K.S. Hanumantha Rao Vs PCIT (ITAT Bangalore)
According to the CIT, the assessee was not entitled to claim for deduction u/s 54 of the I.T.Act amounting to Rs.48,81,963 for the investment made in new asset, since the investment in the new asset was made one year prior to the date of sale of the original asset. T
As mentioned in CIT’s order (para 5), the window of purchase of new asset available to the assessee and his wife is from 24.05.2011 to 24.05.2014. The CIT considered the absolute sale deed dated 06.04.2011 as the date of purchase of new assets. Therefore, according to the CIT, the purchase of new asset was one year prior to the date of sale of the original asset (sale of original asset was on 24.05.2012) and hence was not entitled to deduction u/s 54 of the I.T.Act. The assessee had submitted a confirmation of builder of the new asset (flat) stating that at the time of registration of sale deed, the apartment was not completed and after finishing all the work in apartment, the same was handed over possession to the assessee only in the month of November 2011. A copy of letter of the builder is placed at page 94 of the paper book. A copy of the invitation extended on the occasion of gruhapravesham of new flat which was performed on 12.03.2012 is also placed on record at page 95 of the paper book. It is the contention of the assessee that the registration process was completed earlier because it was expected that there would be increase in stamp duty rates. This contention of the assessee cannot be brushed aside as untrue. In many cases, before the completion of flat the property would be registered on anticipation that there would increase in stamp duty rates. Be it as it may, I notice that the builder has certified that the new flat was handed over to the assessee only in the month of November 2011. This fact is also acknowledged by the CIT in the impugned order at para 5.2, wherein he states that – “5.2. ………….. From the submission and evidence produced, it is seen that though the newly acquired flat gets completed and comes into existence in November 2011 and gets physically handed over to the assessee in the same month………………… ” . Admittedly, the assessee is handed over possession of new flat in the month of November 2011 and gruhapravesham was completed on 12.03.2012. Since the assessee was handed over the possession of the new flat only in November 2011, that date should be considered for all practical purposes, the date of acquisition of new flat for claiming deduction u/s 54 of the I.T.Act. As mentioned earlier, window of purchase of new asset is available to the assessee from 24.05.2011 to 24.05.2014. Therefore, handing over possession of new asset being in the month of November 2011 falls within the period of window mentioned above. Hence, I hold that the assessee is entitled to deduction u/s 54 of the I.T.Act on purchase of new asset. It is ordered accordingly.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal at the instance of the assessee is directed against CIT’s order dated 19.01.2021 passed u/s 263 of the I.T.Act. The relevant assessment year is 2013-2014.
2. Seven grounds are raised. Ground Nos.1, 2, 3, 6 and 7 are regarding the issue on jurisdiction of CIT to invoking revisionary powers u/s 263 of the I.T.Act. Ground Nos.4 and 5 are regarding two issues, namely, (i) CIT has erred in holding that assets sold (ground floor of residential site bearing No.579 in Jayanagar) as short term capital gains; (ii) the assessee is entitled to deduction u/s 54 of the I.T.Act on investment of new asset (flat).
3. The brief facts of the case are as follow:
The assessee is a senior citizen and a practicing Advocate. For the assessment year 2013-2014, the return of income was filed on 26.07.2013 declaring total income of Rs.46,75,460. The return was selected for scrutiny and assessment was completed u/s 143(3) of the I.T.Act on 04.03.2016. Subsequently, notice u/s 263 of the I.T.Act was issued by the CIT. According to the CIT, the assessment order completed u/s 143(3) of the I.T.Act on 04.03.2016 is erroneous and prejudicial to the interest of the revenue mainly for the reason that the assessee had claimed cost of indexation benefit for the entire purchase. According to the CIT properties sold were purchased in two instances (on 27.02.1989 and 29.10.2009) and for the portion which was purchased on 29.10.2019, the assessee was not entitled to the benefit of indexation as the said asset was held for less than 36 months. Secondly, according to the CIT, the assessee was not entitled to claim for deduction u/s 54 of the I.T.Act amounting to Rs.48,81,963 for the investment made in new asset, since the investment in the new asset was made one year prior to the date of sale of the original asset. The assessee raised objections to the notice issued u/s 263 of the I.T.Act, both on jurisdictional aspect and on merits. The CIT rejected the objections raised by the assessee and passed the impugned order on 19.01.2021.The CIT set aside the assessment order dated 04.03.2016 and gave following directions to the Assessing Officer :-
“i. The Assessing Officer is directed to re-compute the Capital gains of the residential units 31 (Ground floor) and 31/1, (1st and 2nd floor) separately in view of the discussion in para 4 above after giving an opportunity to the assessee.
ii. The Assessing Officer is directed to re-consider the computation of deduction u/s 54 of IT Act in view of the discussion in para 5 above after giving an opportunity to the assessee.
iii. The Assessing Officer is directed to re-consider income to the extent of Rs.15,201/- as professional income of the assessee as discussed in para 6 above.”
