• Jul
  • 21
  • 2013

Exemption U/s. 54F not allowable on amount invested in construction before transfer of original asset

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Brief facts of the case are that the assessee is a director in M/s. Veen Promoters Pvt. Ltd. There was a survey u/s. 133A of the Act on 14.7.2009 in the case of M/s. Veen Promoters Pvt. Ltd. The assessee filed return of income for the A.Y. 2008-09 on 31.7.2009 declaring total income at Rs. 24,99,289 after claiming deduction u/s. 54F at Rs. 5,30,04,081 has invested in H. No. C-10, AFCHS, Sainikpuri, Secunderabad according to which the investment was made during the period from August, 2007 to July, 2008. It is also on record that the assessee sold property bearing No. 986 Road No. 50, Jubilee Hills in the financial year 2007-08 vide sale document No. 2739/2007 and 2741/2007 dated 26.7.2007 for a gross consideration of Rs.  4,32,00,000 as against Sub-Registrar value of Rs. 5,04,92,000. According to the Assessing Officer, as the assessee sold the property on 26.7.2007 and the new investment made by the assessee is before 31 .3.2007. In other words, the construction of house was substantially completed by 31 .3.2007 i.e., before the sale of capital asset which led to capital gain. As such the condition laid down u/s. 54F of the Act was not fulfilled. Being so, the assessee is not entitled for deduction u/s. 54F and the same was denied.

Held- Investment in residential house which would have taken place after the sale of existing capital asset is to be considered for deduction u/s. 54F   of the Act as the investment in residential house would not only include the cost of purchase of the house but also the cost incurred in making the house habitable and an inhabitable premises, in our opinion, cannot be equated with a residential house. If a person cannot live in the premises, then such premises cannot be considered as a residential house. In case of semi finished house, the assessee will have to invest huge money on finishing the house to make it habitable. Therefore, in our view, the investment in a house would be complete only when such house becomes habitable. This view of ours is supported by the order of the Tribunal in the case of Saleem Fazelbhoy v. DCIT (106 ITD 167) (Mum) and Mrs. Sonia Gulati vs. ITO (115 Taxman 232) (Mum).

Similarly, in the case of Smt. Shantaben P. Gandhi v. CIT (129 ITR 218) (Guj) held that where the construction of new residential property is completed before the date of transfer of the existing property, the assessee is not entitled to relief u/s. 54 in respect of capital gain received on sale of existing property.
In view of the above discussion, it is clear that whatever investment made by the assessee in construction of new property within the period stipulated u/s. 54F after the sale of existing property the assessee is entitled for deduction u/s. 54F of the Act. In other words, the investment in new property made by the assessee is not entitled for deduction u/s. 54F of the Act to the extent made before the sale of property. Only that portion of investment made in the new property in accordance with section 54F of the Act is entitled for deduction u/s. 54F of the Act. Accordingly, we direct the assessee to furnish the details of investment made by the assessee in the construction of new residential building after the sale of existing property before the due date of filing of return of income u/s. 139(1) of the Act. The Assessing Officer shall consider that investment made by the assessee in the construction of new property after the sale of existing property in terms of section 54F of the Act. Accordingly, the issue is remitted back to the file of the Assessing Officer for the purpose of quantification of deduction u/s. 54F of the Act.

THE INCOME TAX APPELLATE TRIBUNAL

HYDERABAD BENCH ‘B’, HYDERABAD

BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER and

SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER

ITA No. 183/Hyd/2012

Assessment year 2008-09

Smt. Nimmagadda Sridevi vs. The DCIT

Date of pronouncement: 22.02.2013

ORDER

CHANDRA POOJARI, AM:PER

This appeal by the assessee is directed against the order of the CIT(A)-IV, Hyderabad dated 25.11.2011 for assessment year 2008-09.

