Date of possession is considerable as actual purchase date for claiming exemption u/s 54

Sanjay Vasant Jumde Vs ITO (ITAT Pune)

ITAT Pune held that as on the date of agreement, the building was not constructed, the date of possession will be considered as actual date of purchase for the purpose of claiming exemption under section 54 of the Income Tax Act.

Facts- During the relevant A.Y., the assessee has sold his bungalow and earned long term capital gain of Rs. 2,10,71,915/-, out of which he claimed deduction of Rs. 1,70,91,871/- u/s 54 of the Act for investment in a residential flat to the extent of Rs. 1,70,91,871/-. The assessee had sold the above bungalow on 23-10-2018. The flat in the investment of which the assessee claimed deduction u/s 54 of the Act was purchased on 21-12-2016.

A.O held that as the property purchased is beyond one year preceding the year of sale, the assessee is not eligible for deduction u/s 54 of the Act. The assessee submitted that he entered into a supplementary agreement with the builder for purchase of the flat on 06-07-2018 and the date of possession of the flat by the assessee was 24-12-2018. Therefore, the assessee had claimed that he is eligible for deduction u/s 54 of the Act. A.O however, observed that the supplementary deed was only a deed of rectification and cannot be taken cognizance of that the flat number, building name and the consideration value of the flat remained the same. Accordingly, the A.O held that the assessee was not eligible for deduction u/s 54 of the Act as the assessee had not purchased the new asset within the period of one year before the transfer took place.

Conclusion- The Hon’ble Bombay High Court held that the substance of the transaction signifies when the new property is ready for possession, when the substantial or full payment had been made and when the actual possession was acquired by the assessee. These substantial necessities are crucial for determining the issue for claim of deduction u/s 54 of the Act. Admittedly, in this case what the department is harping upon is merely the agreement dated 21-12-2016 when the building itself was not constructed and the assessee has only acquired his right to get a flat in the said building. When actually therefore, can it be said that the new property was purchased? It is only when the assessee received the possession through letter of possession on 24-12-2018. This is when all the three ingredients as enumerated in the decision of Hon’ble Jurisdictional High Court for claiming deduction u/s 54 had been complied with by the assessee.

In another decision of Pune Tribunal in ITA No. 1424/PUN/2016 and ITA No. 1707/PUN/2016, for A.Y. 2012-13, order dated 17-0-2019 identical facts were considered. It was observed by the Tribunal that it is an unabated fact that at the time of execution of agreement, the residential property was not in existence. Therefore, taking into consideration the facts of the case, the date of possession of the flat as the date of actual purchase for the purpose of claiming exemption u/s 54 of the Act.

FULL TEXT OF THE ORDER OF ITAT PUNE

This appeal preferred by the assessee emanates from order of the ld. D.R.P. dated 31-03-222 for A.Y. 2019-20 as per the following grounds of appeal.

“The following grounds are taken without prejudice to each other-On facts and in law,

1) The learned A.O.IDRP erred in denying deduction u/s 54 of Rs.1,70,90,871/- to the appellant from the capital gains on sale of a residential property.

2) The learned A.O. I DRP was not justified in holding that- Bombay H.C. decision in the case of CIT v. Smt. Beena K. Jain [217 ITR 363] was against the appellant as the appellant had paid full consideration to the developer before 01.07.2017 i.e. more than one year before the date of the sale of the old flat and accordingly, the new flat was purchased more than one year before the date of sale of the old flat and hence, the deduction u/s 54 was not allowable.

3) The learned A.O. I DRP failed to appreciate that-

a. The appellant had complied with the conditions of section 54 in that he had received possession of the new residential property within two months of sale of the old property and hence, the deduction u/s 54 was allowable to the appellant.

b. The agreement for purchase of a new flat dated 21.12.2016 was only for booking of a new flat which was yet to be constructed at that time and therefore, it is not correct to hold that the appellant had purchased a new flat on the date of agreement i.e. 2l.12.20 16.

c. As the appellant received possession of the new flat from the builder on 24.12.2018 which was within the prescribed time limit u/s 54 from the date of the sale of the old residential house which was 23.10.2018 and accordingly, the appellant satisfied the condition of section 54.

d. Bombay H.C. decision in the case of Smt. Beena K. Jain [217 ITR 363] was supporting the appellant’s claim when the Hon’ble H.C. has clearly held that the new property is deemed to be acquired only when it is ready, full consideration is paid and the possession is received by the assessee and in the present case, all these three conditions were fulfilled only on 24-12-2018 when the appellant received possession of the new flat and the deduction was rightly allowable to the appellant.

