THE issue before the Bench is - Whether where actual transfer of share in favour of transferee is done only at time of registration, period for which such shares were held till date of transfer is required to be considered for determining nature of capital gains arising on such transfer. YES is the answer.
Facts of the case
The assessee is an individual. During the concerned year, the assessee had filed his return declaring income of Rs. 2,78,53,090/-. The case of assessee was selected for scrutiny and notice u/s 143(2) was issued. During assessment, the AO noted that in the computation of income for the AY 2006-07, the assessee claimed deduction u/s 54F amounting to Rs. 62,47,576/- against the long term capital gains of Rs. 63,96,328/- arising from the sale of share of M/s. Perfect Buildwell Pvt. Ltd., by investing an amount of Rs. 63 lakhs in the purchase of residential building at Village Fatehpur Beri, New Delhi by an agreement to sell. The assessee was also having a residential house property at Mehrauli, value of which was shown as Rs. 60,000/-. The assessee showed that he was earning less income from the said property. For the A.Y 2007-08, the assessee again claimed deduction u/s 54F amounting to Rs. 2,21,69,090/- against the long term capital gains of Rs. 3,74,47,787/- on sale of shares of Valleyview Probuild Private Limited (VPPL). From the above facts the AO concluded that in A.Y 2007-08, the assessee was having more than one residential house property. The AO observed that the purchase of the property at Meherauli was within two years from the date of transfer from the long term capital assets, i.e. shares of VPPL. The AO was of the opinion that the assessee had therefore violated the conditions for claiming exemption u/s 54F, and therefore, the assessee was required to show cause why penalty u/s 271(1)(c) should not be imposed. In response, the assessee submitted that his ownership of 15% in the Mehrauli house would not constitute the exclusive ownership of a residential house u/s 54F.
The AO however rejected the assessee's explanation and observed that no evidence had been produced by the assessee to show that he was only 15% co-owner of Gadaipur house. It was not ascertainable whether the construction was on the parcel of land belonging to the assessee or whether the land belonging to father remained vacant or vice versa or the structure occupied parts of the land belonging to both. Consequently, the AO declined to grant the benefit to the assessee u/s 54F and also directed penalty proceedings u/s 271(1)(c). On appeal, the CIT(A) reversed the order of AO and held the assessee entitled for the benefit of deduction u/s 54F. On further appeal, the Tribunal concurred with the decision of the CIT(A) that the transfer of shares resulted in long term capital gain and that CIT(A) was right in upholding that the assessee was not a fractional owner of the property at Gadaipur and therefore, eligible for deduction u/s 54F.
Having heard the parties, the High Court held that,
++ it has been factually found by the CIT(A) and concurred with by the ITAT that the shares were held for more than 12 months and it was therefore long term capital asset. The fact of purchase of shares by the assessee and their sale have been sufficiently proved by producing the requisite evidence. The conclusion of the AO was that sale of the shares took place at a time earlier on 8th Nov, 2006 since 60% of the consideration was already paid by them is inconsistent with the legal position. In the present case, there was no actual transfer in the name of the transferee, Mrs. Falguni Nayar, till her name was entered in the share register. Moreover, there is a receipt executed by the assessee acknowledging the receipt of the balance consideration for the shares from Mr. Nayar and confirmation endorsed by Mr. Nayar on that date was not that "I have received the original share certificate along with share transfer deed form for 5,000 shares from Kapil Nagpal, Green Park Extension, New Delhi on this day of 8th November 2006." After analysing the documentary evidence produced by the assessee, the CIT(A) concluded that the actual transfer of the shares took place only on 8th November 2006 and that therefore, the Assessee had held shares for more than one year. The further consequential finding that long term capital gains resulted cannot be said to be perverse;
++ turning to the question whether the exemption u/s 54F could be availed of by the assessee, it requires to be first noticed that in light of the decision of the Supreme Court in CIT v. Podar Cements (P) Limitedm, in order to constitute purchase for the purpose of Section 54F, it is not necessary that there should be registered sale deed. This Court in Balraj v. CIT held that "for the purpose of attracting the provisions of Section 54, it is not necessary that the assessee should become the owner of the property. In the present case, as pointed out by the CIT (A), the sale deed does show that what was purchased by the assessee is an agricultural land. The explanation by the assessee that only the rental income from letting out the constructed portion property was being shared between him and the father in the ratio of 15%: 85% appears to be a plausible one. Unless there is document to show that the assessee was a co-owner of the said building to the extent of even 15%, there cannot be an inference in that regard. The evidence produced by the assessee showed that the house was purchased by him on 10th April 2007 within the time allowed u/s 54F, after making payment and by obtaining the possession thereof. A substantial part of the consideration of Rs. 2 crores was paid on the date of the agreement to sell itself. The balance payment of Rs. 22 lakhs was made on 17th April 2007 when the possession was handed over. The conclusion that the house was in fact purchased on 10th April 2007 within the time allowed u/s 54F stands supported by the documents placed on record by the assessee. This Court is therefore satisfied that the prior to 10th April 2007 the assessee was not the owner of another residential house and therefore the exemption u/s 54 r/w/s 54F could not be denied to him