2. The assessee raised the ground with regard to non‑granting of deduction u/s. 54F of the Income-tax Act, 1961.

3. Brief facts of the case are that the assessee is a director in M/s. Veen Promoters Pvt. Ltd. There was a survey u/s. 133A of the Act on 14.7.2009 in the case of M/s. Veen Promoters Pvt. Ltd. The assessee filed return of income for the A.Y. 2008-09 on 31.7.2009 declaring total income at Rs. 24,99,289 after claiming deduction u/s. 54F at Rs. 5,30,04,081 has invested in H. No. C-10, AFCHS, Sainikpuri, Secunderabad according to which the investment was made during the period from August, 2007 to July, 2008. It is also on record that the assessee sold property bearing No. 986 Road No. 50, Jubilee Hills in the financial year 2007-08 vide sale document No. 2739/2007 and 2741/2007 dated 26.7.2007 for a gross consideration of Rs.  4,32,00,000 as against Sub-Registrar value of Rs. 5,04,92,000. According to the Assessing Officer, as the assessee sold the property on 26.7.2007 and the new investment made by the assessee is before 31 .3.2007. In other words, the construction of house was substantially completed by 31 .3.2007 i.e., before the sale of capital asset which led to capital gain. As such the condition laid down u/s. 54F of the Act was not fulfilled. Being so, the assessee is not entitled for deduction u/s. 54F and the same was denied. The assessee went in appeal before the CIT(A).

4. It was observed by the CIT(A) that the assessee started house construction in plot No. C-10, AFCHS, Sainikpuri, Secunderabad in the financial year 2005-06 vide construction agreement with Suguni Constructions Pvt. Ltd. on 21.12.2005. As per the agreement, the construction was to be completed and the house has to be handed over to the assessee under habitable condition on or before 20.3.2007. It was also noticed by the CIT(A) that as per Balance Sheet as on 31 .3.2007 the value of construction was at Rs. 4,52,40,382. Accordingly, the CIT(A) confirmed the order of the Assessing Officer denying deduction u/s. 54F of the Act. Against this, the assessee is in appeal before us.

5. The learned AR submitted that the entire construction of the house building was not at all completed by March, 2007. The construction was in progress from the date of the construction agreement with Suguni Construction Pvt. Ltd. from 21.12.2005. All the payment to M/s. Suguni Construction Pvt. Ltd. was made by cheque. The house was finally completed in  October, 2009 and the assessee occupied the house in  November, 2009. The assessee is not having any other  residential house. The municipal tax assessment was completed by GHMC in November, 2009. He drew our attention to the copies of Balance Sheet for the A.Ys. 2007-08 to 2009-10. He submitted that the construction was shown in the Balance Sheet as under construction. He submitted that as seen from the Balance Sheet up to 31.3.2007, investment in house building was at Rs. 4.80 crores. Thereafter, year by year the assessee made further investment. Thus, up to October, 2009 the total investment on the property at C-10, AFCHS, Sainikpuri, Secunderabad works out at Rs. 13,63,22,640.

6. According to him all details were furnished to the Assessing Officer. In spite of this, the lower authorities rejected the claim of the assessee holding that the investment in house was made before the sale of property. He submitted that out of the total investment, investment in the house after the date of transfer of original assets is Rs. 5,24,69,141 and before the date of filing of return of income for the assessment year under consideration u/s. 139 of the Act. According to the assessee~s counsel this amount has to be considered as eligible for deduction u/s. 54F of the Act. He also filed copy of Municipal Assessment dated 7.2.2009 as an evidence to show the completion of construction in the A.Y. 2009-10.

7. The learned DR relied on the orders of the lower authorities and submitted that none of the above contentions could ever be established with valid and necessary evidence at any stage. The assessee has not been able to furnish any confirmation from M/s. Suguni Constructions P Ltd. as to work up to which stage was done by them and whether or not the construction could be completed by them by the date stipulated in the agreement of construction. In fact, the present contention of the assessee that only part work was given to them is not supported by the terms of the agreement itself. Further, the claim of getting the work done on her own as also not been substantiated by giving any details or evidences regarding construction, purchase of materials, engaging of labour etc. In fact, the assessee has not been able to furnish any contemporaneous evidence regarding the alleged construction out of the sale proceeds of the original asset.

