Gandraju Prabhavathi Vs Pr. CIT (ITAT Visakhapatnam)
In a recent judgment in Gandraju Prabhavati vs Pr. Commissioner of Income Tax-1, ITAT Visakhapatnam held that benefit u/s 54 can be availed even if plot was purchased prior to sale of property provided construction of the house property is completed within the time frame provided in Section 54. Appellant i.e. the assessee filed ROI on 08/09/2010 claiming total income of Rs.1,57,220/- and agricultural income of Rs.80,000 for AY 2010-11. Case was assessed u/s 147 which was accepted by the AO. Same was again opened by the Ld. Pr. CIT u/s 263 of IT Act. Ld. Pr.CIT realized that the assessee has sold a house property (duly reflected in ITR) for a consideration of Rs.99,45,000/- to four persons on 15/01/2010 and has claimed exemption u/s 54 on account of purchase of plot on 25/09/2008 i.e. prior to sale of his property. Ld Pr. CIT was of the opinion that the assessee is thus not entitled to benefit u/s 54. Assessee contented that she has entered into MOU with the sellers of the property on 29/06/2008 and that the same was constructed and completed within the stipulated time period. Contentions of the assessee were upheld by ITAT and it was concluded that benefit u/s 54 can never be denied to the assessee as the intention of the legislature was to encourage housing in the country and that she has acquired and constructed the property within 3 years.
FULL TEXT OF THE ITAT JUDGMENT
This appeal is filed by the assessee against the order of the Pr.Commissioner of Income Tax (Pr.CIT)-1, Visakhapatnam vide F.No.Pr.CIT-1/VSP/263/2016-17 dated 31.03.2017 for the assessment year 2010-11.
2. All the grounds in this appeal are against the order passed by the Ld.Pr.CIT u/s 263 of the Income Tax Act, 1961 (hereinafter called as ‘Act’)Ǥ In this case, the assessee filed return of income on 08.09.2010 disclosing total income of Rs.1,57,220/- and agriculture income of Rs.80,000/-. The Assessing Officer (AO) reopened the assessment u/s 147 and taken up the case for scrutiny and completed the assessment u/s 143(3) r.w.s. 147 of the Act, accepting the income returned. Subsequently, the Ld.Pr.CIT has taken up the case for revision and found that the assessee has sold the site admeasuring 300 sq.yards together with RCC slabbed building thereon situated at Vidyuthnagar, Visakhapatnam to four persons namely (i) Mr.Vaziruddin Ahmed Sidduiqi (ii) Mr.Habibuddin Ahmed Jafri (iii) Mr.Iqbal Hussain Farooqui and (iv) Mr.Javvad Ahmed Qureshi, all being the residents of Lawsons Bay Colony, Visakhapatnam by sale deed document No.71/2010 dated 15.01.2010 for a consideration of Rs.99,45,000/-. The market value of the property was also of the same consideration. The assessee claimed the deduction u/s 54 of the Act for acquiring the new property or asset. The assessee acquired vacant site admeasuring 350 sq.yards situated at Akkayyapalem from Sri K.S.N.Murthy vide document No.2064/2008 dated 25.09.2008 for a consideration of Rs.65,45,000/-. In the return of income filed for the assessment year 2010-11, the assessee claimed the cost of the new property including the cost of the land and the cost of construction of house at Rs.1,01,49,000/- as deduction u/s 54 of the Act. The Ld. Pr.CIT has taken up the case for revision and observed that the assessee had sold the property by sale deed dated 15.01.2010 and the investment for acquiring the land was made by sale deed document dated 2 5.09.2008 prior to the sale of the impugned property, hence the Ld.Pr.CIT was of the view that the assessee is disentitled for deduction u/s 54 of the Act and thus issued the notice u/s 263 and called for the explanation of the assessee. In response to the notice the assessee submitted before the Ld. Pr.CIT stating that she had entered into Memorandum of Understanding (MoU) on 29.06.2008 with the 4 buyers of the said property. As per the MOU, the four buyers have agreed to purchase the property of the assessee situated at Vidyuth Nagar, Visakhapatnam for the sale consideration of Rs.99,45,000/- and offered other property in exchange, located at Akkayyapalem belonging to Shri K.S.N.Murthy. Further, the buyers offered to pay the cost of acquisition of the new property on behalf of the assessee, from out of loan funds proposed to be raised from banks and also help in construction. Subsequently, the assessee acquired the vacant site admeasuring 350 sq.yards situated at Akkayyapalem, Visakhapatnam from Sri K.S.N.Murthy for a sum of Rs.65,45,000/- and completed construction within the period of three years provided in the Act. The assessee argued before the Ld.Pr.CIT that the new residential house was constructed within the stipulated time provided u/s 54 of the Act, hence, the capital gains arising on sale of the residential house would be entitled for deduction u/s 54 of the Act for acquiring the new property and requested drop the proceedings u/s 263.
