1. This appeal by the assessee relates to the assessment year 1979-80.
The accounting year ended on 31-3-1979. The assessee sold certain properties in the accounting period and capital gains arose therefrom.
According to the assessee, since certain investment of the type contemplated under section 54E (1) of the Income-tax Act, 1961 (the Act) had been made, the assessee was entitled to exemption of capital gains. The ITO, however, did not agree. We set out below in extenso extract from the assessment order giving reasons which weighed with the ITO for denying relief as also the computation of assessable capital gains as made by him : "Capital gains : The assessee sold her house for Rs. 73,500 on 22-7-1978. Against this, the assessee claimed the acquisition value, i.e., the value as on 1-1-1964 at Rs. 60,000. Considering the rates prevailed as on 1-1-1964 in the area, the value is on the high-side. On agreed basis, the value of the property as on 1-1-1964 is fixed at Rs. 45,000.
At the time of hearing and also by letter dated 16-3-1982 filed on 17-3-1982, the assessees representative claimed exemption under section 54E on the plea that the assessee deposited amounts aggregating to Rs. 59,200 in banks. This is not admissible to the assessee. The exemption is available to those deposits which were made after 27-4-1978.
According to section 54E (1), the assessee has to deposit the sale proceeds (whole or part) within six months from the date of transfer.
According to section 54E (1A), it is clear that the deposits made after 27-4-1978 only qualify for exemption subject to two conditions, viz.
(a) the assessee has to furnish along with the deposit a declaration in writing to the bank to the effect that the assessee will not take any loan or advance on the security of such deposit during a period of three years from the date of which the deposit is made, and (b) the assessee has to furnish along with the return of income for the assessment year relevant to the previous year, a copy of the declaration referred to in clause (a) duly attested by an officer not below the rank of sub-agent of such bank.
In the present case, none of the conditions mentioned above are satisfied. Firstly, the deposits made were prior to 27-4-1978. Secondly there was no declaration furnished to the bank and a copy of it duly attested to the return of income. Even there was no claim in the return of income. In view of the above, the assessees claim is rejected.
2. The assessee appealed to the AAC and contended that the ITO was in error in denying relief to her. The AAC stated that after due consideration it appeared that the plea of the assessee could not succeed. He, therefore, upheld the order of the ITO.3. The submission of the learned counsel is that the deposits in the bank were made out of advances of sale consideration received and as such the same constituted part of sale proceeds. Since advance was received prior to the date of transfer, it was stated that the requirement of making deposit within six months of the transfer stood satisfied. At the time of making the deposits it was stated that there was no requirement in law of furnishing a declaration to the bank and that no loan, etc., would be taken. This requirement came into force only in respect of deposits made after 27-4-1978. Therefore, the contention was that the non-making of the declaration referred to in the assessment order would not stand in the way of the relief being allowed to the assessee. It is, therefore, pleaded that capital gain should be exempted.
4. The learned departmental representative submitted that the transfer in the present case took place on 22-7-1978 which was a date which fell subsequent to 27-4-1978 and, therefore, the deposits out of sale consideration should satisfy all the requirements of law which actually existed after 27-4-1978 and since the requisite declaration was not given to the bank that loan, etc., would not be taken against the fixed deposits, the ITO was justified in declining to grant the exemption sought for. Apart from this, the learned departmental representative submitted that the provision of law was very clear that the deposit had to be made within six months of the transfer and this would not include deposits made prior to the transfer dates. For all these reasons, he submitted that the assessee was not entitled to relief.
5. The learned counsel for the assessee had also relied on a circular of the Board No. 359 (F. No. 207/8/82-ITA-II), dated 10-5-1983 reproduced in (1983) 143 ITR (St.) 1. According to the learned counsel, this circular fully supported the stand he was taking and in terms of the circular relief should be allowed. The learned departmental representative submitted that this circular was not in existence in the assessment year 1979-80 and, hence, was not applicable to the assessment as made.
6. I have carefully considered the rival submissions. The facts as stated in the assessment order are that the assessee sold certain properties for Rs. 73,500 on 22-7-1978. The value as on 1-1-1964 was fixed at Rs. 45,000 and the capital gain is Rs. 28,500. None of the aforesaid figures are in dispute. However, to decide the issue canvassed, it is necessary that certain further facts have to be stated. These facts which are available in the statement of facts filed before the AAC and a copy of which has been furnished by the learned counsel are that the assessee along with her son had contracted to sell the properties in question on 2-2-1975 to one Shri Jupudi Yagnarayana, advocate and M. L. C. for Rs. 90,000. In pursuance of the agreement advances were received aggregating to Rs. 90,000 on the following dates : Due to some difficulties, eventually Shri Yagnarayana nominated one Shri K. Venkataratnam as the party in whose favour the sale deed was to be executed. The sale deed itself came to be registered on 22-7-1978.