4. The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal.”

2. The relevant facts are that the assessee is a non-resident Indian and he has filed his return of income declaring the total income of Rs. 8,70,970/- for the A.Y. 2019-20. The assessee has claimed deduction of Rs. 1,70,91,871/- u/s 54 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”). During the relevant assessment year the assessee has sold his bungalow and earned long term capital gain of Rs. 2,10,71,915/-, out of which he claimed deduction of Rs. 1,70,91,871/- u/s 54 of the Act for investment in a residential flat to the extent of Rs. 1,70,91,871/-. The assessee had sold the above bungalow on 23-10-2018. The flat in the investment of which the assessee claimed deduction u/s 54 of the Act was purchased on 21-12-2016. The A.O held that as the property purchased is beyond one year preceding the year of sale, the assessee is not eligible for deduction u/s 54 of the Act. The assessee submitted that he entered into a supplementary agreement with the builder for purchase of the flat on 06-07-2018 and the date of possession of the flat by the assessee was 24-12-2018. Therefore, the assessee had claimed that he is eligible for deduction u/s 54 of the Act. The A.O however, observed that the supplementary deed was only a deed of rectification and cannot be taken cognizance of that the flat number, building name and the consideration value of the flat remained the same. Accordingly, the A.O held that the assessee was not eligible for deduction u/s 54 of the Act as the assessee had not purchased the new asset within the period of one year before the transfer took place.

3. Before the ld. D.R.P the assessee had submitted as follows:

“In this case, the assessee filed the return declaring total income of Rs. 8,70,970/- for the A. Y. 2019 – 20. As against this returned income, in the draft order the assessment is proposed to be made on the total income of Rs.1, 79,61,8411- by making disallowance of deduction claimed under Section 54 of the. Act of Rs. 1, 70,90,871/-.

During the year, the assessee on sale of his bungalow and a plot has earned long term capital gains of Rs.2, 10,71,915/-. The assessee claimed deduction’ under Section 54 of the Act for investment in a residential flat to the extent of Rs.1,70,90,871/-.

This deduction is being disallowed by the Ld. AO in the draft order on the ground that the assessee has purchased a new flat on December 21, 2016 while the capital gains arose on sale of the property on October 23, 2018. Thus, in the opinion of the Ld. A 0 the new residential flat was purchased by the assessee more than one year before the sale of the property. As per Section 54 of the Act, the deduction is available if a new residential property is purchased within a period of one year before or two years after the date on which the transfer took place or has within a period of three years from the date of transfer constructed one residential house in India. Accordingly, the Ld. AO has held that the assessee is not entitled to the deduction under Section 54 of the Act and the disallowance of Rs. 1, 70,90,871/- is being proposed in the draft order

In this context, the assessee relies on his submissions made during the assessment proceedings. However, in addition, the assessee submits the following contentions in support of his plea that the deduction under Section 54 of the Act is rightly claimed.

For the sake of convenience, the relevant portion of section 54 is reproduced hereunder-

Section 54

Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long term capital asset being buildings or lands appurtenant thereto and being a residential house, the income of which is chargeable under the head “Income from house property” (hereafter in this section referred to as the original asset) and the assessee has within a period of [one year before or two years after the date on which the transfer took place purchased] or has within a period of three years after that date [constructed one residential house in India] then instead of the capital gain being charged to income tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section that is to say.

