S. 54F exemption available for sum invested in land but non-construction of building due to Court order
IN THE ITAT CHENNAI BENCH ‘D’
Smt. V.A. Tharabai
Deputy Commissioner of Income-tax, Circle I, Vellore
IT APPEAL NO.1894 (MDS.) OF 2011 S.P. NO.86 (MDS.) OF 2011
[ASSESSMENT YEAR 2007-08]
JANUARY 12, 2012
Dr. O.K. Narayanan, Vice-President - This appeal is filed by the assessee. The relevant assessment year is 2007-08. The appeal is directed against the order of the Commissioner of Income-tax (Appeals)-IX at Chennai, dated 20-10-2011 and arises out of the assessment completed under section 143(3) of the Income-tax Act, 1961.
2. The assessee had sold one of her capital assets in the previous year relevant to the assessment year 2007-08, resulting in capital gains. The property was sold for a consideration of Rs. 34,73,447/-. The cost of acquisition was Rs. 1,25,000/- and indexed to Rs. 1,95,997/-. The long-term capital gains arising out of the sale was Rs. 32,77,450/-.
3. The assessee claimed exemption in her return of income on the long-term capital gains. The exemption was claimed as the assessee was proposing to construct a residential house property out of the sale consideration of the property. The exemption was thus claimed under section 54F of the Income-tax Act, 1961.
4. The assessee sold the property on 8-6-2006 and immediately thereafter, on 5-7-2006, purchased a landed property to construct a house for a consideration of Rs. 33,88,160/-The purchase price paid for the land was more than the long-term capital gains arisen in the hands of the assessee on sale of her capital asset. But the assessee could not construct the residential house in the land purchased by her, as proposed. The purchase of the property was transacted on the authority of a power of attorney. The owners of the land filed a petition for injunction before the Civil Court at Poonamallee in No.156 of 2008 in Civil Suit No.23 of 2008. In the above suit and petition, the Civil Court granted injunction to the owners of the property and ordered status quo, which prevented the assessee from proceeding further in constructing the residential house. In continuation of the litigation a Civil Revision Petition was filed in 2008 as No.2913 of 2008, which was dismissed by the Hon’ble High Court on 5-8-2009. The expiry of the three-year-period from the date of sale of the property was on 8-6-2009. Thereafter, the matter went upto the Hon’ble Supreme Court, which was dismissed by the Hon’ble Supreme Court on 13-9-2011, as the case was withdrawn and all proceedings before the City Civil Court at Poonamallee were dismissed as withdrawn on 19-9-2011. Because of the above events subsequent to the sale of the capital asset and purchase of the landed property, the assessee could not construct the proposed residential house.
5. Even though these circumstances were explained before the assessing authority, the claim of exemption made by the assessee under section 54F was rejected on the ground that the assessee has not constructed the residential house within the period of three years, which is mandatory as per the provisions of the Income-tax Act, 1961. In first appeal, the Commissioner of Income-tax (Appeals) explained all the facts of the case and acknowledged the fact that the assessee was prevented from constructing the proposed residential house. But, still he held that the conditions laid down in section 54F are mandatory and, as those conditions were not complied with by the assessee, exemption cannot be granted. The first appeal was thus dismissed.
6. The assessee is aggrieved and, therefore, this second appeal before us.
7. The grounds raised by the assessee in the present appeal read as below:-
“1. The order of the learned CIT(A) is contrary to law, facts and circumstances of the case and opposed to principles of legitimate expectation and evidence on record.
2. The assessing officer erred in reopening the asst. in the absence of materials to form opinion and live link or nexus for the purpose of reopening of the asst.
3. The learned CIT(A) erred in mechanically confirming the order of the Assessing Officer without considering the eligibility of relief based on the case law and on account of force majeure situation of stay order of the court obtained against the appellant and others and hence the appellant could not complete the construction within the time frame fixed by the Act.
4. The learned CIT(A) ought to have appreciated the ‘purposive approach’ to the issue in hand and ought to have appreciated that the appellant had invested Rs. 33,88,160/- till 26th day of September 2006 during the accounting year 2006-07 and the learned CIT(A) ought to have appreciated the well settled principle: law does not compel doing impossibilities-impossibilium nulla obligatio est. There is no obligation to do impossible things and in any event the purchase of land qualifies for relief as per the CBDT circular 667 dt 18-10-1993, 204 ITR st 103 since: Lex semper dabit remedium-”The law always gives a remedy” Lex nemini facit injuriam â€”"The law does wrong to no one”.
5. The learned CIT(A) ought to have considered the binding decisions of the jurisdictional High court and other ITAT decisions, namely: (a) Smt. Ranjeet Sandhu v Dy CIT, 36 II ITCL 657(chd); (b) Saraambal Kothari, 302 ITR 286 (Mad); (c) Seetha Subramaniam, 59 ITD 94 ; (d) Satish Chandra Gupta 54 ITD 508 and (e) Sahsi Varma CIT, relied on by the appellant and ought to have granted the well intended relief.”
