2023 (8) TMI 1507 - AT - Income Tax

Exemption u/s 54 and 54F - unutilized amount out of amount invested in Capital Gain account - Assessee partly utilized the fund kept in the bank account under capital gains account scheme HELD THAT - Assessee was not able to utilize the funds deposited in the capital gains account scheme due to the fact that the builder could not proceed with completion of the project. It is also fact that assessee has entered into an agreement with the builder with the indemnity clause in case builder fails to complete the project in time. It is also fact that assessee has filed the suit before Hon'ble High Court with the main ground for objections is about the capital gains liability. AO interpreted the indemnify clause entered by the assessee in the purchase agreement that assessee has got the compensation or he may get the compensation without there being any concrete evidences on record or he is aware of the fact that the case is still pending before Hon'ble High Court. He is also aware of the fact that the issue is still unresolved and there are no evidences on record to show that assessee has already indemnified with the tax liability. Assessee cannot utilize the funds deposited in the bank account under capital gains account scheme, it shows that it is impossible of performance and the funds is still available in the above said account unutilized. The courts have held that where the assessee has entered into an agreement with a builder and invested the capital gain for purchase of a residential unit, he is entitled to deduction u/s. 54 irrespective of the fact that builder has not completed the construction or has not yet handed over the flat Pr. CIT v. C. Gopalswamy 2016 (6) TMI 643 - KARNATAKA HIGH COURT . Similarly, in the present case assessee has no doubt claimed the deduction u/s. 54F and partly utilized the fund kept in the bank account under capital gains account scheme. Balance was not utilized by the assessee due to the fact that the builder stopped construction. It is a situation where assessee was not able to utilize the same under the above said circumstances, it is not proper to presume that assessee will get the indemnity from the builder and also it is fact that the case is still pending before Hon'ble High Court. Therefore, in the situation of impossibility of performance, the period for utilization in the special circumstances like the present case has to be extended till the performance is possible. It is fact on record that the funds are still in the bank account unutilized and the case is also pending before Hon'ble High Court and till the case the decided or the issue is resolved by the Hon'ble High Court the assessee is not in a position to utilize the funds. Therefore, the limitation period has to be extended till it is resolved. In case assessee is not able to get the indemnity from the builder, the assessee cannot be forced to pay the tax and further the AO should not allow the assessee to utilize the funds till the issue is resolved in case assessee withdraws or utilizes the funds for some other purposes then the AO may proceed to tax the same the day assessee utilizes the funds for some other purposes, till such time assessee cannot be forced to declare the same as income immediately after the expiry of the limitation period. The question is how long the limitation period to be extended. From the record, it is not clear when the builder stopped the construction. In case, he has stopped the construction one year prior to the date of completion, then the assessee should be allowed to utilize the same from the date of the Hon'ble High Court order for a period of one year. Unless and until, the issue is resolved, the assessee cannot be compelled to treat the unutilized portion of the funds lying the bank account (Capital Gain Account scheme) as taxable. We are inclined to decide the issue in favour of the assessee since the assessee is not in a positon to perform and utilize the funds kept in the bank account under capital gains account scheme. Accordingly, the appeal filed by the assessee is allowed for current Assessment Year. Appeal filed by the assessee is allowed.

Summary

Issues Involved:

1. Taxability of unutilized capital gains under Section 54F due to builder's failure to complete construction.
2. Interpretation of legislative intent and judicial precedents regarding Section 54F.
3. Applicability of indemnity clauses in agreements affecting tax liability.

Issue-Wise Detailed Analysis:

1. Taxability of Unutilized Capital Gains under Section 54F Due to Builder's Failure to Complete Construction:

The assessee, an NRI, sold inherited property and invested the capital gains in a new property, depositing a portion in a Capital Gains Account Scheme. The builder failed to complete the construction, leaving Rs. 4,44,28,160 unutilized. The Assessing Officer (AO) taxed this amount, rejecting the assessee's claim for exemption under Section 54F. The AO noted that the assessee had indemnified himself against capital gains tax liability in the agreement with the builder, thus should claim compensation from the builder. The assessee argued that the delay was beyond his control and cited judicial precedents supporting his position. The Tribunal observed that the unutilized funds remained in the Capital Gains Account due to the builder's default, making it impossible for the assessee to utilize the funds. The Tribunal ruled that the period for utilization should be extended until the issue is resolved, thus allowing the appeal in favor of the assessee.

2. Interpretation of Legislative Intent and Judicial Precedents Regarding Section 54F:

The assessee cited multiple judicial precedents where courts held that substantial investment in a new property within the prescribed period suffices for claiming exemption under Section 54F, even if the construction is incomplete or possession is delayed. The Tribunal referenced cases such as CIT v. Mrs. Shakuntala Devi, Pr. CIT v. C. Gopalswamy, and CIT v. R.L. Sood, which supported the view that the legislative intent of Section 54F is to promote housing and should be interpreted liberally. The Tribunal agreed that the assessee had demonstrated clear intent to invest in a new property and that the delay was due to the builder's default, not the assessee's fault.

3. Applicability of Indemnity Clauses in Agreements Affecting Tax Liability:

The AO argued that the indemnity clause in the agreement indicated that the assessee should seek compensation from the builder for any tax liability. However, the Tribunal noted that the case was still pending in the High Court, and there was no evidence that the assessee had been indemnified. The Tribunal emphasized that the indemnity clause did not negate the fact that the funds remained unutilized due to the builder's failure to complete the project. The Tribunal ruled that the assessee should not be forced to pay tax on the unutilized funds until the issue is resolved by the High Court.

Conclusion:

The Tribunal allowed the appeal, ruling that the assessee should not be taxed on the unutilized portion of the capital gains deposited in the Capital Gains Account Scheme due to the builder's default. The period for utilization should be extended until the issue is resolved, and the assessee should not be compelled to declare the unutilized funds as income immediately after the expiry of the limitation period. The appeal filed by the assessee was allowed for the current assessment year.