VADAKEPAT GOPALAKRISHNA NARAYAN MENON,BANGALORE vs. INCOME TAX OFFICER(IT), WARD-1(2), BANGALORE

Facts

The assessee, a non-resident individual, sold a residential flat on June 15, 2015, for ₹1.38 crores, having purchased it in January 1994 for ₹8,87,635. After indexation, the cost was ₹39,32,514, resulting in a long-term capital gain of ₹98,67,486. The assessee invested this entire gain in a new residential apartment by entering into an agreement on July 6, 2015, and making payments totaling ₹1,28,60,928 to the builder by July 2016, which was before the due date for filing the return under section 139(1). The Assessing Officer (AO) accepted the capital gain computation but denied exemption under section 54 of the Income Tax Act, 1961, citing that the registered sale deed was executed on November 5, 2020, and the Occupancy Certificate was received on September 3, 2018, both dates being beyond three years from the sale of the original property. The Dispute Resolution Panel (DRP) upheld the AO's decision. The assessee appealed to the ITAT.

Held

The Tribunal held that the assessee has satisfied the conditions of section 54 of the Income Tax Act, 1961. It was not disputed that the assessee sold a residential property and invested the entire capital gains in a new residential flat, with payments made before the due date of filing the return under section 139(1). The denial of exemption was solely based on the delay in issuing the Occupancy Certificate and executing the sale deed. The Tribunal noted that section 54 uses the expression "purchased or constructed" within the prescribed period and does not mandate registration of the sale deed or obtaining possession within the same period. The Tribunal relied on the judgments of the Delhi High Court in R.L. Sood v. CIT and the Karnataka High Court in CIT v. Sambandam Udaykumar, which held that substantial payment within the stipulated period fulfills the requirement of section 54, even if possession is delayed. The Tribunal also found support in CBDT Circulars 471 and 672, which clarify that allotment or booking of a flat and making payments towards construction is to be treated as construction for section 54. The Tribunal concluded that the assessee complied with the investment requirement within the stipulated time, and the delays in the Occupancy Certificate and sale deed were due to the builder and regulatory issues, for which the assessee should not be penalized. Therefore, the AO and DRP erred in denying the exemption. The assessee is entitled to deduction under section 54 for the entire long-term capital gain of ₹98,67,486. The AO was directed to allow the claim.

Key Issues

1. Whether the assessee is entitled to exemption under section 54 of the Income Tax Act, 1961, for the long-term capital gain arising from the sale of a residential flat, when the sale deed was registered and Occupancy Certificate was obtained beyond the three-year period stipulated for purchase or construction, despite substantial investment within the period. Assessee's contentions: - The entire capital gain was invested in the new flat within the statutory period. - The delay in issuing the Occupancy Certificate and executing the sale deed was beyond the assessee's control. - Section 54 requires investment in a new residential house within the stipulated time and does not mandate completion of construction or registration of the sale deed within 3 years. - Relied on R.L. Sood v. CIT (Delhi High Court) and CIT v. Sambandam Udaykumar (Karnataka High Court) for the principle that substantial payment within time is sufficient. - Relied on CBDT Circulars No. 471 and 672, clarifying that allotment/booking and making payments amount to construction for section 54. - Delays were caused by demonetisation, RERA, GST, and COVID restrictions, which were outside the assessee's control. Revenue's contentions: - The learned DR vehemently supported the order of the authorities below.