JAGDISH WADHWANI,JAIPUR vs. ITO, JAIPUR

PER VIJAY PAL RAO, JM : This appeal by the assessee is directed against the order dated 4th August,

2016 of ld. CIT (A)-1, Jaipur for the assessment year 2011-12. The assessee has

raised the following grounds :-

“ 1. That on the facts and in the circumstances of the case, the ld. Lower authorities grossly erred in computing Long Term Capital Gain at Rs. 7,25,681/- instead of Rs. 6,18,178/- as the assessee appellant.

1.1. That on the facts and in the circumstances of the case, the ld. Lower authorities grossly erred in disallowing the indexed construction cost incurred by the assessee appellant in the year 2011-12 on the property sold by him.

1.2. That on the facts and in the circumstances of the case, the ld. Lower authorities grossly erred in not giving the benefits of Sec. 54 of the Income-tax Act at Rs. 10,00,000/- toward the reinvestment made by the assessee appellant.

2 ITA No. 975/JP/2016 Shri Jagdish Wadhwani, Jaipur.

1.2.1. That even if it is held that benefit u/s 54 is not available then too, it is not taxable in the year under consideration.

Ground nos. 1 and 1.1 are regarding disallowing the claim of

indexed cost of construction/improvement. The assessee filed his return of income on 3rd January, 2012 declaring total 2.

income of Rs. 2,02,300/-. The assessee declared income from Long Term Capital

Gain and also claimed deduction under section 54 of Rs. 10,00,000/-. On

examination of record, the AO noted that while computing the Long Term Capital

Gain, the assessee has deducted indexed cost of improvement at Rs. 1,07,505/-.

The AO asked the assessee to furnish the documentary evidence in support of the

cost of improvement/construction in the property in question. Since the assessee

did not furnish any supporting evidence, accordingly the AO disallowed the claim of

indexed cost of improvement/construction of Rs. 1,07,505/-. The assessee

challenged the action of the AO before the ld. CIT (A). However, in the absence of

any documentary evidence, the ld. CIT (A) has confirmed the disallowance made by

the AO.

claimed indexed cost of improvement/construction of Rs. 1,07,505/- and given the

details before the AO. However, the ld. A/R has fairly conceded that in support of

the said claim the assessee could not furnish any documentary evidence.

3 ITA No. 975/JP/2016 Shri Jagdish Wadhwani, Jaipur.

below.

record. The AO has issued show cause notice on 02.01.2014 asking the assessee to

furnish the documentary evidence to prove the quantum of expenditure on

improvement at Rs. 1,07,505/-. Since the assessee did not furnish any evidence,

accordingly, the AO has denied the claim in para 5 as under :-

“ 5. The assessee was asked to furnish his reply, if any, on this by 10.01.2014. However, till the passing of assessment order, assessee did not furnish any supporting evidence with regard to indexed cost of construction claimed at Rs. 1,07,505/- nor said anything in this regard. Therefore, it has been established on record that the cost of construction and indexed cost claimed accordingly has been done wrongly. In these circumstances, the Long Term Capital Gain on assessee’s share of sale consideration is re-worked out as under :-

Sale consideration Rs. 35,00,000/-

Less : Indexed cost of acquisition as Rs. 27,74,319/- Claimed by the assessee _____________ Long Term Capital Gain Rs. 7,25,681/- --------------------

Though the assessee challenged the said action of the AO, however, even during the

proceedings before the ld. CIT (A), the assessee did not file any documentary

evidence and consequently the addition made by the AO was upheld by the ld. CIT

(A). Even before us, the assessee has neither produced any supporting evidence nor

claimed that the assessee is having any supporting evidence. Accordingly, in view of

4 ITA No. 975/JP/2016 Shri Jagdish Wadhwani, Jaipur.

the facts and circumstances of the case when the assessee has not produced any

documentary evidence in support of the claim, we do not find any error or illegality

in the orders of the authorities below, qua this issue.

Ground Nos. 1.2 and 1.2.1 are regarding disallowance of deduction

under section 54 of the IT Act.

developed by M/s. Ornate Spaces Pvt. Ltd. and made a payment of Rs. 10,00,000/-

to the builder prior to the sale of the existing property under consideration on

29.09.2010. The AO conducted the enquiry in this regard and found that the said

builder has submitted the plans to the Government authorities for development of

the land at Mumbai in the month of October, 2013 and was expecting the approval

in May, 2014. Accordingly, the AO denied the claim of deduction under section 54 of

the Act by holding that the payment to the builder M/s. Ornate Spaces Pvt. Ltd. was

made prior to the date of sale of property. However, the assessee has failed to

acquire the allotment of the said flat within a period of 2 years from the transfer of

original asset or till the date of the order and, therefore, the assessee failed to

purchase or construct the new residential house within the prescribed period under

section 54 of the Act. The assessee challenged the action of the AO before the ld.

