Long-term Capital Gains Based on Sale Deed; Bonus Shares Not Taxable Under Section 56(2)(vii)(c); Section 54F Deduction Allowed

The ITAT Delhi upheld the CIT(A)'s findings dismissing the Revenue's grounds regarding long-term capital gains computation, confirming that capital gains are determined based on sale consideration in the sale deed without imputing notional income. The addition under section 56(2)(vii)(c) related to bonus shares from HPCL and GAIL was also dismissed, following precedents that bonus shares do not attract this provision. Regarding deduction under section 54F, the tribunal held that the assessee was the absolute owner of only one property at the time of transfer and thus eligible for the deduction, rejecting the AO's denial based on ownership of more than two flats. The appeal was allowed on this ground, affirming that mere rights or partial ownership do not constitute absolute ownership for denying section 54F benefits.

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ISSUES:

Whether the addition of notional interest income on sale consideration received in an earlier year can be added to determine Long Term Capital Gain (LTCG) in a subsequent year where sale deed was executed later.Whether the provisions of section 56(2)(vii)(c) of the Income Tax Act apply to receipt of bonus shares by a shareholder.Whether exemption under section 54F of the Income Tax Act can be denied on account of ownership of more than one residential house when one property is acquired by will but mutation in the assessee's name occurred after the date of transfer of original asset.

RULINGS / HOLDINGS:

Regarding LTCG computation, the Court held that the assessee has rightly computed long term capital gain as per the mode of computation prescribed in section 48 of the Income Tax Act, and the Assessing Officer was not justified in computing income on a notional basis by adding time value of money; "there is no such procedure for computation of capital gain prescribed under the Income Tax Act" and "Income Tax Act permits the taxation of Real Income and not the notional Income".On applicability of section 56(2)(vii)(c) to bonus shares, the Court held that the provisions of sub-clause (c) of clause (vii) of section 56(2) would not apply to bonus shares, as bonus shares are "merely a distribution of capitalised undivided profit" and "no property however being passed on to the assessee in the instant case". The addition made by the Assessing Officer was thus deleted.Regarding exemption under section 54F, the Court held that the assessee became owner of the additional property only after mutation in March 2017, which was after the date of transfer of the original asset in August 2016. Mere right under a will prior to mutation does not constitute ownership for the purposes of section 54F. Therefore, the assessee was owner of only one residential house on the date of transfer and eligible for exemption under section 54F.

RATIONALE:

The Court applied the statutory provisions of sections 48 and 52 of the Income Tax Act for computation of capital gains, emphasizing that section 48 prescribes the mode of computation based on "full value of the consideration received or accruing" and disallows taxation of notional income such as interest on sale consideration received earlier but taxed later. The Court relied on precedents including K.P. Varghese vs ITO and various Supreme Court decisions affirming that "Income Tax Act permits the taxation of Real Income and not the notional Income".In interpreting section 56(2)(vii)(c), the Court recognized the legislative intent and judicial precedents (including Khoday Distilleries Ltd. v. CIT and ITAT decisions) that bonus shares are a capitalization of company reserves and do not constitute receipt of property without consideration. The Court noted that the provision targets undervaluation or receipt of property without consideration, which is not the case with bonus shares. The principle that no new property passes to the shareholder was emphasized, supported by multiple judicial authorities.For section 54F exemption, the Court analyzed the concept of ownership versus right, relying on judicial precedents distinguishing "Right" and "Ownership" in property law. The Court held that ownership arises upon mutation or legal transfer, not merely on creation of a will. The Court also referred to decisions holding that joint or partial ownership does not constitute ownership of multiple residential houses for section 54F purposes. The principle that the assessee was owner of only one residential house on the date of transfer was upheld, allowing the exemption.

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