2017 (1) TMI 1444 - AT - Income Tax

Non-granting of exemption u/s. 54F - assessee had not deposited unutilized capital gains in the capital gains account scheme before due date of filing the return of income which falls on 31.07.2012 - time limit for assessee to invest - Held that - The similar issue had also come up before the Honbie Guwahati High Court in the case of CIT V/s Rajesh Kumar Jalan (2006 (8) TMI 126 - GAUHATI High Court) as held that if the assessee fulfils the condition for exemption u/s 54 within the extended time of filing of return u/s 139(4) of the Act, the assessee is entitled to exemption u/s 54 of the Act. In view of above, we hold that the assessee is entitled to claim deduction u/s 54F of the Act for utilization of sale consideration for investment in new residential property within due date as stipulated u/s 139 of the Act. Hence, Grounds of appeal taken by assessee are allowed by reversing the orders of authorities below. So far as, the time limit for assessee to invest the amount of capital gains in purchase/construction of new residential asset or investment in capital gains scheme u/s.54F of the Act is concerned, it has been affirmed by the High Court that due date refers to the extended due date u/s.139(4) of the Act. In view of this, we remit the issue in dispute to the file of AO for the purpose of verifying the records, whether the residential building had come into existence within specified period, i.e. three years from the transfer of original asset. The assessee is directed to produce relevant documentary evidence before the AO to show that the residential building had come into existence within three (3) years after the date of transfer of original asset. The AO after verifying the facts, grant necessary deduction in accordance with law. Appeal of the assessee is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Non-granting of exemption under Section 54F of the Income Tax Act.
2. Requirement to deposit unutilized capital gains in the capital gains account scheme.
3. Incorrect application of the cost inflation index.

Detailed Analysis:

Issue 1: Non-granting of exemption under Section 54F of the Income Tax Act
The primary grievance of the assessee is the denial of exemption under Section 54F of the Income Tax Act. The assessee sold vacant land for ?56,51,000 and invested the sale consideration in constructing a residential house on inherited land. The Assessing Officer (AO) disallowed the exemption claim because the unutilized capital gains were not deposited in the capital gains account scheme before the due date of filing the return, which is 31.07.2012. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, noting discrepancies in the assessee's claims about the timing and amount of the investment.

Issue 2: Requirement to deposit unutilized capital gains in the capital gains account scheme
The AO and CIT(A) both emphasized that it is mandatory for taxpayers to deposit unutilized capital gains in a specified account before the due date of filing the return to claim exemption under Section 54F. The assessee argued that the entire sale consideration was reinvested in the construction of a residential house within three years, fulfilling the conditions of Section 54F. The assessee also contended that the return was filed within the extended period allowed under Section 139(4), which extends the due date for filing returns.

Issue 3: Incorrect application of the cost inflation index
The assessee also raised the issue of the AO using the incorrect cost inflation index (CII). The AO used the CII for the year 2004-05 instead of 1988, the year when the previous owner acquired the asset. The correct CII should be 161 for the year 1988. Additionally, the AO did not consider the improvement costs incurred by the previous owner, which should be included in the cost of acquisition for calculating capital gains.

Judgment Analysis:

The tribunal considered the arguments from both sides. The assessee's compliance with Section 54F, including the reinvestment of the sale consideration within three years and the filing of the return within the extended period under Section 139(4), was acknowledged. The tribunal referenced several judicial precedents, including decisions from the Punjab and Haryana High Court and the Karnataka High Court, which supported the interpretation that the extended due date under Section 139(4) should be considered for the purpose of Section 54F.

The tribunal concluded that the AO's and CIT(A)'s interpretation was incorrect and that the assessee's reinvestment within the extended period should be considered valid. The tribunal remitted the case back to the AO to verify whether the residential building was constructed within the specified period of three years from the transfer of the original asset. The AO was directed to grant the necessary deduction in accordance with the law after verifying the facts.

Conclusion:
The appeal was partly allowed for statistical purposes, with directions for the AO to verify the construction of the residential building within the stipulated period and grant the exemption under Section 54F accordingly. The tribunal's decision emphasized the importance of considering the extended due date under Section 139(4) for compliance with Section 54F and corrected the AO's application of the cost inflation index.