Commencement of property construction prior to transfer of original asset not an impediment for section 54F exemption

Article analyses ITAT delhi Judgment in the case of Tarun Jalali Vs. DDIT  in which it was held that Commencement of property construction prior to transfer of original asset not an impediment for exemption under section 54F of Income Tax Act, 1961.

Facts of the case:

• Tarun Jalali (“the tax payer”) entered into a transaction of sale of house property owned by him vide agreement to sale dated 30.09.2010.
• He had acquired a new residential house property through sale cum construction agreement dated 20.11.2007 and sale deed dated 20.04.2011.
• The construction of the new property was commenced prior to the sale of old property and completed within a period of three years from the date of sale.
• The tax payer claimed exemption under Section 54 of the Income Tax Act, 1961 (“Act”) for investment made in new residential house since construction was completed within three years and start of construction prior to the date of sale of old property was immaterial.
• The Assessing Officer (“AO”) rejected the exemption claim on the ground that no allotment or agreement was made within one year from the date of sale of old property and no substantial payments were made towards the cost of new asset during the year under consideration.
• Aggrieved by this order, the tax payer filed an appeal before the Commissioner of Income-Tax (Appeals) (“CIT (A)”). The CIT (A) partly allowed the appeal by relying on the judgement of the Allahabad High Court in case of H. K. Kapur. It held that the tax payer was entitled to the benefit of section 54 of the Act.
• However, the CIT (A) also noted that the unutilised capital gain amount up to the due date of filing of return was not deposited in the notified capital gain account scheme. Hence, the CIT(A) allowed exemption under Section 54 only for amounts appropriated towards construction of new flat after the date of transfer of old asset.
• Aggrieved by the CIT (A)’s order, the tax payer filed an appeal before the Income-Tax Appellate Tribunal, New Delhi (“the Tribunal”).

Issue

• Is the amount invested in construction of new residential house prior to date of sale of old property eligible for exemption under Section 54?

Ruling:

• The ratio laid down by Delhi High Court in case of CIT vs. Bharti Mishra and Karnataka High Court in case of CIT vs. J.R. Subramanya Bhat would apply to the instant case.
• The Delhi High Court in case of Bharti Mishra held that section 54F prescribes appropriation of sale consideration within one year before the date of transfer of original asset, two years from the date of transfer or construction of new property within three years from the date of transfer. However, the Act does not prescribe any condition as to the date of commencement of construction of house property which may be commenced even before the date of transfer of original asset.
• In case of CIT vs. J.R. Subramanya Bhat, Karnataka High Court held that investment made towards construction of house property prior to the date of transfer should also be eligible as deduction for the purpose of Section 54.
• Following the aforesaid ratio, the tax payer is eligible for exemption in respect of investment made in construction of new property prior to the date of transfer of old house since the construction of new house was completed within three years from the date of transfer.

Conclusion

Through this decision, the Tribunal has followed the principles laid down by the various High Courts on the issue of capital gain exemption thereby ensuring consistency across jurisdictions and time periods.