Jagdish C. Dhabalia vs. ITO (Bombay High Court)

IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO.981 OF 2016

Jagdish C. Dhabalia
An Individual residing at
Ground Floor, Bhavsar Compound
M.G. Road, Borivali (W),
Mumbai – 400 066. …. Appellant
versus
The Income Tax Officer, 25(2)(1)
Having his office at
Pratyakshakar Bhavan,
Bandra Kurla Complex, Bandra (E),
Mumbai – 400 051. … Respondent
WITH
INCOME TAX APPEAL NO.983 OF 2016
Mehul Jagdish Dhabalia
An Individual residing at
501/502 Alaknanda, BWing
TPS, III 51st Road Borivali (W)
Mumbai – 400 092. …. Appellant
versus
The Income Tax Officer, 25(2)(2)
Having his office at
Pratyakshakar Bhavan,
Bandra Kurla Complex, Bandra (E),
Mumbai – 400 051. … Respondent
…….
• Mr.V.Joshi a/w Mr.Nishith Gandhi, Ms.Namrata Kasa,e
Mr.Mayur Patel & Ms.Urvi Patel i/b. M.M. Patel & Co.,
Advocate for Appellants.
• Mr.Arvind Pinto, Advocate for Respondent.

CORAM : AKIL KURESHI &
SARANG V. KOTWAL, JJ.
DATE : 12th MARCH, 2019.
ORAL JUDGMENT :
(PER : AKIL KURESHI, J.)
1. These Appeals arise out of common background. They
have been heard together and would be dispose of by this
common order. We may record facts from Income Tax Appeal
No.983/16. The Appeal is filed by individual assessee to
challenge the Judgment of Income Tax Appellate Tribunal (‘Tribunal’
for short). Following question is presented for our consideration;
“Whether, in the facts and circumstances of the
case, and in law, the Tribunal was right, while
reversing the order of CIT in confirming the action
of the assessing officer in taxing capital gain, to the
extent of the enhanced and notional sale
consideration under section 50 C of the Act, inspite
of the fact that the Appellant had invested the
entire sale consideration accruing on transfer of the
immovable property in the prescribed bonds in
terms of section 54 EC of the Act?”

2. The assessee was a joint owner of a plot of land
situated at Borivali, Mumbai, having 25% undivided share in the
plot. The assessee and other coowners
transferred the plot in
favour of purchaser under a sale deed dated 29/09/2007
pursuant to which the assessee received a sum of Rs.25 lakhs by
way of sale consideration. The assessee invested entire amount
of Rs.25 lakhs in the bond of ‘Rural Electrification Corporation
Ltd.’ as specified under section 54 EC of the Income Tax Act,
1961 (‘the Act’ for short). In the return of income filed for the
year 20082009
the assessee had declared the long term capital
gain on transfer of land at Rs.21,19,344/and
claimed full
exemption of such capital gain, under section 54 EC of the Act.
3. The Stamp Duty Authorities however had valued the
land for the purpose of levying stamp duty at Rs.3,04,70,810/.
The Assesse’s share of such stamp valuation of the property at
25% comes to Rs.76,17,702/.
4. During the course of scrutiny of assessee’s return, the
Assessing Officer determined the long term capital gain of

Rs.49,47,344/and
accordingly passed the order of assessment
on 29/12/2010.
5. The assessee filed Appeal against the order of
Assessment, before CIT (Appeals). The Assessee contended that
since the entire sale consideration of Rs.25 lakhs was invested in
the specified bond, the assessee must get full exemption from
capital gain, irrespective of the computation of the deemed sale
consideration under section 50C of the Act. CIT Appeals allowed
the assessee’s Appeal, upon which the revenue filed Appeal
before the Tribunal. The Tribunal by the impugned judgment
allowed the revenue’s Appeal. The tribunal was of the opinion
that for the purpose of exemption under section 54EC of the Act,
deeming fiction contained in section 50C of the Act cannot be
ignored. The assessee could claim exemption only in relation to
the investment made in the specified bond and not qua the
entire capital gain.
6. Learned Counsel for the Appellant raised following
contentions;

(i) Taking through the provisions contained in
Chapter IV of the Act it was contended that the
deeming fiction contained in section 50C of the
Act, would have no applicability while computing
the exemption as provided in section 54EC of the
Act. He contended that section 45 which is a
charging provision, is made subject to various
exemption provisions, including (though not so
stated in the section) section 54EC of the Act.
(ii) It was contended that section 50C of the Act
creates a deeming fiction for the purpose of
computation of capital gain under section 48 of the
Act. Such fiction would have no applicability for
the purpose of charging capital gain as per section
45 or for computing exemption under section 54EC
of the Act. It was contended that the effect of
deeming provision would be limited to the purpose
for which the same has been enacted. In this
context, learned Counsel relied on the decision of

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Supreme Court in the case of CIT Vs. Amarchand
N. Shroff, reported in (1963) 48 ITR 59 (SC) and
CIT Vs. Vadilal Lallubhai, reported in (1972) 86
ITR 2 (SC).
(iii) Learned Counsel submitted that in the present
case, the relevant provisions would require
harmonious construction. The interpretation
adopted by the revenue as accepted by the tribunal
would lead to anomalous situation which should
be avoided.
(iv) It was further contended that the legislature would
not expect a person to perform an impossible task.
If the assessee had received total sale consideration
of Rs.25 lakhs from transfer of the land, he could
not be expected to invest any amount in access
thereto, for claiming full exemption under section
54 EC of the Act.
(v) Our attention was drawn to the decision of
Supreme Court in case of K.P. Verghese Vs.

