2014 (8) TMI 463 - HC - Income Tax

Benefit u/s 54 Second property not purchased within two years of sale of first property Whether amount paid for cancellation of the earlier agreement for sale of the original property and amount paid as brokerage, could be allowed to set off from the sale consideration received Held that - The payments cannot be challenged on the ground that they were not genuine or were not made the payments were not directly relatable to the transaction for sale which had resulted in income by way of capital gains - the tribunal has rightly held that the expenditure was incurred and was wholly connected with the sale transaction - By cancelling earlier transaction and ensuring that the rights created by the earlier agreement to sell do not obstruct the sale transaction, payments of ₹ 5,00,000/- to Ashok Singhal and ₹ 2,50,000/- to Rajat Kapur, have been made. Whether the assessee had purchased the second property and the payment made was entitled to exemption u/s 54 of the Act Held that - The word purchase used in Section 54 of the Act should be interpreted pragmatically in a practical manner and legalism shall not be allowed to play and create confusion or linguistic distortion - the assessee to deposit unspent amount not utilized by the assessee for purchase or construction of a new asset before the date of furnishing of return, in a specified account - the amount, if already utilized for purchase or construction of the new asset with the amount so deposited will be deemed to be cost of a new asset subject to the proviso - The word purchase is used in sub-section (2) and indicates that the word is not restricted or confined to registered sale deed or even possession but has a wider connotation. The proviso supports the interpretation and stipulates that the amount deposited but not utilized wholly or partly for purchase or construction of new asset within the specified period will be charged to tax u/s 45 in the previous year in which the period of three years from the date of transfer of original asset expired - The period of three years is stipulated as this is the longer period specified in the sub-section (1) to Section 54 - It is only the balance amount which is not utilized which is to be brought and charged to tax - The entire amount of sale consideration or the capital gains is not to be brought to tax, but the unspent amount/figure is taxed - Decided against revenue.

Issues Involved:
1. Eligibility for benefit under Section 54 of the Income Tax Act, 1961.
2. Allowability of expenses incurred for cancellation of an earlier agreement and brokerage as deductions from the sale consideration.

Detailed Analysis:

1. Eligibility for Benefit under Section 54 of the Income Tax Act, 1961:

The primary issue was whether the assessee was entitled to the benefit of Section 54 of the Income Tax Act, 1961. The assessee sold a house property and claimed exemption under Section 54 by investing in a new residential property. The Assessing Officer denied the benefit, stating that the new property was not purchased within the stipulated period of two years from the date of sale of the original property.

The court examined the facts and noted that the assessee had entered into a flat buyers agreement on 9th February 2006 and had paid substantial amounts towards the purchase of the new property. The agreement specified the apartment details and linked payments to the construction stages. The court recognized that the legal title had not been transferred within the two-year period, but noted that the payment and agreement indicated a clear intention to purchase.

The court referred to the Supreme Court's interpretation in CIT Andhra Pradesh vs. T.N. Aravinda Reddy, which provided a broader meaning to the term "purchase," including payment of consideration and possession under Section 53A of the Transfer of Property Act, 1882. The court emphasized a pragmatic and practical interpretation of "purchase" to fulfill the legislative intent of providing relief to taxpayers reinvesting in residential property.

The court also cited recent Supreme Court rulings, including Sh. Sanjeev Lal vs. CIT, which supported a purposive interpretation of Section 54, focusing on the taxpayer's intention to reinvest in residential property rather than strict legal ownership transfer within the specified period.

2. Allowability of Expenses Incurred for Cancellation of an Earlier Agreement and Brokerage as Deductions from the Sale Consideration:

The secondary issue was whether the amounts paid for the cancellation of an earlier agreement and brokerage fees could be deducted from the sale consideration. The assessee had paid Rs. 5,00,000 as cancellation charges and Rs. 2,50,000 as brokerage, both by cheque, which were undisputed.

The tribunal found that these payments were genuine and directly related to the sale transaction resulting in capital gains. The court agreed with the tribunal's findings, noting that the payments were necessary to facilitate the sale and were thus allowable as deductions.

The court emphasized that the tribunal's findings were factual and could not be deemed perverse. The payments were seen as integral to the sale transaction and were rightly allowed as expenses incurred in connection with the sale.

Conclusion:

The court dismissed the appeal, affirming the tribunal's decision to grant the benefit under Section 54 and allow the expenses for cancellation charges and brokerage as deductions. The court's interpretation highlighted a pragmatic approach to the term "purchase" and reinforced the legislative intent to provide relief to taxpayers reinvesting in residential property.

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