S. 54 Amount not utilized in construction of residential house within 3 years is taxable in the year in which period of 3 years expires

ITAT HYDERABAD BENCH ‘A’

Sri Prasad Nimmagadda

Versus

Deputy Commissioner of Income-tax

IT Appeal NO. 255 (HYD.) OF 2012
[ASSESSMENT YEAR 2008-09]

FEBRUARY 15, 2013

ORDER

Saktijit Dey, Judicial Member

This appeal preferred by the assessee is directed against the order of the CIT(A)-V, Hyderabad dated 21/12/2011, for the assessment year 2008-09.

2. The only issue involved in this appeal is relating to denial of assessee’s claim of exemption u/s 54 of the Act.

3. Briefly the facts are, the assessee an individual filed his return of income for the impugned assessment year on 31/07/2008 declaring total income of Rs. 5,73,76,170/- besides admitting agricultural income of Rs. 2,82,800/-. During the relevant previous year the assessee sold some residential flats belonging to him and derived long term capital gain of Rs. 85,10,009/-. The assessee also claimed exemption u/s 54 of the Act, towards payment of an amount of Rs. 84,00,000/- for purchase of 2 acres of land at Vattinagulapally to M/s Meenakshi Infrastructures a developer vide agreement of sale dt. 09/07/2008 for the proposed constructing a house. In course of the scrutiny assessment proceeding the AO noticed that the assessee has not constructed the house within 3 years from the sale of the original asset. When the AO raised a query in this regard the assessee explained that the land was purchased from a reputed builder M/s Meenakshi Infrastructure with an intention to construct a house on the land as the builder was intending to make a residential lay out spread over 22 acres. However, the builder could not obtain permission for the lay out spread on 22 acres due to certain environmental issues. On considering the aforesaid facts the AO came to a conclusion that as the assessee has not constructed the residential house in terms with the provision contained u/s 54 of the Act, the exemption claimed is not allowable. Accordingly, the AO disallowed exemption claimed of an amount of Rs. 84,00,000/- u/s 54 of the Act. The assessee challenged the assessment order by preferring an appeal before the CIT(A). The CIT(A) also sustained the disallowance made as the assessee has not fulfilled the conditions laid down u/s 54 of the Act.

4. The learned counsel for the assessee submitted before us that the assessee claimed exemption of capital gain u/s 54 of the Act, of an amount of Rs. 84.00 lakhs being the advance paid by cheque dated 05/12/2007 to M/s Meenakshi Infrastructure Pvt. Ltd. for purchase of site jointly along with his brother vide agreement of sale dated 09/07/2008. As per the terms of the agreement, the vendor developer was proposing to acquire adjacent lands also and intended to make a residential layout of one 1 acre each by duly earmarking some area towards passages and by virtue of lay out every purchaser would forgo some land for passages. After making the lay out the vendor developer has to obtain permission from HUDA to enable the assessee to construct a residential house. However, due to certain environmental issues the developer could not obtain permission for layout, as a result, no construction of the residential house could be made within the stipulated period. The learned counsel submitted that since the assessee was not able to construct the house within the period of 3 years as provided u/s 54 of the Act, the assessee offered the capital gain for taxation after the expiry of the 3rd year i.e. in the assessment year 2011-12. The learned counsel submitted that the assessee has fulfilled the conditions by investing the amount of capital gain in the purchase of the land for the purpose of constructing residential house. However, since the vendor has failed to hand over the site within 3 years the construction work could not be started. In these circumstances, it cannot be said that the assessee has not invested the amount for purchase or construction of a residential house as per the mandate of section 54 of the Act. In this context, the learned counsel relied upon the following decisions:

(i) Satishchandra Gupta v. Assessing Officer [1995] 54 ITD 508 (Delhi).

(ii) Mrs. Seetha Subramanian v. Asstt. CIT [1996] 59 ITD 94 (Mad.)

(iii) Smt. Rajneet Sandhu v. Dy. CIT [2012] 49 SOT 7

(iv) CIT v. Sardarmal Kothari [2008] 302 ITR 286 (Mad.)

(v) CIT v. R.L. Sood [2000] 108 Taxman 227 (Delhi)

5. The learned counsel further submitted that if ultimately the capital gain could not be utilized then the capital gain would be taxable only after the expiry of three years and not in the assessment year in which the exemption was claimed u/s 54 of the Act. In support of such contention, the learned counsel relied upon the decision of the Income-tax Appellate Tribunal, Hyderabad Bench in case of M. Janardhan Reddy v. ITO [ITA No. 1238/Hyd/06, dated 30/03/2009].

