2018 (2) TMI 863 - AT - Income Tax

Claim of exemption u/s 54 - AO denied the claim because as per the agreement with the builder, the house was to be completed within 4 years, whereas, as per the provisions of section 54 of the Act, the house should have been constructed within 3 years from the date of receipt of the capital gains - Held that - Various courts have held that if assessee invests the amount in purchase / construction of building within the stipulated period and the construction is in progress, then the benefits of exemptions, cannot be denied to the assessee. We have also gone through the provisions of sections 54 54F of the Act and we do not find any such distinction as drawn by the CIT(A) or any such dissimilarity in the wordings of the provisions from which any such conclusion can be drawn that u/s 54F of the Act the investment is to be considered and / or that u/s 54 of the Act, the house must be completed within the stipulated period of three years or that investment is not be considered. if agreement for purchase of residential flat is made and the entire amount is paid within three years from the date of sale, the basic requirement for claiming relief u/s 54(1) of the Act is to be taken as fulfilled. The issue, thus, is squarely covered in favour of the assessee by the various decisions of the Hon'ble High Court. Assessee did not deposit the amount of sale receipt in the capital gains account scheme before the due date for filing of return u/s 139(1) - Held that - If the intention is not to retain cash but to invest in construction or any purchase in property and if such investment is made within the period stipulated therein, than section 54F(4) is not at all attracted. We may clarify here that provisions of section 54(2) are almost identically worded as in section 54F(4) of the Act. Admittedly, in this case, the assessee has invested the amount for the purchase / construction of the house within the stipulated period as also observed above while deciding the first issue. The assessee has proved such investment during the assessment proceedings and, thus, the assessee has complied with the requirement of substantive provisions and, thus, is entitled to the claim of exemption u/s 54F of the Act. In view of this, we direct the Assessing officer to grant exemption to the assessee as permissible under the provisions of section 54 - Assessee appeal allowed.

Summary

Issues Involved:
1. Compliance with the conditions of Section 54 of the Income Tax Act.
2. Investment of capital gains in a specified scheme as per Section 54(2) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Compliance with the conditions of Section 54 of the Income Tax Act:

During the assessment proceedings, the Assessing Officer (AO) noted that the assessee had shown Long Term Capital Gain (LTCG) at nil on the sale of a residential flat after accounting for various costs. The AO accepted the costs claimed but computed an LTCG of ?2,97,78,977/- and noted that the assessee claimed an exemption of ?3,00,00,000/- under Section 54 for investing in another flat. However, the AO concluded that the conditions of Section 54 were not met as the new flat was not completed within the stipulated three-year period, and thus disallowed the exemption claim.

The CIT(A) upheld the AO's decision, distinguishing the case laws cited by the assessee, which related to Section 54F and not Section 54. The CIT(A) emphasized that Section 54 did not specifically mention "investment" in a residential house and noted that the assessee did not deposit the sale proceeds in the specified capital gains account but instead in FDRs.

Upon appeal, the Tribunal noted that the assessee had indeed invested the capital gains in the purchase of a new house within two years from the date of sale, aligning with the object of Sections 54 and 54F to promote the purchase and construction of residential houses. The Tribunal cited various rulings, including those from the Punjab & Haryana High Court and the Calcutta High Court, supporting a liberal interpretation of the provisions to allow the exemption if the investment is made within the stipulated period, even if the construction is not completed within three years. The Tribunal found no significant distinction between Sections 54 and 54F regarding the requirement of investment and ruled in favor of the assessee, allowing the exemption under Section 54.

2. Investment of capital gains in a specified scheme as per Section 54(2) of the Income Tax Act:

The second issue was the failure of the assessee to deposit the capital gains in the specified capital gains account scheme before the due date for filing the return under Section 139(1). The CIT(A) and the AO had denied the exemption on this ground.

The Tribunal referred to the enabling provision of Section 54(2), which requires the deposit of unutilized capital gains in a specified account to demonstrate the intention to invest in a new residential house. The Tribunal emphasized that the primary goal of Section 54 is to promote housing, and the procedural requirements of Section 54(2) should not override the substantive right provided by Section 54(1). The Tribunal supported a liberal construction of the provisions, citing the Karnataka High Court's decision in CIT Vs. Shri K Ramachandra Rao, which held that if the capital gains are invested in a new house within the stipulated period, the failure to deposit the amount in a specified account does not negate the exemption.

The Tribunal concluded that since the assessee had invested the capital gains in the purchase/construction of a new house within the stipulated period, the exemption under Section 54 could not be denied. The Tribunal directed the AO to grant the exemption to the assessee.

Conclusion:

The appeal of the assessee was allowed, and the Tribunal directed the AO to grant the exemption under Section 54 of the Income Tax Act. The order was pronounced in the Open Court on 05.02.2018.