Advances paid amount to utilization of capital gains

Advances paid for purchase of assets would amount to utilization of capital gains u/s 54G- Supreme Court

Case Law Citation:

Fibre Board Pvt. Ltd. Vs. CIT (Supreme Court Of India), Civil Appeal No. 5525-5526 of 2005, Date of Decision: 11.08.2015

Brief of the case:

In this case assessee with an intention to shift its industrial undertaking from urban to non-urban area sold its land, plant & machinery, building etc. and out of capital gain earned he made advance payments to various persons to purchase land, plant & machinery, building etc. Assessee claimed exemption on the entire capital gain earned from the sale proceed in view of the advances so made being more than the capital gain made by it. On appeal to supreme court by assessee Hon’ble SC held that under sub-section (1), the assessee is given a period of three years after the date on which the transfer takes place to purchase new machinery or plant and acquire building or land or construct building for the purpose of his business in the said area. Advances paid for the purpose of purchase and/or acquisition of the aforesaid assets would certainly amount to utilization by the assessee of the capital gains made by him for the purpose of purchasing and/or acquiring the aforesaid assets.

Facts of the case:

• The assessee is a private limited company which had an industrial unit at Majiwada, Thane, which was a notified urban area.
• With a view to shift its industrial undertaking from an urban area to a non-urban area at Kurukumbh Village, Pune District, Maharashtra, it sold its land, building and plant and machinery situated at Majiwada, Thane to Shree Vardhman Trust for a consideration of Rs.1,20,00,000/-, and after deducting an amount of Rs.11,62,956/-, had earned a capital gain of Rs.1,08,33,044/-.
• Since it intended to shift its industrial undertaking from an urban area to a non-urban area, out of the capital gain so earned, the appellant paid by way of advances various amounts to different persons for purchase of land, plant and machinery, construction of factory building etc.
• Such advances amounted to Rs.1,11,42,973/- in the year 1991-1992. The appellant claimed exemption under Section 54G of the Income Tax Act on the entire capital gain earned from the sale proceeds of its erstwhile industrial undertaking situate in Thane in view of the advances so made being more than the capital gain made by it.
• AO vide order 31.03.1994, imposed a tax on capital gains, refusing to grant exemption to the appellant under Section 54G due to non-declaration of the area to be a non-urban area by Central Govt. and its failure to deposit the capital gain in the Capital Gains Deposit Account.

Contention of the revenue:

• The non-urban area has not been declared to be so by any general or special order of the Central Govt. Therefore, the assessee cannot take the plea that it has shifted the undertaking to a non-urban area.
• Assessee utilized entire capital gains by way of advances made to various persons to purchase land, plant, building etc. However, such advance does not amount to utilization of capital gains. The assessee is required to acquire the plant and machinery within the time frame spelt out in sub-section (1) of Section 54G.
• If it fails to acquire the plant and machinery before one year of transfer or within the period of filing return, it is supposed to deposit the capital gains in the Capital Gains Deposit Scheme. It cannot be said that giving advance to different concerns means utilization of money for acquiring the assets.
• Section 24 of the General Clauses Act had no application to the facts of the present case as it only applied to `repeals’ and not ‘omissions’, and also that it saved rights that were given by subordinate legislation, and as the notification dated 22.9.1967 did not by itself confer any right on the appellant, Section 24 of the General Clauses Act would not be attracted.
• As no purchase of plant and machinery and/or acquisition of land or building or construction of building had actually taken place in the assessment year in question, in any event the conditions precedent for the applicability of Section 54G were not met.

Contention of the assessee:

• Chapter XXII-B of the Income Tax Act, prior to 1.4.1988, contained Section 280ZA which when read with the definition of “urban area” in Section 280Y(d) gave to a person who shifted from an urban area to another area, a tax credit certificate with reference to the amount of tax payable by the Company on income tax chargeable under the Heading “Capital Gains” and would be given relief accordingly.
• Thane had been declared to be an urban area for the purpose of chapter XXII-B vide notification dated 22.09.1967.
• Section 54G was inserted on 1.4.1988 at the same time that Section 280ZA was omitted and that therefore Section 24 of the General Clauses Act would be attracted to the facts of this case. That being so, the notification dated 22.9.1967 would ensure to the benefit of the appellant for the purpose of claiming exemption from capital gains under Section 54G.
• On a correct interpretation of Section 54G, the assessee gets a period of three years after the date on which the transfer has taken place to purchase new machinery and plant, and acquire land or construct building.
• In order to avail the benefit of Section 54G all that the assessee has to do in the assessment year in question is to “utilize” the amount of capital gain for the purposes aforesaid before the date of furnishing the return of income under Section 139. If that is done, it is not necessary for the assessee to deposit before furnishing such return, the amount in a Capital Gain Deposit Scheme and utilize such proceeds in accordance with the scheme which the Central Government may by notification frame in this behalf.
• In any case the explanation added to Section 54G(1) being in the same terms as Section 280Y(d) has repealed Section 280Y(d) by implication.

