2025 (2) TMI 31 - AT - Income Tax

Taxpayer wins appeal on long-term capital gains from gifted shares, gets section 54F deduction allowed

Ms. Deepa Pamnani Pamnanai Hospital & Research center Versus The Income tax officer Ward 20 (1) (1), Mumbai

Ms. Deepa Pamnani Pamnanai Hospital & Research center Versus The Income tax officer Ward 20 (1) (1), Mumbai - TMI ISSUES PRESENTED and CONSIDEREDThe primary issues considered in this judgment were:1. Whether the characterization of the long-term capital gain from the sale of shares as unexplained cash credit under Section 68 of the Income Tax Act was justified.2. Whether the assessee was entitled to claim exemption under Section 54F of the Income Tax Act for the acquisition of a new residential property.3. Whether the disallowance of the expense of Rs. 75,000/- on account of stamp duty paid on the sale of shares was valid.ISSUE-WISE DETAILED ANALYSIS1. Characterization of Long-Term Capital Gain as Unexplained Cash CreditRelevant Legal Framework and Precedents: The characterization of income under Section 68 of the Income Tax Act pertains to unexplained cash credits. The court analyzed whether the long-term capital gain declared by the assessee could be considered unexplained income.Court's Interpretation and Reasoning: The court found that the assessee had adequately demonstrated the acquisition and subsequent sale of shares. The shares were originally acquired by the assessee's son and gifted to her, and later sold to a co-promoter of the company. The court noted that the transaction was supported by documentation, including share certificates and the transfer deed.Key Evidence and Findings: The court examined the balance sheet of Beam Developers Private Limited, noting the net worth and inventory of the company. It found that the valuation of shares at Rs. 1043 per share was justified based on the company's net worth and real estate inventory.Application of Law to Facts: The court applied Section 49(1)(ii) regarding the cost of acquisition in cases of gifts, and Section 2(29AA) and 2(42A) concerning the holding period. The court concluded that the long-term capital gain was correctly computed and not unexplained income.Treatment of Competing Arguments: The court rejected the CIT (A)'s argument that the transaction was fictitious, noting the lack of evidence to support this claim.Conclusions: The court held that the long-term capital gain was not unexplained credit under Section 68, allowing the assessee's appeal on this ground.2. Entitlement to Exemption under Section 54FRelevant Legal Framework and Precedents: Section 54F provides for exemption from capital gains tax if the proceeds are invested in a new residential property. The court considered whether the assessee's acquisition of a 60% share in a property met the requirements.Court's Interpretation and Reasoning: The court noted that the assessee had entered into a transfer deed with her husband for the acquisition of a property share. Despite the absence of a registered sale deed, the court found that the transaction was valid for the purposes of Section 54F.Key Evidence and Findings: The court examined the bank statements showing payment for the property and the husband's tax return reflecting the transaction. The court also considered the decision in PCIT V Vembu Vaidyanathan, which supported the allowance of exemption under similar circumstances.Application of Law to Facts: The court applied the principles from the cited case law and found that the assessee's transaction satisfied the conditions of Section 54F.Treatment of Competing Arguments: The court dismissed the CIT (A)'s reliance on the Supreme Court's decision in Suraj Lamp Industries, clarifying that it did not apply to the facts of this case.Conclusions: The court directed the AO to grant the benefit of Section 54F to the assessee, allowing the appeal on this ground.3. Disallowance of Stamp Duty ExpenseRelevant Legal Framework and Precedents: The issue concerned whether the stamp duty paid was deductible as an expense in computing capital gains.Court's Interpretation and Reasoning: The court found that there was insufficient clarity on the transaction for which the stamp duty was paid. It noted the need for further substantiation by the assessee.Key Evidence and Findings: The court highlighted the lack of discussion on this issue by the lower authorities and the need for verification of the transaction details.Application of Law to Facts: The court restored the matter to the AO for further examination and directed the assessee to substantiate the claim.Conclusions: The court did not make a final determination on this issue, instead remanding it for further consideration by the AO.SIGNIFICANT HOLDINGSCore Principles Established: The court reaffirmed the principles regarding the characterization of income under Section 68 and the conditions for exemption under Section 54F. It emphasized the importance of supporting documentation and the validity of transactions even in the absence of registered deeds, where appropriate.Final Determinations on Each Issue: The court allowed the appeal on the grounds of the characterization of long-term capital gain and entitlement to exemption under Section 54F. It remanded the issue of stamp duty expense for further examination.