Case Law Details

Case Name : Estate of Late Dr. S. Zakaulla Masood Vs ITO (ITAT Bangalore)
Appeal Number : ITA No. 775/Bang/2018
Date of Judgement/Order : 14/10/2020
Related Assessment Year : 2010-11
Courts : All ITAT (7439) ITAT Bangalore (435)

Estate of Late Dr. S. Zakaulla Masood Vs ITO (ITAT Bangalore)

The issue under consideration is whether the CIT(Appeals) was justified in denying the benefit of deduction to assessee u/s. 54 of the Income Tax Act, 1961?

ITAT states that, in the present case, ITAT are satisfied on the basis of evidence produced by the assessee that a building had come up over the site purchased by assessee and the purchase of site and cost of construction was much more than the capital gain arrived at by the assessee on sale of ancestral house. The CIT(Appeals) has gone by the fact that there was absence of Occupation Certificate. In our opinion, this will not be a ground to deny the claim of assessee for deduction u/s. 54 of the Act, as other evidence filed by the assessee sufficiently demonstrates that assessee has constructed a residential house within the period of stipulated by law. The findings of the CIT(Appeals) in this regard are very vague and cannot be the basis to deny the claim of assessee for deduction u/s. 54 of the Act. ITAT therefore hold that assessee is entitled to deduction u/s. 54 of the Act and consequently no long term capital gain is eligible to tax. The addition is deleted. In the result, the appeal of the assessee is accordingly allowed.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal by the assessee is against the order dated 11.01.2018 of the CIT(Appeals)-3, Bengaluru relating to assessment year 2010-11.

2. The only issue that arises for consideration in this appeal is as to, whether the CIT(Appeals) was justified in denying the benefit of deduction to assessee u/s. 54 of the Income Tax Act, 1961 (‘Act’). Under Section 54 of the Act, if capital gain arises from the transfer of a long-term capital asset, being buildings or land appurtenant thereto, and being a residential house, the income of which is chargeable under the head “Income from house property” (referred to in Sec.54 of the Act as the original asset), and the assessee has

(i) within a period of one year before, or

(ii) two years after the date on which the transfer took place (a) purchased, or (b) has within a period of three years after that date constructed, a residential house, then,

capital gain will be allowed as deduction to the extent of Long-Term Capital Gains OR to the extent of amount invested in the purchase or construction of the new residential house. whichever is less.

3. The undisputed facts are that the assessee was a co-owner of residential house. By a Sale Deed dated 30.10.2009, the aforesaid property was sold by the assessee. The assessee’s share of sale consideration was a sum of Rs.40 lakhs. In the return of income filed for AY 2010-11, the assessee declared long term capital gain(LTCG) on sale of property at Nil and the following was the computation LTCG :-

Appellant’s share 40,00,000
Indexed cost of acquisition = 3,54,500 x 632/100 22,40,440
Capital gains 17,59,560
Less : Investment in purchase of property 39,41,170
Taxable Capital Gains Rs. Nil

4. The assessee’s claim for deduction u/s.54 of the Act was on the basis that the Assessee has within a period of 3 years from the date of transfer of the original asset, constructed a residential house. The Assessee claimed that it had purchased a residential site at Anjanapura Layout, Bangalore on 2.1.2020 for a sale consideration of Rs.39,41,170 including stamp duty. The assessee also filed evidence to show that he had constructed a residential house on the vacant site purchased from him viz., copy of sanctioned building plan, copy of property tax receipts, BDA Khatha Certificate, copy of Tax Invoice dated 11.7.2012 for purchase of Single Phase energy meter and evidence of electricity usage for the period from Sept. 2012 to Feb. 2013. The assessee sold the property on 30.10.2009 and to claim deduction u/s. 54 of the Act, the Assessee ought to have completed the construction within a period of 3 years from the date of transfer of the original asset, i.e., on or before 29.10.2012.

5. The AO, however, recomputed the income from Long Term Capital Gains at Rs. 25,59,560/- by varying the assessee’ share of consideration to Rs.48,00,000/- as against Rs.40,00,000/- reported by the assessee. Thus, the AO computed the long term capital gains before deduction u/s.54 of the Act at Rs.25,59,560/- as against the sum of Rs.17,59,560/- reported by the assessee.

6. The AO thereafter noticed that the assessee had purchased a residential property for Rs.39,41,120/- and compared this figure with the capital gains of Rs.25,59,560/- arrived at by him. He then made an addition of Rs.13,81,560/- under the head “Income from Other Sources” being the difference between the investment in the new house and the capital gains computed by him. The AO did not deny deduction u/s. 54 of the Act as claimed, but had brought to tax the difference in the investment made as compared to the capital gains as income from other sources.

7. On appeal by the assessee, the CIT(Appeals) computed long term capital gain at Rs.18,93,860 as against Rs.17,59,560 computed by assessee. He, however, went on to hold that the assessee would not be entitled to deduction u/s. 54 of the Act. He accepted that the addition made by the AO under the head ‘income from other sources’ cannot be sustained and deleted the addition. As already stated, the CIT(A) however held that the assessee will not be entitled to deduction u/s. 54 of the Act.

