2022 (8) TMI 604 - HC - Income Tax

Deduction u/s 54F - dates relevant for examining the claim of the assessee for computation of business income - Whether Tribunal has erred or not in denying the deduction under section 54F on the investment made prior to the date of transfer of original asset? - whether or not the denial of deduction for investment prior to transfer can be denied at all in respect of a house constructed within time? - HELD THAT - CIT (Appeals) has not noted all the sequential events in the explanation given by the assessee. But has arrived at a quick finding for extending the relief under Section 54F - Turning to the findings of the Tribunal, we are of the view that the Tribunal has given importance only to the time of the payments made by the assessee or sanction of the loan by the ICICI Bank in favour of the assessee s husband. The test ought to be when the residential house was completed. Either the finding on the crucial aspect is incomplete or not satisfactory. As rightly argued by Mr Kumar relevant to the consideration is when the assessee has completed the residential house. Even assuming the loan was sanctioned in February 2012, that by itself is not conclusive. According to him, the conclusive circumstance is the completion of construction of a residential house three years from the sale of the original asset. As we notice a serious flaw in the application and appreciation of Section 54F to the circumstances stated by the assessee, we prefer to remit the matter to the CIT(Appeals) for a decision afresh. Hence for statistical purposes, the questions are answered in favour of the assessee and against the Revenue.

Issues Involved:
1. Eligibility of deduction under Section 54F of the Income Tax Act for investments made prior to the transfer of the original asset.
2. Interpretation of the scope and parameters of Section 54F regarding the timing of investment and construction of a new residential house.

Detailed Analysis:

1. Eligibility of Deduction under Section 54F for Investments Made Prior to Transfer:

The assessee filed returns for the assessment year 2013-14 and claimed an exemption under Section 54F of the Income Tax Act for an investment of Rs.2,14,87,000/-. The Assessing Officer limited the exemption to Rs.1,21,00,000/- and disallowed Rs.93,87,000/- for the house construction at Vaduthala. The disallowance was based on the interpretation that the construction payments made before the sale of the original asset in March 2013 were not eligible for exemption under Section 54F. The Assessing Officer noted that the construction had started in 2007, well before the sale of the original asset, and was still incomplete.

The CIT (Appeals) allowed the full exemption, stating that the construction of the residential house need not be funded solely from the sale consideration of the original asset. The Tribunal reversed this decision, emphasizing that the construction must be completed within three years after the sale of the original asset for the exemption to apply.

2. Interpretation of Section 54F and Timing of Investment and Construction:

The appellant argued that the Tribunal's interpretation conflicted with precedents set by the Delhi and Madras High Courts, which held that the construction of a new residential house need not be funded exclusively from the sale proceeds of the original asset. The appellant cited the cases of Commissioner of Income-tax V. Bharti Mishra and C.Aryama Sundaram V. Commissioner of Income Tax, which emphasized a liberal interpretation of Section 54F as a beneficial provision. These cases clarified that the construction could commence before the sale of the original asset, provided it is completed within three years after the sale.

The Tribunal's decision was challenged on the grounds that it failed to consider whether the residential house was completed within the stipulated three-year period. The Tribunal focused on the timing of payments and loan sanctions rather than the completion of the construction.

Judgment:

The Court found that the CIT (Appeals) had not adequately considered the sequence of events and the Tribunal had erred in focusing solely on the timing of payments and loans. The crucial aspect was whether the residential house was completed within three years from the sale of the original asset. The Court noted that the Tribunal did not satisfactorily address this issue.

The Court remanded the matter to the Commissioner of Income-tax (Appeals) for a fresh decision, emphasizing the need to determine if the residential house was completed within the required timeframe. The appeal was allowed, and the case was sent back to the Commissioner of Income-tax (Appeals) for further consideration, allowing the assessee to submit additional material if necessary.

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