2012 (1) TMI 275 - AT - Income Tax

Exemption u/s 54 - utilization of capital gains proceeds in the residential house only within the time provided u/s 139 - Held that - The exemption should be forfeited for a technical breach does not appear to be the correct proposition particularly since the appellant pleads that he was not aware of the requirement ot invest in the capital gains account scheme and also states that his objective was to invest in a residential house which is apparent from the fact that he has purchased a land and also constructed a house thereon. It is also seen that section 54E (since deleted) and sections 54EC and 54ED which require investment of the proceeds in specified assets specifically provides that the exemption would be forfeited if the specified asset is given as a security for taking loan. In section 54 we do not find any such provision and therefore in our considered view the purpose of section 54(2) is not to deprive the assessee of an exemption but only to avoid rectification. The ultimate object of the section having been satisfied namely to encourage construction of houses we are convinced that the utilization of the funds in constructing a residential house should be treated as sufficient compliance of section 54 and therefore hold that the appellant is entitled to the exemption u/s 54 even in respect of the amount invested by way of construction of the residential house - Decided in favour of assessee.

Issues Involved:
1. Eligibility for exemption under Section 54 of the Income-tax Act, 1961.
2. Interpretation of the time limit for investment under Section 54(2).
3. Compliance with the deposit requirement in the Capital Gains Account Scheme.
4. Application of judicial precedents and beneficial circulars.

Issue-wise Detailed Analysis:

1. Eligibility for Exemption under Section 54 of the Income-tax Act, 1961:
The appellant sold a flat in Chennai and invested the sale proceeds in purchasing a new flat in Coimbatore. The Assessing Officer (AO) allowed only Rs. 9 lakhs as exempt under Section 54, disallowing the remaining amount since it was not utilized before filing the return. The appellant contended that the entire capital gains were utilized in purchasing the new flat, fulfilling the requirements of Section 54, and thus, the entire amount should be exempt.

2. Interpretation of the Time Limit for Investment under Section 54(2):
Section 54(2) stipulates that the amount of capital gain not utilized for purchasing or constructing a new asset before filing the return should be deposited in a specified account by the due date of filing the return under Section 139(1). The appellant argued that the beneficial provisions of Section 54 should be liberally interpreted, considering the intention to invest in a residential house within the time allowed under Section 139. The AO and CIT(A) interpreted the provision strictly, linking it to Section 139(1) to restrict the exemption.

3. Compliance with the Deposit Requirement in the Capital Gains Account Scheme:
The appellant did not deposit the unutilized capital gains in a specified account as required by Section 54(2). Instead, the appellant made payments to the builder in installments. The CIT(A) upheld the AO's decision, stating that the failure to deposit the unutilized amount in the specified account disqualified the appellant from the exemption. The appellant argued that this was a mere technical fault and that the legislative intention of Section 54 was to encourage investment in residential property.

4. Application of Judicial Precedents and Beneficial Circulars:
The appellant cited several judicial decisions and CBDT Circulars No. 471 and 672, which support the view that allotment and construction should be treated as construction of a residential house. The Tribunal considered these precedents and found that similar cases had allowed exemptions despite technical breaches, provided the ultimate objective of investing in a residential house was met. The Tribunal cited the case of Shri Madhuvan Prasad, where the exemption was allowed despite non-compliance with the deposit requirement, emphasizing the intention behind the investment.

Conclusion:
The Tribunal allowed the appeal, emphasizing the appellant's intention and actual investment in a residential house within the stipulated period. The Tribunal held that the failure to deposit the unutilized amount in a specified account was a technical default and should not deprive the appellant of the exemption under Section 54. The Tribunal followed the principle that beneficial provisions should be liberally interpreted to achieve their legislative intent.

Order:
The appeal filed by the appellant was allowed, and the Tribunal directed that the entire capital gains be exempt under Section 54. The order was pronounced in the open court on 24-01-2012.

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