Capital Gain Exemption allowable even if the construction of the house is commenced prior to the sale of old property
The case detail is as under:
Shri Jignesh Jaysukhlal Ghiya v DCIT ITA No. 324/Ahd/2020 AY 2013-14
Let us have a Short Overview of the case:
The taxpayer owned a residential property and its sale resulted in capital gains. The assessee started construction of a new house. However, the land on which this new house was constructed had been purchased earlier, and the construction had begun before the sale of the original property.
In the tax return, the assessee claimed deduction under Sec 54 which allows exemption from capital gains tax if gains are reinvested in purchase/construction of another residential property within specific time frames i.e., the new property must be purchased within 1 year before or 2 years after the sale, or constructed within 3 years after the sale.
The AO rejected assessee’s claim under Sec 54 holding that construction of new house had commenced prior to sale of the original property.
The AO held that the law intended new house to be constructed only after sale, utilizing the funds received from the sale. The AO further observed that cost of land on which new house was built cannot be included while calculating the exemption, holding that only the cost of construction, excluding land, is to be considered for deduction under Sec 54.
Accordingly, the AO added capital gains as taxable income of the assessee.
The CIT(A) upheld the AO’s view.
The ITAT reviewing the facts and language of S. 54(1) which clearly stipulates that exemption is available if the new residential property is purchased within 1 year before or 2 years after the sale, or if it is constructed within 3 years after the sale.
The Tribunal observed that the law does not mandate that construction of new house must begin only after sale of original property.
The primary condition is construction should be completed within 3 years after sale, which was met in this case.
The tribunal also stated that purpose of section 54 is to encourage reinvestment of capital gains into residential properties, and the timing of commencement of construction is irrelevant as long as the house is completed within the stipulated period.
As regards AO’s observation that exemption should be limited to the amount of capital gains actually used for constructing the new house, the Tribunal further noted that section 54 does not require the specific sale proceeds to be used in the construction or purchase of new property.
Exemption is based on the acquisition of a new residential property within the allowed timeframe, irrespective of whether the funds used are direct proceeds from sale.
The ITAT following the decisions in the case of 97 taxmann.com 74 (Mad) and referring to decisions in 23 taxmann.com 94 (Ahd);178 ITD 255 (Del);165 ITR 753 (Karn); 234 ITR 753(All) and 41 taxmann.com 50(Del) directed the AO to grant deduction
u/s54.
The Tribunal also held that assessee is entitled to S.54 deduction where return is filed belatedly u/s139(4) as held in 96 taxmann.com 219 (Ahd).
The Copy of the order is as under:
