Denial of deduction under Sec 54F would not lead to imposition of penalty u/s Sec 271(1)(c): ITAT

The assessee has challenged the imposition of the penalty of Rs. 13,75,050/- on account of disallowance of deduction under Section 54F of the Income Tax Act.

Facts of the Case:

• The assessing officer in the quantum proceedings, disallowed the assessee’s claim under Section 54F of the Act for exemption of capital gains on the ground that the assessee has not satisfied the conditions of Section 54F of the Act.
• In this regard, the ld. counsel pointed out that the assessee has transferred the original asset on 30.05.2011 (incorrectly written as 24.05.2011) by the CIT(A) and claimed exemption of Rs. 44,50,000/- towards Long Term Capital Gain (LTCG) arising thereon on the ground that the assessee purchased new asset albeit on 09.04.2010. Further, the ld. counsel pointed out that the Tribunal in the quantum proceedings itself has noted the fact that the assessee had received Rs.5 lac on account of security deposit against the property under proposed sale on 06.04.2011 (i.e. within a period of one year from the date of corresponding of new asset) although a formal agreement was executed on 30.05.2011 with a different party.
• The security deposit received was promptly refunded on the next date of agreement on 31.05.2011 on happening of actual sale. In these circumstances, it was pointed out that when the date of receipt of security deposit on 06.04.2011 is reckoned as a cause of action, the purchase of the property on 09.04.2010 falls within the stipulated time period specified under Section 54F of the Act.
• Under the circumstances notwithstanding the rejection of the claim of the assessee in the quantum proceedings upto ITAT, the penalty being a distinct proceeding requires to be tested on these facts.
• It was claimed that the claim of deduction under Section 54F albeit found to be wrong in the quantum proceedings, by itself would not construe that the assessee has concealed any particulars of his income or furnished inaccurate particulars of such income per se.
• It was contended that mere incorrect claim in law for such deduction would not automatically tantamount to the default specified under Section 271(1)(c) of the Act as held by the Hon’ble Supreme Court in CIT vs. Reliance Petro Products Pvt. Ltd., (2010) 322 ITR 158 (SC). The ld. counsel accordingly urged for cancellation of the penalty imposed by the Assessing Officer.

Taxpayers Contention: Provisions of Section 54F are beneficial in nature:

It is seen that the basis for denial of deduction under Section 54F is that the purchase of the property i.e. new asset was beyond the period of one year vis-à-vis sale of the old asset in this regard. It is the case of the assessee that although the purchase of new asset is beyond one year vis-à-vis sale of the old asset, the security deposit for sale of old asset was taken within a period of one year, and therefore, the action for sale of old asset started rolling within the stipulated period. It is the case of the assessee that the provisions of Section 54F are beneficial in nature and the Courts have always accorded liberal interpretation and a small delay of few days have been condoned for the eligibility purposes. Even otherwise, in these circumstances, the imposition of penalty on account of denial of deduction on such technical breach is not justified on the contours of Section 271(1)(c) of the Act.

Order of Tribunal:

Admissibility of Sec 54 deduction may be somewhat debatable: However, this would not result in the imposition of a penalty

As per Income Tax Appellant Tribunal (ITAT), “While the admissibility of deduction under Section 54F in the circumstances may be somewhat debatable due to non-compliance of strict letter of law. However, this by itself, would not result in the imposition of penalty as a consequential measure.”

A small breach in one year period between the purchase and sale of assets would not justify the imposition of a penalty

Admittedly, no inaccuracy was found in the particulars of deduction claimed as such. The assessee also has a basis for claim of deduction in the light of the fact that security deposit was accepted from the brokers against the sale of property which ultimately materialized 20-25 days later resulting in slight delay in actual execution of sale agreement of old asset. In such circumstances, small breach in the stipulated period of one year between purchase and sale of assets would not justify imposition of onerous penalty.