Exemption u/s 54F if Process of purchasing plot or constructing house started within a reasonable time prior to the date of transfer of original asset

Overview : 

 Benefit of exemption under section 54F had to be allowed with reference to whole of the cost of plot or the cost of construction thereon, even if such a process of purchasing plot or constructing the house started within a reasonable time anterior to the date of transfer of original asset.

Assessee transferred original asset on 11-6-2012 and invested proceeds thereof in construction of residential house and accordingly, assessee claimed exemption under section 54F. Date of completion of construction, being 15-9-2014 was within the period of three years from the date of transfer of original asset, however, AO denied exemption on the ground that assessee acquired land in two parts for construction of new residential house, viz., first part of plot was purchased on 11-10-2010 and second part in year 2011-12.

It is held that enefit of exemption under section 54F had to be allowed with reference to whole of the cost of plot or the cost of construction thereon, even if such a process of purchasing plot or constructing the house started within a reasonable time anterior to the date of transfer of original asset. In the instant case, date of purchase of first part of plot on 11-10-2010, which was within the reasonable period constituted the date of initiation of process of construction, and deadline for completion of construction would be 10-6-2015. As construction actually got concluded latest by 15-9-2014, assessee was entitled to exemption under section 54F with reference to full amount spent on purchase of two parties of land and construction of new residential house thereon.

Decision: In assessee’s favour.

Referred: Pr. CIT v. Aarham Softronics vide its judgment dt. 20-2-2019 : 2019 TaxPub(DT) 1345 (SC).

 

IN THE ITAT, PUNE ‘B’ BENCH

R.S. SYAL, V.P. & PARTHA SARATHI CHAUDHURY, J.M.

Sohanlal Mohanlal Bhandari v. Asstt. CIT

IT Appeal No. 294 (Pun) of 2017

A.Y. 2013-14

28 March, 2019

Appellant by: Abhay Avchat

Respondent by: Pankaj Garg

R.S. Syal, V.P.

This appeal by the assessees emanates from the order passed by the learned Commissioner (Appeals) on 18-10-2016 in relation to the assessment year 2013-14.

2. The only issue argued by the learned AR is against the denial of exemption under section 54F of the Income Tax Act, 1961 (hereinafter also called ‘the Act’) on a sum of Rs. 34,83,440, being, the amount paid by the assessee for purchase of a part of land on 11-10-2010, on which construction was done.

3. Succinctly, the factual matrix of the case is that the assessee transferred certain plot of land (being, original asset) on 11-6-2012 which resulted into long-term capital gain of Rs. 97,46,504. The assessee claimed exemption under section 54F of the Act for a sum of Rs. 87,73,454 on proportionate basis towards investment of Rs. 1,12,92,650 on purchase of plot and construction of a new residential house thereon. The assessing officer (AO) observed that exemption under section 54F of the Act was claimed, inter alia, on the total cost of plot amounting to Rs. 44,14,840. Taking note of the prescription of section 54F, granting exemption on construction of a new residential house within a period of three years from the date of transfer of original asset, the assessing officer held that such purchase of land by the assessee for Rs. 44,14,840, made prior to the date of the transfer of original asset, could not be considered as qualifying amount. Allowing exemption under section 54F on the cost of construction incurred by the assessee to the tune of Rs. 67,59,973, the assessing officer rejected the claim of the assessee for exemption qua purchase of total plot amounting to Rs. 44,14,940. In holding so, the assessing officer relied on Circular No. 667 issued by the CBDT on 18-10-1993. The learned Commissioner (Appeals) held that the part of common plot of land purchased by the assessee within one year before the date of transfer of the original asset qualified for exemption under section 54F. Investment in the part of the common plot made before one year from the date of transfer of the original asset was held to be not eligible for exemption, against which the assessee has come up in appeal before the Tribunal. The factum of filing of any cross appeal by the Revenue has not been brought to our notice by the learned DR.

