RECENT CASE LAWS IN CAPITAL

GAINS
CA. Chirag Jobanputra
M/s. Kapoor & Parekh Associates, Mumbai
cachirag21@gmail.com
CONTENTS – LIST OF CASE LAWS
 Enpro Finance Limited
 T.V. Nagasena
 ETC Industries Limited
 Sambandam Udaykumar
 Jatinder Kumar Madan
 Sultana Nazir
 RKP Elayarajan
 Yahya E. Dahriwala
 Shri Shankar Sharma
 Aspi Ginwala
 Rajkumar Jain & Sons (HUF)
 Mahesh Ganeshwade
 Chanchal Kumar Sircar 2
 Usha B Madan
CASE STUDY A
 CJ is a public limited company and is engaged in the
business of manufacturing goods from past 20 years.
It operates from its industrial undertaking located at
Mumbai.
 CJ has taken land on lease and the said industrial
undertaking is situated on leasehold premises.
 The industrial undertaking was making losses since
last 5 years and therefore CJ decided to dispose off
the said undertaking. Consequently it sold off its
entire plant and machinery in the year 2006-07.
 However the leasehold rights could be surrendered
only in the year 2011-12 for Rs. 45 millions after
3
ongoing negotiations with the Lessor.
CASE STUDY A
 All the employees of CJ working in the industrial
undertaking has left the job in 2006-07.
 In 2006-07 CJ has undertaken another business
activity namely development of property in rural
area.
 CJ invested Rs. 30 millions (out of the amount
received in the year 2011-12 from surrender of
rights) in land and building for the business of
development of properties.

4
CASE STUDY A - ISSUES
 What will be taxability of receipt of Rs. 45 millions ?
 Whether CJ can avail any exemption?
 Is CJ’s business of manufacturing in existence in
2011-12?
 Whether continuity of same business is necessary to
claim exemption under section 54G of the Act?
 Can CJ claim exemption in the year 2006-07 as well
as in the year 2011-12 on investment in business of
development of properties? Can there be two dates for
shifting of an industrial undertaking?
 On purchase of agricultural land in rural area will it
amount to industrial development? Will shifting of
one unit of the industrial undertaking be eligible for
5
54G?
CASE STUDY A – DECISION OF MUMBAI
ITAT IN ENPRO FINANCE LTD.
 Leasehold rights being capital asset and cost of acquisition
being NIL, the amount of Rs. 45 millions shall be taxable
as capital gains.
 CJ has shifted its industrial undertaking from Mumbai
(Urban area) to rural area and therefore shall be eligible to
claim exemption under section 54G of the Act.
 CJ’s business of manufacturing is in existence in 2011-12
as the process of closing down the industrial undertaking is
being carried out through protracted negotiations for
surrender of leasehold rights.
 Continuity of same business is not necessary but for
claiming exemption –
 New Plant and Machinery should be purchased in rural area
for the business of industrial undertaking; and/ or
 New land or building should be purchased or constructed for
any business of Assessee.; and/ or
 Shifted the original assets and transferred the establishment 6
of industrial undertaking to rural area.
CASE STUDY A – DECISION OF MUMBAI
ITAT IN ENPRO FINANCE LTD.