6. The learned Departmental Representative, on the other hand, supporting the orders of the revenue authorities submitted that as the assessee has not constructed the residential house within a period of 3 years as per the provision contained u/s 54, the exemption claimed was rightly rejected. The learned Departmental Representative relied upon the following decisions:

(i) R. Kalanidhi v. ITO [2010] 122 ITD 388 (Chennai).

(ii) Smt. Shantaben P. Gandhi v. CIT [1981]129 ITR 218

7. We have heard the rival submissions and perused the materials on record. The facts which are not disputed are that during the relevant assessment year the assessee derived long term capital gain of Rs. 85,10,009/- on account of sale of residential flat and at the same time the assessee claimed exemption u/s 54 of the Act of an amount of Rs. 84.00 lakh towards purchase of a land for constructing a residential house. Due to some reason or the other, the construction of the house could not be made within the period of 3 years from the date of transfer of the original asset, as per the terms of section 54 of the Act. As a result of which, the exemption claimed u/s 54 of the Act was denied to the assessee. It is the claim of the assessee that if the capital gain at all has to be taxed due to failure in utilizing it in construction of a residential house then it has to be taxed only after the end of the period of 3 years from the date of transfer of the original asset and it is the submission of the learned counsel that the assessee has offered the capital gain for taxation after the expiry of three years in the AY 2011-12. The coordinate bench of the Tribunal in case of M. Janardhan Reddy (supra) after interpreting the proviso to section 54F held in the following manner:

“5. We have duly considered the rival contentions and the material on record. Though in the grounds of appeal, the assessee has contended that the room constructed on the new plot is a house, at the time of hearing, the learned counsel has clarified that he agrees that it cannot be called a house but his only contention is that the capital gain, if at all it is taxable, it will be taxable only at the end of the period of three years from the date of the transfer of the original asset. We quite agree with the contention of the learned counsel. The present previous year ended on 31/03/2003. As per the Assessing Officer’s own admission, the assessee should have constructed the house by 8-7-2005. As per the proviso to section 54F, if the house is no so constructed within the stipulated period, then the capital gains which remain uninvested shall be charged u/s 45 as income of the previous year in which the period of three years expires. Thus, he has advanced the taxing of capital by more two years, i.e. in assessment year 2003-04. He was prompted to do so because he took up the assessment as late as in December, 2005/2006 and completed it on 27/01/2006. This does not permit him to go beyond the provisions of the Act and advance the taxing of the capital gain. Accordingly, we reverse the order of the CIT(A) and delete the addition of capital brought to tax by the Assessing Officer. The reliance of the learned Departmental Representative on the decision in the case of Smt. Rohini Reddy (supra) is misplaced in so far as that in that case, the assessee had vehemently contended that the shed constructed constituted a house. The tribunal agreed with the department that it was not a house and hence did not allow the exemption. In the present case, as mentioned earlier, the learned counsel clarified that he is not claiming the construction made to be a house but he is only on the issue of taxing the gain, if it is taxable, in the appropriate year s provided in section 54F. Therefore, the decision in the case of Smt. Rohini Reddy (supra) is not applicable.”

8. On examining section 54 and 54F, we find that the provision contained u/s 54 including the proviso are parimateria with section 54F of the Act. The proviso to section 54 also lays down that if the amount of capital gain is not utilized towards construction of residential house within a period of 3 years from the date of transfer of original asset, then, it will be charged to capital gain u/s 45 of the Act in the year in which the period of three years from the date of transfer of the original asset expires. In such view of the matter the ratio laid down by the coordinate bench in case of M. Janardhan Reddy (supra) squarely applies to the facts of the present case. This view of ours is also fortified by the decision of the Income-tax Appellate Tribunal, Chennai Bench – “C” in case of Jt. CIT (OSD) v. B. Shivkumar[2012] 54 SOT 562. The department has not disputed the fact that the assessee has invested Rs. 84.00 lakh in purchase of land towards construction of the house, which could not be constructed within the stipulated period of 3 years as the possession of the land could not be delivered by the developer. In these circumstances, the assessee’s claim of exemption u/s 54 of the Act could not be denied in view of proviso to section 54 of the Act. The decisions relied upon by the learned Departmental Representative are not applicable to the facts of the present case as on going through the said decisions it is found that the facts involved therein are totally different. Respectfully following order passed by the coordinate bench in the case of M. Janardhan Reddy (supra), we direct the Assessing Officer to allow the exemption claimed by the assessee u/s 54 of the Act for the impugned assessment year. The Assessing Officer shall also verify whether the assessee has offered the capital gain for taxation in the assessment year 2011-12 as has been claimed by him. If on verification, the assessee’s claim is found to be incorrect, then, Assessing Officer shall bring the capital gain to tax in the assessment year 2011-12. Accordingly, the grounds raised by the assessee on this issue are allowed.

9. In the result, appeal of the assessee is allowed.