2013 (11) TMI 514 - AT - Income Tax

Deduction u/s. 54F - Sale of property - Construction of house was substantially completed before the sale of capital asset which led to capital gain - Violation of conditions u/s 54F - Whether the cost of construction incurred by the assessee after the sale of capital asset, though the construction commenced before the sale and the construction completed within two years from the sale of capital asset is entitled for deduction u/s. 54F - Held that - investment in residential house which would have taken place after the sale of existing capital asset is to be considered for deduction u/s. 54F of the Act as the investment in residential house would not only include the cost of purchase of the house but also the cost incurred in making the house habitable and an inhabitable premises, in our opinion, cannot be equated with a residential house. If a person cannot live in the premises, then such premises cannot be considered as a residential house. In case of semi-finished house, the assessee will have to invest huge money on finishing the house to make it habitable. The investment in new property made by the assessee is not entitled for deduction u/s. 54F of the Act to the extent made before the sale of property. Only that portion of investment made in the new property in accordance with section 54F of the Act is entitled for deduction u/s. 54F of the Act. Accordingly, we direct the assessee to furnish the details of investment made by the assessee in the construction of new residential building after the sale of existing property before the due date of filing of return of income u/s. 139(1) of the Act. The Assessing Officer shall consider that investment made by the assessee in the construction of new property after the sale of existing property in terms of section 54F of the Act. Accordingly, the issue is remitted back to the file of the Assessing Officer for the purpose of quantification of deduction u/s. 54F of the Act - Decided in partly favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Non-granting of deduction under Section 54F of the Income-tax Act, 1961.
2. Determination of the eligibility and timing of the investment in the new residential house for claiming the deduction under Section 54F.

Detailed Analysis:

1. Non-granting of Deduction under Section 54F:
The primary issue is whether the assessee is entitled to a deduction under Section 54F of the Income-tax Act, 1961. The assessee claimed a deduction of Rs. 5,30,04,081 for the investment in a new house, but the Assessing Officer denied this, stating that the construction was substantially completed before the sale of the original asset, thus not fulfilling the conditions of Section 54F.

2. Determination of Eligibility and Timing of Investment:
The assessee argued that the construction of the new house was ongoing and not completed by March 2007. The construction continued until October 2009, and the house was occupied in November 2009. The assessee provided balance sheets and municipal tax assessments to support this claim. The assessee contended that the investment made after the sale of the original asset should be eligible for deduction under Section 54F.

The Departmental Representative (DR) countered that substantial construction was completed before the sale of the original asset, and thus, the assessee already had a residential house at the time of sale. The DR cited the judgment in CIT v. Pradeep Kumar, emphasizing that mere additions or modifications to an existing house do not qualify as constructing a new residential house under Section 54F.

Tribunal's Findings:
The Tribunal reviewed the material and arguments presented. It noted that the construction was ongoing at the time of the sale of the original asset and continued until October 2009. The Tribunal referred to the Karnataka High Court's decision in CIT v. J.R. Subrahmanya Bhatt, which held that the commencement of construction before the sale but completion within the stipulated period qualifies for deduction under Section 54F.

The Tribunal emphasized that Section 54F should be construed liberally to promote investment in residential houses, as supported by the Supreme Court's observation in Bajaj Tempo Ltd. and the Board's Circular No. 471. The Tribunal concluded that investment in a residential house includes making the house habitable, and thus, investments made after the sale of the original asset should be considered for deduction under Section 54F.

Conclusion:
The Tribunal directed the assessee to furnish details of the investment made in the construction of the new residential building after the sale of the existing property. The Assessing Officer was instructed to quantify the deduction under Section 54F based on the investment made after the sale and within the stipulated period. The appeal was partly allowed for statistical purposes.

Order Pronounced:
The order was pronounced in the open court on 22nd February 2013.