai v. Assistant Commissioner of Income-tax, Central Circle-1