 The wordings used in section 54G are ‘in the course of

or in consequence of, shifting the industrial
undertaking’. Therefore it is possible to have more
than one date of transfer and exemption can be
claimed in more than one assessment year provided
the existence of industrial undertaking is established.
 As per circular no. 495 the intention behind
introduction of section 54G exemption is to promote
decongestion of urban areas and also balanced
regional growth. Further it is clarified that the
shifting of an independent integrated unit shall be
eligible for exemption under section 54G of the Act.
Thus transfer of a distinct part of the industrial 7
undertaking shall be eligible for exemption.
CASE STUDY B
 JN is a private limited company engaged in the
business of manufacturing steel products.
 During the year 2011-12 JN sold a Flat for Rs. 20
millions which was included in its fixed assets
schedule.
 JN deducted the sale consideration from its block of
assets.
 The stamp duty value of the Flat is Rs. 50 millions.
 At the time of assessment proceedings the AO applied
the provisions of section 50C of the Act and
substituted the sale consideration of Flat for stamp
duty value without issuing any notice to JN or
without informing JN and calculated short term
capital gains chargeable under section 50 of the Act. 8
CASE STUDY B - ISSUES
 Is it mandatory for the AO to provide any opportunity
to JN before applying the provisions of section 50C of
the Act?
 Does section 50C gets precedence over section 50 and
capital gains is to be calculated by applying both
section 50 and section 50C of the Act?
 Can the calculation of capital gains be different in
case the block of assets remain and in case the block
of assets cease to exist after sale of Flat?
 If section 50C is applied then what value is to be
deducted from the block of assets to calculate WDV
for depreciation?
 If section 50C is applied then exemption under section
54 to section 54G is available on deemed LTCG or on
actual LTCG?
9
CASE STUDY B – DECISION OF
BANGALORE ITAT IN T.V. NAGASENA
 There is no requirement in the Act for the Assessing
Officer to put the Assessee on notice before invoking
the provisions of section 50C.
 From a reading of the provisions of section 50C(2), it
is clearly mandated that should an Assessee
challenge or object to the Assessing Officer adopting
the guideline value of the property for stamp duty
purposes in place of the stated consideration in the
sale deed for the purposes of computing LTCG, then
the Assessing Officer ought to refer the property for
valuation to the Valuation Officer of the Income Tax
Department.
10
CASE STUDY B – DECISION OF INDORE
ITAT IN ETC INDUSTRIES
 Deeming fiction created under section 50 operates in
limited field and modifies section 48 only to the extent
of modifying the ‘cost of acquisition’.
 Section 50C operates in specific field and modifies the
‘full value of consideration received or receivable as a
result of transfer. Thus section 50 and 50C operates
in different field and there is no conflict.
 If there was any legislative intention to exclude the
applicability of the provisions of section 50C to cases
involving transfer of land and building covered by
section 50, nothing prevented the legislature to make
the proviso in the statute. There is no extension of the
legal fiction created in the said provision beyond its
legitimate field. 11
CASE STUDY B – DECISION OF INDORE
ITAT IN CASE OF ETC INDUSTRIES
 A harmonious interpretation of the relevant provision
makes it clear that there is no exclusion of
applicability of one fiction in a case where other
fiction is applicable. There is no conflict in these two
legal fictions which operates in different fields.
 Further, no distinction is made between a depreciable
asset and a non-depreciable asset in the provisions of
section 50C, therefore, it cannot be said that said
provision is not applicable in a case of transferable
asset which is covered by provisions of section 50 of
the Act, therefore, provisions of section 50C were
applicable to transfer of depreciable asset covered by
section 50 and the capital gain arising from such
transfer has to be computed by adopting the stamp
12
duty valuation.
CASE STUDY B – DECISION OF MUMBAI
ITAT
 In the case of block of assets, depreciation under s. 32 can
be claimed on the WDV as computed under s. 43(6)
provided as on the last day of the previous year the
following two requirements are to be fulfilled :
(1) there must be at least one asset in the block; and
(2) there must be some value for the block on which
prescribed percentage can be applied.
 When any one or both the above mentioned requirements
are not satisfied on transfer of any asset from the block, the
provisions of s. 32 cease to apply and automatically the
provisions of s. 50 become applicable resulting in short-
term capital gains/loss.

13
ACIT vs. Roger Periera communications (P) Ltd.
CASE STUDY B – DECISION OF MUMBAI
ITAT SPECIAL BENCH
 The Indore ITAT in ETC Industries followed the
decision of Mumbai ITAT (SB) in case of United
Marine Academy wherein it has been held that
section 50 and 50C both operate in different fields
and hence 50C is applicable even in cases where
section 50 is applicable.
 However the decision of special bench was based on
the fact that the block of assets ceased to exist.

