Interesting Issue: Assessee initially purchased land for construction of house to avail capital gain exemption but later changed his mind and instead, purchased a residential house

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Interesting Issue: Assessee initially purchased land for construction of house to avail capital gain exemption but later changed his mind and instead, purchased a residential house

Short Overview : Although initially assessee purchased a land with a view to put up construction over the same but later changed his mind and instead purchased a residential house, the same could not debar the assessee from claiming benefit of deduction under section 54.

Revenue denied deduction under section 54 to assessee on the ground that the assessee purchased land by utilizing capital gain but did not put up construction of residential house on the said land and claimed deduction under section 54 in respect of purchase of residential house.

It is held that  It was found that the assessee purchased a piece of land with a view to put up construction on the same but did not do so and instead purchased a residential house property. Further, the provisions of section 54(1) give two options, viz., (i) purchase of a residential house or (ii) putting up of construction in the form of a residential house and there is no prohibition in law for the assessee to opt for either of the mode for claiming deduction. Thus, the fact that initially assessee purchased a piece of land with a view to put up construction over the same but later changed his mind and instead, purchased a residential house, could not debar the assessee from claiming benefit of deduction under section 54.

Decision: In assessee’s favour.

Income Tax Act, 1961, Section 54

Capital gains—Deduction under section 54—Non-compliance of provisions of section 54(2)

Conclusion: If capital gain is utilized in purchase of new asset within the time permitted by section 54(1) then there is no necessity to make deposit of the unutilized capital gain in a designated bank account.

Revenue denied deduction under section 54 to assessee for non-compliance of provisions of section 54(2) i.e., not depositing unutilized capital gain in a designated bank account within the due date prescribed under section 139. Held: Although assessee did not deposit unutilized long-term capital gain in the designated bank account as per section 54(2); however, he completed purchase of a new asset within a period of two years from the date of transfer. In such circumstances, there was no requirement to satisfy the condition under section 54(2). Further, the question of deposit of unutilized capital gain will come up for consideration only when the capital gain is not utilized in construction of house property and when it is so utilized for construction of house property, then there is no need to make deposit in the specified bank account. Hence, the assessee was entitled to deduction under section 54.

Decision: In assessee’s favour.

Relied: CIT v. K. Ramachandra Rao [ITA No.47/2014 dated 14-7-2014: 2015 TaxPub (DT) 1933 (Karn-HC)] and Fathima Bai v. ITO (2009) 32 DT 243 (Karn.): 2010 TaxPub (DT) 0227 (Karn-HC).

IN THE ITAT, BANGALORE BENCH

N.V. VASUDEVAN, V.P. & D.S. SUNDER SINGH, A.M.

Dharamchand Bafna v. ITO

ITA No. 260/Bang/2019

30 December, 2019

Appellant by: Suman Lunkar, CA

Respondent by: R. Premi, Jt. CIT(DR)(ITAT)

 

ORDER

N.V. Vasudevan, V.P.

The above appeal by the Assessee is against the Order dated 31-12-2018 relating to assessment year 2013-14.

2. The only issue that arises for consideration in this appeal is as to whether the revenue authorities were justified in denying the benefit of deduction to the assessee under section 54 of the Income-tax Act, 1961 [the Act].

3. The admitted facts are that the assessee is an individual. He sold the residential property during the previous year for a sale consideration of Rs. 1,02,00,000 and the guideline value adopted for the purpose of stamp duty and registration by the Sub-Registrar was a sum of Rs. 1,08,00,000. In the computation of long term capital gain on sale of the aforesaid property, the assessee had adopted sale consideration of Rs. 1,11,00,000. The claim of exemption on the long term capital gain on sale of residential property was Rs. 82,96,920. The assessee had sold the residential house property on 7-2-2013. The assessee purchased a site for putting up a residential house on 30-3-2013 for a consideration of Rs. 1.15 crores. In the return of income filed for the relevant assessment year, the assessee claimed exemption under section 54 in respect of the investment made in the purchase of site on 30-3-2013.

4. The assessee could not put up residential house over the site purchased by him. The assessee, however, purchased under a Sale Deed dated 31-10-2014 another residential house for a sum of Rs. 96,11,000. In the course of assessment proceedings, the assessee claimed deduction under section 54 of the Act for purchase of residential house under the Sale Deed dated 31-10-2014. The conditions to be satisfied for allowing deduction under section 54 of the Act are that the amount of capital gain has to be invested in purchase of a residential house within two years from the date of transfer.

