NITIN BHATIA,HYDERABAD vs. ITO., WARD-12(1), HYDERABAD

Aggrieved with the order of the Ld. AO, the assessee filed appeal before the Ld. CIT (A). The Ld. CIT (A) dismissed the appeal of the assessee and upheld the addition made by the Ld. AO.

Aggrieved with the order of the Ld. CIT (A), the assessee is in appeal before the Tribunal. At the outset, the Learned Authorised Representative (“Ld. AR”) submitted that the solitary issue out of the grounds of appeal of the assessee is towards the rejection of deduction under section 54 of the Act amounting to Rs.22,51,617/-. The Ld. AR further submitted that the assessee had entered into an Agreement of Sale dated 02.03.2018 with M/s Sri Aditya Vamsiram Homes LLP for purchase of a new residential house for a total consideration of Rs.4,44,00,000/-. The Ld. AR also submitted that the assessee had made payments aggregating to Rs.44,40,000/- towards the new residential house up to the due date of filing the return under section 139(1) of the Act and that the balance amount was subsequently paid through housing loan and own funds. The registered sale deed was executed on 24.10.2019, i.e., well within two years from the date of transfer of the original residential house. The Ld. AR vehemently contended that as the assessee invested more than the amount of capital gain in purchase of the Page 4 of 10 new residential property within two years from the date of transfer of the original residential house, the substantive condition under section 54(1) of the Act stood fully complied with and that the denial of deduction of Rs. 22,51,617/- was solely on account of non-deposit of the unutilized amount in CGAS as contemplated under section 54(2) of the Act. The Ld. AR submitted that section 54(2) of the Act is only procedural and directory in nature and cannot override the substantive provision contained in section 54(1). In support, reliance was placed on the judgment of the Hon’ble Madras High Court in the case of Venkata Dilip Kumar v. CIT (2021) 419 ITR 298 (Mad.), wherein in para nos. 14 to 17, the Hon’ble High Court has clearly held that section 54(2) of the Act cannot be read in isolation and that once the assessee satisfies the requirement of section 54(1) of the Act, the benefit cannot be denied for mere procedural non-compliance under section 54(2) of the Act. It was further submitted that the legislative intent behind section 54 of the Act is to promote housing and alleviate genuine hardship, and therefore a liberal interpretation consistent with the object of the provision should be adopted. Accordingly, the Ld. AR prayed for allowing the appeal and directing the Ld. AO to grant full deduction of Rs.66,91,617/- under section 54 of the Act.

We have carefully considered the rival submissions and perused the material available on record, including the judicial precedents relied upon. In the present case, the assessee sold the original residential house on 14.12.2017, resulting in long-term capital gains of Rs.66,91,617/-. The assessee thereafter purchased a new residential house for a total consideration of Rs.4,44,00,000/- by a registered sale deed dated 24.10.2019, which is within two years from the date of transfer of the original residential house. Out of the total consideration of Rs.4,44,00,000/-, the assessee had made payments aggregating to Rs.44,40,000/- up to the due date of filing of the return of income under section 139(1) of the Act. The Ld. AO allowed deduction under section 54 of the Act only to the extent of Rs.44,40,000/-, being the amount invested up to the due date of filing the return under section 139(1) of the Act, and disallowed the balance

At this juncture, the Division Bench decision of the Karnataka High Court made in of 2014 in the case of K. Ramachandra Rao (supra) is relevant to be quoted, wherein while considering the scope of Section 54F(1) to 54F(4) of the Income Tax Act, it has been observed as follows: "If the intention is not to retain cash but to invest in construction or any purchase of the property and if such investment is made within the period stipulated therein, then Section 54F(4) is not at all attracted and therefore, the contention that the assessee has not deposited the amount in the Bank account as stipulated and therefore, he is not entitled to the benefit even though he has invested the money in construction is also not correct."

Learned counsel for the Revenue relied on the decision of the Supreme Court Dilip Kumar and Co. (supra) in support of her contention that exemption notification should be interpreted strictly and the burden of proof of its applicability would be on the assessee. I have already pointed out that the assessee, in this case, has claimed that it has utilised the disputed sum towards the cost of the additional construction within the period of three years from the date of the transfer and therefore, if such contention is factually correct, it is to be held that the assessee has satisfied the mandatory requirement under Section 54(1) to get deduction. Therefore, I find that the above decision relied on by the Revenue is not helping the case of the respondents under the facts and circumstances of the present case.

The claim of the assessee for deduction of the disputed sum towards the additional construction cost was rejected only on the ground that the said sum was not deposited in the capital gain account. In view of my findings rendered supra, the Revenue is not justified in making such objection. On the other hand, it has to verify as to whether the said sum was utilised by the petitioner within the time stipulated under Section 54(1) for the purpose of construction. If it is found that such utilisation was made within such time, the Revenue is bound to grant deduction. Therefore, this Court is of the view that the matter needs to go back to the first respondent for considering the issue as to whether the disputed amount, claimed by the assessee as deduction, has been utilised by the petitioner towards the additional construction within the time limit prescribing under Section 54(1) and thereafter, to pass fresh order accordingly in the Page 8 of 10

On perusal of above, we find that the Hon’ble High Court has elaborately examined the interplay between sections 54(1) and 54(2) of the Act and has held that section 54(2) of the Act cannot be read independently or in isolation. The Hon’ble High Court has categorically held that section 54(2) of the Act comes into operation only when the assessee fails to comply with the substantive requirement under section 54(1) of the Act. The Hon’ble High Court further held that compliance with section 54(1) of the Act is mandatory and substantive, whereas the conditions under section 54(2) of the Act are procedural and directory in nature. Once the assessee has invested the capital gain in a new residential house within the period stipulated under section 54(1) of the Act, the benefit of deduction cannot be denied merely for non-compliance with section 54(2) of the Act. In the present case, the assessee has purchased of the new residential house within two years from the date of transfer of the original residential house. Thus, the substantive requirement of section 54(1) of the Act stands fully satisfied. Therefore, respectfully following the binding decision of the Hon’ble Madras High Court in the case of Venkata Dilip Kumar v. CIT (supra), we hold that the assessee is entitled to deduction under section 54 of the Act for the entire amount of Rs.66,91,617/-. Accordingly, the addition of Page 9 of 10 Rs.22,51,617/- made by the Ld. AO and sustained by the Ld. CIT(A) is directed to be deleted.