2017 (1) TMI 324 - AT - Income Tax

Deduction u/s 54 denied - AO observe that deduction for construction of residential house is allowable u/s 54 of the Act only if the assessee constructs the house within a period of three years after the date of transfer of original asset, whereas assessee commenced and almost completed the construction of new residential house much before the date of transfer of capital asset - Held that - Provisions of section 54 of the Act contemplates that deduction u/s 54 of the Act can be made by assessee only if a residential house is purchased within one year before or two years after the date of transfer of old residential house or in the alternative if the assessee constructs new residential house within three years from the date of transfer of capital asset. We find that the assessee is eligible to claim deduction under this section even if a new residential house is purchased within one year before the date of transfer of capital asset which means that assessee has to make use of funds other than the sale consideration of house sold for investing in a residential house and it is not mandatory that only the sale consideration of house sold is to be utilized for purchasing or constructing a new residential house. In the given case assessee has utilized other funds (apart from sale consideration) for constructing residential house and for this reason only he cannot be denied deduction u/s 54 of the Act. Further going through the provisions of section 54 of the Act we also observe that there is no mention about the date of start of construction of residential house but it only refers to a construction of a residential house which in our view is the date of completion of the constructed residential house habitable for the purpose of residence. Thus in the case of assessee long term capital gain arose from sale of old residential house on 18.07.2008 and assessee invested ₹ 53,92,287 in constructing another residential house construction of which was commenced in 2006 but was completed on 16.4.2009 and was well within the statutory time limit meant for constructing of new residential house within 3 years from the date of transfer of capital asset as envisaged in the provisions of section 54 of the Act and, therefore, assessee is eligible to claim deduction u/s 54 - Decided in favour of assessee

Summary

Issues Involved:
1. Denial of deduction under Section 54 of the Income Tax Act, 1961.
2. Interpretation of the timeline for construction of a new residential house as per Section 54.
3. Validity of the commencement and completion dates of the construction of the new house in relation to the sale of the old house.

Issue-wise Detailed Analysis:

1. Denial of Deduction under Section 54 of the Income Tax Act, 1961:
The primary issue in the appeal was the denial of the deduction of ?29,62,200/- under Section 54 of the Income Tax Act, 1961 by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee claimed this deduction for the construction of a new residential house after selling an old residential property. The AO denied the deduction on the grounds that the construction of the new house had commenced and was almost completed before the sale of the old house, which was against the provisions of Section 54.

2. Interpretation of the Timeline for Construction of a New Residential House as per Section 54:
The AO observed that the construction of the new house began before the transfer of the old property on 18.07.2008, and hence, the deduction under Section 54 was not permissible. The CIT(A) upheld this view, citing various judicial precedents which emphasized that the construction should be completed within three years after the transfer of the original asset. The CIT(A) referred to cases like J.R. Subramaniam Bhatt and Smt. Shantaben P. Gandhi, which supported the view that only the expenses incurred after the sale of the old house should be considered for deduction under Section 54.

3. Validity of the Commencement and Completion Dates of the Construction of the New House in Relation to the Sale of the Old House:
The assessee argued that the construction of the new house was completed on 16.04.2009, which was within the three-year period allowed by Section 54. The assessee contended that the date of commencement of construction was irrelevant as long as the construction was completed within the stipulated period. The Tribunal noted that the completion certificate was issued on 16.04.2009, indicating that the house became habitable on that date. The Tribunal also observed that the provisions of Section 54 do not mandate the use of sale proceeds from the old house for the construction of the new house, and the deduction can be claimed if the new house is constructed within three years from the date of transfer of the old house.

Conclusion:
The Tribunal concluded that the assessee was eligible for the deduction under Section 54 as the construction of the new house was completed within the statutory period of three years from the date of transfer of the old house. The Tribunal set aside the orders of the lower authorities and allowed the appeal of the assessee, granting the deduction of ?29,62,200/- under Section 54 of the Income Tax Act, 1961.

Order Pronouncement:
The appeal of the assessee was allowed, and the order was pronounced in the open Court on 3rd January, 2017.