2016 (9) TMI 251 - AT - Income Tax

Deduction claimed under section 54 - Held that - Merely because construction was not complete in all respect and it was not in a fit condition to be occupied within the stipulated period, would not disentitle the assessee from claiming the benefit under section 54 of the Act. The above facts, therefore, clearly prove that assessee had intention to purchase only plot because old structure and debris were removed by the owner and assessee wanted to raise the construction in the plot itself which was also raised partly. The income tax authority shall have to act on human probabilities by considering surrounding circumstances. In this circular No. 667, dated 18-10-1993, it is provided that aggregate cost of plot and construction should be considered for determining the quantum of deduction under section 54 of the Act. It would also support the case of the assessee for claim of deduction under section 54 of the Act. Thus, the assessee produced sufficient and reliable evidence on record to prove that practically the assessee purchased the plot and raised construction thereon for residential purposes. The assessee, therefore, would be entitled for deduction under section 54 of the Act. - Decided in favour of assessee.

Issues Involved:

1. Invocation of proviso to Section 54(2) of the Income Tax Act, 1961.
2. Assessment of capital gains tax and compliance with Section 54(1).
3. Interpretation of the Capital Gains Scheme 1988.
4. Entitlement to purchase or construct a residential house under the Capital Gains Scheme.
5. Liberal construction of Section 54 to encourage residential house construction.

Issue-wise Detailed Analysis:

1. Invocation of proviso to Section 54(2) of the Income Tax Act, 1961:
The appellant contested the invocation of the proviso to Section 54(2), which resulted in the addition of ?24,74,000 as long-term capital gains. The Assessing Officer (AO) disallowed the exemption under Section 54, arguing that the appellant purchased a semi-constructed house rather than constructing a new one. The AO noted that the construction cost shown was insignificant and appeared to be for repairs or renovations, not new construction.

2. Assessment of capital gains tax and compliance with Section 54(1):
The appellant argued that no capital gains were assessable as they had complied with Section 54(1) by constructing a residential house within the stipulated period. The appellant sold a property on 16.02.2006 and deposited the capital gains in a Capital Gain-B account within the prescribed period. They later purchased a semi-constructed property on 14.01.2009 and spent additional amounts on construction. The appellant claimed that the aggregate cost should be considered for exemption under Section 54.

3. Interpretation of the Capital Gains Scheme 1988:
The appellant deposited the capital gains in the Capital Gains Scheme 1988 before the expiry of the time to file the return of income. They argued that this deposit entitled them to either purchase or construct a residential house within the stipulated period. The appellant relied on Circular No. 667 dated 18.10.1993, which states that the cost of the plot and construction should be considered together for determining the quantum of deduction under Section 54.

4. Entitlement to purchase or construct a residential house under the Capital Gains Scheme:
The appellant contended that having made a deposit under the Capital Gains Scheme, they were entitled to purchase or construct a residential house within the stipulated period. They argued that the intention of the legislature was to encourage investment in residential houses and that completion or occupation was not a requirement of law. The appellant cited several judicial precedents to support their claim that the provisions should be liberally construed.

5. Liberal construction of Section 54 to encourage residential house construction:
The appellant argued that the provisions of Section 54 should be construed liberally to promote the construction of residential houses. They cited judicial precedents, including decisions from the Hon'ble Madras High Court, Karnataka High Court, and Gauhati High Court, which held that the provisions should be interpreted to achieve the legislative intent of encouraging investments in residential properties. The appellant also referred to the Board's Circular No. 667, which supports the inclusion of the cost of the plot in the cost of the residential house for determining the quantum of deduction.

Judgment:

The tribunal concluded that the authorities below were unjustified in denying the benefit under Section 54 to the appellant. The tribunal noted that the appellant had purchased a semi-constructed property and made substantial payments towards its construction. The tribunal emphasized that Section 54 is a beneficial provision aimed at promoting residential house construction and should be construed liberally. The tribunal referred to various judicial precedents and the Board's Circular No. 667 to support the appellant's claim. Consequently, the tribunal set aside the orders of the lower authorities and deleted the addition of ?24,74,000 made by the AO, allowing the appeal of the appellant.

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