2025 (4) TMI 1209 - AT - Income Tax

Exemption u/s 54 - Long Term Capital Gain arising on the sale of his old residential house - claim denied as sale consideration of the old residential house was deposited in the assessee s bank account was neither utilized/used by him for purchase of the new residential property nor deposited by him till the end of the financial year relevant to AY 2016-17 in the Capital Gains Account Scheme (CGAS) as was required per the mandate of law to claim exemption of the LTCG arising on sale of the old residential house HELD THAT - As the assessee had within the specified time period made an investment in the aforesaid new residential property viz. Villa No. 53 much in excess of the sale consideration of Rs. 72.54 lacs of his old residential house therefore we find no reason for declining of his claim of exemption under Section 54 of the Act by both the lower authorities. Alternatively even if the CIT(A) s view that the assessee had made investment in construction of the new residential property i.e. Villa No. 53 (supra) is to be accepted then also there could have been no justification in declining his claim for exemption under Section 54 of the Act. Ostensibly the CIT(A) had declined to consider the investment that was made by the assessee in the new residential property viz. Villa No. 53 (supra) but we are unable to concur with the same. As decided in H.K. Kapoor 1997 (8) TMI 44 - ALLAHABAD HIGH COURT exemption of capital gains could not be refused to the assessee simply on the ground that the construction of the new residential house had begun before the sale of the old residential property. Second issue i.e. for availing the benefits under Section 54 of the Act is it necessary that the sale proceeds of the old residential house must be used in the purchase or construction of the new residential house we do not find any substance in the view taken by the AO which thereafter had impliedly been approved by the CIT(A). On a perusal of Sec. 54 of the Act it transpires that the same contemplates appropriation of the capital gain arising on the sale of the old residential property towards purchase or construction of the new residential property. However nothing can be gathered therefrom that it is necessary that the sale proceeds of the old residential house must be utilized by the assessee for the purchase or construction of the new residential house. Our aforesaid view is fortified by the judgment of Moturi Lakshmi (Ms.) 2020 (9) TMI 416 - MADRAS HIGH COURT as observed that Section 54F of the Act nowhere envisages that the sale consideration obtained by the assessee from the original capital asset is mandatorily required to be utilized for the purchase or construction of a house property. Thus not being able to persuade ourselves to concur with the view taken by the lower authorities we set-aside the order of the CIT(A) and direct the A.O to allow the assessee s claim for exemption under Sec. 54. We are of the affirm conviction that as the assessee had based on sale of his old residential property viz. House No. 10-3-734/3 situated at Vijaynagar Colony Malleapally Hyderabad had made an investment towards purchase of the new residential house property viz. Villa No. 53 (supra) therefore no infirmity arises from the claim of exemption that was raised by him under Section 54 - Decided in favour of assessee.

Summary

The core legal questions considered by the Tribunal in this appeal are:

(i) Whether the investment made by the assessee in the new residential property prior to the sale of the old residential property qualifies for exemption under Section 54 of the Income-tax Act, 1961;

(ii) Whether for availing the benefits under Section 54, it is mandatory that the sale proceeds of the old residential house must be utilized for the purchase or construction of the new residential house within the prescribed time frame;

(iii) Whether the non-deposit of the capital gains amount in a Capital Gains Account Scheme (CGAS) before the due date of filing the return disentitles the assessee from claiming exemption under Section 54;

(iv) The correctness of the findings of the Assessing Officer (AO) and Commissioner of Income-Tax (Appeals) (CIT(A)) in disallowing the exemption claim under Section 54;

(v) The relevance of the assessee's ownership of more than one residential property on the eligibility for exemption under Section 54;

Issue-wise Detailed Analysis

Issue (i): Eligibility of investment made prior to sale for exemption under Section 54

The relevant legal framework is Section 54 of the Income-tax Act, which provides exemption from long-term capital gains arising from the transfer of a residential house if the assessee purchases a new residential house either one year before or two years after the transfer or constructs one within three years after the transfer.

The AO and CIT(A) had disallowed exemption on the ground that the capital gains amount was not deposited in the CGAS before the due date of filing the return and that the payments made after sale were insufficient.

The Tribunal examined the facts and found that the assessee had entered into an agreement to purchase the new residential property prior to the sale of the old house and had made payments aggregating Rs. 1.82 crores towards purchase and construction of the new property within the prescribed time period. Specifically, payments exceeding Rs. 1.55 crores were made before the due date of filing the return for AY 2016-17, which was well in excess of the sale consideration of Rs. 72.54 lacs.

The Tribunal relied on the statutory language of Section 54(1) which allows investment one year before or two years after the date of transfer. It held that the investment made prior to sale qualifies for exemption, overruling the lower authorities' view that only post-sale investments qualify.

Precedents relied upon include the Allahabad High Court decision in Commissioner of Income Tax vs. H.K. Kapoor, which held that construction of a new house commencing before the sale of the old house does not disentitle the assessee from exemption under Section 54. The Court emphasized that the statute does not require construction to begin after the sale.

The Tribunal concluded that the assessee complied with the statutory requirements and the investment prior to sale was valid for exemption.