8. The DR submitted that a substantial amount had already been admittedly spent by the assessee before 31.2.2007 and it can be reasonably concluded that such huge investment would have indeed resulted In a habitable structure, which can be indeed called a residential house. Therefore, it is clear that on the date of sale of the original asset under discussion, the assessee was already having one residential house of her own. In fact, even if certain additions were made to the same, it cannot be said that a new residential house was constructed by the assessee out of the sale proceeds of the present original asset. The case laws relied upon by the Assessing Officer duly support his conclusion that the assessee cannot be said to have constructed a new residential house or purchased a new one out of the sale proceeds of the original asset, as the additional expenditure in the old house can at best be called additions to an existing house and not construction of a new residential house altogether. She relied on the judgement of Madras High Court in the case of CIT vs. V. Pradeep Kumar (290 ITR 90) wherein held that the burden is on the assessee to prove that he has actually constructed a new residential house for the purpose of exemption u/ s. 54 of the IT Act. In fact, like the said case, in the present case also there is no tangible material even to infer that a new residential house was constructed. Additions / modifications to an existing house do not amount to real construction as contemplated u/s. 54 F. The Hon’ble High Court have also observed that a mere extension of the existing building will not give benefit to the assessee as contemplated u/s. 54F of the Act.

9. We have heard both the parties and perused the material on record. The crux of the argument of the assessee~s counsel is that the construction was finally completed after the date of sale of existing capital asset and at the time of sale of the capital asset i.e., building No. 986, Road No. 50, Jubilee Hills, Hyderabad, the construction on plot No. C-10, AFCHS, Sainikpuri, Secunderabad was in progress. It is also recorded that for A.Y. 2007-08 (as on 31.3.2007) the construction cost  was incurred at Rs. 4,52,40,382. Thereafter, the assessee further incurred expenditure towards construction and till October, 2009 total construction cost was Rs. 13,63,22,640. Regarding this construction cost the assessee filed Paper Book in the form of the Balance Sheet as on 31 .3.2007 and 31 .3.2008 and also construction account from 1.8.2007 to 31.7.2008 in page Nos. 9 to 22. There is no allegation against the assessee that the assessee owning any other residential building though the assessee having certain other commercial buildings from where the assessee is deriving rental income. Now the question before us is whether the cost of construction incurred by the assessee after the sale of capital asset, though the construction commenced before the sale and the construction completed within two years from the sale of capital asset is entitled for  deduction u/s. 54F of the IT Act. In this connection it is appropriate to consider the ratio laid down by Karnataka High Court in the case of CIT v. J.R. Subrahmanya Bhatt (165 ITR 571) wherein held that if the assessee has within a period of  one year after the date on which the transfer took place purchased or has within a period of two years after the date of transfer constructed the new residential house, the assessee is entitled for deduction u/s. 54F of the Act, though the assessee has commenced construction before the sale but completed the construction within two years after the sale. The commence­ment of construction prior to the sale of capital asset is immaterial and the assessee is entitled for deduction u/s. 54 of the Act.

10. The relevant provisions of section 54F read as under:

“54F. (1) Subject to the provisions of Sub-section (4), where, in the case ofan 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 ofthis section, that is to say, –

(a) —————–

(b) ————–

11.  A bare look to the above provisions shows that the above provisions are incentive provisions intended to augment the investment in residential houses. -It is the settled legal position that incentive provisions should be construed liberally in such a manner that object of the statute is fulfilled rather than the manner which may frustrate the object. Reference can be made to the following observations of the Hon’ble Supreme Court in the case of Bajaj Tempo Ltd., 196 ITR 188:

“The provision in a taxing statute granting incentives for promoting growth and development should be construed liberally; and since the provision for promoting economic growth has to be interpreted liberally, restrictions on it too has to be construed so as to advance the objective ofthe provisions and not to frustrate it.”

12. At this stage, it would also be useful to refer to the Board’s Circular No. 471 dated 15.10.1986, which reads as under:

“1. Capital gains tax – Whether investment in a flat under the self-financing Scheme of the Delhi Development Authority would be construction for purpose of Sections 54 and 54F ofthe IncomeTaxAct, 1961. – Section 54 and 54F of the Income-tax Act, 1961, provide that capital gains arising on transfer of a long-term capital asset shall not be charged to tax to the extent specified therein, where the amount of capital gain is invested in a residential house. In the case ofpurchase ofa house, the benefit is available if the investment is made within a period of one year before or after the date on which the transfer took place and in case of construction of house, the benefit is available if the investment is made within three years from the date oftransfer.

