2013 (10) TMI 601 - AT - Income Tax

Deduction u/s 54 - Procurement of new flat within 2 years of sale of land - A.O. disallowed deduction - Held that - developer was not entitled to enter into any agreement of sale in respect of the share of the assessee. Accordingly, the CIT(A) agreed with the contention of the assessee that agreement in substance was an agreement for construction of residential and other properties. Therefore, a period of 3 years was available to the assessee to take possession of the residential house. It is apparent that assessee was in possession of this property before 31.05.2007 i.e., before a period of three years from date of transfer of property at H.No.4-3-540 as according to the assessment order, telephone got installed on 07.12.2006 and Passport to one of the assessee s nephew was issued on 08.02.2007, i.e., before three years from the date of transfer of original asset. Therefore, the assessee fulfilled the condition in respect of construction of residential house within a period of three years from date of transfer of the original asset - Following decision of CIT vs. Mrs.Shahzada Begum 1988 (3) TMI 39 - ANDHRA PRADESH High Court - Decided against Revenue.

Issues Involved:
1. Whether the order of the CIT(A) was contrary to law and facts.
2. Whether the CIT(A) erred in directing the Assessing Officer to allow the assessee deduction under Section 54 of the Income-tax Act, 1961.
3. Whether the agreement entered into by the assessee was an agreement for construction of residential and other properties by the developer on behalf of the assessee.
4. Whether the residential property allotted to the assessee was in lieu of the sale consideration receivable by the assessee towards the transfer of development rights to the developer.
5. Whether the developer had acquired rights to deal with the said property without any encumbrance from the assessee.
6. Whether the assessee had purchased a residential property and was required to possess the property within two years as per the provisions of Section 54F(1) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Contrary to Law and Facts:
The assessee contended that the order of the CIT(A) was contrary to law and facts. The CIT(A) directed the Assessing Officer to allow the assessee deduction under Section 54 of the Income-tax Act, 1961. The Assessing Officer had initially disallowed the deduction because the assessee failed to prove that the new flat was taken within two years from the date of sale of land. The CIT(A) found that the agreement was for construction and not purchase, thus allowing a period of three years for possession.

2. Deduction under Section 54:
The CIT(A) directed the Assessing Officer to allow the assessee deduction under Section 54 of the Income-tax Act, 1961. The Assessing Officer had disallowed the deduction on the grounds that the assessee did not produce evidence proving possession of the flat within two years from the date of sale. The CIT(A) found that the agreement was for construction, thus allowing a period of three years for possession.

3. Agreement for Construction:
The CIT(A) held that the agreement entered into by the assessee was an agreement for construction of residential and other properties by the developer on behalf of the assessee. The assessee contended that the understanding between both parties was that of construction of house property, thus the period of three years should be considered.

4. Residential Property in Lieu of Sale Consideration:
The CIT(A) failed to appreciate that the residential property allotted to the assessee was in lieu of the sale consideration receivable by the assessee towards the transfer of development rights to the developer. The assessee argued that the developer was constructing the property for the assessee as per the development agreement.

5. Developer's Rights:
The CIT(A) failed to appreciate that the developer had acquired rights to deal with the said property without any encumbrance from the assessee. The development agreement allowed the developer to enter into agreements of sale, mortgage, lease, or transfer in respect of his share of the property.

6. Purchase vs. Construction:
The CIT(A) failed to appreciate that the assessee had purchased a residential property and was required to possess the property within two years as per the provisions of Section 54F(1) of the Income-tax Act, 1961. The CIT(A) agreed with the assessee that the agreement was for construction, thus allowing a period of three years for possession. The CIT(A) found that the assessee was in possession of the property before 31.05.2007, fulfilling the condition for construction within three years from the date of transfer of the original asset.

Conclusion:
The CIT(A) allowed the claim of the assessee under Section 54 of the Income-tax Act, 1961, finding that the agreement was for construction and not purchase, thus allowing a period of three years for possession. The ITAT upheld the CIT(A)'s decision, finding no interference necessary. The appeal filed by the Revenue was dismissed.

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