14
CASE STUDY C
 Mr. C, an individual, sold a residential house property
located at Mumbai for Rs. 20 millions on 16.07.2011.
 The LTCG on the said property was calculated at Rs.
15 millions.
 Mr. C had invested Rs. 5 millions in a residential plot
located at Ahmedabad on 21.10.2007 and started
construction of residential bungalow on the said plot.
 The construction of residential bungalow was
completed on 16.12.2011. Mr. C spent an amount of
Rs. 15 millions on the construction activity. Out of the
said amount Rs. 2 million was spent after 16.07.2011.
 Against the LTCG of Rs. 15 millions Mr. C claimed
exemption under section 54 of the Act for investment
in bungalow. 15
CASE STUDY C - ISSUES
 Whether Mr. C is eligible to claim exemption under
section 54 of the Act?
 What is the amount available for claiming exemption
under section 54 of the Act?
 Is completion of construction within 3 years necessary
for claiming exemption? Whether exemption is
allowed if the construction is not completed within 3
yrs from the date of transfer but substantial
investment is made?
 What will be the position if Mr. C dies after sale took
place but before investment in new house property?
Can legal heirs make investment on behalf of C and
16
claim exemption under section 54 for C?
CASE STUDY C – VARIOUS JUDICIAL
PRONOUNCEMENTS
 The intention of the Legislature was to encourage
investments in the acquisition of a residential house and
completion of construction or occupation is not the
requirement of law.
 If after making the entire payment, merely because a
registered sale deed had not been executed and registered
in favour of the Assessee before the period stipulated, he
cannot be denied the benefit of section 54F of the Act.
Similarly, if he has invested the money in construction of a
residential house, merely because the construction was not
complete in all respects and it was not in a fit condition to
be occupied within the period stipulated, that would not
disentitle the Assessee from claiming the benefit under
section 54F of the Act. 17
CIT vs. Sambandam Udaykumar(Kar HC) No. 175 of 2012
CASE STUDY C – VARIOUS JUDICIAL
PRONOUNCEMENTS
 The provisions of section 54 are applicable and
Assessee is entitled to exemption if the new flat had
been constructed within a period of 3 years from the
date of transfer.
 The exact date of taking possession of the flat is also
not clear. This aspect therefore, requires verification
by the AO as to whether Assessee had taken
possession of new flat within a period of 3 years. We,
therefore, allow the claim of exemption under section
54 subject to verification of above aspects by the AO
after providing opportunity to the Assessee.

Jatinder Kumar Madan vs. ITO (Mum ITAT) (2012)

21 taxmann.com 316 18
CASE STUDY C – VARIOUS JUDICIAL
PRONOUNCEMENTS
 Since the construction was completed within three
years of transfer of capital asset, the ratio as laid
down Karnataka High Court in the case of
Subramanya Bhat is applicable to the facts of this
case as it has been clearly held in that case that for
claiming deduction u/s 54, the construction of the
house should be completed within the prescribed time
limit and date of commencement of construction is not
material for claiming deduction.

ACIT vs Shri Subhash Sevaram Bhavnani (Ahd ITAT)

CIT vs. J.R. Subramanya Bhat (Kar HC) 165 ITR 571
19
CASE STUDY D
 Mr. P sold a land for Rs. 10 millions on 5.5.2007 and paid
advance Rs. 10 millions (entire purchase value) for
residential house property (HP 1) on 1.10.2007 under
irrevocable POA.
 He claimed exemption under section 54F for AY 2008-09
 On 1.11. 2008 Mr. P sold HP 1, by way of conveyance of
irrevocable POA, as the same was not in accordance with
Vastu Shastra. Subsequently, on 3.11.2008 he invested Rs.
8 millions in another residential house property (HP 2) and
presently resides in HP 2.
 Mr. P claims that he is eligible to claim exemption under
section 54F in respect of investment in HP 2 as the sale
consideration is invested in residential house property
within 2 years from the date of sale of land. 20
CASE STUDY D - ISSUES
 Whether sale by conveyance of irrevocable POA is
considered to be transfer?
 Whether exemption under section 54F is available for
deemed LTCG?
 Can money advanced for investment in residential
HP be considered to be equivalent to investment in
capital gains deposit scheme?

