2021 (1) TMI 686 - AT - Income Tax

Rectification of mistake u/s 254 - Eligibility of exemption u/s.54F - HELD THAT - We are concerned with the initial year when the assessee deposited the amount in capital gain account scheme. A categorical finding has been recorded that the assessee did deposit capital gain in specified capital gain account scheme. In that view of the matter, the assessee becomes entitled to exemption u/s.54F of the Act for the year under consideration - It is for the AO to examine as to whether the assessee has constructed the house within period of three years or not. In case the house is not so constructed or the other relevant conditions are not satisfied, then the AO becomes free to charge the amount of exemption earlier allowed as income u/s.45 of the third year. We, therefore, modify paras nos. 10 and 11 as under 10. We have found it as an admitted position that the assessee deposited balance capital gain in the specified capital gain account scheme. This makes the assessee entitled to exemption u/s.54F in respect of the year under consideration. However, the AO is free to examine as to whether the assessee constructed the house within the stipulated period of three years. In case such construction is not done or the other relevant conditions are not satisfied, then the AO will be at liberty to invoke the proviso to section 54F and make suitable addition in the income of the assessee at the end of third year from the date of transfer of the original asset. Insofar as the year under consideration is concerned, the assessee is entitled to exemption because she has deposited the amount in the designated capital gain account scheme. 11. In the result, the appeal of the Revenue is dismissed. Miscellaneous Application is allowed.

Summary

Issues Involved:
1. Modification of direction given by the Tribunal regarding exemption u/s.54F of the Income-tax Act, 1961.
2. Eligibility of exemption u/s.54F based on construction of a residential house within a specified period.
3. Interpretation of Section 54F(4) regarding exemption and consequences of non-compliance.

Issue 1: Modification of Tribunal's Direction
The assessee filed a Miscellaneous Application seeking modification of the Tribunal's direction concerning the eligibility of exemption u/s.54F of the Income-tax Act, 1961. The Tribunal had ordered a re-examination of the exemption eligibility in relation to the construction of a residential house.

Issue 2: Eligibility of Exemption u/s.54F
The Tribunal deliberated on the availability of exemption u/s.54F, focusing on whether the assessee had constructed a residential house within three years of the sale of the original capital asset. It was noted that the assessee had sold a property and deposited the balance capital gain in a specified capital gain account scheme, claiming exemption u/s.54F. The Tribunal directed the assessee to provide documentary evidence of house construction within the stipulated timeframe to qualify for the exemption.

Issue 3: Interpretation of Section 54F(4)
Section 54F(4) was analyzed to understand the conditions for exemption. It was highlighted that the assessee becomes eligible for exemption by depositing the amount in the designated capital gain account scheme within the prescribed period. The provision stated that if the deposited amount is not utilized for asset purchase or construction within the specified timeframe, the earlier exemption granted would be charged as income u/s.45 after three years from the original asset transfer date.

The Tribunal emphasized that the assessee's entitlement to exemption u/s.54F was based on depositing the capital gain amount in the specified account. However, the AO was tasked with verifying if the residential house was constructed within three years. Failure to meet construction requirements would allow the AO to charge the previously granted exemption as income u/s.45 after the third year. The Tribunal modified the directions, affirming the assessee's entitlement to exemption for the year in question due to the capital gain deposit, subject to construction verification within the specified period.

In conclusion, the Tribunal dismissed the Revenue's appeal, affirming the assessee's entitlement to exemption for the relevant year. The Miscellaneous Application seeking modification was allowed, with the order pronounced on 18th January 2021.