Section 54F Allowed even if house gifted to daughter within 3 year

P. Radhakrishnan, IRS, Jt. CIT for the Appellant. V.S. Jayakumar, Adv. for the Respondent.

ORDER

G. Pavan Kumar, Judicial Member – The appeal is filed by the Revenue against order of CIT (A)- 19, Chennai in ITA No. 86/CIT(A)10/2013-14, Dated 31.03.2015 for the assessment year 2011-12 passed u/s. 143(3) and 250 of the Income Tax Act, 1961.

2. The Revenue has raised the followings grounds of appeals:—

”2.1. The Id CIT(A) erred in holding that the assessee is entitled, for deduction u/s 54

2.2 The Id CIT(A) erred in stating that the assessee had settled the property in favour of his daughter in the subsequent year and hence the issue of disallowance of deduction u/s 54 should be dealt with in that year which is factually incorrect. The settlement was made in the same assessment year.

2.3 The Id CIT(A) ought to have appreciated the fact that the action of the assessee to acquire the property in his name and immediately settling it in favour of his daughter is not much distinct from giving the sale proceeds to his daughter and she making the investment in her name, in which case the benefit of reinvestment is lost without any dispute.

2.4 The Id CIT(A) ought to have appreciated that the assessee seems to manipulate the provisions of the section by misinterpreting the same.

2.5 The Id CIT(A) ought to have applied the ratio of the decision of the Hon’ble Bombay High court in the case ofPrakash v ITO (2008) (173 Taxman 311) wherein it was held that in order to qualify for exemption under section 54F, it is necessary and obligatory to have investment made in residential house in the name of assessee only and not in the name of any other person. The assessee is attempting to circumvent the decision by making the investment in his name and immediately settling the property in favour of his daughter”.

3. The Brief facts of the case that the assessee is an individual filed income tax return for the assessment year 2011-12 admitting total income of Rs. 7,04,414/-. Subsequently the case was selected for scrutiny under CASS and notices u/s. 143(2) and 142(1) were issued. In response to the notice, the assessee’s authorized representative appeared from time to time and submitted information. The assessee has offered income from House Property, income from Business and also income from Long Term Capital Gains on sale of property and claimed exemption u/sec 54 of the Act. During the hearing proceedings, the Assessing Officer considered clarifications and explanations of the assessee in respect of interest payment of House Property and Business income offered under of Sec 44AD of the Income Tax Act. The main issue being the long term capital gains on sale of residential property after considering the indexed cost of acquisition Rs. 39,52,254/-. In the same financial year, the assessee purchased residential property on 24.08.2010 and claimed exemption u/s. 54 of the Act. On verification of the Encumbrance Certificate from Sub-Registrar office the assessee has settled the same residential property in favour of his daughter vide registered settlement deed No. 1225 dated 1st November, 2010. It was submitted in compliance to show cause notice that the Capital gains shall arise only when the settle i.e. daughter of the assessee sells the property within a period of three years. Contra to the submissions, the Assessing Officer gave findings that the settlement does not cover u/s. 54(i) or 54(ii) of the Act. Further, the ld. Authorised Representative substantiated his claim that under the provisions of Section 47(iii) gift is not taxable and the word ”transfer” does not include family settlement. Considering the submissions and explanations the Assessing Officer deferred with the explanations and made an addition of long term capital gains alongwith other additions and raised demand. Aggrieved by the order of the Assessing Officer, the assessee has filed an appeal before the Commissioner of Income Tax (Appeals).

4. In the appellate proceedings, the assessee has submitted documentary evidences, also gave a detailed explanations and filed written submissions at para 2 of page 4 of CIT order are as under:—

‘The appellant is an individual being assessed to Income Tax, by Business ward VI(l), Chennai.

The appellant was owninq a property at 33, Srinivasa Perumal Sannathi II Street, Royapettah, Chennai – 600 014. This property was sold in April 2010 and the Proceeds were invested in August 2010 in another property having twin door numbers 10, Arunachala Achari Street and 8, Mian Sahib 11 Street at Triplicane, Chennai 600 005. The appellant in November 2010, had settled the new property to his daughter out of love and affection. The assessing officer treated that the property was transferred within a period of three years and rejected appellants claim for deduction under section 54.

As per Section 54, the Capital Gains arises on sale of House Property, if invested in another Property the deduction of 54 shall be allowed. If the new property is transferred within three years of acquisition, the gain chargeable shall be worked out by taking cost as NIL in the year of sale of new property. The assessing officer was not right in rejecting the claim made under Section 54.

Without prejudice to the above submission.

The Property which was acquired new was settled in favour of his daughter by means of settlement deed, out of love and affection. This should not be treated as Transfer. The assessing officer contended that, the Section 47(iii) exempts only the Gift and not Settlements made. The settlement is made out of love and affection and it was a gift though. termed as settlement. This was made without any consideration for exclusive enjoyment of his daughter.