21
CASE STUDY D – DECISION OF CHENNAI
ITAT IN SULTANA NAZIR
 The appellant had finally decided to dispose off HP 1,
which was acquired by way of an irrevocable POA, by
paying advance only and hence, the sale of HP 1 by
the appellant under the said POA in any way cannot
be construed as a sale.
 On transfer of HP 1 the appellant got back his
advance and the same was finally invested in HP 2
within two years from the date of sale of original
asset and hence exemption under section 54F is
available against the deemed LTCG.

22
CASE STUDY E
 Mr. C derived LTCG of Rs. 50 millions from sale of
shares in AY 2008-09. Sale date 01/04/2008.
 Mr. C invested an amount of Rs. 20 millions upto
31/07/2008, additional Rs. 25 millions upto 11/01/2009
and further Rs. 5 millions upto 31/03/2009 in a
residential house property.
 The sale deed of residential property was executed on
02/05/2008 for total consideration of Rs. 50 millions.
On the same date Mr. C had paid Rs. 10 millions to
the builders.
 Mr. C filed his ROI on 11/01/2009 and claimed
exemption under section 54F of the Act of the entire
23
Rs. 50 millions.
CASE STUDY E - ISSUES
 What is the amount of exemption available to Mr. C –
50 millions, 20 millions, 45 millions or 10 millions?
 If Mr. C invests in REC bonds on 30/10/2008 can he
claim exemption under section 54EC of the Act?
 Suppose Mr. C had sold a house property for Rs. 50
millions. Against the sale consideration he received
Rs. 40 millions and invested the same in REC bonds
before 31/03/2012. On receipt of 40 millions C gave
possession of his house to the purchaser to carry out
carpentry work. The sale deed is executed on
11/04/2012 and on the same date C received the
balance Rs. 10 millions which is again invested in
REC bonds, then can he claim exemption under
section 54EC of the Act of entire Rs. 50 millions? 24
CASE STUDY E – VARIOUS JUDICIAL
DECISIONS
 As per provisions of section 54F(4), the amount of net
consideration which is not appropriated by the
Assessee towards purchase/ construction of new house
before the date of furnishing return of income under
section 139 shall be deposited in capital gains deposit
scheme before due date specified under section 139(1)
to claim exemption. Section 139 includes sub-sections
(1),(2),(3),(4) and (5). Thus any amount which is
utilized by the Assessee for purchase of new house
before due date of filing return of income under
section 139 (which includes belated return) is allowed
as exemption.