The assessee is giving the following details of the dates of various transactions relevant in this regard –

The above chronological chart indicates the important relevant events which have to be considered for the purposes of allowing the deduction under Section 54 of the Act. It is to be noted that the assessee on December 21, 2016 entered into an agreement with the builder, M/s. . Gayatree Skyscrapers India LLP for acquiring the flat No. 302 in the building under construction. Kindly refer 3rd para from the top on page 4 of the agreement and also the first para in the operative portion of the agreement. Both these paras clearly state that the developer shall construct the building in which the assessee has acquired a right to get the flat No. 302 from the developer. It is very clear that in December, 2016, the flat was not ready and the building had to be constructed. This agreement clearly proves that on December 21, 2016, by the agreement with the developer, the assessee received a right to acquire a flat No. 302 after the building construction was completed. It is also to be noted that the agreement dated December 21, 2016 is an agreement for purchasing the flat by the assessee and not the sale deed. Had the flat been ready, the builder would have made a sale deed instead of the agreement for sale. The possession letter issued by the developer dated December 24, 2018 clearly states that the assessee received the possession of the new flat only on December 24, 2018 from the developer. Accordingly, when the flat was not at all ready on December 21, 2016, date of agreement with the developer, it cannot be held that the assessee purchased a flat on December 21, 2016. All that the assessee acquired as per this agreement is to get a flat No. 302 from the developer in the project after the construction was completed .. The assessee humbly submits that he has not purchased the new flat on December 21, 2016 but he purchased (acquired) it only when the possession was given by the developer and that is on December 24, 2018.

The assessee has reproduced the relevant portion of section 54 of the Act in para 1.5 above. The condition for grant of deduction under Section 54 of the Act as stated in the section is that the assessee has purchased a flat within one year before the sale transaction or within two years after the sale transaction or constructed a residential property within three years from the date of sale transaction. From the bare wording of the section, it is clear that the condition is that the assessee should purchase or construct the property within the above time limit and if the purchase or construction is beyond that time limit, the deduction is not allowable. The assessee has clarified that on December 21, 2016, by entering into an agreement with the developer, the assessee had not purchased the flat No. 302 but had only acquired a right to get it from the developer after the construction was complete. The assessee clarifies that an article I property is said to be purchased only when it is totally ready for sale. If the property is not ready, fully prepared constructed at the time of agreement, one cannot hold a view that it is purchased by the buyer on the date of the agreement. When an agreement is entered into for acquiring a property which is under preparation development construction, that agreement only gives a buyer a right to get that property from the seller and nothing else. In this case, the assessee has shown and proved that the new flat No. 302 in the project was not at all ready in 2016 when the agreement was entered into and thus, it is grossly incorrect to hold a view that the assessee purchased a new flat in December, 2016 and the condition of section 54 is not satisfied. The benchmark date for calculating the window of “one year before to two years after sale of residential property” is the date of execution of the Deed of Transfer of the sold property (i.e. bungalow at unit no. 8, Bulk Land-1, Sector26, Nigdi Pradhikaran, Pune- 411044). That date of execution of the Deed of Transfer is October 23, 2018- the date on which the new owner of the property legally acquired his rights and obtained the possession of the bungalow + plot. In the same way, the date of acquisition of the new property (Flat no. 302 in Gayatrree Grace Apartment Condominium building at plot no. 341, Sector 24, Nigdi Pradhikaran, Pune-411044) by the assessee should be the date on which the builder handed the possession of the new flat to the assessee by way of a Deed of Possession which was on December 24, 2018.

Accordingly, the assessee submits that the new flat No. 302 in the project, Gayatree Grace is acquired by the assessee on 24.12.2018 when the developer has given the possession of the flat to the assessee as per the possession letter. Thus, the new flat is acquired by the assessee on December 24, 2018 which is within the time limit of two years from the date of sale of the bungalow along with the plot which was October 25, 2018 and therefore, the assessee satisfies the condition of section 54 and the deduction claimed under Section 54 of the Act may kindly be allowed.

4. The ld. D.R.P after considering the assessment order and the submissions of the assessee held as follows:

We have perused the draft assessment order and the submissions of the assessee. The chronological sequence of events in this case are as under:

It is clear from the above that the new flat was purchased by the assessee in December, 2016 whereas the date of sale of residential property including plot was in October, 2018 which is beyond one year from the date of purchase of the flat.

Section 54 of the I.T. Act is reproduced here under for ready reference.

