2017 (1) TMI 1700 - AT - Income Tax

Deduction u/s 54F - capital gain arising on transfer of Long Term Capital Gain Asset - AO found that the conditions specified in section 54F of the Act was not satisfied in the case of the assessee - delay in completion of construction activity of the residential house - HELD THAT - We find ourselves in agreement with the proposition canvassed on behalf of the assessee that section 54F is a beneficial provision for promoting the construction of residential house and therefore requires to be construed liberally for achieving that purpose. The intention of literature is to encourage investments in the acquisition of residential house and completion of construction or occupation is not the strict requirement of the law so long as the consideration has been appropriated for construction of a residential house. The condition of construction of residential house within a period of 3 years has been somewhat read down and relaxed by the judicial precedents as relied upon by the assessee. Merely because the construction could not be completed within a stipulated period of three years after the date of transfer of original asset as contemplated under section 54F of the Act, this by itself would not act as an handicap for availing benefit of 54F. Several objections on facts have been recorded by the CIT(A) while denying section 54F of the Act. The objections ranges from purchase of only plot of land and no evidence of construction cost tagged thereon to objection in the form of purchase of plot prior to transfer of original asset in derogation of condition stipulated u/s 54F whereby deployment of funds in construction activity only after the transfer of original asset is eligible for relief. These objections recorded by CIT(A) as extracted supra are essentially factual in nature. The money stated to be utilized and appropriated towards purchase of plot of land and construction of residential house thereon after the transfer of original asset in terms of S. 54F is required to be ascertained to determine the eligibility of claim. In the absence of factual details before us, we are unable to address the factual controversies involved. It was asserted on behalf of the assessee that the construction of a residential house has been eventually completed. Copies of some electricity bills were produced to lend support to such assertions. Bare reading of S. 54F would suggest that construction of house beyond stipulated time limit of 3 years is not the only condition precedent for eligibility of deduction claimed. The other conditions would thus continue to apply. Matter is to examined afresh after granting proper opportunity of being heard to the assessee. It will be open to the AO to verify the entire issue de novo and satisfy himself that the conditions of section 54F have been duly complied with. However, in the same vain, we clarify that mere delay in completion of construction activity of the residential house will not act as a fetter for eligibility of deduction under section 54F of the Act. The issue is thus set aside and remitted back to the file of the AO in terms of directions noted above. Appeal of the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of deduction under Section 54F of the Income Tax Act, 1961.
2. Charging of interest under Sections 234B and 234C of the Income Tax Act.
3. Initiation of penalty proceedings.

Detailed Analysis:

1. Disallowance of Deduction under Section 54F:

The primary issue in the appeal is the disallowance of the deduction claimed under Section 54F of the Income Tax Act by the assessee against the capital gain arising from the transfer of a long-term capital asset. The assessee claimed a deduction of ?59,32,904/- under Section 54F, which was denied by the Assessing Officer (AO) on the grounds that the conditions specified in Section 54F were not satisfied.

The CIT(A) upheld the AO's decision, emphasizing several key points:
- The statutory provisions of Section 54F require the assessee to either purchase a residential house within one year before or two years after the transfer of the original asset or construct a residential house within three years from the date of transfer.
- Mandatory conditions include that the assessee should not own more than one residential house other than the new asset on the date of transfer, should not purchase any other residential house within one year from the date of transfer, and should not construct any other residential house within three years from the date of transfer.
- The CIT(A) noted that the assessee failed to provide evidence of constructing a residential house within the mandatory period and that the investment in the land was made prior to the date of transfer of the original asset.

The Tribunal acknowledged that Section 54F is a beneficial provision and should be construed liberally. It observed that the condition of construction within three years has been relaxed by judicial precedents. However, it also noted that several factual objections raised by the CIT(A) needed to be addressed, such as the timing of the investment in the land and the lack of evidence of construction.

The Tribunal thus set aside the issue and remitted it back to the AO for a fresh examination, directing that the AO verify whether the conditions of Section 54F were duly complied with, while clarifying that mere delay in construction would not disqualify the deduction.

2. Charging of Interest under Sections 234B and 234C:

The assessee contested the charging of interest under Sections 234B and 234C. The CIT(A) dismissed this ground, stating that the charging of interest is mandatory as per the decision of the Kerala High Court in the case of Ramlinga Iyer, which held that liability to pay interest under Sections 234A, 234B, and 234C is automatic. The Tribunal upheld this decision, dismissing the ground of appeal.

3. Initiation of Penalty Proceedings:

The assessee also contested the initiation of penalty proceedings. The CIT(A) dismissed this ground, noting that the initiation of penalty proceedings cannot be a ground for grievance as it is premature. The assessee would have the opportunity to contest the penalty at the time of the penalty proceedings. The Tribunal upheld this decision, dismissing the ground of appeal.

Conclusion:

The Tribunal allowed the appeal of the assessee for statistical purposes, setting aside the issue of deduction under Section 54F to the AO for a fresh examination while upholding the decisions regarding the charging of interest and the initiation of penalty proceedings. The order emphasized the need for a liberal interpretation of Section 54F while ensuring compliance with its conditions.