RKP Elayarajan vs. DCIT (Chennai ITAT) 25

CASE STUDY E – VARIOUS JUDICIAL
DECISIONS
 As per provisions of section 54EC, the amount of LTCG shall
be exempt if the Assessee has invested in long term specified
asset at any time within a period of six months after date of
transfer.
 The wording used in the section is "At any time within a
period of six months after the date of such transfer". Under
the General Clauses Act, 1897, "Month" shall mean the month
reckoned according to the British Calendar.
 In the Income Tax Act, the term "month" has been used in
certain sections and wherever the legislature wanted to
specify the number of days, it was stated as such in those
sections. For e.g., in section 143(2)(ii), 142, 153 of the Act.
 In view of the above discussion and from the language in
section 54EC, we are of the opinion that six months period
should be reckoned from the end of the month in which the
transfer takes place. 26
Yahya E. Dhariwala vs. DCIT (Mumbai ITAT)
CASE STUDY E – VARIOUS JUDICIAL
DECISIONS
 Section 54EC clearly states that the investment in specified
bond is to be made “within a period of six months after the
date of such transfer”. In Section 54 and 54F which are
adjacent to the Section 54EC, no such provision has been
made.
 The intention of the legislature is clear. It was not desired
by them to give the exemption u/s 54EC for investment
made before the transfer of the long term capital assets.
Smt Dakshaben Patel vs. ACIT (Ahd ITAT) 22 taxman 237
 We emphatically hold that when there is no bar to take
possession by an agreement and transfer can be treated to
have taken place on the basis of an agreement and advance
payments. Simply because the sale deed was executed later
on, the Assessee cannot be charged of default of violation of
the provision of s. 54EC in this particular case. 27
Bhikulal Chandak (HUF) vs. ITO (Nag ITAT) 126 TTJ 545
CASE STUDY F
 Mr. J and his minor son sold an immovable property
which was held in their joint names with 50% share
each. The property was sold on 1/11/2011 generating
LTCG of Rs. 20 millions.
 Mr. J and his minor son invested Rs. 10 millions each
in REC Bonds to claim exemption under section 54EC
of the Act. Out of total investment Rs. 5 millions were
invested on 1/12/2011 and balance on 30/5/2012.
 Mr. J intends to claim Rs. 10 millions exemption on
LTCG arising in his own name and Rs. 10 millions
exemption on LTCG arising in the name of his minor
son in addition to Rs. 1,500 as provided in section
64(1A) of the Act. 28
CASE STUDY F - ISSUES
 Can J claim exemption under section 54EC in his own
name as well as in name of his minor son?
 What will be the amount of deduction available to Mr.
J?
 What is the last date for making investment in bonds
to claim exemption?
 If the part amount of sale consideration is received
after a period of six months from the date of transfer
then can the period of claiming exemption under
section 54EC shall be extended accordingly?

29
CASE STUDY F – VARIOUS JUDICIAL
DECISIONS
 As per section 64(1A) of the Act in computing total
income of any individual, there shall be included all
“such” income as arises or accrues to his minor child.
Thus word “such” means total income of minor child
as it is preceded by the word total income of
individual. Therefore minor’s total income is to be
clubbed after allowing exemption and not the gross
total income.

DCIT vs. Shri Shankar Sharma (Kol ITAT)

30
CASE STUDY F – VARIOUS JUDICIAL
DECISIONS
 It is clear from the proviso that where Assessee transfers
his capital asset after 30th September of the financial year
he gets an opportunity to make an investment of Rs.50
lakhs each in two different financial years and is able to
claim exemption upto Rs.1 Crore u/s 54EC of the Act. Since
the language of the proviso is clear and unambiguous, we
have no hesitation in holding that the Assessee is entitled
to get exemption upto Rs.1 Crore in this case.
 Since the wording of the proviso to section 54EC is clear,
the benefits which are available to the assessee cannot be
denied. In view of above, it is hereby held that the assessee
is entitled for exemption of Rs.1 crore as six months’ period
for investment in eligible investments involved two
financial years. 31
Aspi Ginwala vs. ACIT (Ahd ITAT)
CASE STUDY F – VARIOUS JUDICIAL
DECISIONS
 The object of the proviso to s. 54EC is to provide a ceiling of
Rs. 50 lakhs on investment by an assessee in the long term
specified assets. If the assessee’s interpretation is accepted
then, because the transfer of assets has taken place from
1st Oct to 31st March, the assessee is able to invest Rs. 50
lakhs in the financial year in which the transfer took place
and Rs. 50 lakhs in the subsequent financial year.
However, assessees who have made a transfer of assets
from 1st April to 30th Sept will not be entitled to do so.
Accordingly, the investment has to be linked to the
financial year in which transfer has taken place and
the claim for deduction cannot exceed Rs. 50 lakhs.

