2019 (12) TMI 143 - AT - Income Tax

LTCG - Benefit of exemption u/s. 54 - assessee has not satisfied the condition that the construction of new asset has to be complied within a period of 3 years from the date of transfer - HELD THAT - As far as exemption claimed by the assessee u/s. 54 is concerned, the assessee has not satisfied the condition that the construction of new asset has to be complied within a period of 3 years from the date of transfer. This condition having not been satisfied in the case of assessee, the deduction u/s. 54 was rightly denied by the revenue authorities. Even today, there has been no construction on the site purchased by the assessee and therefore the action of the revenue authorities in denying the benefit of exemption u/s. 54 is upheld. Long term capital gain on sale of the flat has to be computed in accordance with the provisions of section 48. The facts which we notice in this regard from the statements filed by the assessee before the CIT(Appeals) is that the flat which was sold by the assessee during the previous year was acquired by the assessee under a joint development agreement dated 7.3.2003. The assessee had 1/3rd share in 2 acres 35 guntas which was given to M/s. Gopalan Enterprises under a joint development agreement and supplementary agreement dated 7.3.2004 and 27.4.2004 respectively. The assessee got 13 flats and 4 car parks from the developer. The assessee retained 7708 sft. and undivided interest in land. The assessee worked out the cost of land and the cost of super built-up area of Flat B 105 that was got under the joint development agreement and which was sold during the previous year Computation of long term capital gain is concerned, the same is a second computation of the long term capital gain filed by the assessee before the CIT(A) and this is not supported by a report of any registered valuer. The flat that was sold by the assessee comprises of undivided share of interest in the land of 472 sft. and the built- up area of the flat is 1315 sft. The land was purchased prior to 1.4.1981 and therefore the assessee has an option to adopt fair market value as on 1.4.1981 insofar as it relates to the land component that was sold along with the built-up area of Flat B 105. The assessee will be entitled to benefit of indexation on such value. As far as cost of acquisition of super built-up area of 1315 sft. of Flat B 105 is concerned, the valuation would be proportionate value for 1315 Sq.ft. based on the cost which the builder had incurred in constructing flats allotted to the assessee or the value of the land conveyed to the developer as per the Sub-Registrar s valuation, whichever is higher. The assessee will be entitled to benefit of indexation on such cost. The AO is directed to compute the capital gain as per directions given above. Appeal by the assessee is treated as partly allowed.

Summary

Issues:
1. Claim of exemption u/s. 54 of the Income-tax Act, 1961 for non-construction of house property within the stipulated time frame.
2. Computation of long term capital gain on the sale of property under section 48 of the Act.

Analysis:
1. Claim of Exemption u/s. 54:
The appellant, an individual, sold a property and reinvested the sale consideration in a new site for constructing a residential house to claim exemption u/s. 54 of the Act. However, the construction was not completed within the prescribed 3-year period. The Assessing Officer (AO) denied the exemption and taxed the entire sale consideration as long term capital gain. The CIT(A) upheld the denial, emphasizing the mandatory nature of the construction completion condition under section 54. The Tribunal agreed with the lower authorities, stating the failure to meet the construction deadline justifies the denial of the exemption.

2. Computation of Long Term Capital Gain:
The appellant provided two computations of long term capital gain before the CIT(A). The first computation, supported by a registered valuer's report, was based on the sale consideration and indexed cost of acquisition, resulting in a taxable gain. The second computation aimed for a NIL gain by separately valuing the land and super built-up area. The CIT(A) found the valuation of built-up area in the first computation overstated and directed a revaluation based on comparable sale deeds or government guidelines. Regarding the second computation, the Tribunal directed the AO to consider the fair market value of land and the cost of construction to compute the capital gain accurately. The Tribunal partially allowed the appeal, instructing the AO to recompute the capital gain as per the directions provided.

In conclusion, the Tribunal upheld the denial of exemption u/s. 54 due to non-completion of construction within the stipulated period. Additionally, it directed a reassessment of the long term capital gain computation to ensure accurate valuation and indexing, based on the fair market value and construction costs, respectively. The appeal was partly allowed, emphasizing the importance of meeting statutory requirements for tax exemptions and precise valuation methods for capital gains calculations.