3. The Ld.Pr.CIT observed that the Memorandum of Understanding (MoU) entered by the vendor with the vendees was dated 29.06.2008 which is unregistered and there was no mention of the said MoU in the sale deed registered vide document No.71/2010 on 15.01.2010. As per the registered sale deed dated 15.01.20 10, the possession of the property was delivered to the vendees on 15.01.2010 which is a very important condition laid down for ‘transfer’ under the Transfer of Property Act. The Ld.Pr.CIT also observed that the value of the properties has undergone change from 1st August 2009 by the Revenue Department of Andhra Pradesh. The vendor and the vendees have arrived at exact market value of the property of Rs.99,45,000/- which is the value in 2010 but not in the year 2008, the year of executing the MoU. Therefore, the Ld.Pr.CIT viewed that the MoU is back dated and an after thought to claim undue deduction u/s 54 of the Act. Therefore, the Ld.Pr.CIT held that the assessee has not satisfied the conditions laid down u/s 54 of the Act to claim the deduction u/s 54 of the Act, since, the property on which the capital gains exemption was claimed was acquired before the sale of the impugned property thus viewed that the assessee is not entitled for deduction u/s 54 of the Act. Accordingly, held that the assessment order passed u/s 147 r.w.s. 143(3) dated 27.03.2015 was erroneous and prejudicial to the interest of the revenue. The Ld.Pr.CIT set aside the assessment order passed u/s147 r.w.s 143(3)dated 27.03.2015 and directed the AO to redo the assessment as per law.
4. Aggrieved by the order of the AO, the assessee is in appeal before this Tribunal.
5. During the appeal hearing, the Ld.AR argued that in this case, the assessment was reopened u/s 147 for the purpose of verification of capital gains which is evident from the assessment order. A notice u/s 148 was issued by the AO and the assessee furnished the complete details before the The Ld.AR invited our attention to the notice issued u/s 142(1) of the Act dated 12.06.2014, where in the AO has called for the details of the immovable property, transactions done during the year with the copies of the documents in question No.13. In question No.14, the AO has called for the details of all immovable properties held by the assessee as well as the family members. The Ld.AR referring to page No.13 of the paper book submitted that vide letter dated 10.07.20 14, which was received by the AO on 11.07.2014, the assessee has furnished the complete details, background of the case, details of the sale transaction, the taxability of capital gains, computation of capital gains, legal position of agreement to sale, the MOU and the allowability of deduction u/s 54 of the Ac. When the jurisdiction was changed the assessee reiterated the submissions vide letter dated 02.12.2014, which is placed on page No.20 of the paper book. After going through the entire information, explanation furnished by the assessee, the AO completed the assessment u/s 143(3) r.w.s. 147 accepting the income returned. The AO after verifying the complete details, has taken a conscious decision to allow the capital gains deduction u/s 54 of the Act, therefore, argued that there is no error committed by the AO, thus invoking jurisdiction u/s 263 is bad in law and required to be quashed.