Thus, the date of transfer of the properties was 22-7-1978, a date which fell in the accounting period relevent to the assessment year 1979-80 now under consideration. The sale consideration attributable to the assessee had been accepting at Rs. 73,500. The balance of sale consideration, i.e Rs. 16,500 pertained to the assessees son. 7. Prior to the date of transfer and subsequent to the receipt of the advances, the assessee had made fixed deposits aggregating to Rs. 59,200 with various banks as under : The question that arises is whether these fixed deposits made would entitle the assessee to exemption under section 54E (1). Section 54E was introduced by the Finance (No. 2) Act, 1977, with effect from 1-4-1978. The said provisions, therefore, applies to the transfer in question which was made on 22-7-1978. Section 54E (1) and Explanation 1(a) (vi) thereto as it stood in relation to the assessment year 1979-80 read as under : "54E. (1) where the capital gain arises from the transfer of a capital asset, not being a short-term capital asset (the capital asset so transferred being hereafter in this section referred to as the original asset), and the assessee has, within a period of six months after the date of such transfer invested or deposited the whole or any part of the net consideration in any specified asset (such specified asset being hereafter in this section referred to as the new 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 new asset is not less than the net "consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45; (b) if the cost of the new asset is less than the net consideration in respect 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 new asset bears to the net consideration shall not be charged section 45; Explanation 1 : For the purposes of this sub-section, specified asset means - (a) in a case where the original asset is transferred before the 1st day of March, 1979, any of the following assets, namely : (vi) deposits for a period of not less than three years with the State Bank of India established under the State Bank of India Act, 1955 (23 of 1955), or any subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959) or any nationalised bank, that is to say, any corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or any co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank);" From the particulars of investments made it is clear that the investments have been made in nationalised banks and are for period of not less than three years. (On the particular facts it may be mentioned that there were more than three years to run for maturity of the deposits even with reference to the date of transfer, i.e., 22-7-1978.
) Therefore, ex facie requirement of Explanation 1(a) (vi) is satisfied be the investment in fixed deposits which become investments in specified assets. The advances received towards sale price agreed upon formed part of the sale consideration. Section 54E required that the sale consideration should be deposited in specified assets within a period of six months from the date of transfer. If amounts which really constituted part of the sale proceeds and which were registration of sale deed, such deposits made cannot be construed as offending the requirement of section 54E, namely, that the deposits were to be made within six months of the date of transfer. These deposits have to be held as having been made within the stipulated period. Section 54E (1A) reads as under : "(1A) Where the assessee deposits after the 27th day of April, 1978, the whole or any part of the net consideration in respect of the original asset in any new asset, being a deposit referred to in sub-clause (vi) of clause (a) of Explanation 1 below sub-section (1), the cost of such new asset shall not be taken into account for the purposes of that sub-section unless the following conditions are fulfilled, namely :- (a) the assessee furnishes, along with the deposit, a declaration in writing, to the bank or the co-operative society referred to in the said sub-clause (vi) with which such deposit is made, to the effect that the assessee will not take any loan or advance, on the security of such deposit during a period of three years from the date on which the deposit is made; (b) the assessee furnishes, along with the return of income for the assessment year relevant to the previous year in which the transfer of the original asset was effected or within such further time as may be allowed by the Income-tax Officer, a copy of the declaration referred to in clause (a) duly attested by an officer not below the rank of sub-agent, agent or manager of such bank or an officer of corresponding rank of such co-operative society." The applicability of this provision has to be construed with reference to the actual date of deposit. If the deposit was made after 27-4-1978, then to secure the exemption under section 54E, the assessee had to give a declaration in writing to the bank that no loan or advance would be taken against the security of the deposit and a copy of the declaration each of the deposits was made falls prior to the date 27-4-197 and, therefore, the provisions of section 54E (1A) do not come into play. The Boards Circular No. 359, dated 10-5-1983 (supra) was not in existence in the assessment year 1979-80, according to the learned departmental representative, and, hence, the departmental representative may be justified in urging that the case should not be decided with reference to the provisions of the circular. The decision which has been rendered is independent of the provisions and the circular. It may only be pointed out that the view eventually taken by the Board in the circular that earnest money or advance received is part of the sale consideration has been arrived at independently as has been arrived at earlier.
8. The assessee, however, is not entitled to exemption of the full amount of capital gain as assessed though by and large, the issue becomes academic in this case because no tax would become payable even on a correct application of the law. Nevertheless it is necessary for the sake of completeness to set out the law on this point. The definition of net consideration as amended with effect from 1-4-1979 as occurring in Explanation 5 to section 54E (1) reads as under : "Net consideration, in relation to the transfer of a capital asset, means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer." In the present case no expenditure on the sale has been incurred and, therefore, net consideration is equivalent to gross consideration on the facts. The net consideration in the present case is Rs. 73,500. The amount invested is only Rs. 59,200. Therefore, the assessee is entitled to exemption form capital gains only in such proportion as Rs. 59,200 : Rs. 73,500. The amount of capital gain which has been considered for the assessment year 1979-80 is Rs. 28,500. On the proportionate basis aforesaid, the amount of Rs. 23,113 will fall to be exempt. Again capital gain to be considered for purposes of tax would be section 80T of the Act of Rs. 5,000 leaving a balance of Rs. 389. Further exemption of 25 per cent thereof is due to the assessee, i.e., Rs. 97 and the assessable capital gain will, thus, be Rs. 292. This makes the total income below the taxable limit.