CIT (A) and reiterated his claim that once the assessee has made the investment for

purchase of new residential house, then even if there is a delay on the part of the

builder to obtain the plan sanctioned from the Government authorities and construct

the project, the claim of deduction under section 54 cannot be denied. The ld. CIT

(A) was not impressed with the explanation of the assessee and held that Circular

No. 471 relied upon by the assessee was in respect of Self Financing Scheme of

5 ITA No. 975/JP/2016 Shri Jagdish Wadhwani, Jaipur.

DDA. The ld. CIT (A) has also observed that at the time of making the payment in

the year 2010 the necessary approval was not received by the builder and it was

anticipated to be received by May 2014, therefore, the assessee did not acquire the

new residential house within the period of limitation prescribed under section 54 of

the IT Act.

that the assessee has invested Rs. 10,00,000/- as an advance for purchase of new

residential house being flat in Mumbai to be developed by M/s. Ornate Spaces Pvt.

Ltd. then the conditions as stipulated in section 54 of the Act are satisfied. He has

further contended that if there is a delay on the part of the developer to develop the

property and handover the flat to the assessee, the same cannot be a ground for

denial of deduction under section 54 of the Act. The ld. A/R has referred to the

provisions of section 54(2) of the Act and submitted that once the assessee has

made the payment of Rs. 10,00,000/-, then even if the said flat was not acquired

within the period prescribed under section 54, the addition cannot be made for the

year under consideration but it has to be made only in the year in which the time

period for acquiring the new residential house expires. In support of his contention,

he has relied upon the following decisions :-

Bhavna Cuccria vs. ITO (2017) 82 taxmann.com 306 (ITAT Chandigarh)

R.S. Sharma vs. ITO (2015) 55 taxmann.com 187 (Karnataka High Court)

Ranjit Narang vs. CIT (2015) 317 ITR 322 (Allahabad)

CIT vs. Sardarmal Kothari & Others (2008) 302 ITR 286 (Madras

6 ITA No. 975/JP/2016 Shri Jagdish Wadhwani, Jaipur.

The ld. A/R has submitted that the deduction to the extent of the amount utilized for

acquisition or construction of the house is to be granted in the year of transfer of

asset and the condition of completion of the construction is to be looked into only

after the window period provided by the Act of 3 years expired.

below and submitted that the assessee claimed to have invested Rs. 10,00,000/- for

acquisition of new residential house. However, at the time of advancing the said

amount in the year 2010 even the plan was not in existence and the builder has

submitted the plan only in the month of October, 2013 which was expected to be

approved in the month of May, 2014. Further, the ld. D/R has submitted that the

proviso to section 54(2) is only for the purpose of not utilizing the amount deposited

in the Capital Gain Account Scheme and, therefore, the said proviso cannot be

extended for the purpose of investment without depositing the amount in the Capital

Gain Scheme Account. Since the time period of 2/3 years have already expired at

the time of passing the assessment order, therefore, there was no reason for

awaiting for the expiry of time period provided under section 54 and then making an

addition in the subsequent assessment year. The ld. D/R has submitted that the

time period for making the investment had expired before the assessment order was

passed by the AO. Therefore, it was already became final that the assessee has

failed to acquire or purchase a new residential house within the time period

prescribed under section 54 of the Act.

September, 2010 and claimed the deduction under section 54 of the Act on account

7 ITA No. 975/JP/2016 Shri Jagdish Wadhwani, Jaipur.

of an advance of Rs. 10,00,000/- given to M/s. Ornate Spaces Pvt. Ltd. for booking

of a flat in the Project High Rise Building to be developed by the said developer.

The AO has denied the claim of the assessee due to the reason that the assessee

could not acquire or purchase the alleged residential house being flat within the time

period as prescribed under section 54 of the Act. The AO has conducted the enquiry

and found that the builder presented the plans for approval only in the month of

October, 2013 and consequently the plans were expected to be approved only by

the month of May, 2014 as responded by the said builder to the notice issued the

AO. Hence the AO held that the assessee has failed to comply with the condition of

acquiring the new residential house within the period of limitation provided under

section 54 of the Act. There is no quarrel that if the assessee has made an

investment for acquisition of the new residential house within the prescribed period

as per section 54 of the Act, then if there is a delay in the actual possession to be

handed over to the assessee and the said delay is not attributable to the assessee

then having regard to the satisfaction of the substantial and primary condition of

investment the deduction under section 54 cannot be disallowed. However, in the

case in hand, the assessee has given an advance of Rs. 10,00,000/- and that too

prior to the sale of existing immovable property. It is not the case of the assessee

that at the time of making the investment, the assessee had a bonafide belief that

he would acquire the said flat within the period of 2 years or 3 years from the date

of sale of the existing asset. Rather, the project in which the assessee has booked

the flat was neither on the site nor the plan was in existence. The builder in

response to the notice issued under section 133(6) has stated that the site plan of

the said Project was presented before the Government authorities only in the month

8 ITA No. 975/JP/2016 Shri Jagdish Wadhwani, Jaipur.

of October, 2013 and was expected to be approved by the authorities by the month

of May, 2014. The AO has reproduced the letter of the builder in the assessment

order. The builder has also expressed the possibility of refunding of the amount due

to the delay in launching of the Project. It is clear that neither on the date of

payment of advance nor till the expiry of time period prescribed u/s 54 the alleged

asset being residential house was in existence and at the most the assessee

acquired a right to purchase a flat in the upcoming project to be developed in future.