“(1) Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head “Income from house property” (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, one residential house in India, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say………

As per the sub-section, the new property has to be purchased within the period of one year before or two years after the date on which the transfer took place. In this case, the purchase of new asset has happened almost two years before the date of transfer making the assessee ineligible for deduction u/s. 54. The assessee has relied upon the supplementary deed which was registered on 06.07.2018 to state that the purchase was well within the period of one year as envisaged in the Act. However, the assessing officer has stated in the draft assessment order that the supplementary deed is only a rectification deed, the name of the building and flat number remaining the same. There is only change in the flat area, the payment made was also as per the original deed. We have also perused the supplementary deed produced before us an are In agreement with the AO that the Supplementary deed is a mere rectification deed. We do not agree with the assessee that the supplementary deed prevails over the original deed. As per the assessee’s own admission more than 95% of the consideration was paid in 2016 and .2017. In this case, the date of possession has no relevance as the agreement is .registered in December, 2016 and almost the entire payment was made around the same time. The assessee has not brought any evidence on record to prove his intention of selling the asset, the proceeds of which were to be invested in the new asset. The new asset was purchased effectively in 2016-17, when the agreement was registered { and almost entire payment was made. The supplementary deed is only a rectification deed and cannot take the place of the original deed. In view of the facts narrated above, we are of the view that the assessee is not eligible for deduction u/s. 54 as he does not fulfill the conditions stipulated in the sub-section.

The assessee has relied upon a few case laws to support his claim. But, we find that the facts of the cases relied upon by the assessee are on different set of facts. For example, in the case of CIT vs. T.N. Arvinda Reddy 120 ITR 0046 (1979) the Hon’ble apex court was dealing with the partition among four brothers of a HUF. In fact, the Hon’ble Supreme Court has explained the meaning of the word “purchase” which goes against the assessee. The Hon’ble Supreme Court held “We find no reason to divorce the ordinary meaning of the word purchase as buying for a price or equivalent of price by payment in kind or adjustment towards an old debt or for other monitory consideration from the legal meaning of that word in section 54 (1).” In the instant case also, the assessee had made the entire payment for the purchase of the flat by 01.07.2017 and has effectively made the purchase by then.

In the case of CIT v/s. J R Subramanya Bhatt 165 ITR 0571 (Kar.), relied upon by the assessee, the Hon’ble Karnataka High Court decided the issue in favour of the assessee but the issue involved in that case was construction of the property and not purchase of the property. In the said case, the construction was completed within 3 years of the transfer of the asset. But in the instant case, the issue involved is purchase and the purchase of the new asset happened more than one year prior to the transfer of the asset.

In the case of M George Joseph Vs. DCIT 440 ITR 0589 (Kar), the Hon‟ble High Court had ruled that the assessee was eligible for deduction u/s 54F as the assessee has completed the construction of residential house within 3 years from the date of transfer of the original asset, As already discussed the facts of the instant case are different form this case.

In the case of DCIT Vs. Dr. Chalasani Mallikarjuna Rao 161 ITO 0721 (Visakhapatnam Trib.), the Hon’ble IT AT held that the date of commencement of construction was immaterial and it was only the date of completion of construction which is relevant as per the provisions of Sec. 54 and as the assessee completed the construction of new residential house within 3 years from the date of .transfer of original asset, the Hon’ble ITAT held that the assessee was eligible for deduction u/s 54.

In the case of CIT V/s. Smt. Beena K Jain, 217 ITR 0363 (Bom), the Hon’ble Bombay High Court agreed with the Trib1lnal when it has said that the relevant date in this connection is 29.07.1988 when the petitioner paid the full consideration amount on the flat becoming ready for occupation and obtained possession of the flat. This has been taken by the Tribunal as the date of purchase. The Tribunal has looked at the substance of the transaction and come to the conclusion that the purchase was substantially affected when the agreement of purchase was carried out or completed by payment of full consideration on 29.07.1988 and handing over of possession of the flat on the next date.” It can be seen from the above, that the payment of full consideration is a crucial aspect to consider the issue of purchase in the instant case more than 95% of the consideration for the new asset has been paid by the assessee in 2016-17 which is beyond the margin allowed.‟

