Construction not completed within 3 years, still capital gain exemption available: Interesting Income Tax

Construction not completed within 3 years, still capital gain exemption available: Interesting Income Tax

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Construction not completed within 3 years, still capital gain exemption available: Interesting Income Tax

When assessee invested a sum in purchase of land, which was invested after date of sale of original asset and before due date of filing of return of income under section 139(1) as per requirement of section 54F, then, deduction under section 54F could not be disallowed merely on the ground that no residential house had been constructed and completed on the land within three years from date of sale of the original asset.

Assessee received sale consideration from selling of immovable property. Assessee claimed deduction under section 54F in respect of investment in a new asset. AO on basis of report of Inspector found that the assessee had purchased a land, but no residential house had been constructed and completed on the land within three years from date of sale of the old asset. AO disallowed the claim of deduction under section 54F. Assessee’s contention was that as per section 54F, the assessee was required to invest the capital gain in the construction of new house property or in the capital gains account scheme after the date of sale of the original asset and before the date of filing of the return of income under section 139(1) which was complied with by her. CIT(A) allowed the assessee’s claim for deduction under section 54F, which was confirmed by Tribunal. 

Held:

Since the assessee had invested a sum in purchase of the land, which was invested after the date of sale of the original asset and before the due date of filing of return of income under section 139(1) as per requirement of section 54F. Further that, the construction of the residential house had also commenced within the period of three years from the date of sale of the original asset. The Tribunal, considering the report of the Inspector, found that the assessee was entitled for deduction under section 54F. The Tribunal as also the CIT(A) had concurred in their factual finding with which interference was not warranted under section 260A. Hence, appeal against the order of the Tribunal was not entertained and the same was dismissed.

Decision:

 In assessee’s favour.

Distinguished: 

Jagwinder Singh v. CIT (2014) 50 taxmann.com 145.

Referred:

 CIT v. Sardamal Kothari (2008) 302 ITR 286 (Mad) : 2008 TaxPub(DT) 2081 (Mad-HC);  Hero Vinoth (Minor) v. Seshammal (2006) 5 SCC 545; M. Janardhana Rao v. Jt. CIT (2005) 273 ITR 50 (SC) : 2005 TaxPub(DT) 1280 (SC); Mrs. Seetha Subramanian v. ACIT (1996) 59 ITD 94 (Mad-Trib) : 1996 TaxPub(DT) 1094 (Mad-Trib); Sir Chunilal V. Mehta & Sons Ltd. v. Century Spg. & Mfg. Co. Ltd., AIR 1962 SC 1314; andRimmalapudi Subba Rao v. Noony Veeraju AIR 1951 Mad 969.

IN THE MADRAS HIGH COURT

INDIRA BANERJEE, CJ. & P.T. ASHA, J.

Pr. CIT v. Charumathi Seshadri

T.C.(A) No. 293 of 2018

17 July, 2018

Appellant by: T.R. Senthil Kumar

JUDGMENT                                                                                                

Indira Banerjee, CJ.

This appeal is against a judgment and order dated 9-10-2017 of the Income Tax Appellate Tribunal, ‘C’ Bench, Chennai, disposing of the appeal of the Revenue being I.T.A. No. 886/Mds/2017, against an appellate order dated 23-12-2016 passed by the Commissioner (Appeals)-15, allowing the appeal of the assessee, being I.T.A. No. 186/Commissioner (Appeals)-15/2014-15, against an order of assessment dated 13-3-2014, adding to the declared income of the respondent assessee Rs. 2,15,56,250 towards capital gains.

  1. The assessee, an advocate by profession, filed her return of income electronically on 22-9-2011 for the assessment year 2011-12 declaring a total income of Rs. 21,53,760. The return was processed under section 143(1) of the Income Tax Act, 1961, hereinafter referred to as ‘the IT Act’, on 12-11-2011.
  2. Thereafter, the case was selected for scrutiny and assessment was completed on 13-3-2014, assessing the income of the respondent assessee at Rs. 2,37,10,011. It appears that in the previous year 2010-11, corresponding to the assessment year 2011-12, the assessee had sold immovable property at Neelangarai, Chennai 600041, being vacant land measuring 2.64 grounds for consideration of Rs. 2,35,00,000.
  3. In her income tax return, the assessee had claimed that the cost of acquisition of the land had been Rs. 3,00,000. Taking into account the indexed cost as per the provision of section 49 of the Income Tax Act, the assessee had claimed Rs. 44,43,750 as deduction and computed the total capital gain at Rs. 2,12,55,250. The respondent assessee had further claimed deduction under section 54F of the Income Tax Act, for an amount of Rs. 2,15,56,250, which, according to the respondent assessee was on account of investment of Rs. 2.6 crores in a new asset. The respondent assessee claimed that the capital gain chargeable to tax was ‘Nil’.
  4. In the course of assessment, the assessee furnished the sale deed of the old asset and the purchase deed of the new asset, as also her explanation on the claim of deduction under section 54F of the Income Tax Act.
  5. The assessing officer observed that the respondent assessee had invested Rs. 2,20,000 on a vacant nanja land measuring 1.25 acres at Ottiambakkam village in Kancheepuram District, incurring an expenditure of Rs. 17,20,167 for the purpose of registration. The total amount of investment in the said nanja land was Rs. 2,37,20,167. Further, the assessee had invested Rs. 2,20,00,000 in the capital gain account scheme. It appears that the assessing officer deputed an Inspector to inspect the premises acquired by the respondent assessee in order to verify whether any residential house had been built by the assessee within three years from the date of receipt of full consideration of the sale of