2. The Board had occasion to examine as to whether the acquisition of a flat by an allottee under the Self-financing Scheme of the Delhi Development Authority amounts to purchase or is construction by the D. D.A. of behalf ofthe allottee. Under the Self-financing Scheme of the Delhi Development Authority, the allotment letter is issued on payment ofthe first instalment ofthe cost ofconstruction. The allotment is final unless it is cancelled or the allottee withdraws from the scheme. The allotment is cancelled only under exception circumstances. The allottee gets title to the property on the issuance ofthe allotment letter and the payment of instalments is only a follow-up action and taking the delivery ofpossession is only a formality. If there is a failure on the part of D.D.A. to deliver the possession of the flat after completing the construction, the remedy for the allottee is to file a suit for recovery of possession.

3. The Board have been advised that under the above circumstances, the inference that can be drawn is that the D.D.A. takes up the construction work on behalf of the allottee and that the transaction involved is not a sale. Under the scheme, the tentative cost of construction is already determined and the D. D.A. facilitates the payment of the cost of construction in instalments subject to the condition that the allottee has to bear the increase, if any, in the cost of construction. Therefore, for the purpose of capitalgains tax, the cost ofthe new asset is the tentative cost of construction and the fact that the amount was allowed to be paid in instalments does not affect the legal position stated above. In view ofthese facts, it has been decided that cases of allotment of flats under the Self-financing Scheme of the Delhi Development Authority shall be treated as cases of construction for the purpose ofcapital gains.”

13. The above Circular clearly shows that object of Sections 54 and 54F was to augment the investment in residential accommodation. Considering the said object, the Board took the view that payment to Delhi Development Authority, under self financing scheme, amounted to investment in construction of residential house even though the assessee himself had not constructed the house. In view of the same, in our opinion, the Learned CIT (A) was not justified in applying strict rule of interpretation.

14. In view of the above discussion, we are of the view that investment in residential house which would have taken place after the sale of existing capital asset is to be considered for deduction u/s. 54F   of the Act as the investment in residential house would not only include the cost of purchase of the house but also the cost incurred in making the house habitable and an inhabitable premises, in our opinion, cannot be equated with a residential house. If a person cannot live in the premises, then such premises cannot be considered as a residential house. In case of semi finished house, the assessee will have to invest huge money on finishing the house to make it habitable. Therefore, in our view, the investment in a house would be complete only when such house becomes habitable. This view of ours is supported by the order of the Tribunal in the case of Saleem Fazelbhoy v. DCIT (106 ITD 167) (Mum) and Mrs. Sonia Gulati vs. ITO (115 Taxman 232) (Mum).

15. Further in the case of Chandru L. Raheja v. ITO (27 ITD 551) (Mum) wherein held that when the assessee had already purchased land, started construction of a building then only that part of the investment in new house that was made out of the sale proceeds received after the transfer of the old house would qualify for exemption u/s. 54 of the Act.

16. Similarly, in the case of Smt. Shantaben P. Gandhi v. CIT (129 ITR 218) (Guj) held that where the construction of new residential property is completed before the date of transfer of the existing property, the assessee is not entitled to relief u/s. 54 in respect of capital gain received on sale of existing property.

17. In view of the above discussion, it is clear that whatever investment made by the assessee in construction of new property within the period stipulated u/s. 54F after the sale of existing property the assessee is entitled for deduction u/s. 54F of the Act. In other words, the investment in new property made by the assessee is not entitled for deduction u/s. 54F of the Act to the extent made before the sale of property. Only that portion of investment made in the new property in accordance with section 54F of the Act is entitled for deduction u/s. 54F of the Act. Accordingly, we direct the assessee to furnish the details of investment made by the assessee in the construction of new residential building after the sale of existing property before the due date of filing of return of income u/s. 139(1) of the Act. The Assessing Officer shall consider that investment made by the assessee in the construction of new property after the sale of existing property in terms of section 54F of the Act. Accordingly, the issue is remitted back to the file of the Assessing Officer for the purpose of quantification of deduction u/s. 54F of the Act.

18. In the result, appeal of the assessee is partly allowed for statistical purposes.

Order pronounced in the open court on 22nd February, 2013.


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