4. We have heard both the sides and gone through the relevant material on record. The undisputed position is that the assessee transferred the original asset on 11-6-2012 and purchased a common plot of land for construction of a new residential house thereon, in the following different parts, which for convenience, can be divided into two parts, viz., the first part of the plot purchased on 11-10-2010 and the second part of the plot purchased in the year 2011-12 :–

5. In addition, the assessee incurred cost of construction amounting to Rs. 67,59,973 on the above common plot for a new residential house, which component has been held by the assessing officer as eligible for exemption. The dispute is only qua the cost of common plot purchased by the assessee for constructing the new house. Whereas, the assessing officer held the assessee to be not eligible for exemption in respect of the entire purchase cost of plot at Rs. 44,14,840, the learned Commissioner (Appeals) restricted the disallowance only to purchase of the first part of plot of land on 11-10-2010 for Rs. 34,83,440, which is beyond a period of one year before the date of transfer of the original asset. It is not disputed that all other relevant conditions contained in section 54F of the Act stand duly complied with. The neat controversy which, therefore, crystalises is whether the assessee is entitled to exemption under section 54F of the Act qua the first part of the plot of land purchased for constructing a new residential house, before one year from the date of transfer of the original asset. In order to answer the issue at hand, it would be apposite to consider relevant parts of provision of section 54F, as under :–

“(1) Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,–

(a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45;

(b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45:

Provided that …………………….

(2) to (4) ***                                                   ***                                                     ***”

6. Sub-section (1) of section 54F provides that where the capital gain arises from transfer of any long-term capital asset (original asset), other than a residential house and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased or has within a period of three years after that date constructed a new residential house, then no capital gain on transfer of the original asset shall be charged if the cost of new asset is more than the net consideration in respect of the original asset. The relevant part of sub-section (1) of section 54F providing exemption states that : ‘the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house (hereafter in this section referred to as the new asset), the capital gain shall be dealt with…….’. On a careful circumspection of the above part of sub-section (1), it is clearly discernible that the legislature has given three disjunctive and mutual exclusive modes in which the exemption can be claimed. The use of word “or” at the relevant places in the above provision leaves nothing to doubt that there are three distinct non-overlapping modes providing for exemption, namely, —

(i) where the assessee has, within a period of one year before the date on which the transfer took place purchased ……. a residential house

(ii) where the assessee has, within a period of two years after the date on which the transfer took place purchased, ……. a residential house

(iii) where the assessee has, has within a period of three years after that date constructed, a residential house.

7. Before categorically dealing with the above three modes separately, we consider it relevant to state in common which is relevant for all of them that the reference to the cost of purchase or construction of residential house includes the cost of plot also and accordingly, the cost of land is liable to be considered for the purpose of granting exemption along with the amount spent on purchase or construction of superstructure thereon. The position that the cost of plot should also be considered as eligible for exemption under section 54F along with the cost of construction has not been agitated by the authorities below and rightly so. The CBDT has also accepted this position vide Circular No. 667, dt. 18-10-1993 by providing that “the Board are of the view that the cost of land is an integral part of the cost of the residential house, whether purchased or built. Accordingly, if the amount of capital gain for the purposes of section 54 and the net consideration for the purposes of section 54F, is appropriated towards purchase of a plot and also towards construction of a residential house thereon, the aggregate cost should be considered for determining the quantum of deduction under section 54/54F……’.

8. Now we turn separately to the above referred three different modes of granting exemption under section 54F. The first mode grants exemption when the assessee purchases a residential house within a period of one year before the date of transfer of the asset. This part of the provision straightaway talks of purchasing a residential house. The process of purchasing a new residential house may have kick started at any point of time, but it must culminate with completion of purchase of a new residential house with in a period of one year before the date of transfer of the original asset. The second mode provides for exemption when the assessee purchases a new residential house within a period of two years after the date of transfer of the asset. Here again, it is manifest that the process of purchasing a new residential house may have started at any point of time, but it must terminate with the completion of purchase of a new residential house with in a period of two years from the date of transfer of the original asset. The third mode, in the like manner, also provides for exemption to the assessee constructing a new residential house within a period of three years from the date of transfer of the original asset. Reference to the period of three years for constructing a new residential house is only for completing the construction and not commencing the construction. The above view emerges on a harmonious reading of different limbs of section 54F including sub-section (4), whose proviso provides that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then, (i) the amount by which — (a) the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of the new asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1), exceeds (b) the amount that would not have been so charged had the amount actually utilised by the assessee for the purchase or construction of the new asset within the period specified in sub-section (1) been the cost of the new asset, shall be charged under section 45 as income of the previous year in which the period of three years from the date of the transfer of the original asset expires. It, therefore, follows that in all the three modes discussed supra, the period of one/two/three years respectively is the outer limit for completing the process of purchasing or constructing a new residential house.