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Income Tax Officer, as reported in 131 ITR 597
(SC) in support of the proposition that to avoid
absurdity and incongruent consequences, the Court
would adopt an interpretation not emerging from
the plain language of a statute.
7. On the other had, the learned Counsel Mr.Arvind Pinto
for the revenue contended that tribunal has correctly interpreted
the relevant statutory provisions. The interpretation advanced
by the Assessee would effectively render the provisions of
section 50C of the Act redundant. The exemption provision
should be strictly construed. Assessee can claim exemption only
in relation to investment made in the specified bond and not
beyond.
8. Having heard learned Counsel for the parties, to test
the correctness of the interpretation of the tribunal, we may
refer to the relevant statutory provisions. Part E of the Chapter
IV of the Act pertains to capital gains. Section 45 contained the

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said part is the charging provision for the capital gain arising
from transfer of a capital asset. Subsection
(1) of section 45
provides that any profits or gains arising from the transfer of a
capital asset effected in the previous year shall, save as
otherwise provided in section 54, 54B, 54D, 54E, 54EA, 54EB,
54F, 54G and 54H be chargeable to income tax under the head
“Capital gains” and shall be deemed to be the income of the
previous year in which the transfer took place. Section 48 of the
Act provides the mode of computation of capital gain. In terms
of this provision, the income chargeable under the head “Capital
gains” would be computed by deducting from the full value of
consideration received or accruing as a result of the transfer of
the capital any amounts towards expenditure incurred wholly
and exclusively with such transfer and the cost of acquisition of
the asset and the cost of any improvement thereto.
9. Section 54EC of the Act pertains to capital gain not to
be charged on investment in certain bonds. Relevant portion of
this section reads as thus ;

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54 EC. (
1) Where the capital gain arises from the transfer
of a longterm
capital asset (the capital asset so
transferred being hereafter in this section referred to
as the original asset) and the assessee has, at any time
within a period of six months after the date of such
transfer, invested the whole or any part of capital
gains in the longterm
specified asset, the capital gain
shall be dealt with in accordance with the following
provisions of this section, that is to say, (
a) if the cost of the longterm
specified asset is not
less than the capital gain arising from the
transfer of the original asset, the whole of such
capital gain shall not be charged under section
45;
(b) if the cost of the longterm
specified asset is less
than the capital gain arising from the transfer of
the original asset, so much of the capital gain as
bears to the whole of the capital gain the same
proportion as the cost of acquisition of the longterm
specified asset bears to the whole of the
capital gain, shall not be charged under section
45.”

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10. Section 50C of the Act introduced by the legislature
under Finance Act 2002 with effect from 01/04/2003, reads as
under ;
50 C. (
1) Where the consideration received or accruing as
a result of the transfer by an assessee of a capital
asset, being land or building or both, is less than the
value adopted or assessed by any authority of a State
Government (hereafter in this section referred to as
the “stamp valuation authority”) for the purpose of
payment of stamp duty in respect of such transfer the
value so adopted or assessed shall, for the purposes of
section 48, be deemed to be the full value of the
consideration received or accruing as a result of such
transfer.
“Provided that where the date of the agreement fixing the
amount of consideration and the date of registration
for the transfer of the capital asset are not the same,
the value adopted or assessed or assessable by the
stamp valuation authority on the date of agreement
may be taken for the purposes of computing full value
of consideration for such transfer:

