2005 (6) TMI 275 - AT - Income Tax

Summary

Issues Involved:

1. Computation of capital gain under Section 54.
2. Compliance with the Capital Gains Account Scheme, 1988.
3. Classification of the transaction as purchase or construction of a new residential property.
4. Entitlement to exemption under Section 54.

Issue-wise Detailed Analysis:

1. Computation of Capital Gain under Section 54:
The primary controversy revolves around the computation of capital gain under Section 54 on the sale of the assessee's residential property in Pune. The assessee declared a sale consideration of Rs. 3,75,000 and deducted Rs. 40,100 as costs, resulting in a capital gain of Rs. 3,34,000, which was claimed as exempt due to the construction of a new house in Nashik. The Income Tax Officer (ITO) pointed out that for exemption under Section 54, the assessee must either purchase a new residential house within one year before or two years after the sale or construct a new house within three years. The ITO found that the conditions for utilizing the money in the Capital Gains Account Scheme were not met and disallowed the exemption under Section 54, allowing pro-rata exemption under Section 53 instead.

2. Compliance with the Capital Gains Account Scheme, 1988:
The ITO noted that the bank account used by the assessee was a savings account and not an account under the Capital Gains Account Scheme, 1988. Further, the assessee transferred funds from this account to another savings account and used some of the money for a term deposit and a loan to a friend, which did not comply with the specified purposes under Section 54(1). The assessee explained that the builder delayed construction, leading to the decision to delay payments and place the money in a term deposit. However, no explanation was provided for the loan to the friend.

3. Classification of the Transaction as Purchase or Construction of a New Residential Property:
The key issue was whether the assessee purchased a new residential property or constructed it. The CIT(A) held that the assessee had not constructed the new property but purchased it from the builder, Kalpataru Construction, beyond the specified period of two years from the sale of the old house. The assessee argued that the construction was completed within three years, and substantial payments were made within two years, thus claiming the exemption under Section 54. The Tribunal examined the agreement and found that it was a binding contract for the purchase of a row-house, not construction on behalf of the assessee.

4. Entitlement to Exemption under Section 54:
The Tribunal considered various submissions and case laws, including CIT vs. Mrs. Hilla J.B. Wadia, CIT vs. J.R. Subramanya Bhat, CIT vs. T.N. Arvinda Reddy, and CIT vs. Smt. Bharati C. Kothari. It was noted that the test of domain and control over the property, rather than legal formalities, should be applied. The Tribunal concluded that substantial payments made within two years indicated that the assessee had domain and control over the new property within the stipulated period. Thus, the assessee was entitled to exemption under Section 54.

Conclusion:
The Tribunal allowed the appeal, holding that the assessee was entitled to exemption under Section 54, as substantial payments were made within the stipulated period, and the domain and control over the new property had passed to the assessee within two years from the sale of the old property.