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Facts
The assessee claimed exemption under Section 54F for capital gains by investing in a new house. The Assessing Officer (AO) disallowed a portion of the exemption because the construction of the new house commenced before the sale of the original asset. The assessee filed a Cross-Objection challenging the AO's disallowance and the CIT(A)'s direction for further verification.
Held
The Tribunal held that commencing construction before the sale of the original asset does not disentitle the assessee to exemption under Section 54F. Relying on judicial precedents, it was decided that timely completion of the new house is the key factor. The AO's disallowance was deemed incorrect, and the directions for verification were partially modified.
Key Issues
Whether construction of a new house commencing before the transfer of the original asset disqualifies for exemption under Section 54F of the Income Tax Act, and if the directions for verification of completion date by the AO were appropriate.
Sections Cited
54F, 147, 148, 143(3), 45
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Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & SHRI S.R.RAGHUNATHA
आदेश / O R D E R
PER ABY T. VARKEY, JM:
1. This is an appeal preferred by the Revenue and Cross-Objection filed by the assessee are against the order of the Learned Commissioner of Income Tax (Appeals)/NFAC, (hereinafter referred to as “the Ld.CIT(A)”), Delhi, dated 09.02.2024 for the Assessment Year (hereinafter referred to as "AY”) 2020-21.
At the outset, the Ld.DR submitted that there is a delay of ‘126’ days in filing of this appeal; and explained the reason for cause of delay.
Having gone through the facts which led to the delay, we find that there was sufficient cause for the cause of delay; and hence, we condone the delay of ‘126’ days and proceed to adjudicate the appeal on merits.
At the outset, the Ld.AR of the assessee brought to our notice that the Revenue appeal is hit by tax effect as per CBDT Circular No.9/2024 dated 17.09.2024 which prescribed the tax effect of Rs.60 lakhs as the threshold limit to file appeal before the Tribunal and the said Circular directed the Revenue not to file the appeals before this Tribunal, if the tax effect is less than Rs.60 lakhs; and in this case a perusal of Form 36 filed by the Revenue shows tax effect as only Rs.55,98,635/- which is less than Rs.60 lakhs, and therefore, the Revenue’s appeal is found to be hit by the aforesaid CBDT Circular and therefore, it is held to be non- maintainable and so, we dismiss the appeal preferred by the department.
Having said so, it is noted that the assessee has preferred a Cross- Objection against the directions given by the Ld.CIT(A) while allowing grounds of appeal preferred before him. Now, we will examine it.
5. The brief facts in respect of the Cross-Objection preferred by assessee are that the assessee is an individual who earns income under the head ‘salaries, interest & capital gains’ and is noted to be the Director of a company named M/s.Shiloh Industries Pvt. Ltd., and in the year under consideration, he filed his return of income (RoI) on 09.01.2021 for AY 2020-21 declaring total income at Rs.9,33,04,960/-. During the scrutiny proceedings, assessee was asked about the claim of exemption in the RoI, i.e. assessee has earned Long Term Capital Gains (LTCG) of Rs.4,45,32,798/- and has claimed exemption of Rs.3,93,40,633/- u/s.54F of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act‘). The AO during the scrutiny proceedings asked the assessee to file the supporting documents for making claim u/s.54F of the Act and noted that the assessee has utilized Rs.2,63,82,379/- out of the total exemption to construct a house (new asset) which event, precede the date of transfer of original asset, which gave rise to capital gains which action of the assessee, the AO found fault with. According to the AO, in order to take advantage of exemption u/s.54F of the Act, the assessee ought to have constructed new house only after selling the original property; and therefore, after noticing from the invoices of expenditure produced to the tune of Rs.4,52,97,679/-, expenditure amounting to Rs.2,63,82,379/- [Rs.1,79,65,500/- plus Rs.84,16,879/-] was noted to have been incurred before the date of transfer of original asset [i.e. transfer of shares had taken on 02.04.2019]. Hence, the AO disallowed Rs.2,63,82,379/- as not allowable application of expenditure on account of construction of house property as per section 54F of the Act. Further, the AO noted that the assessee had claimed to have made expenditure to architect of Rs.33,80,800/- for building of the house in question. However, since he submitted proof of payment of only Rs.17,70,000/-, he disallowed balance amount of Rs.16,10,800/-. Thus, the AO disallowed Rs.2,79,93,179/- u/s.54F of the Act [Rs.2,63,82,379/- plus Rs.16,10,800/-].
