2021 (9) TMI 159 - AT - Income Tax

Deduction u/s 54 - Proportionate deduction - Denial of deduction as capital gains arising out of sale of original asset was not deposited in the Capital Gain Deposit Account - Assessee had claimed exemption for having invested the capital gains in the new residential house - HELD THAT - Though assessee purchased the residential site and incurred the expenditure the assessee failed to deposit the balance amount in the account notified by the Central Govt within extended period due to litigation, hence the assessee is not entitled for deduction to the extent of balance amount which was not invested under an account notified by the Central Govt. Deduction under this section is restricted to proportionate amount invested in purchase of new residential site for the purpose of construction of new residential house after sale of the original asset and also amount invested in construction of property. The intention of legislature was that either the assessee has to purchase or construct new residential house out of net sale consideration received by sale of original asset or deposit the same in the account notified by the Central Govt. u/s. 54 - If the assessee failed to do so, he is liable for capital gain on the transfer of capital asset. In the present case, the assessee purchased the residential site and used portion of net sale consideration for construction of new house and not appropriated the balance sale consideration either in investment in construction of residential house or deposit into account notified by the Central Govt. to avail exemption u/s. 54. Hence the assessee is entitled for deduction only to the extent of amount used for purchase of residential site only - Decided partly in favour of assessee.

Issues Involved:
1. Entitlement to deduction under Section 54 of the Income Tax Act, 1961.
2. Compliance with the conditions for claiming deduction under Section 54.
3. Impact of pending litigation on the fulfillment of conditions for deduction.
4. Proportionate deduction based on actual investment in new residential property.

Issue-wise Detailed Analysis:

1. Entitlement to Deduction under Section 54 of the Income Tax Act, 1961:
The primary issue was whether the assessee was entitled to a deduction under Section 54 for the assessment year 2014-15. The assessee sold a property and intended to reinvest the entire consideration in purchasing a BDA site and constructing a residential building. The CIT(Appeals) allowed the deduction, observing that the assessee was prevented from constructing the residential building due to pending litigation. The CIT(A) relied on the decision of the Hon’ble High Court of Karnataka in CIT v. K. Ramachandra Rao, which held that the deduction cannot be denied if the intention was to invest in construction, even if the amount was not deposited in the Capital Gain Deposit Account.

2. Compliance with the Conditions for Claiming Deduction under Section 54:
The Assessing Officer (AO) denied the exemption on the grounds that the capital gains were not deposited in the Capital Gain Deposit Account. The CIT(A) noted that the assessee made attempts to obtain necessary licenses and plans for construction but was delayed due to litigation. The CIT(A) concluded that the assessee was entitled to the deduction since a major portion of the sale consideration was invested in purchasing the site, and the delay in construction was beyond the assessee's control.

3. Impact of Pending Litigation on the Fulfillment of Conditions for Deduction:
The litigation between a private party and BDA prevented the assessee from constructing the residential building within the stipulated time. The CIT(A) observed that the litigation was a sufficient cause beyond the assessee's control, which should not be a ground for disallowance of the deduction. The CIT(A) referenced the Hon’ble High Court of Karnataka’s decision, which supported the view that if the intention was to invest in construction, the deduction should not be denied due to non-deposit in the Capital Gain Deposit Account.

4. Proportionate Deduction Based on Actual Investment in New Residential Property:
The Tribunal noted that the assessee invested ?1,70,16,279 in purchasing the residential site but did not deposit the balance amount in the account notified by the Central Government. The Tribunal held that the deduction under Section 54 should be proportionate to the amount actually invested in the new residential property. The Tribunal calculated the eligible deduction as ?1,22,58,148 based on the proportionate investment formula.

Conclusion:
The Tribunal partly allowed the revenue's appeal, granting the assessee a proportionate deduction of ?1,22,58,148 under Section 54, instead of the full amount claimed. The judgment emphasized that while the intention to invest in a new residential property was clear, compliance with the stipulated conditions, including proportionate investment and deposit requirements, was necessary for claiming the full deduction. The decision balanced the assessee's genuine intention with the statutory requirements, providing a fair resolution in light of the pending litigation.

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