5.1. On merits, the Ld.AR argued that the assessee had entered into MoU on 29.06.2008 for sale of property as explained before the AO as well as the Pr.CIT. Because of the compulsions and pressures, the assessee had no option except to sell the impugned property to the vendees by MoU dated 29.06.2008. Vendees have agreed to pay the consideration of Rs.99,45,000/- for acquiring the new asset and it was not an after thought. They have agreed to assist in construction of the new building. Accordingly, the assessee was paid the sale consideration and acquired the new asset with the funds arranged by the buyers. Therefore, requested to reckon the date of transfer as 29.06.2008 which is the date of MoU. The assessee has sold the property vide MOU dated 29.06.2008 and registered the sale deed on receipt of full payment on 15.01.2010. Though there were some mismatching in dates, since, the assessee has constructed the new residential house within 3 years from the date of entering into sale agreement and completed the construction, the Ld.AR argued that the intention of the legislature to encourage the housing has satisfied and there is no prejudice caused to the revenue, hence requested to allow the deduction u/s 54 of the Act.
5.2. Even otherwise, the Ld.AR submitted that as per the provisions of section 54 of the Act, for claiming deduction u/s 54, the assessee is required to construct residential house within 3 years from the date of transfer of the property. In the instant case, the assessee has constructed the property within the three years period and there is no prejudice caused to the department. Having constructed the property within 3 years period of time, the assessee satisfied the conditions laid down for making the deduction u/s 54 of the Act. Therefore argued that the assessee is entitled for deduction u/s 54 and accordingly requested to quash the order passed by the Ld.CIT u/s 263. The Ld.AR relied on the decision of Hon’ble Madras High Court (2018) 97 taxmann.com 74 (Madras) in the case of C. Aryama Sundaram Vs. CIT-3, wherein Hon’ble High Court held that not only the cost of construction of new property incurred after sale of old property would be eligible for exemption under section 54, but also cost of land on which new property was constructed, even if such land had been purchased three years prior to sale of old property. Similarly, this Tribunal in the case of Dy.CIT, Circle-2(1), Vijayawada Vs. Dr.Chalasani Mallikarjuna Rao (2016) 75 taxmann.com 270 held that in order to claim deduction under section 54, date of commencement of construction of house property is irrelevant and thus construction may be commenced even before transfer of asset.
6. On the other hand, the Ld.DR relied on the order of the Pr.CIT as well as provisions of section 54 of the Act and argued that there is no error in the order passed by the Pr.CIT and requested to upheld the order of the Pr.CIT.
7. We have heard both the parties and perused the material placed on record. Ground No.1 and 4 of the Grounds of Appeal are related to the issue of invoking the jurisdiction by the Pr.CIT u/s 263 of the Act. In this connection, the Ld.AR argued that the AO has completed the assessment and allowed the deduction u/s 54 after making detailed enquiries with regard to the allowability of the deduction u/s 54 of the Act, thus there is no error in the order passed by the AO, hence there is no case for invoking the jurisdiction u/s 263 of the Act. Perusal of the assessment order shows that the case was reopened u/s 147 of the Act for the purpose of verification of long term capital gains in respect of the sale of property located at Vidyuth Nagar, for a sum of Rs. 99,45,000/- on 15.01.20 10. The AO has called for the details, verified the details and after verification of the various submissions, allowed the deduction u/s 54 claimed by the assessee and completed the assessment accepting the return of income. The AO issued notice u/s 142(1) on 12.06.2014, furnished at page No.11 of the paper book. In the notice issued u/s 142(1), in question No.13, the AO called for the details of all immovable property transactions made by the assessee during the previous year relevant to the assessment year under consideration. As per page No.13 of the paper book, vide letter 10.07.2014, the assessee furnished the complete details with regard to the sale of the property, allowability of the long term capital gains, deduction claimed u/s 54. The assessee in her explanation also stated that as per the MoU dated 29.06.2008, the buyers agreed to facilitate the acquisition of the residential house in exchange for the impugned property. Both the purchase and sale transactions were meant to be facilitated simultaneously and also argued that as per law it is not mandatory to register the MoU. The assessee has paid the sum of Rs.65,45,000/- to the owner of the new asset on 25.09.2008 which was arranged only by the buyers as per MOU, vide cheque drawn Kanakamahalakshmi Cooperative Bank. The assessee further stated that the entire sale consideration was received by the assessee on 2 5.09.2008 on the date of registration of new site along with cash of Rs.31,00,000/- to fund the cost of construction from the buyers Hence, the sale for all practical purposes was completed on 25.09.2008 itself. The buyers of the land and the parties for MoU are one and the same. Thus, argued that the date of MoU should be reckoned for the transfer of the property. As per the date of MoU, the purchase of the new site as well as the completion of construction was within the period of 3 years which is the time available for claiming the deduction u/s 54. The assessee explained the provisions of section 54 and also relied on the various decisions to support of her claim including the decision of Hon’ble Supreme Court in the case of Sanjeev Lal Vs. CIT 46 taxmann.com 300 (SC) for the purpose of section 2 (47)/54, CIT Vs. Sambandam Udaykumar (2012) 19 taxmann.com 17 (Kar), CIT Vs Shahzada Begum (1988) 38 taxman 311 (AP), RL Sood Vs. ITO (1994) 49 TTJ 282 (Del ‘B’Bench), Sri Rajaram Vs. ITO (1986) 19 ITD 141 (Hyd. ‘A’ Bench) and the CBDT Circular No.538 dated 13.07.1989.