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Provided further that the first proviso shall apply only in
a case where the amount of consideration, or a part
thereof, has been received by way of an account payee
cheque or account payee bank draft or by use of
electronic clearing system through a bank account, on
or before the date of the agreement for transfer.”.
(2) Without prejudice to the provisions of subsection
(1),
where—
(a) the assessee claims before any Assessing Officer
that the value adopted or assessed [or assessable]
by the stamp valuation authority under subsection
(1) exceeds the fair market value of the
property as on the date of transfer;
(b) the value so adopted or assessed [or assessable] by
the stamp valuation authority under subsection
(1) has not been disputed in any appeal or
revision or no reference has been made before any
other authority, court or the High Court,
the Assessing Officer may refer the valuation of the capital
asset to a Valuation Officer and where any such reference is
made, the provisions of subsections
(2), (3), (4), (5) and
(6) of section 16A, clause (i) of subsection
(1) and sub:::
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sections (6) and (7) of section 23A, subsection
(5) of
section 24, section 34AA, section 35 and section 37 of the
Wealthtax
Act, 1957 (27 of 1957), shall, with necessary
modifications, apply in relation to such reference as they
apply in relation to a reference made by the Assessing
Officer under subsection
(1) of section 16A of that Act.
[Explanation 1] —
For the purposes of this section, “Valuation Officer” shall
have the same meaning as in clause (r) of section 2 of the
Wealthtax
Act, 1957 (27 of 1957).
[Explanation 2 ]—
For the purposes of this section, the expression “assessable”
means the price which the stamp valuation authority would
have, notwithstanding anything to the contrary contained
in any other law for the time being in force, adopted or
assessed, if it were referred to such authority for the
purposes of the payment of stamp duty.]
(3) Subject to the provisions contained in subsection
(2),
where the value ascertained under subsection
(2)
exceeds the value adopted or assessed [or assessable]
by the stamp valuation authority referred to in subsection
(1), the value so adopted or assessed [or

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assessable] by such authority shall be taken as the full
value of the consideration received or accruing as a
result of the transfer.]
11. Combined reading of these provisions would show that
capital gain upon transfer of a capital asset is to be charged as
per section 45 of the Act and which shall be deemed to be the
income of the assessee for the previous year in which the
transfer took place. In terms of the provisions contained in
section 48 the capital gain would be computed by deducting
from the full value of consideration received or accruing as a
result of transfer, expenditure incurred wholly and exclusively in
connection with the transfer and the cost of acquisition of the
asset and cost of improvement thereof. It is at the stage of
computation that section 50C of the Act kicks in. This provision,
as can be seen, provides for a deeming fiction. Subsection
(1) of
section 50C provides that where the consideration received or
accruing as a result of the transfer by an assessee of a capital
asset, being land or building or plot or both is less than the
value adopted or assessed or assessable by stamp valuation

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authority for the purpose of stamp duty collection in respect of
such transfer, the value so adopted, assessed or assessable shall
for the purpose of section 48 be deemed to be the full value of
consideration for transfer received or accruing as a result of such
transfer. In plain terms, the stamp valuation assessment by the
stamp duty officer of the State Government would be deemed to
be the sale consideration of capital asset, replacing the declared
sale consideration, if it happens to be less than stamp duty
valuation. For the purpose of charging capital gain in view of
section 45, to be computed as provided in section 48, this
deemed consideration would be applied.
12. We may refer to section 54EC which is an exemption of
provision. SubSection
(1) of section 54EC provides that where
the capital gain arising from the transfer of a longterm
capital
asset being land or plot or both and the assessee has, at any time
within a period of six months after the date of such transfer,
invested the whole or part of the capital gains in specified asset,
the capital gain shall be dealt with in accordance with clause (a)

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and (b) of subsection
(1). As per clause (a) if the cost of the
longterm
specified asset is not less than the capital gain arising
from the transfer of the original asset, the whole of such capital
gain shall not be charged under section 45. As per clause (b) if
the cost of the longterm
specified asset is less than the capital
gain arising from the transfer of the original asset, the Assessee
would receive proportionate exemption from payment of capital
gain. Further proviso of subsection
(1) of section 54EC limits
the investment that an assessee can make in any specified asset
to Rs.50 lakhs. In other words, therefore clauses (a) and (b) of
subsection
(1) of section 54EC would always have limit of
Rs.50 lakhs specified in the further proviso for investment in the
specified asset.
13. We do not find any conflict or any incongruent
consequences of applying the provisions of section 50C for the
purpose of computation of capital gain tax after claiming
exemption under section 54EC of the Act. The deeming fiction
under section 50C of the Act, must be given its full effect and the Court should not allow to boggle the mind while giving full
effect to such fiction. We are not opposing the proposition
canvassed by the Counsel of the Assessee that deeming fiction
must be applied in relation to the situation for which it is
created. However, while giving full effect to the deeming fiction
contained under section 50C of the Act for the purpose of
computation of the capital gain under section 48, for which
section 50C is specifically enacted, the automatic fallout thereof
would be that the computation of the assessee’s capital gain and
consequently the computation of exemption under section 54EC,
shall have to be worked out on the basis of substituted deemed
sale consideration of transfer of capital asset in terms of section
50C of the Act.
14. Any other interpretation, particularly one canvassed by
the learned Counsel for the Assessee, would render the
provisions of section 50C redundant. In a situation like the one
on hand, even if for the purpose of section 48, in terms of
section 50C of the Act, the sale consideration deemed to have

been received by the Assessee may be much higher than one
declared in the sale deed, the Assessee would claim no further
capital gain tax liability by simply claiming to have made
investment in specified asset the full declared sale consideration.
15. Under such circumstances we do not find that the
Tribunal has committed error in interpreting the relevant
statutory provision. Income Tax Appeals are therefore dismissed.
(SARANG V. KOTWAL, J.) (AKIL KURESHI, J.)