2017 (8) TMI 1239 - AT - Income Tax

Exemption u/s 54 denied - purchase of property in apartment - to be treated as purchase or construction of residential property - eligibility period of 2 years or 3 years - possession was not taken till filing of return - Held that - As per CBDT Circular No. 471 dated 15/10/1986 read with Circular No. 672 dated 16/12/2993 the terms of scheme of allotment and construction of new apartment as provided in apartment buyers agreement are similar to those as mentioned in para 2 of CBDT Circular No. 471 dated 15/10/1986. The reliance of the assessee on various case laws supports the case of the assessee. The assessee has complied with all the conditions for making investment of capital gains in asset which cannot be termed as new asset as the old asset was sold on 11/4/2008 and time limit for investing capital gains in construction of new asset would have expired on 10/4/2011 but the assessee prior to that had entered into an apartment buyers agreement on 3/1/2007. Thus, the assessee has proved its stand along with the documentary evidence which was totally ignored by the Assessing Officer as well as by the CIT(A). Treating the interest expense on borrowed funds towards cost of acquisition of residential house as transferred the assessee had not claimed such interest expense as a deduction on such self occupied property under any Section like that of Section 24(B) or Section 57 of the Act. Therefore, the assessee is entitled to claim it as part of cost of acquisition of such house. The same is supported by the Karnataka High Court judgment in case of CIT Vs. Maithrevi Pai 1983 (11) TMI 43 - KARNATAKA High Court wherein it is held that interest paid on borrowings for acquisition of a capital asset must fall for deduction u/s 48 of the Act provided the same has not been claimed as a deduction under other heads like those u/s 57 of the Act. Thus, the order of CIT(A) is set aside. - Appeal of assessee allowed.

Summary

Issues Involved:

1. Exemption under Section 54 of the Income Tax Act, 1961.
2. Treatment of interest expenses on borrowed funds as part of the cost of acquisition for computing Long Term Capital Gains.

Detailed Analysis:

Issue 1: Exemption under Section 54 of the Income Tax Act, 1961

The assessee, a non-resident Indian, sold a residential house and sought exemption under Section 54 of the Income Tax Act, 1961, by investing in a new flat being constructed by a developer. The Assessing Officer (A.O) denied the exemption, arguing that the assessee did not have firm ownership of the new property and had not made substantial payments towards its purchase by the date of filing the return. The A.O also contended that the new flat fell under the "purchase" category of Section 54(1), which requires the property to be purchased within one year before or two years after the sale of the original asset. The CIT(A) upheld the A.O's decision, stating that the assessee did not meet the requirements of Section 54.

The appellant argued that the investment in the new flat should be considered as "construction" rather than "purchase," which allows a three-year period for completion. The appellant relied on CBDT Circulars No. 471 and 672, which extend the exemption to flats constructed by developers, and cited various judicial precedents supporting this view.

The Tribunal agreed with the appellant, noting that the CBDT Circulars apply to developers and builders, and the investment in the new flat should be considered as "construction." The Tribunal also highlighted that substantial payments were made within the specified time limits, and the delay in possession was due to circumstances beyond the appellant's control, such as litigation involving the developer. The Tribunal concluded that the appellant met the conditions for exemption under Section 54.

Issue 2: Treatment of Interest Expenses on Borrowed Funds

The appellant claimed that interest expenses on borrowed funds used to acquire the original property should be included in the cost of acquisition for computing Long Term Capital Gains. The CIT(A) rejected this claim, stating that such expenses could only be deducted under Section 24(b) of the Income Tax Act.

The Tribunal disagreed with the CIT(A), citing the Karnataka High Court judgment in CIT vs. Maithrevi Pai, which held that interest paid on borrowings for acquiring a capital asset could be deducted under Section 48, provided it had not been claimed under other sections like Section 57. The Tribunal concluded that the appellant was entitled to include the interest expenses in the cost of acquisition.

Conclusion:

The Tribunal allowed the appeal, granting the exemption under Section 54 and permitting the inclusion of interest expenses in the cost of acquisition for computing Long Term Capital Gains. The order of the CIT(A) was set aside.