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M/S Fibre Boards (P) Ltd., Bangalore v. Commissioner of Income Tax, Bangalore

Civil Appeal · Neutral citation not assigned (Civil Appeal Nos. 5525-5526 of 2005)Decided 11 Aug 2015
Civil Appeal Nos. 5525-5526 of 2005
Justice A.K. Sikri · Justice Rohinton Fali Nariman

Background

A private company sold its industrial land, building, and machinery in Thane (an urban area) and earned a capital gain of over Rs. 1.08 crore, intending to shift its unit to a non-urban area near Pune. It paid advances exceeding the capital gain amount to various persons for purchasing new land, plant, and machinery at the new site, and claimed a tax exemption on the capital gain under Section 54G of the Income Tax Act. The tax authorities and the High Court denied the exemption, holding that merely paying "advances" did not amount to "utilizing" the capital gain for acquiring new assets as the section required, and that the area had not been formally notified as non-urban.

Decision Breakdown

The Supreme Court held that the area in question had, in substance, already been treated and understood as a notified urban/non-urban area for the relevant purposes, so that objection failed. On the central question, the Court held that Section 54G uses the word "utilized," not "purchased towards," and that paying advances for the purchase of land, building, and plant/machinery within the statutory time frame does amount to "utilization" of the capital gain for the purposes the section allows, even if actual possession or formal purchase is completed later. The Court found the High Court's stricter reading would make a core part of Section 54G unworkable, since the law gives an assessee three years to complete the actual purchase. It therefore set aside the High Court's judgment and allowed the assessee's appeals.

Lesson Learnt

For tax-exemption provisions tied to "utilizing" sale proceeds for a specified purpose (such as relocating a business), paying genuine advances toward that purpose within the statutory time limit can itself count as utilization: a taxpayer need not complete the full purchase or take possession within the same year to claim the benefit.

Official source (sci.gov.in)View Judgment (PDF)

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