Query No. 1: (Penalty u/s. 271(1)(c) for not disclosing Long Term Capital Gain)

An assessee did not declare the LTCG on sale of plot of land under the bona fide impression that it will be exempt if he invests the proceeds in acquisition of plot, as such he kept the amount deposited in FD for purchase of plot. He purchased the plot in subsequent year by encashing the FD but did not purchase flat or construct the house. Now penalty u/s. 271(1)(c) also levied. – Any way out?


From the fact, it is clear that the assessee did not comply with the conditions mentioned under section 54F of the Act.

No doubt under bona fide belief he had invested in fixed deposits instead of depositing, net consideration before furnishing return of income under section 139(1), in Capital Gain Accounts Scheme, 1988.

Now therefore, it is on assessee to prove, how he bona-fidely believe that long term capital gains on sale of plot would be exempt, if he has invested in acquisition of plot instead of residential house. Further, he has also to prove, how, investment in fixed deposit instead of depositing the net consideration in Capital Gains Account Scheme was in order to comply with section 54F.

Therefore, unless he proves his bona fide, he is liable for penalty u/s. 271(1)(c ) of the Act, for concealing the particulars of his income by not disclosing the long term capital gain on sale of plot of land.

Query No. 2: [(Second generation income, not to be clubbed with u/s. 64(2)]

The member of HUF gifts her plot of land to HUF & the HUF, thereafter sells the plot & utilise the proceeds in acquisition of Residential House within the prescribed time to claim the benefit of section 54F. The house will be partly SOP and partly let out:

  1. Applicability of section 64(2) in the case of Donor member.
  2. Is there any problem to claim exemption u/s. 54F by HUF/Member?
  3. Taxability of rental income – income from income as well as LTCG


From the query, it is clear that a female member has gifted her plot of land to HUF, wherein she is a member. Therefore section 64(2) is clearly applicable.

On the facts of the case, after receipt of gift the HUF sells the plot and utilises the proceeds in acquisition of residential house within prescribed time. The HUF would be entitled to claim benefit of section 54F and thereby no income would be taxed in the hands of female member.

However, rental income and in the event of sale of such house property, the capital gain would be taxed only in the hands of HUF, as per CIT v. MSS Rajan [252 ITR 126 (Mad.) and not in the hands of donor member.

Query No. 3 [Reopening of assessment for disallowance of expenses u/s. 40a(ia)]

Non-deduction of TDS in financial years 2008/09 / 2009-10, hence reopening of assessment u/s. 147 only for disallowing claim u/s. 40a(ia). Assessee depositing TDS now, can he save himself from reassessment proceeding by intimating / replying to information? The recipient is not traceable / non-cooperative otherwise he could file information about his paying tax on said sum.

  1. Whether action u/s. 147 valid in law when the assessment
    u/s. 143(3)?
  2. Whether the payment of TDS with interest can save himself from action u/s. 147?


Under section 40a(ia), if the assessee fails to deduct tax at source for any sum paid towards the specified business expenditure, it shall not be allowed as deduction. Now from the above fact, it is clear that while completing the assessment, the business expenses mentioned under section 40a(ia) were allowed, though no tax was deducted. Therefore, notice under section 147 can be issued for disallowing the business expenses, unless the said notice is after four years from the end of the relevant assessment year and at the time of assessment under section 143(3), the assessee had disclosed fully and truly all material facts necessary for the assessment of that assessment years.

Now payment of tax with interest would not save the assessee from reopening the assessment of those years.

Query No. 4: [Capital expenditure can be claimed as application of income u/s. 11(1)(a)]:

Where the amount was given with specific direction for construction of Wadi, it shall be treated as having been made for corpus [CIT v. Sthanakvasi Vardhman Vanik Jain Sangh 260 ITR 366 (Guj.)]. See also [CIT v. Bharatiya Samskriti Vidyapith Trust 43 taxman.com 295 (Ker)]

In connection with above, whether the amount actually spent on construction of Wadi will qualify as application of income? Will it amount to double deduction as corpus donation would be exempt u/s. 11(1)(d) and construction cost of Wadi (capital expenditure) will be treated as applicable u/s. 11(1)(a)?


There is no question of double deduction. Section 11 of the Act deals with application of income different from revenue expenditure or allowance.

The exemption entitlement under section 11 of the Act is based on “application of income” and “permissible accumulation”. The ”balance of income”, if any, is treated as income which is not applied for the objects of the trust and is brought to tax under Chapter III of the Act. Chapter IV is no way is applicable to section 11
[DIT(E) v. AL- Ameen Charitable Fund Trust – 383 ITR 517 (Karn)].

So, even though, corpus donation is directly credited to corpus account, the construction cost of Wadi can be claimed as application of income [see
DIT(E) v. Govindu Naicker Estate – 315 ITR 237 (Mad.).

Query No. 5: [Investment in F. D. be treated as application of income u/s. 11(1)(a):

Application of surplus funds in construction of additional buildings with the purpose of letting them out and utilising the rent for the objects of the trust would amount to applying funds for religious and charitable purposes [St. George Forana Church – 170 ITR 62 (Ker.)]

As per the principle applied in above decision, can investment in fixed deposits be treated as application of income as income generated from the said fixed deposit will be applied for carrying out the object of trust?


Yes, section 11(1A) of the Act reads as under:

“For the purpose of sub section (1), –

  1. Where a capital asset, being property held under trust wholly for charitable or religious purposes, is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then, the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes …..”

In CIT v. Hindustan Welfare Trust [206 ITR 138], the Calcutta High Court held that :

“the Tribunal was right in law in holding that investment by the assessee – trust in fixed deposit in scheduled banks for a period of 60 days made in the previous year out of sale proceeds of the shares of companies amounted to acquiring of “another capital asset” in terms of section 11(1A)”

Similar view has been taken by the Calcutta High Court in CIT v. East India Charitable Trust [206 ITR 152] and Delhi High Court in
DIT(E) v. D.L.F. Qutab Enclave Complex Medical Charitable Trust [248 ITR 41).

Note: Please send your queries relating to Direct, Indirect & International taxation, Accounting & Auditing Standards and Company Law, FEMA etc., to AIFTP, having interest to the Members.

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