4. Aggrieved by the order of the CIT, passed u/s 263 of the I.T.Act, the assessee has preferred this appeal before the Tribunal. The assessee has filed a paper book comprising of 156 pages inter alia enclosing therein copy of the return of income along with computation of income for the relevant assessment year, copy of the notices issued u/s 142(1) of the I.T.Act, copies of the replies filed by the assessee to the notices issued u/s 142(1) of the I.T.Act, copies of the sale deeds executed by the assessee for purchase of original asset, copy of the sale deed when assessee sold the original asset, copy of the purchase deed with regard to investment of flat, copy of the assessment order, notice issued u/s 154 of the I.T.Act by the A.O., confirmation issued by the builder of the new asset (flat), submissions to the notice issued u/s 263 of the I.T.Act, etc. The assessee appeared in person and argued the case at length. He raised arguments both on the validity / jurisdiction of the CIT to invoke revisionary powers u/s 263 of the I.T.Act, and on merits, which I shall narrate in the course of adjudicating each of the issues raised.
I shall first adjudicate the issue raised on merits.
Ground No.4 : Sale of ground floor of residential unit at Jayanagar, whether it give rise to long term capital gains or short term capital gains).
5. The assessee sold a residential unit bearing No.579 in Jayanagar, through registered sale deed on 24.05.2012 for a total consideration of Rs.3,69,00,000 (refer page 8 of the sale deed dated 24.05.2012) and declared entire gains arising out of the sale as long term capital gains. This residential unit originally consisted of ground and first floor. The first floor was purchased by the assessee and his wife on 27.02.1989 and they constructed second floor during the financial year 19921993. The ground floor was retained with the original owner. Later, vide sale deed dated 29.10.2009, the assessee and his wife purchased the ground floor also for a consideration of Rs.55,00,000.
5.1 The CIT in the order passed u/s 263 of the I.T.Act was of the view that capital gains on sale of first and second floors would give rise to long term capital gains. However, with regard to sale of ground floor, the CIT held that since it was purchased by the assessee vide sale deed dated 29.10.2009 and was sold vide sale deed dated 24.05.2012, the ground floor was held by the assessee for a period less than 36 months. Hence, according to the CIT, the income arising out of sale of ground floor would give rise to short term capital gains. The main contention of the assessee was that he had entered into an oral agreement to purchase the ground floor on 28.06.2008 and payments were made to the vendor right from 28.06.2008, which is reflected in the sale deed dated 29.10.2009 (refer page 6 of the sale agreement dated 29.10.2009). It was submitted that reckoning the period of holding of ground floor from 28.06.2008, the same would give rise to long term capital gains. In this context, the assessee relied on various case laws. The CIT rejected the contention of the assessee and held that since the ground floor was given possession to the assessee only on executing the sale deed, the period of holding is to be reckoned from 29.10.2009 and sale of the same on 24.05.2012 would only give rise to only short term capital gains.
5.2 I have heard rival submissions and perused the material on record. To understand the dispute raised, it is necessary to analysis the relevant provisions of section 2(42A) of the I.T.Act, which reads as follow:-
“Section 2(42A) in the Income-Tax Act, 1961 (42A) “short-term capital asset” means a capital asset held by an assessee for more than thirty-six months immediately preceding the date of its transfer”.
5.2.1 The term “transfer” is defined under Section 2(47) of the I.T.Act. This provision has undergone substantial amendment by Finance Act, 1987, which came into effect from 1.4.1988, whereunder clauses (v) and (vi) were introduced. In the definition of “short-term capital asset” prior to the amendment, by Finance Act No.2 of 1977, which came into effect from 1.4.1978, the period prescribed was 60 months. By Finance Act, 1977, it was amended reducing the period to 36 months. In the memorandum explaining the provisions in the Finance (No.2) Bill, 1977, the reasons for enlargement of the scope of long-term capital gains is set out as hereunder:
‘Enlarging the scope of “long-term capital gains”. Any profits or gains arising from the transfer of any capital asset held by a taxpayer for not more than 60 months immediately preceding the date of its transfer are treated as capital gains relating to a “short-term capital asset” and charged to tax as ordinary income. Gains arising from the transfer of a capital asset held by the taxpayer for more than 60 months are treated as “long-term capital ‘gains” and charged to tax on a concessional basis. As the holding period of 60 months is unduly long and adversely affects the investment climate, the Bill seeks to secure that gains arising from the transfer of any capital asset held by a taxpayer for more than 36 months immediately preceding the date of its transfer are treated as “long-term capital gains” and, therefore, charged to tax on a concessional basis.’