9. At this juncture it would be relevant to comprehend the object of enactment of section 54F, which can be culled out from its language. Sub-section (1) provides for exemption from capital gain arising from the transfer of original asset where the assessee has purchased within a period of one year before or two years after or constructed within three years a new residential house. Sub-section (4) provides that where the new residential house is not purchased or constructed within the stipulated periods as given under sub-section (1), the assessee will be obliged to deposit the unutilized net sale consideration in a designated capital gain scheme bank account before the date of furnishing of return under section 139(1) of the Act. In such a scenario, the assessee will be allowed exemption qua such amount of deposit as well. Sub-section (2) provides that where the assessee purchases or constructs another residential house within the two/three years, which is different from the residential house purchased/constructed by the assessee qualifying for exemption under section 54F, then the amount of exemption allowed under sub-section (1) of section 54F shall be deemed to be the income of the year in which new non-qualifying residential house is purchased or constructed. Sub-section (3) provides that where the new qualifying residential house is transferred within a period of three years from the date of its purchase or construction etc., the amount for which exemption under sub-section (1) of section 54F was allowed on account of investment in such purchase/construction of new house, shall be deemed to be the income chargeable under the head “Capital gains” for the year in which such new qualifying residential house is transferred. On a conjoint reading of all the four sub-sections of section 54F, it becomes vivid that the exemption under this section is granted from capital gain arising on the transfer of original asset when an assessee purchases or constructs a new residential house within the prescribed period. It is further pertinent to note that such an exemption is not available for any number of residential houses constructed/purchased by the assessee but there is a cap contained in sub-section (2). At the same time, there is another deterrent provision in sub-section (3) which restricts transfer of qualifying new residential house within the stipulated period. An overview of section 54F, in totality, indicates that the object or purpose of its enactment is to encourage building of new residential house for an assessee and then staying invested in it for certain duration. So long as such an object is achieved and there is no breach of any of the express conditions, the provision should be interpreted in such a manner as advances its purpose and not frustrates it. Recently, the Hon’ble Supreme Court in Pr. CIT v. Aarham Softronics vide its judgment dt. 20-2-2019 : 2019 TaxPub(DT) 1345 (SC), has reiterated the rule of purposive interpretation by laying down that if a statutory provision is open to more than one meaning, the Court has to choose the interpretation which represents the intention of the legislature. Turning to the relevant part of section 54F, we find that what the legislature has contemplated for allowing exemption under section 54F is that : ‘the assessee ……. has within a period of three years after that date constructed, one residential house’. It is only the closing deadline of three years from the date of transfer of the original asset, which has been stipulated for completing the construction.

10. The learned DR contended that even though no opening time limit is enshrined in the provision for starting construction of a new qualifying residential house, it should be logically inferred w.r.t. the date of transfer of original asset as is the case with the purchase of a new residential house within one year before or two years after the date of transfer of the original asset. We find this contention sans merits. It is palpable on a simple reading of the provision that there is no reference whatsoever to the opening time limit from which the process of purchasing or constructing a new residential house has to begin. Similar to a situation when an assessee completes the process of purchasing a new residential house within one/two years, if an assessee completes the process of construction of a new residential house within a period of three years from the date of transfer of the original asset, he becomes entitled to exemption. In the absence of any opening deadline given in the provision for purchase of land or start of construction thereon, it is wholly impermissible to read the date of transfer of the original asset as the starting period under this mode.

11. It is important to bear in mind that sale of an original asset and side-by-side purchase or construction of a new residential house is not only an important decision of one’s life having repercussions for a longer period of time, but is also a time-consuming matter as the concerned person has to mobilise his resources. If a plot is purchased in contemplation of ensuing construction within a reasonable time even before the transfer of the original asset, there can be no fetters on the allowability of exemption under section 54F, if other conditions are fulfilled. What is a reasonable period, depends on the facts and circumstances of each case, which should normally not exceed two years before the date of transfer of the original asset, albeit such a period of two years cannot be a benchmark. A plot of land purchased prior to such a reasonable period cannot ordinarily be viewed as having been purchased for starting construction of a new residential house. It, ergo, follows that so long as the construction of a new residential house is completed within a period of three years from the date of transfer of the original asset, the benefit of exemption under section 54F has to be allowed with reference to whole of the cost of plot or the cost of construction thereon, even if such a process of purchasing the plot or constructing the house started within a reasonable time anterior to the date of transfer of the original asset. Ex consequenti, Circular 667, providing for acquisition of plot and also completing construction within a period of three years from the date of transfer of the asset, being contrary to the intent and language of the provision, cannot be given effect to that extent.