There is no definition of the term Gift under the Income Tax Act Section 122 of Transfer of Property Act, Gift is defined as

“Gift is the transfer of certain existing moveable or immovable property made voluntarily without consideration of one person called donor to another the donee and accepted by done. It is clear that settlement and gift are the same and the “said transaction was not covered under “Transfer”, and the appellant is entitled for deduction u/s.54’

The ld. Commissioner of Income Tax (Appeals) after considering the evidences, written submissions and also findings of the Assessing Officer relied on the settlement deed executed in favour of Daughter out of love and affection which take the characteristic of gift. Further, it was demonstrated that the settlement also covered by the provisions of Sec 47(iii) of the Act. The ld. Commissioner of Income Tax (Appeals) mistook that the property has been transferred in the assessment year 2011-12 and concluded that the assessee has complied with all the conditions u/s.54 of the Act which is not disputed by the lower authorities except the settlement deed which falls into the category of gift u/s.47(iii) of the Act and directed the Assessing Officer to delete the addition and allowed the appeal. Aggrieved by the order of the Commissioner of Income Tax (Appeals) the Revenue filed an appeal before the Tribunal.

5. The ld. Departmental Representative has clarified that the issue of settlement deed and the purchase of property failing in the same assessment year and therefore the provisions are controvert by the assessee and exemption be denied and relied on the Bombay High Court decision in the case of Prakash v. ITO [2008] 173 Taxman 311 and pleaded for set aside of the Commissioner of Income Tax (Appeals) order and uphold the order of the Assessing Officer.

6. On the other hand, the ld. Authorised Representative has filed paper book and furnished detail submission on the issues dealt by the Assessing Officer alongwith settlement deed and also the interpretation of provisions applicable to gift under Income Tax Act. The ld. Authorised Representative drawn our attention to Secs 47(i) and 47(iii) and also simultaneously Sec 54 of the Act. The contention of the ld. Authorised Representative is that though the settlement deed is made without any monetary consideration and purely out of love and affection qualifies for exemption as gift. There is no dispute about the compliance of Sec. 54 except the Assessing Officer treated the settlement deed as transfer within the period of three years and raised various issues interpreting the terminology of gift. The ld. Authorised Representative submitted that the gift definition is not defined under Income Tax Act therefore expression of gift under section 47(iii) has to be construed under general law and also referred to Sec. 122 of the Transfer of property Act, 1882 and interpreted the definition with supporting decisions of ACIT v. Anjana Mohan [2013] 36 CCH 0008 (Cochin) and also Redington (India) Ltd. v. Jt. CIT [2014] 49 taxmann.com 146 (Chennai – Trib.). The ld. Authorised Representative has vehemently argued that transfer of property made voluntary and without consideration by way of settlement deed fall within the definition of gift and there is no difference between gift and settlement u/sec. 47(i)(iii) relied on judicial decisions and the order of the Commissioner of Income Tax (Appeals) and prayed for dismissal of the Revenue appeal.

7. We have heard the rival submissions of both the parties, perused the material on record and orders of the lower authorities and judicial decisions cited. The assessee being a father has settled the property in favour of his daughter out of love and affection without any consideration as referred at para 3 of settlement deed.

“In consideration of natural love and affection of the Settlor towards the settle herein, who being his daughter, the Settlor doth hereby transfer and assign his entire right, title and interest over the said property, which being 39.2115% undivided share in all that piece and parcel of land and building having twin door numbers namely (i) New door No.8, Old door No.10,Arunachala Achari Street and (ii) door No.8, Main Sahib II Street, Triplicane, Chennai 600 005, comprised in R.S.No.3017 of Triplicane Village, Out of 1 ground and 729 square feet, which is morefully described in the Schedule hereunder, to the settlee herein absolutely for ever and free from all encumbrances whatsoever, with all the rights of alienation and the Settle has accepted the same.”

As far as the settlement is concerned the assessee as a donor transferred the immovable property out of love and affection without consideration to the daughter done and same is not regarded as transfer of a capital asset under a gift, or will or an irrevocable trust does not attract long term capital gain as the provision of Sec 47(iii) of the Act. Hence, the gift does not attract long term capital gain tax. Coming to the exemption provisions of Sec 54 the assessee has complied with the provisions and the conditions laid down and the long term capital gains setoff with the cost of acquisition of new asset purchased in the same year but the issue arise whether the settlement or gift of such property claimed as exemption will call for addition on transfer within three years. After considering the elaborate submissions, judicial decisions followed, the assessee after availing exemption settled the property in favour of the daughter duly following the process of law. However, we make it clear that during the restriction period, the daughter shall not transfer the property by any means. At this stage we have no information about status of the property. Hence for limited purpose to examine the present status of the property, we remit the issue to the file of the Assessing Officer, and Assessing Officer shall provide adequate opportunity of being heard before deciding the issue.

8. In the result, the appeal of the Revenue in ITA No. 1782/Mds/2015 partly allowed