8. Shri N. Devanathan, the learned counsel appearing for the assessee, argued that the sale proceeds were straightaway utilized by the assessee in purchasing the landed property to construct a residential house and it was on that basis that exemption was claimed under section 54F. He submitted that the assessee had purchased the landed property for a consideration more than the taxable long-term capital gains, but could not proceed further to construct the house, as the assessee was prevented from proceeding further by virtue of the restraint ordered by competent Civil Court. The learned counsel submitted that the law does not compel to perform a thing which is impossible to perform and, therefore, the non construction of the residential house was beyond the scope of assessee’s abilities and, therefore, the purchase of the land itself should be considered as sufficient investment for claiming exemption under section 54F. He relied on the judgment of the Hon’ble Supreme Court in the case of State of Rajasthan v. Shamsher Singh, 1985 (Supp) SCC 416 to bring home the point that a person should not be deprived of justice for not doing a particular thing, which was not capable of doing. He also relied on another judgment of the Hon’ble Supreme Court in the case of Cochin State Power & Light Corpn. Ltd. v. State of Kerala,  3 SCR 187, to reiterate the same judicial principle.
9. The learned standing counsel appearing for the Revenue, on the other hand, submitted that irrespective of the circumstances faced by the assessee, exemption under section 54F could be granted only if the conditions prescribed by the statute are complied with by an assessee. In the present case, the assessee has not constructed a residential house and, therefore, the assessee is not entitled for any exemption under section 54F.
10. We considered the matter in detail. The course of events in the present case shows that the assessee was really contemplating the construction of a residential house. This intention of the assessee is very clear from the fact that within days of the sale of her old property, the assessee had purchased the new site for constructing a residential house. The old property at Koyambedu was sold on 8-6-2006. The new landed property was purchased immediately on 5-7-2006. The events of sale and purchase and their proximity clearly demonstrate that the assessee had purchased the property at Nolambur Village only for the purpose of constructing a residential house. The old property at Koyambedu was sold for a consideration of Rs. 34,73,447/-, out of which the assessee was accountable for long-term capital gains of Rs. 32,77,450/-. The assessee has invested Rs. 33,88,160/- for the purchase of the land, which is more than the quantum of long-term capital gains. This again demonstrates the fact that the assessee had arranged the transaction in such a bona fide manner so as to claim the exemption available under section 54F of the Income-tax Act, 1961.
11. It is after the purchase of the property that the hell broke loose against the assessee in the form of civil litigation. The litigation started on 25-2-2008 and ended only on 19-9-2011. By that time the available period of three years to construct the house was already over, on 8-6-2009. The assessee was absolutely prevented from taking any single step in constructing the proposed residential house during this period of three years. The assessee was restrained by a competent court from constructing a house and the status quo of the property at the time of purchase was ordered to be maintained. Where, on the one hand section 54F demands the assessee to construct the house within a period of three years, on the other hand, civil courts restrain the assessee from constructing a house throughout that period of three years. The assessee is in fact between devil and deep sea. It is an accepted principle of jurisprudence that law never dictates a person to perform a duty that is impossible to perform. In the present case, it was impossible for the assessee to construct the residential house within the stipulated period of three years.
12. Now, the question is whether the assessee is still entitled for the benefit of section 54F or not.
13. A dominant factor to be seen in the present case is that the entire consideration received by the assessee on sale of her old property has been utilized for the purchase of the new property. The purchase value of the property is more than the long-term capital gains taxable in the hands of the assessee. This fact is very crucial. The conduct of the assessee unequivocally demonstrates that the assessee was in fact proceeding to construct a residential house, based on which the assessee had claimed exemption under section 54F. Therefore, what is the reality? The reality is that the assessee has spent the entire consideration received on the sale of property towards the construction of the residential house. It is true that the assessee could not construct the house. But she has purchased the land utilizing the entire consideration received on the sale of the old property. It means that the assessee has invested the entire consideration received on sale of the old asset in acquiring/constructing a residential house property. In the special facts and circumstances of the present case, therefore, it is necessary to hold that the amount utilized by the assessee to purchase the land was in fact utilized for acquiring/constructing a residential house. De facto speaking, that part of the construction of the house property which was not completed within the period of three years, is altogether a different matter. Without purchasing land, house cannot be constructed. The first step should be the purchase of land. That was done. No step could be put forward thereafter, for reasons already stated. Therefore, the entire amount spent by the assessee in purchasing the land should be construed as amount invested in purchase/construction of residential house.
14. In view of the above, the assessee is entitled for exemption under section 54F. The intention of the statute provided in section 54F has been fully satisfied by the assessee in the present case. We, therefore, direct the assessing authority to grant exemption to the assessee under section 54F as claimed by the assessee.
15. As the appeal of the assessee is disposed of, the stay petition becomes infructuous and therefore liable to be rejected.
16. In result, the appeal filed by the assessee is allowed.