The date of transfer in the present case was 7-2-2013 and in terms of section 54(1) of the Act, the purchase of one residential house in India has to be made on or before 6.2.2015. It was the plea of the assessee that the new residential house was purchased on 31-10-2014. The requirements of claim of deduction under section 54(1) have been complied with by the assessee.

Under section 54(2) of the Act, if the assessee does not utilize the capital gain in purchase of a new asset before the date of furnishing the return of income under section 139 of the Act, he has to deposit the capital gain in a specified bank account within the due date for filing the return of income under section 139(1) of the Act for the relevant assessment year. Admittedly, the assessee had not made deposit of capital gain in the specified bank account as required under section 54(2) of the Act. Section 54 of the Act reads thus :–

“Profit on sale of property used for residence.

54.(1) Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head “Income from house property” (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, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say :–

(i) if the amount of the capital gain is greater than the cost of the residential house] so purchased or constructed (hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or

(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain.

(2) The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139 in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset :–

Provided 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 not so utilised shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and

(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.”

5. It was the plea of assessee that when the capital gain is utilized in purchasing the new asset within a period of two years from the date of transfer, there was no requirement of deposit of capital gain in the specified bank account. In this regard, the assessee has placed on the decision of the Hon’ble Karnataka High Court in the case of Fathima Bai v. ITO, (2010) 32 DTR 233 (Kar) : 2010 TaxPub(DT) 0227 (Karn-HC) wherein it was held that when the capital gain is invested in purchase of new asset within a period of two years from the date of transfer, there was no requirement to deposit capital gain in specified bank account and on that ground deduction under section 54 cannot be denied to the assessee. The assessing officer, however, rejected the plea of the assessee for deduction for the reason that assessee failed to comply with the requirements of section 54(2) of the Act.

6. On appeal by the assessee, the Commissioner (Appeals) confirmed the action of the assessing officer with the following relevant observations :–

“5. I have considered the above grounds of appeal, statement of facts and written submissions filed by the appellant and also perused the assessment order. During the appellate proceedings the appellant has submitted that the issue is covered by the judgments of various judicial authorities and I have taken a look on the facts of the appellant’s case and examined as to whether the facts of those cases are squarely applicable to the facts of the appellants case or not. The assessing officer has noticed vide the assessing officer’s order in Para No 4.4 that the assessee in his submission has now stated he has purchased a residential. property jointly with his wife vide sale deed dated 31-10-2014 wherein his share of investment was Rs. 96,11,000. It is seen from the sale deed furnished that the total sale consideration of the property is Rs. 1,80,00,000. The assessee has further stated that he has satisfied the conditions under section 54(1) i.e., purchase of residential property within two years from the date of sale of the original assets. The assessee has relied upon the following decisions as mentioned in the letter filed:

5.1 As per Income Tax Act 1961, the assessee has to inter alia satisfy the following conditions far claiming exemption under section 54 :–

1. 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.

2. If the amount of capital gain is not appropriated by the assessee towards purchase of the new assets made within one year before the date on which the transfer of the original asset took place, or which is not utilized for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited furnishing such return (such deposit being made in any case not later than the due applicable in the case of the assessee for furnishing the return of income under sub-section(l) of section 139 in an account in any such bank or institution as may specified in, and utilized in accordance with any scheme which the Central Government may, by notification in the official Gazette frame in this behalf and such return shall be accompanied by proof of such deposit… …. .

5.2 As per section 54(2) if the new asset has not been acquired before filing the return of income under section 39, the capital gain amount which is not utilized is to be deposited in the capital gain account by the assessee before furnishing the return of the income (such deposit being made in any case not letter than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139). After fulfilling this condition the assessee is eligible to purchase new property within two years of the date of transfer of asset. In the instant case the assessee has not deposited any amount in the capital gain account. The assessee’s claim (the claim for exemption under section 54 in the return of Income filed is towards site purchased) of exemption under section 54 on the property purchased jointly vide sale deed dated 31-10-2014, though his submission dated 03-3-2016, is not acceptable.

5.3 The facts of the case law relied upon by the assessee is totally different from the facts of the instant case and hence the ratio of the decisions relied upon by Hon’ble Courts is not applicable in this case.

