2008 (10) TMI 250 - AT - Income Tax

Disallowance of exemption claimed u/s 54F - Purchase of residential flat - long-term capital Gains - HELD THAT - The main part of s. 54 provides that assessee has to purchase a house property for the purpose of his own residence within a period of one year before or after the date on which transfer of his property took place or he could have constructed house property within a period of two years after the date of transfer. We find that sale proceeds of the capital assets received by the assessee was utilized or appropriated for different purpose and assessee had no personal funds to acquire a residential house and the residential house was purchased from the loans borrowed from the bank, as admitted by the assessee during the course of hearing. In these circumstances, Since the sale proceeds or the capital gain accrued to the assessee was not wholly appropriated towards the purchase of the residential house within a specified period, the assessee is not entitled to claim exemption of whole capital gain u/s. 54F. Whatever amount was utilized in purchase of a residential house, the corresponding deduction u/s. 54F, is to be allowed and the Revenue authorities have already allowed the corresponding exemption to the assessee. We, therefore, find no infirmity in the order of the CIT(A) and we confirm the same. Accordingly, the appeal of the assessee is dismissed. In the result, appeal of the assessee is dismissed.

Issues Involved:
1. Disallowance of exemption claimed under Section 54F of the Income Tax Act on long-term capital gain for the purchase of a residential flat.

Issue-wise Detailed Analysis:

1. Disallowance of Exemption under Section 54F:

The primary issue in this case revolves around the disallowance of the exemption claimed by the assessee under Section 54F of the Income Tax Act for the long-term capital gain on the purchase of a residential flat.

Facts and Background:

The assessee claimed an exemption under Section 54F for a long-term capital gain of Rs. 14,18,890, which arose from the sale of shares for an aggregate consideration of Rs. 17,28,686. The exemption was claimed on account of the purchase of a residential flat through an agreement dated 15th June 2004, with the total cost being Rs. 17,29,355. The possession of the flat was received on 1st July 2004. The purchase was financed by a housing loan of Rs. 15 lakhs from Union Bank of India. The Assessing Officer (AO) disallowed the exemption to the extent of Rs. 12,31,676, allowing only a proportionate exemption based on the balance cost of Rs. 2,28,000.

Arguments by the Assessee:

The assessee argued that Section 54F does not mandate that only the sale consideration from the capital asset must be utilized for the purchase of the new residential property. The section does not prohibit the use of borrowed funds for such a purchase. The assessee relied on various judgments, including those related to Section 88, where borrowed funds were allowed for investments to claim deductions.

Arguments by the Department:

The Department contended that Section 54F(1) should be read along with its sub-section (4). The sale proceeds of the capital asset must be utilized for the purchase of the new asset within the specified period, or deposited in a specified account if not utilized before the date of furnishing the return. If the sale proceeds are appropriated for other purposes and the new asset is acquired out of borrowings, the exemption under Section 54F cannot be granted.

Tribunal's Analysis:

The Tribunal examined the provisions of Section 54F, emphasizing that sub-section (1) should be read in conjunction with sub-section (4). The benefit of Section 54F is allowed only if the sale proceeds are either appropriated for the purchase of the new asset within the specified period or deposited in a specified account before the due date of filing the return. The Tribunal noted that the objective of Section 54F is to encourage investment in residential properties, and it is not necessary that the same funds must be used for the purchase of the new property. However, the funds should be available for investment within the specified time.

Precedents and Legal Interpretations:

The Tribunal referred to several judgments, including the Kerala High Court's decision in K.C. Gopalan, which held that there is no condition that the sale consideration itself must be used for the acquisition of the new property. The Tribunal also considered the cases of Mrs. Prema P. Shah and Dr. P.S. Pasricha, where it was held that the source of funds is irrelevant as long as the investment is made within the specified period.

Conclusion:

The Tribunal concluded that the residential property should be acquired or constructed by the assessee out of personal funds or the sale proceeds of the capital asset. If the property is purchased using borrowed funds, the assessee is not eligible for the full deduction under Section 54F. In this case, since the sale proceeds were appropriated for different purposes and the residential house was purchased with borrowed funds, the assessee was not entitled to claim the full exemption. The Tribunal upheld the order of the CIT(A) and dismissed the appeal of the assessee.

Result:

The appeal of the assessee was dismissed, confirming the disallowance of the exemption claimed under Section 54F to the extent of the long-term capital gain not appropriated towards the purchase of the residential house.

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