6. Aggrieved, the assessee preferred an appeal before the Ld.CIT(A) who appreciated the contentions of the assessee that even though the date of transfer of original asset (unlisted shares of M/s.Shiloh Industries Pvt. Ltd.) which gave rise to capital gains was on 02.04.2019 [AY 2020- 21], he had already started construction on 14.02.2019 [i.e. two months before the transfer] and made payments to the builder on 14.02.2019 to the tune of Rs.84,16,879/- and made another payment on 13.03.2019 to the tune of Rs.1,79,65,500/- [total amount of Rs.2,63,82,379/-] the same couldn’t have been disallowed on the ground that assessee had started construction two months before the date of transfer of original asset, by relying on various High Court decisions including the jurisdictional Hon’ble Madras High Court in the case of C. Aryama Sundaram v. CIT reported in [2018] 407 ITR 01 (Mad) by observing as under:
5.5 It is not dispute that the appellant spent Rs. 2,63,82,379/- to construct a new building before transferring the property that led to the capital gain. The issue that needs to be addressed is whether the amount spent on construction of new building that occurred prior to transfer of the old building is eligible for exemption under section 54F of the Act. The assessee is required to construct a residential house within three years of the sale of original asset to claim exemption, which is a condition of section 54F of the Act. The section does not specify if the exemption is applicable when a residential house construction starts before the old asset is transferred. Therefore, to determine the issue at hand, it is necessary to rely on the Hon'ble High Courts' interpretation of Section 54F of the Act.
6.1 The Hon'ble Delhi High court in the case of held as follows when considering the question whether the assessee could be denied the benefit under section 54F of the Act simply because he started building a new house before the sale of old one.
"5 Thus, the only issue which is raised and has to be examined whether the responded assessee can be denied the benefit of section 54F because construction of the house had commenced before sale of the shares i.e. on 17 th September, 2008.
Commissioner (Appeals) and the tribunal have relied upon decisions of Allahabad High Court and Karnataka High Court in CIT v H. K. Kapoor (1998) 234 ITR 753(All) and CIT v JR Subramaya Bhat (1987) 165 ITR 571/(1986) 28 Taxman 578(Kar). These two cases deal with interpretation of section 54 of the Act. The said section is pari materia in section 54F. The only distinction being that section 54 applies to investment in a new house where the original asset sold was/is residential property and provision of section 54F were/are applicable to all other assets, not being a residential house.
In JR Subramaya Bhat (supra), Karnataka High Court noticed language section 54 which stipulated that the assessee should within one year from the date of transfer purchase, or within a period of two years thereafter, construct a residential house to avail of concession under the said section. The contention of the revenue that construction of the new building had commenced earlier to the sale of the original asset, it was observed, cannot bar or prevent from taking benefit of Section 54. It was immaterial when the construction commenced, the sole and important consideration as per the Section was that construction should be completed within specified period"
6.2 The Hon'ble Madras High Court, which is the jurisdictional High Court in the appellant's case examined the similar matter in the case of C. Aryama Sundaram vs. CIT examined the similar issue, albeit with regards to section 54 of the Act. The Hon'ble Court observed the following:
"23. At the cost of repetition, it is reiterated that exemption of capital gain from being charged to income tax as income of previous year is attracted when another residential house has been purchased within a period of one year before or two years after the date of transfer or has been constructed within a period of three years after the date of transfer of the residential house. It is not in dispute that the new residential house has been constructed within the time stipulated in Section 54 (1) of the said Act. It is not prerequisite of section 54 construction could not have commenced prior to the date of the transfer of the asset resulting in capital gain. If the amount of capital gain is greater than the cost of new house the difference between the amount of capital gain and the cost of new asset is to be charged under Section 45 as the income of the previous year. If the amount of capital gain is equal to or less than the cost of new residential house, including land on which the residential house is constructed, capital gain not be charged".