7.1. For the sake of clarity and convenience, we extract relevant part of the submissions made by the assessee before the AO which reads as under :
“With reference to the above-mentioned reassessment proceedings, the undersigned [“Assessee’] wishes to reiterate as under:
1. BACKGROUND OF CASE
a. The Assessee [who is the VENDOR] had purchased a plot during FY 1983-84 admeasuring 300 sq.yds (or 250.84 sq.mtrs) situated at Plot No.5 (part) covered by No.542/2A & 2C in TP No.26/2 7, Akkayyapalem and thereupon constructed a residential house during FY 2004-05 [“PROPERTY”] being D.No.49-55-1A, Vidyuth Nagar, Akkayyapalem, Visakhapatnam – 530 016. She has been residing there since then.
b. In June 2008, four brothers namely M/s V.A.Siddiqi, H.A jafri, I.H.Farooqui & A.Qureshi [‘BUYERS”] who are known to the Assessee, approached her and expressed their desire to acquire the aforesaid Property owned by the Assessee and offered another site which had a slightly larger extent [hereinafter referred to as “NEW PROPERTY” in exchange located in the vicinity and identified by the buyers The reason why the Buyers were persistent was on account of Vaastu reasons and also the fact that they owned the adjacent plots and sought to make a composite block to enhance the value of the site. Initially, the Assessee was reluctant on the exchange deal but on persuasion, finally relented and agreed to accept the identified second site in exchange which was owned by one Sri K.S.N.Murthy. When the Assessee expressed her inability to raise funds even for a temporary period, the Buyers offered pay for the cost of acquisition of the New Property on behalf of Assessee from out of loan funds proposed to be raised from banks and also help in funding the cost of construction. In short, the financial commitment of the Assessee in the whole gamut of transactions was practically ‘Nil”Ǥ
c. Accordingly, the Assessee entered into a binding Memorandum of Understanding (MOU) dated 29TH Jun 2008 with the Buyers wherein the latter agreed to facilitate acquisition of a residential house in exchange for the Property. Both purchase and sale transactions were meant to be to be facilitated simultaneously. It may be noted that under law, it is not necessary to register an MOU- although it is a legally enforceable document under the Law of Contract.
d. The Assessee then acquired the new property through a sale deed 09.2008 and the consideration was paid to the owner Sri K.S.N.Murthy for Rs.65.45 lacs arranged wholly by the Buyers vide Cheques drawn on Kanakamahalakshmi Cooperative Bank (the Buyers bankers details given in the Purchase Document). The buyers had initially arranged funds from out of their own resources and had proposed to formalize the transaction by executing registration of sale deed of the Property after availing a housing loan from bank.
e. Consequent on payment of sale consideration by the Buyers in the form of direct payment to Sri K.S.N.Murty, the Assessee took possession of the new property and simultaneously handed over physical possession of her own property to the The Assessee (with the help of plan approval secured by the site owner) then began construction of the house and was ready for occupation around Apr 2010.