  1. asset, which gave rise to capital gain. After physical inspection, the Inspector submitted a report, the relevant part whereof is extracted hereinbelow :–

“From the road side-the sprawling 1.25 acres of nanja land was fenced with barbed wire and in the balance three sides, compound wall was erected. From the entrance a rough road has been laid. To the right of the road, (facing the plot) a small thatched shed was available in which cement bags were arranged. To the far let hand end of the plot (facing the plot), there was one building which was under construction. No proper steps were provided. Fixtures like windows and doors were not there and no electric supply has been provided to the building yet. No flooring and plastering of walls had been carried out. To have a correct view for passing scrutiny order, the entire place was neatly photographed and video-graphed, which shows the exact position of the so-called residential house property. For the claim of deduction under section 54F, the construction of confidential house should have been completed by 6-1-2013, the place has been visited on 20-12-2013, beyond 45 days of the due date for completion of construction as per section 54F of the Income Tax Act and found to be very much incomplete, and utilization of land is very minimal for the building, leaving a vast area of land unutilized. Hence it is evident that the claim of deduction under section 54F of Rs. 2.6 crores (which is the cost of 1.25 acres of nanja land itself) is untenable and needs to be disallowed soft copy of photos and video submitted.”

  1. Having regard to the aforesaid report, the assessing officer observed that there was no residential house in the nanja land and the incomplete structure in the said nanja land did not have any kind of resemblance to a completed residential house. Furthermore, a vast area of land had been kept unutilized and the incomplete structure was at one corner of the land. The assessing officer, thus, found that no residential house had been constructed and completed within three years from the date of sale of the old asset.
  2. The assessing officer also took note of the fact that the respondent assessee had obtained supply of electricity from the Tamil Nadu Electricity Board under Tariff No. V, which is given in cases where more than 25% of the built-up area is utilised for commercial purpose. The assessing officer deduced that the intention of the respondent assessee was not to construct a wholly residential house, but a structure for commercial purpose. The assessing officer, thus, disallowed the claim to deduction under section 54F of the Income Tax Act and added Rs. 2,15,56,250 to the income of the assessee under the head ‘Income from long-term capital gain’.
  3. Being aggrieved by the aforesaid order, the respondent assessee filed an appeal being I.T.A. No. 186/Commissioner (Appeals)-15/2014-15, before the Commissioner (Appeals)-15, which has been allowed by an order dated 23-12-2016. Before the Appellate Commissioner, the respondent assessee assailed the assessment order impugned on two major grounds. The first ground was that completion of construction within three years from the date of sale of the original asset was not a condition precedent for deduction under section 54F. The only condition was that it should have been utilised before filing of the return of income under section 139 of the Income Tax Act. The reason for the delay in completion of the construction was explained as unavoidable, as the respondent assessee had to hire the services of three different contractors to accomplish the construction.
  4. The Appellate Commissioner found that there was genuine and bona fidereasons which resulted in the delay in completion of construction of the residential house, which were beyond the control of the respondent assessee. The Appellate Commissioner also took note of certain subsequent developments which indicated that the investment was for construction of a residential house. The residential house was completed on 24-3-2014, as certified by the concerned contractor. The electricity connection which was a temporary connection was later changed to a domestic connection. The relevant portion of findings of the Appellate Commissioner is extracted hereinbelow :–

“16. During the course of the appellate proceeding on 7-12-2016, the learned A.R. was requested to furnish the details of investments towards purchase of land and construction of residential property. The Long Term capital asset was sole by the appellant on 4-11-2010 vide the registered Sale Deed for a consideration of Rs. 2,35,00,000. The relevant return of income was filed by the appellant on 22-9-2011 which was within the due date of filing of return of income under section 139(1) for the relevant year under consideration. Accordingly, in view of the provisions of section 54F, the appellant was required to invest the capital gain in the construction of new house property or in the Capital Gain Scheme account after the date of sale of the original asset and before the date of filing of the return of income under section 139(1). In the present case, the appellant had invested Rs. 2,59,64,300 in the purchase of the land (including registration charges and stamp duty) with effect from 6-5-2011 to 4-6-2011 which was invested after the date of sale of the original asset on 4-11-2010 and before the due date of filing of return of income under section 139(1). The amount of Rs. 20,20,000 was deposited in Capital Gains Account Scheme before the date of filing of return of income under section 139(1) which was later withdrawn for construction of residential house property.

  1. From the above, it is evident that the amount of capital gain was invested by the appellant towards purchase of the land on which residential house was constructed and deposited in Capi

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