5.2.2 Similarly, the reason for introduction of clauses (v) and (vi) in the definition of the word “transfer” in Section 2(47) of the Act is contained in the circular No.495 dated 22.9.1987 by way of explanatory notes on the provisions of the Finance Act, 1997, which reads as under:
‘11.1 The existing definition of the word “transfer” in section 2(47) does not include transfer of certain rights accruing to a purchaser, by way of becoming a member of or acquiring shares in a co-operative society, company, or association of persons or by way of any agreement or any arrangement whereby such person acquires any right in any building which is either being constructed or which is to be constructed. Transactions of the nature referred to above are not required to be registered under the Registration Act, 1908. Such arrangement confer the privileges of ownership without transfer of title in the building and are a common mode of acquiring flats particularly in multistoreyed constructions in big cities. The definition also does not cover cases where possession is allowed to be taken or retained in part performance of a contract, of the nature referred to in section 53A of the Transfer of Property Act, 1882. New sub-clauses (v) and (vi) have been inserted in section 2(47) to prevent avoidance of capital gains liability by recourse to transfer of rights in the manner referred to above.
11.2 The newly inserted sub-clause (vi) of section 2(47) has brought into the ambit of “transfer”, the practice of enjoyment of property rights through what is commonly known as Power of attorney arrangements. The practice in such cases is adopted normally where transfer of ownership is legally not permitted. A person holding the power of attorney is authorized the powers of owner, including that of making construction. The legal ownership in such cases continues to be with the transferor.
11.3 These amendments shall come into force with effect from 1-41988 and will accordingly apply to the assessment year 1988-89 and subsequent years.’
5.2.3 Subsequent to the amendment, the Central Board of Direct Taxes issued a Circular No.471 dated 15.10.1986 explaining how capital gains from long-term capital asset is to be calculated in cases where the allottee gets title to the property on the issuance of allotment letter and the payment of instalments though possession is not delivered and registered deed of conveyance is not disputed. It reads as under:
“474. Capital gains from long-term capital asset Investment in a flat under the self-financing scheme of the Delhi Development Authority Whether to be treated as construction for the purposes of capital gains
1. Sections 54 and 54-F 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 of purchase of a 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 a house, the benefit is available if the investment is made within three years from the date of the transfer.
2. The Board had occasion to examine as to whether the acquisition of a flat by an allottee under the Self-Financing Scheme (SFS) of the D.D.A. amounts to purchase or is construction by the D.D.A. on behalf of the allottee. Under the SFS of D.D.A., the allotment letter is issued on payment of the first instalment of the cost of construction. The allotment is final unless it is cancelled or the allottee withdraws from the scheme. The allotment is cancelled only under exceptional circumstances. The allottee gets title to the property on the issuance of the allotment letter and the payment of instalments is only a follow-up action and taking the delivery of possession is only a formality. If there is a failure on the part of the 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. 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 true 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 capital gains tax the cost of the 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 of these facts, it has been decided that cases of allotment of flats under the Self-Financing Scheme of the D.D.A. shall be treated as cases of construction for the purpose of capital gains.”
5.2.4 Perusal of definition of short term capital asset shows that the legislature has used the expression ‘held’. In various other allied or similar sections, namely Section 54 / 54F of the I.T.Act, the legislature has preferred to use the expression ‘acquired’ or ‘purchased’ Thus, it is clear that the legislature was conscious while making use of this expression. The expressions like ‘owned’ has not been used for the purpose of determining the nature of asset as short term capital asset or long term capital asset. Thus, the intention of the legislature is clear that for the purpose of determining the nature of capital gain, the legislature was concerned with the period during which the asset was held by the assessee for all practical purposes on de facto basis. The legislature was apparently not concerned with absolute legal ownership of the asset for determining the holding period. Thus, we have to ascertain the point of time from which it can be said that assessee started holding the asset on de facto basis.
5.2.5 In the instant case, the assessee had purchased the ground floor for a total consideration of Rs.55,00,000 by executing a sale deed dated 29.10.2009. However, the assessee had entered into an oral agreement, whereby advance of Rs.5,00,000 was paid on 28.06.2008 itself for purchase of above mentioned property. The details of entire payment of Rs.55,00,000 as mentioned in the sale deed dated 29.10.2009 is reproduced below:-