f. Meanwhile, although the Assessee received the full sale consideration from the Buyers (in the form of title of new property) both in the form of consideration paid to new property owner as well as cost of construction and, therefore, the transaction for all practical purposes was complete by Sep 2008 itself; yet on account of an inordinate delay in arranging the housing loan on the part of buyers, the actual registration could materialize only on 15 Jan 2010. Consequent to the sale deed, the Assessee received additional funds from the Buyers (on account of sanction of housing loan) and soon refunded back the amount to the buyers – since she had already received the funds earlier.
g. It is emphasized here that the entire sale consideration was received by the Assessee on 25.09.2008 on date of registration of the new site along with cash of Rs.31 lacs to fund the cost of construction along with from the Buyers and hence, the sale deed for all practical purposes was complete on 25.09.2008 itself. In the instant case, the buyer and de-facto sellers are the same. As soon as the MOU was entered into and the Assessee purchased the new property, the Assessee had handed over her property to the Buyers thereby fulfilling specific performance. In other words, both sale of assessee’s residential house as well as purchase of new house were carried out simultaneously and legal conveyancing by way of execution of sale deed in favour of Buyers was only a matter of mere legal formality.
2. FILING RETURN / MISTAKE APPARENT ON RECORD
a. The Assessee had filed her return of income for AY 2010-11 declaring a total income of Rs.1,57,220/- (net of agricultural income) and had disclosed the sale of residential house and claimed deduction u/s 54 of I.T.Act 1961. I had attached an explanatory note giving details of cost of new house at the time of filing return & submitted copies of the following:
i. Sale Deed of Property in favour of buyers –
ii. Sale Deed for acquisition of new property
iii. Cash receipt for Rs.31 lacs received from Buyers-to fund the construction of new house
iv. Bank statement, Memorandum of Understanding dt 29.06.2008 between Assessee & Buyers etc. –
b. The learned AO had issued a notice u/s 148 seeking reassessment and the Assessee had replied that the original return filed could be treated as compliance with notice.
c. However, subsequently, the Assessee on seeking professional help, detected a glaring mistake apparent on record in her return. In Schedule CG of her return for AY 2010-11, the assessee while computing long-term capital gains had erroneously shown the gross consideration instead of deducting the indexed cost of acquisition/improvements which is eligible towards reinvestment claim u/s 54. It may be noted that the Assessee had purchased her house site in Nov 1983 and had constructed one floor admeasuring about 1344 sq ft during FY 1985-86. Subsequently, in FY 1994-95 she had constructed the first floor consisting of 1344 sq ft in addition to back yard shed of about 189 sq.ft. The cost of land was Rs.26,500/- (including registration cost) and the construction cost was approx.Rs.2,35,200/- and Rs.3, 02,400/- (for ground floor & first floor respectively).
d. Sec. 54 for the relevant AY reads as under :
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Profit on sale of property used for residence.
54. [[1)] [Subject to the provisions of sub-section (2) where, in the case of an assessee being on individual or 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 dote constructed, a residential house, 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 within accordance with the following provisions of this section, that is to say,—
(i) if the amount of the capital gain is greater than the cost of [the residential house] so purchased or constructed (hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or
(ii) if the amount of the capital gain is equal to or–less than the cost of the new asset the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain.
The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 13Q. shall be deposited by him before furnishing such return (such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 159 in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit, and, for the purposes of sub-section (1), the amount if any, already utillsed by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset:
Provided that if the amount deposited under this sub-section is not utilised wholly or partly for purchase or construction of the new asset within the period specified in sub-section (1), then,–
(i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and
(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid. Explanation.[Omitted by the Finance Act, 1992, e.f. 1.4.1993.]
e. Thus, the Assessee erred in not claiming ‘net capital gains’ (i.e. after deducting
indexed cost of acquisition) and had instead disclosed gross sale consideration available for reinvestment u/s 54. The same is recomputed as under :
RE-COMPUTATION OF CAPITAL GAINS
