Gujarat High Court Allows Section 54 Deduction On Cash Transaction Of Sell And Purchase Of Residential Property

The Gujarat High Court has allowed the deduction under Section 54 of the Income Tax Act on the cash transaction of the sale and purchase of residential property.

The bench of Justice Bhargav D. Karia and Justice Niral R. Mehta, while quashing the order of the Interim Board for Settlement Commission, denied the deduction of Rs. 2.4 crore with respect to the cash transaction of the sale and purchase of the residential property.

Section 54 of the Income Tax Act offers capital gains exemption to individuals or Hindu Undivided Families (HUFs) selling residential property in India. This provision allows them to reinvest the sale proceeds in another residential property by avoiding capital gains tax.

The petitioner or assessee was subjected to search proceedings by the Income Tax Authority under Section 132. During the course of the search proceedings, various incriminating material and documents were found and seized, and proceedings for assessment under Section 153A commenced.

The petitioner filed an application before the Settlement Commission on 27.12.2019 for the period from A.Y. 2011–12 to 2018–19, disclosing the total income of Rs. 2,99,15,288. The petitioner in the application stated that the undisclosed income has been earned by carrying out transactions for the buying and selling of land. The petitioner also declared an unaccounted investment in the construction of bungalows out of unaccounted sale proceeds for the sale of properties.

The Settlement Commission processed the application filed by the petitioner by passing an order under Section 245D(1) on January 9, 2020, and an order under Section 245D(2C) on February 19, 2020.

The Principal Commissioner of Income Tax submitted a report as per Rule 9 of the Settlement Commission Rules and requested permission to conduct an inquiry for a specific issue, which was permitted by the Settlement Commission.

By the Finance Act, 2021, the provisions of settlement were amended, and the Settlement Commission was abolished with effect from February 1, 2021. For pending cases with the Settlement Commission, respondent no. 1—the Interim Board for Settlement Commission—was constituted by inserting Section 245AA of the Act with effect from February 1, 2021.

The Central Government, as per the powers conferred by Sections 11 and 12 of Section 245(D) of the Act, has framed the E-Settlement Scheme 2021 via a notification dated November 1, 2021. The case of the petitioner was allotted to the Board by CBDT.

The petitioner, along with other issues, claimed exemption under Section 54 on long-term capital gains earned on the sale of residential bungalows.

The Interim Board of Settlement rejected the claim of the petitioner to the extent of the cash portion of the sale consideration on the sale of the property. The order denied the claim of exemption under Section 54 on the cash portion of the investment made by the petitioner to purchase the property after the sale of the property on three grounds. Firstly, the claim has not been made in return for income. Secondly, a claim of exemption is not allowed for the concealed transaction. Lastly, the petitioner has not deposited the amount of capital gain in the capital gain deposit scheme under Section 54(2).

The petitioner contended that the petitioner has claimed exemption under Section 54 in the return of income; however, so far as undisclosed income is concerned, obviously the petitioner would not have made a claim in the return of income.

The petitioner argued that if the undisclosed sale consideration is brought to tax by the Settlement Commission, then the undisclosed payment made for the purchase of the property is required to be considered for granting the benefit of Section 54. As per the provision of Section 245D(4), which provides that after examination of the records and reports of the Principle Commissioner, the Settlement Commission may, in accordance with the provisions of the Act, pass an order as it thinks fit on the matters covered by the application. The Board is discharging the power of the Settlement Commission, which ought to have passed orders in accordance with the provisions of the Act. The petitioner is entitled to the benefit of exemption under Section 54 to the tune of Rs. 2,40,14,000 for FY 2016–17.

The department contended that the settlement commission, after considering the facts of the case in respect of the cash portion, has rightly rejected the claim of the petitioner for deduction under Section 54, as the conditions prescribed under Section 54 were not complied with by the petitioner and no such claim was made in the return of income.

The court stated that the grounds on which the deduction under Section 54 was denied by the board are not tenable, as none of the three grounds on which the deduction under Section 54 is denied can be said to be contrary to the provisions of the Act. The contravention has prejudiced the appellant, and the petitioner is entitled to get the deduction under Section 54 in respect of the amount paid in cash to purchase the property, as the amount received in cash by the petitioner is considered part of the undisclosed income of the petitioner.

The court held that the order passed by the Settlement Commission under Section 245D(4) is ordered to be modified to such an extent by directing the respondent authority to accept the amount offered by the petitioner as taxable long-term capital gains after granting deductions under Section 54 as claimed by the petitioner.

Counsel For Petitioner: Sasurbabh Soparkar

Counsel For Respondent: Varun K.Patel

Citation: 2024 LiveLaw (Guj) 84

Case Title: Ashwinbhai Babubhai Dudhat Versus The Interim Board For Settlement

Case No.: R/Special Civil Application No. 20186 Of 2023

Click Here To Read The Order