Capital Gain deduction under Section 54 of Income Tax Act was provided by the Gujarat High Court based on seized evidence despite non-disclosure of cash transactions. The court reversed the decision of the Interim Settlement Board ( previously Settlement Commission ).
The bench of Justices Bhargav D. Karia and Niral R. Mehta stated that the assessee is entitled to the deduction under Section 54 of the Income Tax provision for the cash transaction involved in the sale and purchase of the property. This entitlement holds valid even if the petitioner did not disclose the cash portion of the transaction in the income tax return or deposit the amount into a bank account.
The court noted that the seized materials clearly indicate that the cash transactions for property sale and purchase were conducted through simultaneous cash receipts and payments on the same dates.
The assessee, Ashwinbhai Babubhai Dudhat filed a writ petition and prayed for setting aside the impugned order passed by the Interim Board for Settlement, so far as it rejects the claim of the income tax exemption under Section 54 of the Income Tax Act amounting to Rs.2,40,14,000/- for Assessment Year 2016-17.
The assessee was subjected to a search under Section 132 of the Income Tax Act on 06.03.2018, resulting in the seizure of incriminating material and documents. Subsequently, assessment proceedings under Section 153A commenced.
On 27.12.2019, the assessee applied to the Settlement Commission for the period from A.Y. 2011–12 to 2018–19, disclosing a total income of Rs.2,99,15,288. This income arose from undisclosed transactions involving the purchase and sale of land, as well as unaccounted investments in constructing a bungalow.
The Settlement Commission processed the application, issuing orders under Section 245D(1) on 09.01.2020 and Section 245D(2C) on 19.02.2020.
On 29.06.2020, the Principal Commissioner of Income Tax, Ahmedabad, submitted a report under Rule 9 of the Settlement Commission Rules, requesting specific inquiry permissions, which were subsequently granted. The petitioner responded under Rule 9A on 31.08.2020, and the Settlement Commission issued an order under Section 245D on 24.11.2020.
Following amendments by the Finance Act, 2021, the Settlement Commission was abolished from 01.02.2021. For pending cases, an Interim Board for Settlement Commission was constituted under Section 245AA of the Act, and the E-Settlement Scheme 2021 was framed on 01.11.2021. The assessee’s case was assigned to the Board on 13.06.2022.
The assessee’s case was heard before the Board. During the proceedings, the petitioner claimed exemption under Section 54 on long-term capital gains from the sale of residential bungalows in Thaltej, Ahmedabad, against investments in another bungalow in Sola, Ahmedabad. However, the Board, in its order under Section 245D(4), rejected the claim regarding the cash portion of the sale consideration for the property in Thaltej.
The assessee filed a rectification application under Section 245D(6B) to rectify the order and allow exemption under Section 54 for the cash portion of the sale consideration. As the Board did not decide on the application, the petitioner has filed this petition seeking relief.
Mr. Soparkar, the assessee’s counsel asserted that the petitioner did claim capital gain exemption under Section 54 in their income tax return, and that the non-disclosure of certain income did not preclude eligibility for this benefit.
The counsel further argued that if undisclosed sale considerations are taxed by the Settlement Commission, the undisclosed payment made for property purchase should be considered for Section 54 benefits. He cited Section 245D(4) of the Act, noting that the respondent no.1-Board, acting in lieu of the Settlement Commission, should adhere strictly to statutory provisions when making rulings.
He concluded that the petitioner is entitled to the claimed deduction under Section 54 of the Act amounting to Rs.2,40,14,000 for A.Y. 2016-17.
Senior Standing Counsel Mr. Varun K. Patel, representing the respondents, countered the petitioner’s arguments and contended that the Settlement Commission rightly rejected the petitioner’s claim concerning the cash portion of Rs.2,40,14,000.
Mr. Patel argued that the conditions prescribed under Section 54 were not met, as the petitioner did not include this claim in their income tax return and the transaction was not disclosed in the books or accounts.
Additionally, the opposing counsel highlighted discrepancies in the petitioner’s disclosures based on seized materials, asserting that the source of the cash remains unexplained without a detailed cash flow statement or evidence of recipients.
Furthermore, the department counsel referenced legal precedents, such as the case of Arpan Associates vs. Income Tax Settlement Commissioner, and the Supreme Court’s ruling in Jyotendrasinhji vs. S.I. Tripathi (1993), stating that judicial review of orders under Section 245D(4) of the Act is limited to instances where there is a clear contravention of statutory provisions that prejudices the petitioner, excluding claims of bias or malice.
He concluded that the respondent no.1-Board acted within its authority by denying the Section 54 exemption, as per the provisions of the Act, due to the absence of proper disclosures and supporting documentation from the petitioner.
The court reviewed Section 54 of the Income Tax Act, noting it does not mandate disclosure of cash sale proceeds for claiming exemption. It found the Board’s denial of deduction based on undisclosed income settlement terms inconsistent with Section 54’s requirements. Section 245D(4) mandates adherence to Act provisions for such settlements, underscoring the Board’s non-compliance.
The court referred to the Supreme Court ruling in the case Jyotendrasinhji, where it was held that writ jurisdiction of the High Court is not barred and the Supreme Court has further observed that the judicial review flowing from the exercise of such powers should be restricted to considering whether the order of Settlement Commission is contrary to the provisions of Income Tax Act.
Responding to respondent counsel’s contentions, the Gujarat High court found the Board erred in disallowing the deduction. The court validated the seized documents’ correlation between cash receipts from property sales and payments for property purchases, thereby refuting the Board’s assertions lacking factual basis.
Thus, the court ruled in favour of the assessee, quashing the Board’s denial of Section 54 deduction concerning Rs. 2,40,14,000 in cash proceeds. It directed the Board to amend the Settlement Commission’s order, accepting Rs. 15,50,432 as taxable long-term capital gains after granting the petitioner’s claimed deduction under Section 54.
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