Held by the CIT (A):

• CIT (A) dismissed appeal filed by assessee.

Held by ITAT:

• ITAT allowed the assessee’s appeal stating that even an agreement to purchase is good enough and that the explanation to Section 54G being declaratory in nature would be retrospective.

Held by the High Court:

• The High Court reversed the judgment of the ITAT and held that as the notification declaring Thane to be an urban area stood repealed with the repeal of the Section under which it was made, the appellant did not satisfy the basic condition necessary to attract Section 54G, namely that a transfer had to be made from an urban area to a non-urban area.
• Further, the expression “purchase” in Section 54G cannot be equated with the expression “towards purchase” and, therefore, admittedly as land, plant and machinery had not been purchased in the assessment year in question, the exemption contained in Section 54G had to be denied.

Held by Supreme Court:

• The idea of omitting Section 280ZA and introducing on the same date Section 54G by the legislature, was to do away with the tax credit certificate scheme together with the prior approval required by the Board and to substitute the repealed provision with the new scheme contained in Section 54G.
• It is true that Section 280Y(d) was only omitted by the Finance Act, 1990 and was not omitted together with Section 280ZA and this would make no material difference inasmuch as Section 280Y(d) is a definition Section defining “urban area” for the purpose of Section 280ZA only and for no other purpose.
• It is clear that once Section 280ZA is omitted from the statute 16 book, Section 280Y(d) having no independent existence would for all practical purposes also be “dead”.
• Quite apart from this, Section 54G(1) by its explanation introduces the very definition contained in Section 280Y(d) in the same terms. Obviously, both provisions are not expected to be applied simultaneously and it is clear that the explanation to Section 54G(1) repeals by implication Section 280Y(d).
• From the Memorandum of the Finance Bill, 1990, it is clear that Section 280Y(d) which was omitted with effect from 1.4.1990 was so omitted because it had become “redundant”. It was redundant because it had no independent existence, apart from providing a definition of “urban area” for the purpose of Section 280ZA which had been omitted with effect from the very date that Section 54G was inserted, namely, 1.4.1988.
• It being clear in the present case that Section 280ZA which was repealed by omission and re-enacted with modification in section 54G, the notification declaring Thane to be an urban area dated 22.9.1967 would continue under and for the purposes of Section 54G.
• The impugned judgment passed by high court in not referring to section 24 of the General Clauses Act at all has thus fallen into error.
• On omission of Section 280ZA and its re-enactment with modification in Section 54G, Section 24 of the General Clauses Act would apply, and the notification of 1967, declaring Thane to be an urban area, would be continued under and for the purposes of Section 54A.
• A reading of Section 54G makes it clear that the assessee is given a window of three years after the date on which transfer has taken place to “purchase” new machinery or plant or “acquire” building or land.
• High Court has completely missed the window of three years given to the 36 assessee to purchase or acquire machinery and building or land. This is why the expression used in 54G(2) is “which is not utilized by him for all or any of the purposes aforesaid….”.
• It is clear that for the assessment year in question all that is required for the assessee to avail of the exemption contained in the Section is to “utilize” the amount of capital gains for purchase and acquisition of new machinery or plant and building or land.
• It is undisputed that the entire amount claimed in the assessment year in question has been so “utilized” for purchase and/or acquisition of new machinery or plant and land or building.
• The High Court has missed the key words “not utilized” in sub-section (2) which would show that it is enough that the capital gain made by the assessee should only be “utilized” by him in the assessment year in question for all or any of the purposes aforesaid, that is towards purchase and acquisition of plant and machinery, and land and building.