6.3 Furthermore, the Hon'ble Kerala High Court in the B. Premanandh vs. CIT (2022) 144 taxman.com 194(Ker) held that completion of new residential house within the time specified in section 54 F is the determine factor for eligibility of exemption under that section when the exemption is claimed for construction of new residential house.
We note that the Ld.CIT(A) has rightly considered the aforesaid judicial precedents and especially the Hon’ble Madras High Court in the case of C. Aryama Sundaram v. CIT (supra) and didn’t find any flaw in assessee commencing construction of new residential house before sale of shares and is noted to have in principle upheld the claim made u/s.54F of the Act. Hence, we don’t find any infirmity in the action of the Ld.CIT(A), so it is upheld.
The only grievance of the assessee raised in the Cross-Objection is that after having held that the assessee is eligible for claiming deduction u/s.54F of the Act even in respect of amount spent of Rs.2,63,82,379/- in the construction of house, the Ld.CIT(A) directed the AO to examine as to whether the assessee has completed the new residential house within three years. According to the Ld.AR, such a direction of the Ld.CIT(A) to verify and thereafter allow the claim couldn’t have been passed since it was not the AO’s case that the assessee has not completed the new asset within three (3) years. Instead, the AO found fault with the assessee advancing Rs.2.63 Crs. before sale of original asset/shares. Therefore, such a direction to verify whether house was completed within three (3) years was not warranted. In this regard, Ld.AR also brought to our notice that while giving effect to the impugned order passed by the Ld.CIT(A), the AO refused to verify the same citing that he has no power to call for any such records/documents since no proceedings are pending before him and therefore, he reiterated his disallowance made as per the assessment order dated 22.09.2022. Thus, according to the Ld.AR, even though the Ld.CIT(A) has appreciated the grounds raised by the assessee and found that the AO erred in disallowing the claim u/s.54F of the Act to the tune of Rs.2,63,82,379/- only because the assessee commenced the construction of the new asset two months before the date of transfer of original asset which event gave rise to capital gains, still the assessee didn’t get any relief, while the AO gave effect to the impugned order, because of the impugned directions given by the Ld.CIT(A) to the AO to verify the date of completion of construction of new asset and then to pass orders.
Aggrieved by the directions given by the Ld.CIT(A) (supra), the assessee is before us.
Having heard both parties, we note that the assessee had sold unlisted 7143 shares of M/s.Shiloh Industries Pvt. Ltd., on 02.04.2019 during AY 2020-21, from which, assessee declared LTCG of Rs.4,45,32,798/- and claimed exemption of Rs.3,93,40,633/- u/s.54F of the Act. Out of such claim, the AO disallowed Rs.2,63,82,379/- only because assessee had commenced construction of new asset two months before the date of transfer of shares. In this regard, it is noted that the assessee had commenced making payment to the builder two months prior to the transfer of shares on 02.04.2019 by making payment of Rs.84,16,879/- on 14.02.2019 and Rs.1,79,65,500/- on 13.03.2019, [total amount of Rs.2,63,82,379/-] which was disallowed only because the assessee commenced making payment before the date of transfer of original asset/shares which gave rise to capital gains i.e. 02.04.2019.
Such an action as we have found supra has been rightly reversed by the Ld.CIT(A) in the light of the judicial precedents especially the decision of the Hon’ble Madras High Court in the case of C. Aryama Sundaram (supra). Therefore, we concur with the findings of the Ld.CIT(A) that the AO erred in disallowing Rs.2,63,82,379/- only on the sole reason that assessee commenced construction before transfer of original asset.