ACIT vs. Rajkumar Jain & Sons (HUF) (Jaipur ITAT) 32

CASE STUDY F – VARIOUS JUDICIAL
DECISIONS
 In Circular No. 791 dated 2/6/2000 the CBDT in consultation
with the Ministry of Law decided that the period of six months
for making investment in specified assets for the purpose of
sections 54EA, 54EB and 54EC of the Act should be taken
from the date such stock-in-trade is sold or otherwise
transferred in terms of section 45(2) of the Act, though the
taxability of capital gain was on the basis of ‘transfer’ as
understood in section 45(2) of the Act.
 In our considered opinion, the interpretation placed by the
CBDT in consultation with the Ministry of Law to the
condition of making investment within six months from the
date of transfer in section 54EC would support the claim of the
Assessee in this case also for exemption from capital gain with
respect to the impugned sum of Rs. 50 lakhs invested in
specified assets (i.e. from the date of receipt). 33
Mahesh N. Ganeshwade vs. ITO (Pune ITAT)
CASE STUDY F – VARIOUS JUDICIAL
DECISIONS
In the present case before us, admittedly Assessee
received part payments after execution of agreement
to sale and handing over of possession thereby
completing the transaction in terms of section 53A of
Transfer of Property Act but invested in specified
bonds i.e. NABARD bonds within one month of the
receipt of sale consideration being part payment.
Hence, we are of the considered view that the
Assessee is eligible for exemption u/s. 54EC of the Act
on part payment received after completion of
transaction.
Chanchal Kumar Sircar vs. ITO (Kol ITAT)
34
CASE STUDY G
 Mr. CJ acquired a residential property by inheritance on
1.4.2008 and sold the said property on 5.5.2011.
 He calculated LTCG on the said property by adopting CII
of 1995-96 (the year in which the previous owner acquired
the property) at Rs. 50 millions.
 Thereafter Mr. CJ invested in another residential house
property on 5.7.2011 for Rs. 45 millions. In addition to that
he also paid Rs. 2 millions towards car parking space & Rs.
2 millions to purchase aluminium material, for various
fittings and other carpentry work and Rs. 1 million for
centralized air conditioning plant.
 In addition to the above CJ also had income from
transaction in shares and securities.
 CJ filed his ROI by claiming exemption under section 54 of
Rs. 50 millions and offering profit on shares as capital 35
gains.
CASE STUDY G
 Whether indexation is available from the date CJ first
held the property or from the date it is acquired by
the previous owner?
 Whether amount paid for car parking space can be
claimed as exempt under section 54 of the Act?
 Whether cost of improvement in the nature of fittings
and fixtures including of air conditioners can be
claimed as exempt under section 54 of the Act? CJ’s
plea is that the cost of improvement is to make the
residential house habitable and therefore exemption
should be allowed?
 What factors are to be considered to determine
whether the profit from sale of shares is capital gains
or business income? 36
CASE STUDY G – DECISION OF MUMBAI
ITAT IN CASE OF USHA MADAN
 Following the decision of special bench of Mumbai ITAT
which is approved by Bombay High Court in case of
Manjula J Shah the benefit of indexation is available from
the year in which the previous owner acquired by the asset.
 It is an universally accepted fact that the car parking in a
society cannot be separately purchased but it is attached
with the flat in the society. Therefore, when any flat in the
society is purchased along with car parking, then the
investment in the flat and car parking will be considered as
investment in the residential house.
 The ITAT upheld the order of CIT(A) and allowed
exemption under section 54 for expenditure on cost of
improvement considering it to form integral part of the flat
except air conditioning plant. 37
CASE STUDY G – GENERAL PRINCIPLES TO
DETERMINE THE NATURE OF INCOME FROM
SHARES

 The intention of the Assessee at the time of purchase of

shares;
 Whether the Assessee has borrowed money to purchase
shares;
 What is the frequency of such purchase and sale in that
particular item or whether the Assessee has carried out
repetitive transactions in single scripts;
 Whether the purchase and sale is for realising profits or
purchases are made for retention and appreciation in its
value;
 How the Assessee has valued the items in the books of
account;
 The volume of transactions; 38
 How the income is assessed in earlier years etc.
 THANK YOU

CA. CHIRAG JOBANPUTRA

M/S. KAPOOR & PAREKH ASSOCIATES, MUMBAI
cachirag21@gmail.com

39