2021 (10) TMI 362 - HC - Income Tax

Exemption u/s 54F(1) - inclusion of cost of the new residential house or cost of construction of the new residential house - adjustment against the cost of new asset - Whether it would include the cost of land though purchased more than 1 year prior to sale of capital asset? HELD THAT - In the case of C. Aryama Sundaram 2018 (8) TMI 864 - MADRAS HIGH COURT condition precedent for adjustment against the cost of new asset is that the new residential house should have been purchased within one year before or two years after the transfer of the residential house, which resulted in the capital gain or alternatively, a new residential house has been constructed in India, within three years from the date of the transfer, which resulted in the capital gain. It has been categorically held that the said Section does not exclude the cost of land from the cost of residential house. It is the cost of the new residential house and not just the cost of construction of the new residential house, which necessarily include the cost of the land, it includes, the cost of the materials used in the construction, the cost of labour and any other cost relatable to the acquisition and/or construction of the residential house. The object of Section 54F is to encourage investment in the residential building and enable the assessee to save tax on capital gains. The aforesaid three limbs of Section 54F(1) being different and distinct, each limb has to be read as a whole separately. The three parts/limbs cannot be intermingled to deny the benefit of 54F(1) to the assessee. The third part/ limb being applicable to the facts of the case and it is not in dispute that the assessee has constructed the residential building within three years from the date of transfer of long standing asset, the benefit flowing from the said Section cannot be denied on the premise that the land was purchased prior to one year. In our opinion, this interpretation of the revenue is wholly untenable and would defeat the object and purport of the provision. The Tribunal has failed to appreciate the judgment of C. Aryama Sundaram, supra in a right perspective. 14. It is trite that even if two plausible views are possible, the view beneficial to the assessee has to be applied. On technicalities, the benevolent provision cannot be interpreted to deny the benefit to the assessee. - Decided in favour of assessee.

Summary

Issues:
1. Interpretation of Section 54F of the Income Tax Act regarding exemption for the cost of a new asset including the cost of land purchased more than one year before the sale of a capital asset.
2. Determining whether the cost of land on which a residential house has been constructed can be disallowed for exemption under Section 54F if purchased one year before the transfer of the capital asset.

Analysis:
1. The appellant challenged the denial of exemption under Section 54F for the cost of land purchased before the sale of the capital asset. The appellant relied on precedents emphasizing a liberal interpretation of the provision to achieve its benevolent purpose. The revenue contended that the land purchase did not meet the one-year requirement before the capital gain arose, focusing on the construction of the residential house within the stipulated time. The court examined Section 54F(1) and relevant case law, including the Madras High Court judgment, to determine the eligibility criteria for the exemption.

2. The court referred to the Madras High Court's decision, which clarified that the cost of the new asset under Section 54F includes the cost of land, materials, labor, and related expenses for constructing a residential house. The court highlighted that the provision aims to promote investment in housing and save tax on capital gains. The judgment emphasized that the cost of land cannot be excluded from the cost of the residential house for claiming the exemption. The court also cited a Karnataka High Court decision and a coordinate bench ruling supporting a liberal interpretation of beneficial tax provisions.

3. Analyzing the legislative intent behind Section 54F, the court emphasized that each limb of the provision should be considered separately. The court noted that the appellant had fulfilled the conditions by constructing the residential house within the specified time frame. The court rejected the revenue's interpretation that the land purchase before one year invalidated the exemption, stating that such an approach would defeat the provision's purpose. The court stressed that a beneficial interpretation favoring the assessee should be applied, especially when technicalities could deny the intended benefit.

4. Ultimately, the court allowed the appeal, setting aside the Tribunal's order and ruling in favor of the appellant assessee. The court answered the substantial questions of law in favor of the appellant and against the revenue, emphasizing the importance of interpreting tax provisions liberally to uphold the legislative intent and provide benefits to taxpayers investing in residential properties.