Issue (ii): Necessity of utilizing sale proceeds for purchase or construction of new house

The AO and CIT(A) held that since the sale proceeds of Rs. 70 lacs were neither utilized for purchase/construction nor deposited in CGAS before the due date of filing the return, exemption was not allowable.

The Tribunal analyzed Section 54(2), which mandates deposit of capital gains not utilized before filing the return in a notified CGAS. However, the Tribunal distinguished between "capital gains" and "sale proceeds," emphasizing that the statute requires appropriation of capital gains, not necessarily the entire sale proceeds.

The Tribunal referred to judicial pronouncements including the Madras High Court in Moturi Lakshmi vs. ITO, Punjab & Haryana High Court in CIT vs. Kapil Kumar Agarwal, and Karnataka High Court in CIT vs. K. Ramchandra Rao, which held that Section 54F (similar in principle to Section 54) does not mandate mandatory utilization of sale consideration but focuses on capital gains.

Accordingly, the Tribunal rejected the AO's and CIT(A)'s interpretation that non-utilization of sale proceeds per se disentitles exemption, holding that the assessee's investment in the new property satisfied the conditions for exemption.

Issue (iii): Non-deposit of capital gains in CGAS before due date of filing return

The AO and CIT(A) emphasized that the assessee did not deposit Rs. 70 lacs of capital gains in CGAS before the due date of filing the return, which is a mandatory condition under Section 54(2) if the capital gains are not utilized.

The Tribunal, however, found on facts that the assessee had made substantial payments towards the new property, including prior to sale, which constituted appropriation of capital gains. The Tribunal held that the assessee was not required to deposit the capital gains in CGAS as the amount was already invested in the new asset within the prescribed period.

The Tribunal distinguished this case from those where the capital gains amount remains unutilized and un-deposited, which would attract disallowance.

Issue (iv): Validity of AO's and CIT(A)'s orders disallowing exemption

The Tribunal analyzed the factual matrix and found that the AO's and CIT(A)'s conclusions were based on an incorrect premise that the capital gains amount was neither utilized nor deposited. The Tribunal found ample evidence of payments made by the assessee towards purchase and construction of the new property within the statutory time frame.

The Tribunal also noted that CIT(A) had introduced an additional reason not taken by AO, which was that only Rs. 10.24 lacs was paid after sale till end of financial year, ignoring payments made prior to sale.

On the competing arguments, the Tribunal gave primacy to the statutory language and judicial precedents favoring liberal interpretation for exemption claims, rejecting the narrow interpretation of AO and CIT(A).

Consequently, the Tribunal set aside the orders of the lower authorities and directed the AO to allow the exemption under Section 54.

Issue (v): Ownership of more than one residential property and its impact on exemption

The Departmental Representative contended that the assessee owning more than one residential property disqualified him from exemption under Section 54.

The Tribunal declined to entertain this argument as it was not raised or decided by the lower authorities, citing the principle that the Department cannot raise a new case in appeal beyond the scope of the original order.

This position was supported by the Special Bench decision which restricts the Department's arguments to those supporting or defending the impugned order.

Additional Observations

The Tribunal noted that although the assessee had erroneously claimed exemption under Section 54F in the return, this was rectified during assessment proceedings by a letter clarifying the claim under Section 54. The Tribunal accepted this correction and did not consider the initial misclassification fatal to the claim.

Significant Holdings

"The exemption of capital gains could not be refused to the assessee simply on the ground that the construction of the new residential house had begun before the sale of the old residential property."

"Section 54 of the Act contemplates appropriation of the 'capital gain' arising on the sale of the old residential property towards purchase or construction of the new residential property. However, nothing can be gathered therefrom that it is necessary that the sale proceeds of the old residential house must be utilized by the assessee for the purchase or construction of the new residential house."

"The assessee had within the specified time period made an investment in the new residential property much in excess of the sale consideration of his old residential house. Therefore, there is no reason for declining his claim of exemption under Section 54 of the Act."

"The scope of argument of the departmental representative should be confined to supporting or defending the impugned order and he cannot be permitted to set up an altogether different case."

Core principles established include:

- Investment made in the new residential property within one year before or two years after the sale of the old residential property qualifies for exemption under Section 54.

- Construction or purchase of the new residential property commencing before the sale of the old property does not disentitle the assessee from exemption.

- The exemption is linked to appropriation of capital gains, not mandatory utilization of entire sale proceeds.

- Non-deposit of capital gains in CGAS is only relevant if the capital gains remain unutilized; if invested timely, deposit is not required.

- The Department cannot raise new grounds not considered by lower authorities in appeal proceedings.

- Clerical or procedural errors in claiming exemption under the wrong section can be rectified during assessment proceedings.

Final determinations:

The Tribunal allowed the appeal, set aside the orders of the AO and CIT(A), and directed the AO to grant exemption under Section 54 of the Income-tax Act for the long-term capital gains arising on sale of the old residential property, on the basis of investment made by the assessee in the new residential property within the prescribed time frame, including payments made prior to the sale.