Deduction u/s 54F of Income Tax Act can be Allowed on Substantiating Assessee’s Intention to Repay Borrowed Funds with Capital Gains: Kerala HC [Read Order]

The Kerala High Court has held that deduction under Section 54F of the Income TaxAct, 1961 can be allowed when assessee substantiate her intention to repay the borrowed funds with the capital gains.

Sainaba Hamza Koya, the petitioner, a widow and senior citizen, has approached the Court, being aggrieved by the denial of permission to her, by the 1st respondent, to close a Capital Gain SB Account maintained by the petitioner, with the 2nd respondent-Bank, and to release the amounts in the said account.

A property having an extent of 4.04 Ares in Survey No.42/13/A/2 Edappally North Village, in Ernakulam District, was acquired by the petitioner by way of a gift deed dated 2.3.2020, executed by the brother of the petitioner. Subsequently, the petitioner sold a portion of the said property having an extent of 2.02 Ares, to one M.H. Abdul Jamal for a sale consideration of Rs.39,60,000/- as per document No.839/20 dated 13.3.2020 of SRO, Edappally. Thereafter, the remaining portion of the property was also sold to the same purchaser on 26.6.2020 for a consideration of Rs.43,64,000/-.

On 6.3.2020, the petitioner opened a Capital Gain SBAccount with the 2nd respondent-Bank and on 14.03.2020, she deposited an amount of Rs.39,60,000/- which is the sale consideration of the 1st transfer, which comes within the financial year 2019-2020. Similarly, Rs.43,64,000/-, which is the sale consideration of the second transfer, was also remitted on 3.7.2020 which comes within the financial year, 2020-2021.

The deposits were made by the petitioner for getting the benefit of exemption of tax from capital gain, as contemplated under Section 54F of the Income Tax Act, 1961, as the petitioner wanted to construct a new case within three years of the sale of the landed properties. According to the petitioner, she spent an amount equal to Rs.39,60,000/- for constructing a residential property at Edappally. However, the construction was affected without withdrawing the amounts in the Capital Gain SB account and by borrowing the funds from her daughter and son-in-law.

To be precise, the petitioner intended to utilize the money deposited with the 2nd respondent for repaying the debt which she incurred for constructing the house within the period of three years. As far as the deposit of Rs.43,64,000/-, which is the sale consideration of the 2nd transfer is concerned, the petitioner did not claim the benefit and the tax in respect of the same was paid in the financial year 2021-2022 on capital gains. The petitioner submitted two letters requesting for permission to submit G forms for the closure of the said Capital Gain account and to release the entire amount to the petitioner.

The case of the petitioner is that, the petitioner had utilised the funds generated from the transfer of her property, within the period of three years from the date of such transfer, for the purpose of construction of a residential building for her at Edappally. According to her, the construction was completed by using the funds borrowed by her from her daughter and son-in-law, and she wants to repay the debt by utilizing the amounts in the said property. In short, the case of the petitioner is that the construction was made by her, utilizing the borrowed funds with an intend to appropriate the amounts lying in the deposit for repaying the same.

It was found that the petitioner failed to utilise any amount from the funds she received from the transfer of her property. There is also a finding that the construction itself was not completed within the time as claimed by the petitioner. The specific contention raised by the petitioner is that, as per the stipulations contained in Section 54F, it is not necessary that the construction should be carried out only with the funds generated by way of transfer of property, which is the subject matter of assessment for capital gains. According to the petitioner, purchasing or constructing the residential building, by utilising the funds borrowed by the assessee and later appropriating the funds from the transfer of property to those transactions, are also permissible under Section 54F of the Income Tax Act.

Section 54F does not prohibit such an exercise and therefore, nothing would preclude the assessee from arranging funds from other sources for fulfilling the obligation of purchasing or constructing a residential building within the period stipulated. The same is evident from the fact that, in Section 54F, when it comes to the case of purchase of a residential building, the time mentioned for utilisation of the amount, is one year before or two years after the date on which the transfer took place.

Justice Ziyad Rahman A.A. stated that “Merely because of that reason, the contentions raised by the counsel for the petitioner cannot be accepted. This is because, even in a case where, the residential building was purchased, or it was constructed utilising the borrowed funds or funds from other sources, there is an obligation on the part of the Assessee to satisfy the authorities that, the funds were spent by the assessee either through borrowing or arranging from other sources at his/her own risks and costs, in anticipation of or with an intention to appropriate the income to be subjected to capital gain tax, for such purchase or construction.”

For the said purpose, materials will have to be produced before the appropriate Authority and such Authority has to scrutinize such materials, for arriving at the conclusion that, the petitioner established the link between the utilisation of the income to be subjected to tax, and the purchase or construction of residential building, as the case may be. Therefore, mere claim of the petitioner by itself is not sufficient, but what is relevant is the satisfaction of the appropriate authority that the petitioner had indeed utilised the funds, which are otherwise subject to tax, for the purposes referred to Section 54F of the Income Tax Act.

It is true that, the adjudication with regard to the tax liability of the petitioner or the entitlement of the petitioner under Section 54F of the Income Tax Act, can be conducted only in a proceeding of assessment of the Income Tax Act, either under sections 143 or 148 thereof. It is also true that, as pointed out by the learned counsel for the petitioner, as of now, no such proceedings are initiated at the instance of the Department.

However, it is to be noted in this regard that, as per Section 54F(4) of the Income Tax Act, in case, the Assessee fails to comply with the conditions stipulated in Section 54F, within the period specified, such income shall be charged under Section 45, as the income of the previous year in which, the period of three years from the date of the transfer of the original Assessee expires. Therefore, it is a matter to be finally decided in an assessment proceeding pertaining to the Assessment year, as mentioned above, which is yet to take place.

When it was made obligatory for the Assessee to get permission of the Officer concerned, it clearly implies that, such officer has a duty to ensure that, the necessary conditions are prima facie satisfied by the Assessee before permission is granted for closure of the account.

The bench held that since the liability of the petitioner was already determined, and it is also evident that such tax liability along with the interest and other charges are lesser than the amount lying in the Capital Gain SB Account of the petitioner, it was not proper to reject the request as a whole. On the other hand, the petitioner should have been permitted to withdraw the excess amount, if any, in the deposit, after retaining the amounts payable by the petitioner towards the Revenue, by way of tax and other incidental liabilities.

The writ petition was disposed of by directing the 1st respondent to grant permission to the petitioner to release the balance amount, if any, in the Capital Gain SB Account maintained by the petitioner with the 2nd respondent-Bank, after retaining the amounts equivalent to the liability of the petitioner pertaining to the relevant assessment years.

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