5. At the time of hearing before us, the ld. A.R for the assessee submitted that the assessee had complied with the conditions of section 54 of the Act and that the assessee received possession of the new residential property within two months of the sale of old property and hence deduction u/s 54 of the Act was allowable to the assessee. Further, it was contended that the agreement for purchase of a new flat dated 21-12-2016 was only for booking of the new flat which was yet to be constructed at that time and therefore, it was not correct to hold by the ld. D.R.P that the assessee had purchased the new flat on the date of agreement i.e. 21-12­2016. The assessee had received possession of the new flat from the builder on 24-12-2018 which was within the prescribed time limit u/s 54 of the Act from the date of sale of the old residential house which was on 23-10-2018 and accordingly, the assessee satisfied the condition u/s 54 of the Act. It was also submitted by the ld. A.R that the ld. D.R.P had wrongly construed the proposition laid down by the Hon’ble Bombay High court in the case of CIT Vs. Smt. Beena K. Jain (1996) 217 ITR 363 (Bom) wherein it has been held that the new property shall be deemed to be acquired only when it is ready, full consideration is paid and the possession is received by the assessee. In the present case all these three conditions were fulfilled only on 24-12-2018 when the assessee received possession of the new flat and therefore, deduction was rightly allowable to the assessee.

6. Per contra, the ld. D.R supported the findings of the ld. D.R.P. and contended that the decision of Hon’ble Jurisdictional High Court (supra) has been brought in light in correct perspective by the ld. D.R.P where the ld. D.R.P has looked into when the substantial consideration was paid and in this case more than 95% of the consideration for the new asset had been paid by the assessee in the year 2016-17 which is beyond the margin allowed under the said provision.

7. We have heard the submissions of the parties herein, considered the facts and circumstances and also the judicial pronouncements placed on record. For proper adjudication of the issue we will revisit the facts in this case. The assessee filed his return declaring total income of Rs. 8,70,970/- for A.Y. 2019-20. As against this returned income when the assessment was completed, the deduction claimed by the assessee u/s 54 of the Act to the tune of Rs. 1,70,91,871/- was disallowed which was upheld by the ld. D.R.P. The assessee, during the year of sale of his bungalow and a plot had earned long term capital gain of Rs. 2,10,71,915/-. The assessee claimed deduction u/s 54 of the Act for investment in a residential flat to the extent of Rs. 1,70,91,871/-. This deduction was disallowed by the ld. A.O on the ground that the assessee had purchased the new flat on 21-12-2016 while the capital gain arose on sale of the property on 23-10-2018. Thus, in the opinion of the A.O the new residential flat was purchased by the assessee more than one year before the sale of the property. As per section 54 of the Act, the deduction is available if a new residential property is purchased within a period of one year before or two years after the date on which the transfer takes place or has, within a period of three years from the date of transfer, constructed one residential house in India. In this context on perusal of the agreement with the assessee and the builder i.e. M/s. Gayatree Skyscrapers India LLP dated 21-12­2016 it is noted that the assessee entered into an agreement for acquiring flat No. 302 in the building which was under consideration. The contents of the agreement further states that the developer shall construct the building in which the assessee has acquired a right to get the flat No. 302 from the developer. Therefore, on 21-12-2016 when the agreement was entered into the flat was not ready and the building had to be constructed. Through this agreement, the assessee received the right to acquire flat No. 302 after the construction of the building was completed. The agreement dated 21-12-2016 is an agreement for purchasing the flat by the assessee and not the sale deed . If the flat was ready, there would have been a sale deed entered into between the builder and the assessee and not the agreement for sale. The possession letter was issued by the developer to the assessee on 24-12-2018 which clearly shows that the assessee received the possession of the new flat only on 24-12-2018 from the developer. Therefore through the agreement dated 21-12-2016 the assessee had only acquired a right to get flat No. 302 from the developer after the building of construction was completed. However, it was only on 24-12-2018 that the assessee received the possession of the new flat. These facts have not been refuted by the department. In the judgment of the Hon’ble Bombay High court in the case of CIT Vs. Smt. Beena K. Jain (1994) 75 Taxman 145 Bombay) while interpreting the provision of section 54 of the Act on an appeal by the Revenue against the Tribunal’s order it was held that the Tribunal was right in allowing the exemption under the said provision considering the date of possession of the new residential premises instead of date of sale of agreement and the date of registration. The Tribunal also held which was affirmed by the Hon’ble Bombay High Court that the relevant date to be considered was when the assessee paid full consideration amount of the flat becoming ready for occupation and obtained possession of the flat. The relevant paras are as follows:

