2016 (12) TMI 492 - AT - Income Tax

Claim of exemption u/s 54 - denial of claim as assessee failed to deposit the sale proceed of the property sold in the notified capital gain account maintained with the bank as per capital gain scheme as also the assessee failed to file necessary evidences towards construction of new residential house at Rajasthan - Held that - We have observed that the ratio of the decision of the Hon ble Bombay High Court in the case of Humayun Suleman Merchant 2016 (9) TMI 70 - BOMBAY HIGH COURT is directly applicable and assessee will be entitled to claim exemption u/s 54 of the Act for all the amount utilized for the construction of new residential house at Rajasthan till the date of filing of return of income on 18.11.2008 which was filed within time stipulated u/s 139 of the Act. In the interest of justice keeping in view facts and circumstance of the case, this matter needs to be set aside and restored to the file of the AO for making necessary verification as to the amount of exemption which the assessee is entitled for exemption u/s 54 of the Act in accordance with the ratio of decision laid down by the Hon ble Bombay High Court in the case of Humayun Suleman Merchant (supra) and in accordance with law, by the AO after verification of the evidences - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Denial of exemption under Section 54 of the Income Tax Act, 1961.
2. Consideration of exemption claim under Section 54F instead of Section 54.
3. Failure to submit evidence for construction of a new house within the prescribed time.
4. Compliance with conditions under Section 54 except for the deposit of funds in a separate bank account.
5. Alternative claim for exemption under Section 54 for the amount invested in the purchase of a plot and construction of a new house till the due date of filing the return of income.

Detailed Analysis:

1. Denial of Exemption under Section 54 of the Income Tax Act, 1961:
The assessee sold a property and claimed exemption under Section 54 of the Act for the capital gains by investing in a new property. The Assessing Officer (AO) denied the exemption as the assessee did not deposit the un-appropriated capital gains in the specified capital gain account before the due date for filing the return.

2. Consideration of Exemption Claim under Section 54F Instead of Section 54:
The Commissioner of Income Tax (Appeals) [CIT(A)] considered the claim under Section 54F instead of Section 54. The assessee argued that the claim was made under Section 54 and not Section 54F.

3. Failure to Submit Evidence for Construction of a New House within the Prescribed Time:
The AO observed that the assessee failed to furnish proof for the construction of the house within the prescribed period of two years. The substantial portion of the capital gain was kept in a fixed deposit instead of a capital gain account.

4. Compliance with Conditions under Section 54 Except for the Deposit of Funds in a Separate Bank Account:
The assessee contended that all conditions under Section 54 were met except for the deposit of funds in a separate bank account. The funds were kept in a fixed deposit with the intention to utilize them for constructing a new house. The assessee cited the Supreme Court's decision in Bajaj Tempo Ltd. v. CIT, emphasizing a liberal interpretation of provisions granting incentives for economic growth.

5. Alternative Claim for Exemption under Section 54 for the Amount Invested in Purchase of Plot and Construction of New House Till Due Date of Filing the Return of Income:
The assessee alternatively argued that exemption should be allowed for the amount invested in purchasing a plot and constructing a new house till the due date of filing the return. The CIT(A) dismissed the appeal, stating the assessee failed to comply with the provisions of Section 54 and did not submit evidence of construction within the prescribed period.

Tribunal's Decision:
The Tribunal considered the recent decision of the Bombay High Court in the case of Humayun Suleman Merchant, which held that exemption under Section 54F shall be allowed if the amount is utilized for constructing a new house before the date of filing the return under Section 139 or deposited in the notified capital gain bank account before the due date of filing the return under Section 139(1). The Tribunal noted that the assessee invested the sale proceeds in a fixed deposit and later utilized them for constructing a new house. The Tribunal set aside the matter to the AO for verification of the amount entitled for exemption under Section 54 in accordance with the Bombay High Court's decision and directed the AO to provide a proper opportunity for the assessee to present evidence.

Conclusion:
The appeal was allowed for statistical purposes, and the matter was remanded to the AO for necessary verification and computation of the exemption amount under Section 54, following the principles laid down by the Bombay High Court in Humayun Suleman Merchant's case. The AO is to provide the assessee with an opportunity to present evidence and explanations regarding the construction of the new residential house.