2017 (5) TMI 1268 - AT - Income Tax

Deduction u/s 54 - long term capital gain - assessee had not complied with the condition stipulated in the section of purchase /construction of new house within the stipulated period of two and three years respectively - Held that - It has been decided in number of cases that for the purpose of claiming exemption under section 54, investment of substantial amount in the new asset, is sufficient compliance. It has been held by various courts that in such circumstances the assessee is entitled to claim exemption despite the fact that the construction is not completed within three years. This issue was addressed by the Delhi High Court in the case of CIT Vs. R.L. Sood 1999 (9) TMI 27 - DELHI High Court wherein held that the assessee having invested substantial amount in the purchase of a new asset, thus acquiring substantial domain over the new flat within the specified period, the assessee could be said to have complied with requirement of section 54 and merely because possession of the Flat was not handed over to the assessee within the specified period the said benefit could not be denied. Thus for the purpose of claiming exemption under section 54 the assessee is only required to invest the amount for the purpose of purchase or construction of a property without completing the same in the impugned year and all amount advanced for the said purpose would be treated as being utilized for the purpose of section 54. - Decided in favour of assessee.

Issues Involved:

1. Disallowance of deduction claimed under section 54.
2. Fulfillment of statutory requirements for availing deduction under section 54.
3. Eligibility for exemption under section 54 based on substantial investment in a new asset.

Issue-wise Detailed Analysis:

1. Disallowance of deduction claimed under section 54:

The primary issue revolves around the disallowance of the deduction claimed by the assessee under section 54 of the Income Tax Act, 1961. The assessee sold a residential house in Shimla and invested the capital gains in purchasing a flat. The Assessing Officer (AO) disallowed the exemption under section 54, arguing that the flat would not be handed over within three years from the date of transfer of the original asset. The AO issued a show cause notice and subsequently rejected the assessee's submission that full/substantial consideration had been paid, holding that the assessee failed to fulfill the basic conditions of section 54.

2. Fulfillment of statutory requirements for availing deduction under section 54:

The assessee contended before the Commissioner of Income Tax (Appeals) [CIT(A)] that she had invested the capital gains before the due date of filing the return and had been allotted the apartment. The CIT(A), however, upheld the AO's decision, stating that the assessee had not purchased or constructed a house within the stipulated period as the flat would become livable only beyond three years from the date of transfer of the original asset.

3. Eligibility for exemption under section 54 based on substantial investment in a new asset:

Before the Appellate Tribunal, the assessee's counsel reiterated that substantial investment had been made before the due date of filing the return, and the flat had been allotted. The Tribunal considered various judicial precedents, including rulings by the Delhi High Court and other benches of the ITAT, which established that substantial investment in the new asset suffices for compliance under section 54, even if the construction is not completed within the stipulated period.

Detailed Analysis:

1. Disallowance of deduction claimed under section 54:

The Tribunal examined the facts and found that the assessee had indeed sold a residential house and invested a substantial amount in purchasing a new flat before the due date of filing the return. The sole reason for denying the exemption was the non-completion of the flat's construction within the stipulated period. The Tribunal noted that various courts had held that substantial investment in a new asset is sufficient for claiming exemption under section 54, even if the construction is not completed within the specified period.

2. Fulfillment of statutory requirements for availing deduction under section 54:

The Tribunal referred to several judicial precedents, including the Delhi High Court's decision in CIT Vs. R.L. Sood, which held that substantial investment in a new asset within the specified period fulfills the requirement of section 54. The Tribunal also cited the ITAT's decisions in cases like Smt. Ranjeet Sandhu and Smt. Usha Vaid, which reiterated that completion of construction is not an essential condition for claiming exemption under section 54, as long as substantial investment is made within the stipulated period.

3. Eligibility for exemption under section 54 based on substantial investment in a new asset:

The Tribunal concluded that the assessee had invested a substantial amount in the new asset before the due date of filing the return. The Tribunal emphasized that section 54 provides a window period of three years for the construction of a new house and two years for purchasing a new house. The Tribunal also referred to the Supreme Court's interpretation in the case of Fiber Boards, which held that advances paid for the purpose of acquiring assets amount to utilization of capital gains, thus entitling the assessee to exemption.

Conclusion:

The Tribunal held that the assessee is entitled to claim deduction under section 54 for the amount invested in the purchase of a new asset. The order of the CIT(A) was set aside, and the appeal of the assessee was allowed. The Tribunal directed the AO to grant the exemption claimed by the assessee. The judgment underscored that substantial investment in a new asset within the stipulated period suffices for claiming exemption under section 54, even if the construction is not completed within the specified period.

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