The Hon’ble Supreme Court in Civil Appeal Nos. 5525-5526 of 2005, M/S Fibre Boards (P) LTD., Bangalore vs. the Commissioner of Income Tax, Bangalore, has held that section 54G does not require that the plant and machinery should be acquired in the same year in which the transfer has taken place. It is sufficient if the capital gain is used for purchase of plant and machinery by giving advances to suppliers.
Section 54G does not mandate
Backgrounds of the case:
The assessee was private limited company, having an industrial unit at Thane being a notified urban area. For the purpose of shifting its industrial undertaking from an urban to a non-urban area at Pune, Maharashtra, the assessee sold its land, building and machinery to Shree Vardhman Trust for a total consideration of Rs.1,20,00,000/-. After deducting an amount of Rs.11, 62,956/-, the assessee earned a capital gain of Rs.1, 08, 33,044/-.
As the assessee intended to shift its industrial undertaking, out of the capital gain, the appellant paid certain amounts to different persons for purchase of land, machinery, construction of building, etc. through advances which amounted to Rs.1, 11, 42,973/- in the year 1991-1992.
The appellant claimed exemption under Section 54G of the Income Tax Act on the capital gains earned out of the sale proceeds of the erstwhile industrial undertaking as the advances made were more than the capital gains earned by it.
The Assessing Officer imposed a tax on capital gains by way of an order dated 31.3.1994 thereby refusing to allow exemption to the appellant under Section 54G of the Act. It was stated in the order that the assessee cannot take the plea of shifting the undertaking to a non urban area. It was categorically stated in the said order that the assessee requires acquiring the plant and machinery within the time specified in Section 54G (1). If it fails to do so before one year of transfer or within the period of filing the income tax return, it should deposit the amount of gains in the Capital Gains Deposit Scheme. It was further expressed that giving advances to different concerns does not amount to utilization of money for acquiring the assets. As the assessee did not deposit the capital gains in the account and file proof of the same, the assessee is not entitled to deduction under section 54G.
The Commissioner of Income Tax CIT (Appeals) by an order dated 20.7.1995 rejected the claim. However on appeal on behalf of the assessee by an order dated 20.11.1995, the Income Tax Appellate Tribunal upheld it. The Tribunal held that even an agreement to purchase plant and machinery is sufficient to allow exemption under Section 54G of the Act.
The High Court by a judgment dated 26.5.2005 reversed the order of the Tribunal and held that since the notification declaring Thane to be an urban area had been repealed along with the repeal of the Section guiding it, the appellant did not satisfy the essence of attracting the provisions of Section 54G, which requires that a transfer should be made from an urban to a non urban area. Moreover, the term “purchase” appearing in Section 54G cannot be confused with the term “towards purchase” as such, as the land, plant, machinery, etc. had not been purchased in the relevant assessment year, the exemption in Section 54G should be denied.
The assessee moved before the highest court of appeal being aggrieved by the aforesaid order.
When the assessee preferred the appeals before the Hon’ble Apex Court against the said order, the Hon’ble Supreme Court reversed the judgment of the Hon’ble High Court.
Shri Dhruv Mehta, the learned senior advocate appearing on behalf of the assessee contended that Chapter XXII-B of the Act contained Section 280ZA which when read along with the definition of “urban area” gave to an assessee who has shifted from an urban area to another non urban area, a tax credit certificate regarding the amount of tax payable by him on income tax chargeable under the head “Capital Gains” and he can claim a relief.
A reading of Section 54G states that the assessee is given a time of three years after the date on which transfer took place to “purchase” new machinery, plant, building or land. It was held that the High Court has missed the said duration of three years given to the assessee to purchase machinery and plant.
It is required for the assessee to avail the exemption of Section 54G by utilizing the amount of capital gains for purchase of new machinery or plant. It was admitted that the total amount claimed in the assessment year has been utilized for purchase of new machinery or plant and land or building.
The High Court was incorrect in holding that Section 54G would not apply to the assessee. It was held by the Apex Court that advances paid for purchasing the aforesaid assets would definitely amount to utilization of the capital gains by the assessee for the purpose of purchasing the said assets.
It was held that on the said ground the assessee was liable to succeed. The appeals were allowed and the judgment of the High Court was set aside.