2018 (8) TMI 864 - HC - Income Tax

Exemption/ deduction u/s 54 - Purchase of land with superstructure - After demolishing the existing superstructure, the appellant assessee constructed a residential house - assessee submitted that the new residential property had been constructed within a period of three years from the date of sale of the old property. He argued that construction of a property cannot be done without land underneath it and, therefore, the cost of construction of the property should also include the cost of land. Held that - It is axiomatic that Section 54(1) of the said Act does not contemplate that the same money received from the sale of a residential house should be used in the acquisition of new residential house. Had it been the intention of the Legislature that the very same money that had been received as consideration for transfer of a residential house should be used for acquisition of the new asset, Section 54(1) would not have allowed adjustment and/or exemption in respect of property purchased one year prior to the transfer, which gave rise to the capital gain or may be in the alternative have expressly made the exemption in case of prior purchase, subject to purchase from any advance that might have been received for the transfer of the residential house which resulted in the capital gain. It is not a requisite of Section 54 that construction could not have commenced prior to the date of transfer of the asset resulting in capital gain. If the amount of capital gain is greater than the cost of the new house, the difference between the amount of capital gain and the cost of the new asset is to be charged under Section 45 as the income of the previous year. - Decided in favor of assessee.

Summary

Issues Involved:
1. Eligibility of cost of land for exemption under Section 54 of the Income Tax Act.
2. Segregation of cost of land from the cost of the constructed house property under Section 54(1) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Eligibility of Cost of Land for Exemption under Section 54 of the Income Tax Act:

The appellant, a Senior Advocate, filed his return of income for the assessment year 2010-11, declaring a taxable income of ?12,20,97,560/-. The return was selected for scrutiny, and notices were issued under Sections 143(2), 129, and 142(1) of the Income Tax Act. The appellant sold a residential house property for ?12,50,00,000/- resulting in a long-term capital gain of ?10,47,95,925/-. He claimed this gain as exempt under Section 54 of the Act, having constructed a new residential house at a cost of ?18,73,85,491/-.

The Assessing Officer allowed exemption only for the construction expenditure incurred after the sale of the original asset, amounting to ?1,14,81,067/-. This decision was upheld by the Commissioner of Income Tax (Appeals). However, the Income Tax Appellate Tribunal (ITAT) held that Section 54 is a beneficial provision and should be construed liberally, remitting the issue back to the Assessing Officer for reconsideration.

The High Court examined whether the cost of the new residential house, eligible for set-off against capital gain, includes the cost of land. The Court emphasized that Section 54(1) does not require the same money received from the sale to be used for the new asset. It clarified that the cost of the new residential house includes the cost of land, materials, labor, and other related expenses. The Court concluded that the capital gain is to be adjusted against the total cost of the new residential house, including the land, provided the new house is purchased or constructed within the stipulated time.

2. Segregation of Cost of Land from the Cost of the Constructed House Property under Section 54(1) of the Income Tax Act:

The appellant argued that the cost of construction should include the cost of land, as construction cannot occur without land. The High Court agreed, stating that Section 54(1) is clear and specific that the cost of the new residential house, not just the construction, is to be adjusted against the capital gain. The Court noted that the provision does not exclude the cost of land from the cost of the residential house.

The Court reiterated that the exemption under Section 54(1) is attracted when another residential house is purchased within one year before or two years after the transfer or constructed within three years after the transfer of the original house. The Court found that the new house was constructed within the stipulated time and that it is not necessary for the construction to have commenced after the sale of the original asset.

Conclusion:

The High Court allowed the appeal, answering the questions of law in favor of the appellant. The Court affirmed that the cost of the new residential house includes the cost of land and that the capital gain should be adjusted against this total cost. The appeal was allowed with no costs, and the questions were answered as follows:
- The cost of the new asset eligible for set-off against capital gain includes the cost of the land if purchased within the stipulated time.
- The cost of land cannot be segregated from the cost of the constructed house property for the purpose of exemption under Section 54(1).