CIT Vs C Aryama Sundaram (Supreme Court of India)
Summary: The Supreme Court of India disposed of the Special Leave Petition in CIT Vs C Aryama Sundaram on the ground of low tax effect, without deciding the substantive question of law. The Revenue stated that the tax amount involved was less than Rs. 2 crores and referred to CBDT Circular No. 17 of 2019 dated 08.08.2019. The Supreme Court accordingly disposed of the petition, expressly leaving the question of law open, and directed disposal of pending applications, if any. The supplied Supreme Court order does not affirm or reverse the High Court’s interpretation of Section 54 on merits.
The underlying dispute concerned assessment year 2010-11. The assessee, a Senior Advocate, declared taxable income of Rs.12,20,97,560/-. He sold his residential property at No.137, Sundar Nagar, New Delhi, on 15.1.2010 for Rs.12,50,00,000/-, earning long-term capital gain of Rs.10,47,95,925/-. Earlier, on 14.5.2007, he had purchased property at No.138, JorBagh, New Delhi, for Rs.15,96,46,446/-, demolished the existing structure and constructed a residential house at a stated cost of Rs.18,73,85,491/-. He claimed exemption of the entire capital gain under Section 54 of the Income Tax Act, 1961. The Assessing Officer restricted exemption to Rs.1,14,81,067/-, representing construction expenditure incurred after the original property’s sale. The Commissioner of Income Tax (Appeals) upheld that restriction on 30.03.2015.
The Chennai Bench of the Income Tax Appellate Tribunal, by order dated 27.12.2016, regarded Section 54 as a beneficial provision and remitted the issue to the Assessing Officer for examination of the construction cost after providing the assessee an adequate opportunity to substantiate it. The Tribunal noted that the assessee had not invested in the capital gains accounts scheme but considered that he had complied with the principal statutory condition. The assessee pursued the matter further, arguing that a newly constructed house necessarily includes the land beneath it and that the full exemption should be allowed. The appeal raised whether land acquired approximately three years before sale of the original residential property could form part of the new asset’s cost and whether land cost could be segregated from the cost of the house for Section 54(1).
In the supplied High Court judgment, the court held that Section 54(1) permits the cost of the new residential house to be adjusted against the capital gain, and that this cost necessarily includes the underlying land, materials, labour and other acquisition or construction expenses. It found no statutory requirement that construction must commence only after the original asset is sold, or that the sale proceeds themselves must finance the new asset. As the new residential house was constructed within the prescribed three-year period, the High Court answered the first question in the affirmative and the second in the negative, allowed the assessee’s appeal and made no order as to costs. That substantive High Court determination must be distinguished from the Supreme Court’s later disposal of the Revenue’s Special Leave Petition solely because of low tax effect, with the legal question expressly left open.
Related High Court Judgment: For the detailed reasoning on inclusion of land cost in the cost of a new residential house for Section 54 exemption, refer to Section 54 Exemption Includes Land Cost of Residential House: Madras High Court, concerning the decision in C. Aryama Sundaram v. CIT.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
It is stated that the tax amount involved in the present case is less than Rs. 2 crores and in view of the Circular No. 17 of 2019 dated 08.08.2019, the present petition need not be decided due to low tax effect.
In view of the aforesaid, we dispose of the present Special Leave Petition, leaving the question of law open. Pending application(s), if any, shall stand disposed of.
