ITAT Directs AO to Examine Section 54 Exemption Eligibility in year in which capital gain is taxable

Manesh Bansilal Shah Vs ITO (ITAT Ahmedabad)

Introduction:

The Income Tax Appellate Tribunal (ITAT) Ahmedabad addressed an appeal by Manesh Bansilal Shah against the order of the Commissioner of Income Tax regarding the deduction under Section 54 of the Income Tax Act, 1961 for the Assessment Year 2013-14. The matter pertains to the capital gain resulting from the sale of property, and the dispute over the Assessment Year to which the capital gain pertains, as well as the eligibility for the exemption.

Analysis:

1. Background: The assessee reported capital gain from the sale of residential property and claimed an exemption under section 54 and 54EC of the Act, resulting in nil capital gain. However, the AO found that the capital gain pertained to the preceding year, thus denying the claim for the impugned year.

2. Assessee’s Appeal: The assessee appealed against the AO’s order, arguing that the property was transferred in A.Y. 2013-14, and that the necessary conditions to claim exemption u/s. 54 were met. Additional arguments were made, including the nature of the property sold and the assessment of interest and penalty.

3. Tribunal’s Observation: The ITAT observed that since the capital gain has been held not taxable in the impugned year, the eligibility to claim exemption needs to be examined in the year to which the capital gain pertains, i.e., Asst. Year 2012-13.

4. Ruling: The Tribunal allowed the appeal and directed the examination of the assessee’s claim of exemption under section 54 in the preceding assessment year.

Conclusion: The ruling of ITAT Ahmedabad in the case of Manesh Bansilal Shah Vs ITO is pivotal in interpreting the correct application of Section 54 of the Income Tax Act. By directing the examination of the claim in the correct assessment year, it provides clarity on the procedural aspects of claiming such exemptions and reinforces the importance of accuracy in determining the year to which the capital gain pertains. The decision emphasizes a thorough examination of facts and adhering to the legal provisions governing capital gains tax.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

Present appeal has been filed by the assessee against the order of the ld.Commissioner of Income Tax (Appeals)-5, Vadodara dated 29.09.2016 passed under section 250(6) of the Income Tax Act, 1961 (hereinafter referred to as “the Act” for short) for the Asst.Year 2013­14.

2. This is a recalled matter. Initially, the Tribunal had dismissed the above appeal of the assessee for default vide order dated 18.9.2018. Thereafter, the assessee had filed a Misc.Application No.29/Ahd/2021 seeking recall of this order on the ground that the assessee was prevented by sufficient reasons in not attending the hearing before the Tribunal. After hearing both the sides, the Tribunal recalled its impugned ex parte order dated 18.9.2018 (supra) vide order dated 10.2.2022 and the appeal of the assessee was placed for de novo hearing. Accordingly the matter came up before us for fresh adjudication.

3. Brief facts relating to the case is that in the return of income filed for the year, the assessee had returned capital gain on account of sale of an alleged residential property being plot No.18, Urmi Cooperative Hsg. Society Ltd., Jetalpur, Vadodara. The said property was sold for a consideration of Rs.3.30 crores and the assessee being co-owner along with two co-owners, he had shown sale proceeds of Rs.1,09,98,900/- pertaining to his share. The assessee had also claimed exemption under section 54 and 54EC of the Act amounting in all to Rs.86,61,245/-, resulting in capital gain at NIL.

On perusal of the documents of sale, the AO noticed that the capital gain pertained to the preceding year since he noted that the property sold on 27.2.2012 ,i.e in F.Y 2011-12pertaining to Asst. Year 2012-13; the impugned year before us being Asst.Year 2013-14. Accordingly he held that the capital gain was not liable to tax in the impugned year. Alternatively, he also examined the assessee’s claim of deduction under section 54 of the Act and found the same to be untenable. Accordingly, he held that the capital gain from sale of property were liable to tax in the preceding year i.e.Asst. Year 2012-13, and alternatively, he also held, that if capital gain is found taxable in the impugned year, then the assessee is not entitled to claim deduction under section 54 of the Act.

4. The matter was carried in appeal before the ld.CIT(A) who confirmed the finding of the AO that the capital gain is liable to tax in the preceding assessment year, and also the alternate denial of claim of deduction under section 54 of the Act. Aggrieved by the same, the assessee has raised the following grounds before us:

1. In law and in the facts and in the circumstances of the case of the appellant, learned Assessing officer had erred in concluding that the property, i.e. residential house in Urmi Co-op. Housing Soc. Limited, is transferred during the previous year relevant to A. Y. 2012-13 and not A. Y. 2013-14, and Hon. CIT (Appeals) has also erred in confirming the same.

2. In law and in the facts and in the circumstances of the case of the appellant, learned Assessing Officer had erred in holding that the possession of the property sold by the appellant had been transferred to the purchaser of the property on the date of executing the registered sale deed i.e. 27th February. 2012 and Hon. CIT (Appeals) has also erred in confirming the same without considering the memorandum of understanding dated 27th February, 2012.

3. In law and in the facts and in the circumstances of the case of the appellant, learned Assessing Officer had erred in holding that the appellant has not satisfied the necessary conditions to claim exemption u/s. 54. whereas the appellant has completed the construction of new residential house property (in Shree Hari Bungalows) by 27/08/2014 and has obtained the allotment letter from Shreeji Associates dated 14/06/2012.

4. Without prejudice to the above, in law and in the facts and in the circumstances of the case of the appellant, the Learned Assessing Officer had failed to appreciate that even if the transfer of property were assumed to have taken place in AY 2012-13, the appellant would have been eligible for benefit u/s. 54, as the construction of new residential house has been completed within three years from the said date of transfer, I.e. 27-02-2012, adopted by him.

5. In law and in the facts and in the circumstances of the case of the appellant, Hon. CIT(Appeals) has erred in holding that the property sold by the appellant is a plot of land and it does not consist of a residential building and thereby rejecting the claim of the appellant for exemption u/s. 54, without stating any basis for reaching such a conclusion.

5.1 Without prejudice to the above, in law and in the facts and in the circumstances of the case of the appellant, Hon. CIT (Appeals) has also erred in not appreciating that even if the appellant had transferred a plot of land, he would have been eligible for exemption u/s. 54F in respect of amount invested by him in a new residential house and not granting the legitimate benefit available to the appellant, as per his own understanding about the property sold by the appellant.

6. On the facts and in the circumstances of the case, the learned Assessing Officer has erred in charging interest under Section 234B and 234D of the Act.

7. In law and in the facts and circumstances of the appellant’s case, the learned Assessing Officer has grossly erred in initiating penalty proceedings u/s.271(1)(c) of the Act.

8. The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal.

5. Ground no.1 & 2 were not pressed before us. The only grievance of the assessee is vis-à-vis the denial of claim of deduction/ exemption under section 54 of the Act of the capital gain earned. Since the capital gain has been held to be not taxable in the impugned year, the eligibility to claim of exemption of the same, we hold, is to be examined in the year to which the capital gain pertains. Therefore, in the eventuality that the departments subjects the capital gains to tax in the preceding assessment year i.e. Asst. Year 2012-13, the assessee’s claim of exemption under section 54 is to be examined afresh in the said year.

6. The grounds of appeal raised by the assessee are disposed of in the above terms.

7. In the result, appeal of the assessee is allowed in the above terms.

Order pronounced in the Court on ^5th July, 2023 at Ahmedabad.