6. In view of the discussions made in the above paras, the assessee has very clearly not fulfilled the conditions mentioned in section 54 for claiming exemption. The assessee has not put up any construction on the sites purchased after transfer of original property and the time limit for completion of construction has expired on 07-2-2016. Hence, the exemption under section 54 of the IT Act which was claimed by the assessee in the return of income filed by him for the assessment year 2013-14 was disallowed by the assessing officer. I do not find any infirmity in the impugned order passed by the assessing officer to interfere and therefore in the light of the facts of the case I hereby uphold the addition made by the assessing officer. The grounds are dismissed.”

7. Aggrieved by the order of the Commissioner (Appeals), the assessee has preferred the present appeal before the Tribunal.

8. We have heard the rival submissions. The learned Counsel for the assessee reiterated the stand of assessee as taken before the revenue authorities. The learned DR relied on the order of Assessing officer/Commissioner (Appeals).

9. We have considered the rival submissions. The two grounds on which deduction under section 54 of the Act was denied by the revenue authorities was (a) non-compliance of the provisions of section 54(2) of the Act i.e., not depositing the unutilized capital gain in a designated bank account within the due date prescribed under section 139 of the Act and (b) the Assessee purchased land by utilizing the capital gain but did not put up construction of residential house on the said land but claimed deduction under section 54 of the Act in respect of purchase of residential house. As far as the second ground on which deduction under section 54 of the Act was denied to the Assessee, viz., the ground that the Assessee purchased a land with a view to put up construction on the same but did not do so instead purchased a residential house property, we are of the view that the provisions of section 54(1) give two options, viz., (i) purchase of a residential house or (ii) putting up of construction in the form of a residential house. There is no prohibition in law for the Assessee to opt for either of the mode for claiming deduction.

The fact that initially Assessee purchased a site with a view to put up construction over the same but later changed his mind and instead purchased a residential house, cannot debar the Assessee from claiming the benefit of deduction under section 54 of the Act, so long as the other conditions of section 54 of the Act are satisfied.

6. As far as the first ground on which deduction under section 54 of the Act was denied to the Assessee viz., non-compliance of the provisions of section 54(2) of the Act i.e., not depositing the unutilized capital gain in a designated bank account within the due date prescribed under section 139 of the Act, it is not disputed that the assessee did not deposit the unutilized long term capital gain in the designated bank account as per section 54(2) of the Act.

Nevertheless, he has completed the purchase of a new asset within a period of two years from the date of transfer. In such circumstances, courts have taken a view that there is no requirement to satisfy the condition under section 54(2) of the Act. In this regard the learned counsel for the Assessee has relied on the decision of the Hon’ble Karnataka High Court in the case of Pr.CIT v. R. Srinivas ITA No.384/2015 judgment dated 2-11-2015 wherein the Hon’ble Karnataka High Court following the decision in the case of Fathima Bai v. ITO (2009) 32 DT 243 (Karn.) : 2010 TaxPub(DT) 0227 (Karn-HC) held that if the capital gain is utilized in purchase of new asset within the time permitted by section 54(1) of the Act then there is no necessity to make deposit of the unutilized capital gain in a designated account. The decision in the case of CIT v. K. Ramachandra Rao in ITA No.47/2014 dated 14-7-2014 : 2015 TaxPub(DT) 1933 (Karn-HC) of the Hon’ble Karnataka High Court also supports the plea of the assessee. The Hon’ble High Court took the view that the question of deposit of unutilised capital gain will come up for consideration only when the capital gain is not utilised in construction of house property and when it is so utilised for construction of house property, then there is no need to make a deposit in the specified bank account. The decisions rendered in the context of section 54F of the Act will also apply to section 54 of the Act, because both the sections are in pari materia the same, on the aspect of deposit of unutilized capital gain in specified bank account.

10. In view of the aforesaid decisions of the Hon’ble Karnataka High Court, we are of the view that the assessee is entitled to deduction under section 54 of the Act. In view of the above conclusion, there may not be any long term capital gain that remains for taxation and therefore the plea of the assessee questioning the period for which the assessee should be given the benefit of indexation while computing the long term capital gain and the question whether the valuation under section 50C should be adopted by calculating the long term capital gain are academic and do not call for any adjudication.

11. In the result, the appeal by the assessee is allowed.

 

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