“2. Under section 54F of the Income-tax Act, in the case of an assessee if any capital gain arises from the transfer of any long-term capital asset, not being a residential house, and the assessee has, within a period of one year before or two years after the date on which the transfer took place, purchased a residential house, the capital gain shall be dealt with as provided in that section. As per the section certain exemption has to be allowed in respect of the capital gains to be calculated as set out therein. The Department contends that the assessee did not purchase the residential house either one year prior to or two years after the sale of the capital asset which resulted in the long-term capital gains. According to the Department, the agreement for purchase of the new flat was entered into more than one year prior to the sale. Hence, the petitioner is not entitled to the benefit under sec. 54F. In our view, the Tribunal has rightly negatived this contention and has held that the new residential house had been purchased by the assessee within two years after the sale of the capital asset which resulted in long-term capital gains. The Tribunal has held that the relevant date in this connection is July 29, 1988, when the petitioner paid the full consideration amount on the flat becoming ready for occupation and obtained possession of the flat. This has been taken by the Tribunal as the date of purchase. The Tribunal has looked at the substance of the transaction and come to the conclusion that the purchase was substantially effected when the agreement of purchase was carried out or completed by payment of full consideration on July 29, 1988, and handing over of possession of the flat on the next day.

3. In the premises, the application is dismissed and the rule is discharged with costs.”

8. The principle therefore, emerges from the aforesaid decision is that the new property shall be deemed to have been acquired only when it is ready, full consideration has been paid and the possession is received by the assessee by the assessee. The ld. D.R.P had tried to distinguish this binding judgment and refusing the claim of the assessee only on the ground as to when the substantial payment was made and it had not considered the essential element of possession of the new flat, which the assessee acquired on 24-12-2018 and which was within the time limit of two years from the date of transfer of the bungalow along with the plot which was on 23-10-2018. In the said decision of the Hon’ble Bombay High Court (supra) it was appreciated about the substance of the transaction involving section 54 of the Act. The question was whether the relevant date was the date of sale agreement or the substantive element of the transaction had to be considered. The Hon’ble Bombay High Court held that the substance of the transaction signifies when the new property is ready for possession, when the substantial or full payment had been made and when the actual possession was acquired by the assessee. These substantial necessities are crucial for determining the issue for claim of deduction u/s 54 of the Act. Admittedly, in this case what the department is harping upon is merely the agreement dated 21-12-2016 when the building itself was not constructed and the assessee has only acquired his right to get a flat in the said building. When actually therefore, can it be said that the new property was purchased? It is only when the assessee received the possession through letter of possession on 24-12-2018. This is when all the three ingredients as enumerated in the decision of Hon’ble Jurisdictional High Court for claiming deduction u/s 54 had been complied with by the assessee.

9. In another decision of Pune Tribunal in ITA No. 1424/PUN/2016 and ITA No. 1707/PUN/2016, for A.Y. 2012-13, order dated 17-0-2019 identical facts were considered. It was observed by the Tribunal that it is an unabated fact that at the time of execution of agreement, the residential property was not in existence. Therefore, taking into consideration the facts of the case, the date of possession of the flat as the date of actual purchase for the purpose of claiming exemption u/s 54 of the Act. In this decision, the Tribunal also relied upon the binding decision of the Hon’ble Bombay High Court in the case of Smt. Beena K. Jain (supra). Thus, in view of the undisputed facts of the case and the decision rendered in the case of Smt. Beena K. Jain (supra) we hold that the assessee is eligible for claiming deduction u/s 54 of the Act. Consequently all the grounds of appeal of the assessee are allowed.

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

Order pronounced in the open court on 02^nd day of February 2023.