8. The assessee had filed a photograph of the property to substantiate the claim of assessee that it constructed a residential house. The assessee had also filed a copy of letter issued by Executive Engineer, BDA, South Division, BSK II Stage, Bangalore in which he had stated that permission was given for constructing a residential house w.e.f. 3.2.2012 to 3.2.2014. The CIT(Appeals) gave the following findings:-

“4.11 The submissions of the appellant have duly been considered. The above photograph cannot be considered as appropriate evidence in this case for following reasons:

    • The photograph does not reveal the date on which it was taken.
    • The photograph does no reveal the exact location of the place as Plot no.704 can be written anywhere and photograph of the same can be taken by standing beside that.
    • The structure shown in the photograph appears to be just a temporary storage shed which is normally made for the storage of construction material before starting construction. Thus the photograph does not reveal that the structure made on the property can be considered as a residential house.
    • The appellant has not given any occupation certificate if any residential house was constructed by him.

4.12 Thus the details produced by the appellant do not show that an residential house was constructed on the plot of land by 29.10.2012. It can only be concluded that the appellant had applied for permission for construction on 21.02.2012 and the same was granted by BDA on 03.03.2012. however no residential house came into existence on the plot till 29.10.2012. So the claim of the appellant that construction of the residential house was completed by 29.10.2012 cannot be accepted. In view of above, the appellant is not found to be eligible for claiming deduction under Section 54 of the Act and the capital needs to be charged to tax.

4.13 Although the capital gain chargeable to tax in case of appellant works out to be Rs 18,93,860/-. however since the AO has already made an addition of Rs 13,81,560/-, the said addition is confirmed although for reasons as discussed above and different than that stated by the AO. Further the income of the appellant is enhanced by the balance amount of Rs.5.12.300.

4.14 Considering above the grounds of appeal of the appellant are dismissed and income is enhanced.”

9. Aggrieved by the order of CIT(Appeals), the assessee has filed the present appeal before the Tribunal.

10. We have heard the rival submissions. As per the requirement of section 54 of the Act, the long term capital gain has to be invested in construction of a residential house within 3 years from the date of transfer. The assessee sold the property on 30.10.2009 and claimed the benefit of deduction u/s. 54 of the Act. He ought to have completed the construction on or before 29.10.2012. The evidence on record goes to show that there was a structure that had come up over the property. The sanctioned plan, usage of electricity, payment of property tax, usage of electricity for the period from Sept. 2012 to Feb. 2013, all go to show that the property existed over the site purchased by the assessee. All these evidence go to show that assessee had put up structure over the site purchased by him. The CIT(A) has come to a conclusion that the Assessee did not construct a residential house within a period of 3 years from the date of transfer of the original asset, on the basis that the photograph filed as evidence does not reveal that the construction of the house was on the plot of land purchased by the Assessee and that there was no completion certificate produced to substantiate the claim of the Assessee regarding completion of construction of a residential house. In our view, the CIT(A) has ignored the other evidence on record which prove construction and completion of construction of a residential house. On the question whether absence of completion certificate can be a ground to reject claim for deduction u/s.54 of the Act, the ld. counsel for the assessee has drawn our attention to the decision of Hon’ble High Court of Karnataka in the case of Sambandam Udayakumar, 354 ITR 389 [Karn] wherein it was held that the non completion of construction within a period of 3 years cannot be a ground to deny deduction u/s.54F of the Act, which provisions are pari materia the same as Sec.54 of the Act on this aspect. In that case, the assessee sold shares for Rs. 4.18 crores and, within 12 months, invested Rs. 2.16 crores thereof to construct a house property and claimed exemption u/s 54F. However, as even after the expiry of 3 years of the date of transfer, the construction of the house was not complete and sale deed not executed, the AO & CIT (A) denied relief u/s 54F though the Tribunal granted it. On appeal by the department to the High Court, it was held that Sec. 54F is a beneficial provision for promoting the construction of residential house & requires to be construed liberally for achieving that purpose. The intention of the Legislature was to encourage investments in the acquisition of a residential house and completion of construction or occupation is not the requirement of law. The words used in the section are ‘purchased’ or ‘constructed’. The condition precedent for claiming benefit u/s 54F is that the capital gain should be parted by the assessee and invested either in purchasing a residential house or in constructing a residential house. Merely because the sale deed had not been executed or that construction is not complete and it is not in a fit condition to be occupied does not disentitle the assessee to claim s. 54F relief. The Hon’ble Karnataka High Court followed similar decision rendered by the Hon’ble Madras High Court in the case of Sardarmal Kothari 302 ITR 286 (Mad). We are therefore of the view that even on the basis of non-completion of construction of the new asset within the period of 3 years, the deduction u/s.54 of the Act cannot be denied to the Assessee.

11. In the present case, we are satisfied on the basis of evidence produced by the assessee that a building had come up over the site purchased by assessee and the purchase of site and cost of construction was much more than the capital gain arrived at by the assessee on sale of ancestral house. The CIT(Appeals) has gone by the fact that there was absence of Occupation Certificate. In our opinion, this will not be a ground to deny the claim of assessee for deduction u/s. 54 of the Act, as other evidence filed by the assessee sufficiently demonstrates that assessee has constructed a residential house within the period of stipulated by law. The findings of the CIT(Appeals) in this regard are very vague and cannot be the basis to deny the claim of assessee for deduction u/s. 54 of the Act. We therefore hold that assessee is entitled to deduction u/s. 54 of the Act and consequently no long term capital gain is eligible to tax. The addition is deleted.

12. In the result, the appeal of the assessee is accordingly allowed.

Pronounced in the open court on this 14th day of October, 2020.

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