12. The learned DR tried to fortify his point of view of having the date of transfer of the original asset as the date of initiation of process of construction by arguing that the same is implicit in the provision in as much as the net consideration from the transfer of original asset is required to be utilized for constructing a new residential house and it is not possible to start constructing a new residential house unless the original asset is transferred and the full value of consideration is realized. We are unable to accord our imprimatur to the argument tendered on behalf of the Revenue. It is nowhere stipulated in the provision that only the sale consideration realized from the transfer of the original asset has to be necessarily used for purchasing or constructing a new residential house so as to qualify for exemption under section 54F. The requirement, couched in the language of sub-section (1) itself, is that : ‘the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house’. The intent and the stipulation of the provision is to purchase or construct a new residential house. It is nowhere provided that only the sale proceeds of the original asset should be utilized for this purpose. It is open to an assessee to use either own or borrowed funds for the purpose of purchase or construction of a new residential house. Our view is further amplified from the mandate of the first mode of granting exemption under this provision, which is, that the assessee has purchased a new residential house within a period of one year before the date of transfer of the original asset. Possibility of availing exemption under this mode can be only in a scenario where the original asset has not been transferred and the sale consideration of the original asset is not realized, except to the extent of advance received, if any, on the ensuing sale of the original asset. Ergo, it is far-fetched to argue that utilization of only the sale consideration from the transfer of original asset is sine qua non for purchase or construction of a new residential house so as to qualify for the exemption. We, therefore, repel the contention of the learned DR that for availing exemption under section 54F of the Act, it is mandatory to purchase or construct a new residential house only by using the consideration realized on the transfer of original asset. Once this argument fails, the edifice of the Revenue’s contention that the starting point would consequently be the date of transfer of the original asset, falls flat on the ground.

13. It is seen that whereas the assessing officer canvassed a view that the period of three years for the purposes of construction of a new residential house, as given in the third mode, should be reckoned from the date of transfer of the original asset, the learned Commissioner (Appeals) went a step ahead and also superimposed the above noted first mode and held that the cost of land purchased within a period of one year before the date of transfer of the original asset should also be considered as eligible along with the cost of construction of new residential house within a period of three years from the date of transfer of the original asset. In our considered opinion, both the views taken by the authorities below are not in accordance with law. We have held hereinabove that the afore discussed three modes are distinct from each other and the availability of exemption under section 54F has to be tested on the touchstone of the mandate given in each of them separately. In our opinion, the learned Commissioner (Appeals) was not justified in combining the above noted first mode with the third mode for conferring partial relief to the assessee. Though technically, the assessing officer was correct in his view in restricting himself to the above noted third mode by considering a period of three years only, but fell into an error when he considered the date of initiation of the process of construction as the date of transfer of the original asset.

14. Adverting to the facts of the instant case, it is seen from pages 5 and 6 of the impugned order that the assessee acquired land in two parts for construction of a new residential house, viz, the first part of the plot purchased on 11-10-2010 and the second part of the plot purchased in the year 2011/12. The date of certificate for commencement of construction is 26-7-2011. The assessee actually started construction work on 21-4-2012 which went on up to 27-9-2013 and the date of completion of construction as per the certificate is 15-9-2014. The original asset was transferred by the assessee on 11-6-2012. The date of completion of construction, being 15-9-2014 is within a period of three years from the date of transfer of the original asset. In such circumstances, the date of purchase of the first part of the plot on 11-10-2010, which is within the reasonable period as discussed above, constitutes the date of initiation of process of construction, and the deadline for the completion of construction would be 10-6-2015. As the construction actually got concluded latest by 15-9-2014, we hold that the assessee is entitled to exemption under section 54F with reference to the full amount of Rs. 1.12 crore spent on purchase of two parts of land and construction of new residential house thereon. The impugned order is overturned pro tanto.

15. No other issue was argued on behalf of the assessee.

16. In the result, the appeal is allowed to this extent.