Kerala High Court Directs Partial Release of Capital Gains Account Funds

Court Orders Retention of Tax Liability Amounts While Allowing Withdrawal of Excess Funds

In a significant judgment, the Kerala High Court has directed the Income Tax Department to permit the partial release of funds from the Capital Gains Savings Account of Mrs. Sainaba Hamza Koya, a widow and senior citizen. The court's decision comes in response to a writ petition filed by Mrs. Koya, challenging the Income Tax Officer's refusal to close her Capital Gains account and release the funds.

The petitioner had opened the account following the sale of property in Edappally North Village, aiming to benefit from tax exemptions under Section 54F of the Income Tax Act, 1961. She claimed that the funds deposited were intended for constructing a residential house and had utilized borrowed funds from her daughter and son-in-law for the construction, planning to repay the debt with the account's funds.

However, the Income Tax Officer had rejected her request, citing several reasons, including lack of evidence for deductions, notional value adoption for cost acquisition, failure to file returns for the relevant assessment year, and non-utilization of funds within the stipulated period for construction. The tax liabilities for the assessment years 2020-2021 and 2021-2022 were determined as Rs. 7,69,693 and Rs. 8,51,482, respectively.

Upon reviewing the case, Justice Ziyad Rahman A.A. ruled that the findings by the Income Tax Officer were only prima facie and not conclusive. The court emphasized that these findings are intended to protect revenue interests and are subject to final adjudication in proper assessment proceedings.

The High Court acknowledged that Section 54F allows the use of borrowed funds for construction, provided the assessee can establish a link between the funds and the intended purpose. The petitioner is entitled to withdraw excess funds from the account after retaining amounts equivalent to her tax liabilities.

The judgment clarifies that while the tax liability findings are preliminary, they should not prevent the petitioner from accessing excess funds in the account. The Income Tax Officer is directed to issue necessary orders for fund release within a month, ensuring the tax liabilities are accounted for. The petitioner retains the right to seek further legal remedies if assessment proceedings are not initiated timely.

Bottom Line:

Income Tax - Capital Gains - Conditions for exemption under Section 54F of the Income Tax Act, 1961 - Prima facie findings of Assessing Officer regarding utilization of funds for construction of residential house within stipulated time - Assessee's claim of utilizing borrowed funds for construction permissible, subject to establishing a link between funds and utilization for intended purposes. 

Statutory provision(s): Income Tax Act, 1961 Section 54F, Section 54F(4), Section 45.

Mrs. Sainaba Hamza Koya v. Income Tax Officer, (Kerala) : Law Finder Doc Id # 2782822