Now the only question which remains to be answered is whether the directions given by the Ld.CIT(A) to the AO to verify as to whether the assessee has completed the construction of new asset within three (3) years of transfer of shares. We find in the facts and circumstances of the case that the assessee has brought to our notice that re-investment made by the assessee for construction of the new asset as under:
Sl.No. Date Bill No. Supplier Amount 1 25.02.2020 82 Raasi Builders 30,34,500 2 14.02.2019 51 Raasi Builders 84,16,879 3 20.03.2020 87 Raasi Builders 25,00,000 4 13.03.2018 87 Raasi Builders 1,79,85,500 5 20.05.2019 NA KK Impex 1,00,00,000 6 NA NA Architect fees 33,50,500 and other site expenses Total 4,52,97,879
According to the assessee, he has already made investment of more than Rs.4.52 Crs. in construction of new asset (supra) and claimed only Rs.3,93,40,633/- as deduction u/s.54F of the Act. It was brought to our notice that the assessee had made the aforesaid investment before 25.02.2020 and had made the payment of Rs.4.52 Crs. to the builder by the said date and thus, according to the assessee, the requirement of law u/s.54F of the Act was substantially complied with by way of re- investment in the new asset consequent to the sale of original asset/shares. Thus, according to the assessee, he fulfilled substantially the requirement of section 54F of the Act by making reinvestment of the amount/gain received from transfer of original asset, which can be noticed from the fact that the last payment made by assessee to builder was on 20.03.2020; and thereafter, within ten (10) days, India was in the grip of Covid-19 pandemic. And the labours who came from north India moved out of the labour camps and returned only after a year and half; therefore, the completion of the project/building got obviously delayed and for that the assessee can’t be blamed for the delay even if caused for completing construction of the building. In this regard, we note that the assessee has made substantial payment to the builder by 25.02.2020 to the builder for construction of building and three years would be over by February, 2022; In this regard, it was brought to our notice that building at Plot No.34/35, 4th Street, VGP Layout, Rajarathinam Avenue, Injambakkam, Chennai-600 115 (new asset constructed by assessee)
received notice from Greater Chennai Corporation on 18.03.2022 to pay building tax of Rs.22,445/- (refer Page No.2 of Paper Book) (meaning the building was completed by that date) and the delay caused was because of spread of Covid-19, which event we take judicial notice that Covid-19 pandemic spreading was from 20.03.2020 onwards which disrupted the construction activities and therefore, there was a delay in completion of the building, for which, the assessee can’t be faulted. In this regard, the architect has given completion certificate as on 28.11.2023 (refer Page No.3 of Paper Book) and finally the builder handed over constructed new asset to the assessee on 08.01.2024, the delay need to be attributed due to disruption in construction activities for more than a year and half and therefore, assessee can’t be denied the benefit of exemption u/s.54F of the Act in the peculiar facts and circumstances of the case and we order accordingly. For that we rely on the Hon’ble Supreme Court in Miscellaneous Petition No.21 of 2022 in Suo Motu Writ Petition (C) No.3 of 2020 which extended the period of limitation to file appeals etc during Covid-19 period from March 2020 to February 2022. In the peculiar facts of the case, the AO to grant the claim of deduction u/s.54F of the Act to the assessee to the tune of Rs.2,63,82,379/-, especially because assessee has made reinvestment to builder by making payment of Rs 4.52 cr by 25.02.2020 and that assessee cannot be faulted for the delay in completion of house due to Covid; and coming to disallowance of Rs.16,10,800/-, we are of the view that in case if the assessee is able to produce evidence before JAO, in respect of the expenses claimed for payment made to the architect of Rs.16,10,800/-, the same may be allowed to the assessee.
In the result, appeal filed by the Revenue is dismissed and Cross- Objection filed by the assessee is allowed.
Order pronounced on the 18th day of June, 2025, in Chennai.