Therefore, it is clear that the said investment made by the assessee was not in

accordance with the scheme of the provisions of section 54 of the Act which is an

incentive provided for acquisition or construction of new residential house for

assessee’s own residential needs. It appears that this investment was not made by

the assessee for acquiring the residential house for the assessee’s own immediate

need and, therefore, the decisions relied upon by the assessee would not help the

case of the assessee once the assessee has clearly failed to satisfy the substantial

and primary condition of acquiring the residential house within the prescribed period

under section 54 of the Act. As regards charging the capital gain in subsequent year

as per the proviso to section 54(2) of the Act, which reads as under :- “Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the 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.”

9 ITA No. 975/JP/2016 Shri Jagdish Wadhwani, Jaipur.

This proviso refers to the situation where the assessee has made a deposit in the

Capital Gain Account Scheme as notified by the Government before the due date of

filing of the return of income under section 139(1) and further if the assessee not

utilized wholly or partly the said amount deposited in the Capital Gain Account for

purchase or construction of new asset within the period specified under section

54(1) of the Act, then the amount not so utilized shall be charged to Capital Gain tax

in the previous year in which the period of 3 years from the date of transfer of

original asset expires. Therefore, once the assessee satisfies the condition of

depositing the amount in the Capital Gain Account Scheme, only then the proviso to

section 54(2) can be pressed into service. In case the assessee has not deposited

the amount in the Capital Gain Account Scheme, then the investment is required to

be made prior to the due date of filing of return under section 139 of the Act.

Hence when the new residential house was neither acquired or constructed within

the time period prescribed under section 54(1) of the Act, then the assessee is not

eligible for deduction under section 54 of the Act and shifting of the assessment year

for making the addition on this account would not achieve any purpose rather it will

defeat the purpose of provisions of section 54 of the Act. The ld. CIT (A) has

decided this issue at pages 5-7 as under :-

“ (iii) I have duly considered the assessment order and the above Circular submitted by the appellant. It may be mentioned that no written submissions were submitted by the appellant during the appellate proceedings. It may be stated that in Circular No. 471, it has been decided by the CBDT that cases of allotment of flats under the self financing scheme of DDA shall be treated as cases of construction

10 ITA No. 975/JP/2016 Shri Jagdish Wadhwani, Jaipur.

for the purpose of capital gains. Therefore, the extended period of three years was made available to the assesses to claim deduction u/s 54 of the Act by treating the allotment of flats by the DDA under self finance scheme at par with the construction of flat. (iv) The appellant claimed deduction u/s 54 of the Act for acquiring a flat at Mumbai and claimed to make payment in the year 2010. However, till 29th January, 2014, even the necessary approval have not been received by M/s. Ornet Spaces Pvt. Ltd. and it was anticipated to be received by May, 2014. Till the date of this order, nothing has been brought on record by the appellant that a flat duly constructed has been allotted to it or possession of the same has been given to it. It may be mentioned that as per provisions of section 54 of the Act, the appellant has either to purchase or construct a residential house property within two or three years, as the case may be, from the date of sale of the subjected property sold by the appellant on 29.09.2010. However, in the instant case under consideration, the appellant has not constructed any property even almost after six years of sale of the subjected property on 29.09.2010. It may be mentioned that in a recent decision in the case of Yashovardhan Sinha vs. ITO (2016) 65 taxmann.com 31 (Patna Trib.) it has been held that where construction of new residential flat was not complete by end of three years from transfer, assessee would not be entitled for deduction u/s 54 of the Act. In the case of Rasiklal M. Pareek vs. ACIT (2012) 28 taxmann.com 195 (Mum Trib.) it was held that allotment of a flat by a builder could not become basis for claim of deduction u/s 54F of the Act. (v) Therefore, in view of the above discussion, it is held that the AO was justified in not allowing deduction u/s 54 of the Act, hence, the action of the AO is hereby upheld.”

11 ITA No. 975/JP/2016 Shri Jagdish Wadhwani, Jaipur.

The facts recorded by the authorities below are not in dispute, therefore, we do not

find any reason to interfere with the orders of the authorities below, qua this issue.

Order is pronounced in the open court on 31/10/2018.

Sd/- Sd/- (foØe flag ;kno) (fot; iky jkWo ½ (VIKRAM SINGH YADAV ) (VIJAY PAL RAO) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member

Jaipur Dated:- 31/10/2018. Das/

आदेश की प्रतिलिपि अग्रेषित@ब्वचल वf जीम वतकमत वितूंतकमक जवरू

सहायक पंजीकार@ Aेेपेजंदज. त्महपेजतंत

12 ITA No. 975/JP/2016 Shri Jagdish Wadhwani, Jaipur.