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November 18, 2023

Absence of Section 54/54F Exemption for Adopted Son’s Property

Absence of Section 54/54F Exemption for Adopted Son’s Property

Fact and issue of the case

We are disposing of these two matters as both relate to the same parties and involving the same property in question.

The facts are that an assessee Mr. Timaji Sakharam Dhanjode (the deceased/assessee) who died on 09.05.1991 owned agricultural lands at Mouja Dighori, Patwai Halka No. 34, which fell within 8 Kms. Range of the Municipal corporation limit. He sold the said lands in two lots. The particulars of such sale are as follows:-

(i) 2 acres of land were sold on 04.08.1982 for Rs. 40,000/-.

(ii) 58 acres of land were sold on 31.08.1982 for Rs. 2,90,000/-.

The Income Tax Officer, First Survey Circle issued a notice under Section 139 (2) of the Income Tax Act (For short IT Act) calling upon the assessee to file his return of income. In response to the same, he filed his return of income declaring nil income. It was contended by him that the land in question was used for agricultural purposes and, therefore, outside the purview of the definition of the terms ‘Capital Asset’ within the meaning of the IT Act and, therefore, not liable to capital gain tax. It was observed that he had invested the sale proceeds in the following manner:-

“(a) By purchase of a vacant plot at circle No. 4, Ward No. 11/20 Ganesh Nagar, Nagpur on 02.03.1983 in the name of Shri Prakash, his only adopted son.

(b) By constructing the commercial and residential building of a value of Rs. 2,00,000/- within the prescribed period. According to the valuation report, the construction of the building was commenced in 1983 and completed in 1985. The assessee filed an affidavit wherein he has affirmed the fact that the land was purchased in his son’s name and the construction was being done on the said land after due sanction. It was also stated in the said affidavit that the investment is being done in his son’s name in view of his old age and counselling by others not to invest in his name. The investment by the assessee in the name of his son Prakash does not qualify for exemption and, therefore, the assessee was liable to be pay capital gain taxes.”

The same order was challenged in an appeal to the CIT-(A) and by order dated 25.01.1989, it was held that the transaction did not involve transfer of any capital asset, therefore, the assessee was not liable to pay capital gain taxes.

The respondent preferred an appeal to the Income Tax Appellate Tribunal vide Income Tax Appeal No. 151/1989. By order dated 07.10.1992 the same was allowed holding that there was transfer of capital asset and the assessee was liable to pay taxes on capital gains arising out of transfer. However, remanded the matter back with direction to consider the claim of the assessee with regard to the claims for exemption. After remand, it was held that; Section 54-F contemplates only investment in residential property by the assessee; it is enough if the sale proceeds are invested in the construction of a residential house. It was further held by the CIT (A) that it is not necessary that newly constructed house should be in the name of the assessee. In the eyes of law an adopted son has the same rights as a natural son. Thus, allowed the appeal of the assessee and directed the Assessing Officer to compute relief in accordance with Section 54F of the IT Act.

Observation of the court

For the above reasons, the proceedings under Section 156 of the Income Tax Act as initiated and proceedings under Section 221 and 271 (1) (a) of the Income Tax Act cannot be said to be bad in law, illegal or violative of any Constitutional and/or legal right. The writ petition filed by the petitioner being an adopted son of the deceased assessee is, therefore, dismissed. Interim relief, so granted, also stands vacated. However, a liberty is granted to the appellant/petitioner to take steps, if any, in accordance with law. Both the matters are dismissed with order as to costs.

Read the full order from here


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