2019 (7) TMI 1410 - AT - Income Tax

Deduction u/s 54 against the LTCG received on sale of residential house - assessee failed to construct the new residential house within a period of three years from the date of sale due to delay in the handing over of the possession of the plot by the developer - HELD THAT - Date of investment made in the purchase of residential plot is not relevant, because, what is relevant is that the investment made in the purchase of land forms an integral part of the cost of new residential house and the same is allowable as exemption along with the cost of construction and other related cost of construction of the new residential house within a period of three years. Besides in the instant case, investment for purchase of plot has been made out of the part sale consideration received as advance only, so as to construct the house thereon and there is no embargo to the purchase of plot or start construction prior to the sale of house property, as held by the Hon ble Karnataka High Court in the case of CIT vs. J.R. Subramanya Bhat 1986 (6) TMI 7 - KARNATAKA HIGH COURT which was followed by CIT vs. H.K. Kapoor (Decd.) 1997 (8) TMI 44 - ALLAHABAD HIGH COURT . The first step was to purchase the land, which was done. Thereafter the developer was to handover the plot, so that assessee could have constructed the house within time allowed of 2 years. However, no step could be put forward thereafter because possession of land was not given by the Developer, for reasons beyond the control of the assessee. If an assessee sells his house property and utilises the money for acquiring a plot for the construction of the house and if facts and circumstances point out that assessee intended to construct the house, which has been found so, then it is clear that he wants to avail exemption as provided under the law. Now if the developer after receiving the money could not fulfill the obligation within time, then can assessee be held responsible for not complying the law. The Hon ble Supreme Court in the case of Sanjeev Lal Vs. CIT 2014 (7) TMI 99 - SUPREME COURT has laid down the purposive interpretation of section 54 to give a liberal approach to the assessee who clearly intended to claim benefit of section 54. Thus amount utilized by the assessee in the acquisition of land should be construed as amount invested in purchase/ construction of residential house. The intention of the statute as provided in section 54 has been fully satisfied by the assessee in the present case. Thus, on the facts of the present case, we hold that the assessee is entitled for exemption under section 54 of the Act and AO is directed to allow the exemption us/ 54. - Decided in favour of assessee.

Summary

Issues Involved:

1. Denial of exemption under Section 54 of the Income Tax Act, 1961.
2. Determination of the date of sale for the purpose of Section 54.
3. Consideration of investment in a plot of land for the construction of a residential property under Section 54.
4. Compliance with the stipulated time frame for construction of a new residential house under Section 54.

Issue-wise Detailed Analysis:

1. Denial of exemption under Section 54 of the Income Tax Act, 1961:
The assessee had claimed an exemption under Section 54 for ?1,58,00,000/- invested in the acquisition of a residential plot and ?25,10,000/- deposited in a Capital Gain Account. The Assessing Officer (AO) allowed the exemption for the amount deposited in the Capital Gain Account but denied the exemption for the investment in the plot, citing that the assessee neither purchased a house nor constructed one within the stipulated time under Section 54.

2. Determination of the date of sale for the purpose of Section 54:
The AO and CIT(A) assumed that the transfer through a registered instrument of conveyance dated 28/11/2014 should be considered as the date of sale, not the agreement to sell dated 07/04/2014. The CIT(A) emphasized that the investment in the plot was made more than one year before the transfer of the capital asset, which did not satisfy the conditions required under Section 54.

3. Consideration of investment in a plot of land for the construction of a residential property under Section 54:
The CIT(A) observed that the investment in a plot of land did not amount to the purchase of a residential house within the meaning of Section 54. The assessee argued that the cost of the plot forms an integral part of the cost of the residential house and should be considered for exemption under Section 54. The assessee cited various case laws and a CBDT Circular No. 667 dated 18.10.1993, supporting the inclusion of the cost of land as part of the cost of the new residential house.

4. Compliance with the stipulated time frame for construction of a new residential house under Section 54:
The CIT(A) noted that no construction was made within the stipulated period of three years. The assessee contended that the delay in construction was due to the developer's failure to hand over possession of the plot, which was beyond the assessee's control. The assessee argued that the law does not compel the performance of an impossible act and that the investment in the plot should be considered sufficient for claiming exemption under Section 54.

Judgment:
The Tribunal considered the relevant provisions of Section 54 and the intention of the legislature to give relief in the matter of payment of tax on long-term capital gains. The Tribunal held that the investment in the purchase of the plot forms an integral part of the cost of the new residential house and is allowable as an exemption along with the cost of construction. The Tribunal noted that the assessee had taken all necessary steps to make the investment for the purchase of the house and had deposited ?25,10,000/- in the Capital Gain Account, demonstrating the intention to construct a new residential house. The Tribunal applied the purposive interpretation of Section 54 as laid down by the Hon'ble Supreme Court in the case of Sanjeev Lal Vs. CIT and concluded that the assessee is entitled to the exemption under Section 54. The AO was directed to allow the exemption.

Conclusion:
The appeal filed by the assessee was allowed, and the order was pronounced in the Open Court on 14th May 2019.