2023 (7) TMI 671 - AT - Income Tax

Exemption u/s. 54 denied - long term capital gains from sale of a residential house - new property was acquired by the assessee beyond the time limit - at time of purchase of residential flats the building was under construction - As per AO assessee had booked the residential flats, beyond one year before the date of transfer of a residential house and the possession of flat was received after two years from transfer of a residential house, hence, the assessee is not eligible to claim exemption - HELD THAT - A perusal of the schedule of payment annexed to the Agreement of Sale as Annexure-F shows that the payments are related to the stage of construction i.e. after the completion of construction upto a particular level, the assessee was required to pay specified percentage of the total consideration. The final installment was to be paid at the time of handing over of possession of the Flat. The assessee received possession of completed flats within three years from the date of transfer of old residential house. The Tribunal in the case of Mustansir I Thahasildar 2017 (12) TMI 1060 - ITAT MUMBAI has held that where the assessee has acquired a flat in a building under construction, it would be a case of construction and not purchase of property. Co-ordinate Bench dehors the fact that the assessee had booked a new flat prior to one year from the date of transfer of old flat, since, the building in which new flat was booked was under construction, the assessee fulfils the condition ie. the assessee within a period of three years after the date of transfer of old flat constructed a residential house in India. In the instant case the assessee acquired possession of new flat on 26/11/2014 and old residential property was sold on 04/08/2012. The construction of flat completed within 3 years from the date of transfer of old residential asset. The section is silent about commencement of construction. The section only mandates that a residential house is constructed within three years after the date of transfer. In the case of CIT vs. Hilla J B Wadia 1993 (3) TMI 7 - BOMBAY HIGH COURT has held that where an assessee has utilized capital gains from transfer of old residential asset towards purchase of flat in a building under construction, this must also be viewed as a method of constructing residential tenement. The only other condition that has to be satisfied is that the assessee must have acquired a right to a specific flat in such a building under construction. No contrary decision is brought to the notice of the Bench. In light of facts of the case and decisions referred above, we accept the appeal of assessee. The assessee is eligible to claim exemption u/s. 54 as the construction of residential house completed within three years from the relevant date. Decided in favour of assessee. Penalty u/s 271(1)(C) - disallowing assessee s claim of exemption u/s. 54 - HELD THAT - penalty levied u/s. 271(1)(c) of the Act is not sustainable. It is not the case of Assessing Officer that the assessee has not made full disclosure of capital gains from sale of long term capital asset. The case of the Revenue is that the assessee has made wrong claim of exemption u/s. 54 of the Act on the long term capital gain. In the case of Reliance Petroproducts (P) Ltd. 2010 (3) TMI 80 - SUPREME COURT has held that merely because the assessee has claimed expenditure for which claim was not accepted or was not acceptable to the Revenue that by itself would not attract penalty u/s. 271(1)(c). Merely for the reason that the assessee had made claim of exemption u/s. 54 of the Act which was not acceptable to the Assessing Officer, penalty u/s. 271(1)(c) of the Act cannot be levied. Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of exemption claim under Section 54 of the Income Tax Act, 1961.
2. Imposition of penalty under Section 271(1)(c) of the Income Tax Act, 1961.

Summary:

Issue 1: Disallowance of Exemption Claim under Section 54

The assessee filed an appeal against the order of the Commissioner of Income Tax (Appeals) [CIT(A)], which dismissed the assessee's claim for exemption under Section 54 of the Income Tax Act, 1961. The assessee had sold a jointly owned flat on 04/08/2012 and booked two new flats on 18/04/2011, receiving possession on 26/11/2014. The Assessing Officer (AO) denied the exemption, stating that the new flats were booked beyond one year before the sale of the old flat and possession was received after two years from the sale date. The CIT(A) upheld the AO's decision.

The assessee argued that the flats were under construction when booked, and possession was received within three years from the sale, meeting the conditions of Section 54. The Tribunal referred to the case of Mustansir I Thahasildar vs. ITO, which held that acquiring a flat in a building under construction is akin to construction and not purchase. The Tribunal noted that the possession of the new flats was obtained within three years from the sale of the old flat, fulfilling the exemption conditions under Section 54. The Tribunal allowed the appeal, stating that the assessee is eligible for the exemption.

Issue 2: Imposition of Penalty under Section 271(1)(c)

The assessee also appealed against the penalty imposed under Section 271(1)(c) following the disallowance of the exemption claim. The AO had levied a penalty of Rs. 14,72,240/- for the alleged wrong claim of exemption. The CIT(A) upheld the penalty.

The assessee argued that the transaction was disclosed in the return of income, and the exemption claim was made in good faith. The Tribunal noted that with the allowance of the exemption claim in the quantum appeal, the basis for the penalty no longer existed. Additionally, the Tribunal referenced the Supreme Court's decision in CIT vs. Reliance Petroproducts (P) Ltd., which held that a mere disallowance of a claim does not warrant penalty under Section 271(1)(c). The Tribunal concluded that the penalty was unsustainable and allowed the appeal.

Conclusion:

Both appeals, ITA No.267/Mum/2023 and ITA No.268/Mum/2023, were allowed by the Tribunal, granting the exemption under Section 54 and deleting the penalty under Section 271(1)(c).