SRI. RAMAKRISHNA NISHTALA,BANGALORE vs. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE- 7(1)(2), BANGALORE

PER BEENA PILLAI, JUDICIAL MEMBER Present appeal has been filed by assessee against order dated 15/12/2019 passed by the Ld. CIT (A)-7, Bangalore for assessment year 2016-17 on following grounds of appeal: “1. The Order of the Learned Commissioner (Appeals) is not justified in law and on facts and circumstances of the case. 2. The Learned Commissioner (Appeals) is not justified in upholding the action of the Learned Assessing Officer in denying the exemption of capital gains of Rs.59,73,467/- claimed under section 54F of IT Act. 3. The Learned Commissioner (Appeals) has erred in upholding disallowance of exemption under section 54F on the basis that the villa was registered on 21.02.2015 i.e. prior to transfer of original asset i.e.

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13.11.2015 when section 54F does not bar construction within one year prior to date of transfer and when the expenses upto Rs.12,50,000/- were incurred during one year prior to the said date and expenses upto Rs.23,63,380/were incurred after the said date towards furnishing the villa. 4. The Learned Commissioner (Appeals) has erred in placing reliance on the decision of Parswanath Padmarajaiah Jam [20191 102 taxmann.com 92 (Bengaluru), when the facts were different and ignoring the decision of Jurisdictional High Court in CIT vs. K Ramachandra Rao, [2015] 230 Taxman 334 wherein it was held that all investments made in the construction of the residential house within a period of one year prior to sale of original asset are eligible for exemption under Section 54F(1). 5. The Learned Commissioner (Appeals) has failed to appreciate that the registration charges of Rs. 3,12,765/-, stamp duty Rs.17,44,200/-, statutory charges of Rs.3,29,655/- and interior works of Rs. 36,13,380/- form part of purchase cost of new residential house (i.e., Adarsh Palm Retreat Villa) and the Appellant is entitled to claim exemption under section 54F on such investments. 6. The Learned Commissioner (Appeals) having noted the submission and judicial precedents submitted by the Appellant that the registration charges, stamp duty and statutory charges form part of purchase cost of new residential house, has unjustly upheld the disallowance. 7. The Learned Commissioner (Appeals) has erred in denying the exemption on investment made towards interior works by stating that "expenditure on interiors to make the house plush and luxurious which not included in the total cost of the house paid to the builder... ", when no such condition prescribed under section 54F of IT Act. 8. The Learned Commissioner (Appeals) has erred in stating "thus, it is found from above details that the house on completion was in livable condition when it was purchased by the Appellant" without appreciating that amount invested for interior works is essential in order furnish and make the home habitable in the manner considered appropriate by the Appellant. 9. The Learned Commissioner (Appeals) has failed to appreciate that when Appellant has satisfied all the conditions stipulated under section 54F towards the construction of new residential house, the Appellant is duly entitled to claim exemption of Rs. 59,73,467/- under section 54F of IT Act. 10. Without prejudice to the above, the Learned Commissioner (Appeals) having denied the exemption under section 54F on the basis that investment in new residential house is made subsequent to the date of registration, ought to have allowed the exemption on investments made on or before the registration of new residential house.

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Invested(date) Amount 21/Feb/2015-Paid towards registration charges-Refer Pg 2 of Sale 3,12,765 deed 17,44,200 21/Feb/2015-Paid towards stamp duty charges-Refer Pg 8 of Sale deed 1,23,836 28/Jan/2015-Paid to builder-Refer the Statement of Account 04/Mar/2015-Paid to builder-Refer the Statement of Account 1,89,663 04/Mar/2015-Paid to interior works for the house 16,156 Amount paid towards interior works for the house 36,13,380 Total amount for claiming exemption u/s 54F in A.Y 2016-17 60,00,000

2.2 The assessee submitted that he had invested in purchase of new residential house within one year before the date of sale of original asset and satisfies all the criteria of section 54F. The Ld.AO rejected the claim of assessee for following reasons: • that assessee has not paid for purchase of new residential house but it is for registration charges stamp duty charges and interior works; • that assessee has already claimed an amount of Rs.93,18,118/- and Rs.43,43,289/- as exemption under section 54 of the Act during assessment year 2013-14 and 2014-15 respectively, for purchase of the same new property. 2.3 The Ld.AO was of the opinion that assessee has misused provisions under section 54 and 54F of the act and has avoided tax by claim exemption under different sections for different assessment years on different capital gains arisen on sale of different capital assets. He thus denied the exemption of Rs.59,73,467/- claimed by assessee under section 54F of the Act, for year under consideration.

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2.4 Aggrieved by the disallowance made, assessee preferred appeal before the Ld.CIT(A). The Ld.CIT(A) observed that assessee sold residential house on 20/07/2012 and claimed exemption under section 54 for assessment year 2013-14 for investment in purchase/conception of Villa at APR, Bangalore. Ld.CIT(A) was of the opinion that as per provisions of section 54, the construction of the house has to be completed within 3 years after the date of sale of original asset and that in the case of present assessee registration of the house took place after completion of construction on 21/02/2015 which is within 3 years of sale of original capital asset on 20/07/2012. The Ld.CIT(A) held that the assessee has to satisfy one of the following ingredients for claiming benefit under section 54F of the Act: • that the capital asset should be purchased within one year before the sale of long-term capital asset; or • the capital asset should have been acquired within 2 years after the date on which the transfer took place; or • within a period of 3 years after the date of sale of capital asset the assessee had constructed one residential house in India. 2.5 The Ld.CIT(A) was thus of the opinion that assessee sold ESOP shares on 13/11/2015 and for claiming deduction under section 54F, the construction of the house needs to be completed within 3 years after the date of sale of capital asset. The Ld.CIT(A) held that the construction of the house at APR had already completed on 21/02/2015 and therefore assessee was not

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eligible for claiming deduction under section 54F for investing in the villa at APR. The Ld.CIT(A) placed reliance on following to decision: • Decision of coordinate bench of this Tribunal in case of Parswanath Padmarajaiah Jain reported in 102 Taxmann.com 92; • Decision of Hon’ble Supreme Court in case of Commissioner of Customs (Import), Mumbai vs M/s. Dilip Kumar & Co.& Ors. reported in (2018) 9 SCC 1. 2.6 The Ld.CIT(A) also observed that the assessee had incurred expenditure for interior decorator which was for making the house more comfortable. On verification of various invoices filed by the assessee, the Ld.CIT(A) held that expenditure on interiors to make the house plush and luxurious is not included in the total cost of the house paid to the builder and therefore cannot be considered as expenditure necessary to make the house habitable. He thus held that the assessee is not eligible for claiming the payment to interior decorators as investment in the construction of the house for the purpose of deduction under section 54F. 2.7 Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before us now. 2.8 At the outset the Ld.AR submitted that authorities below are not justified in denying exemption on incorrect premises. He submitted that registration charges stamp duty charges and interior works do constitute the cost of new residential house that are entitled for deduction under section 54F.

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2.9 Referring to the provisions of section 54F the Ld.AR submitted that, capital gain arose in the hands of assessee from transfer of long-term capital asset not being a residential house. It was submitted that assessee has within a period of one year before or 2 years after the date on which the transfer took place purchased the new asset. He also submitted that assessee does not own more than one residential house other than the new asset as on the date of transfer of original asset and that assessee has not constructed any other residential house other than the new asset within the period of 3 years after the date of transfer of original asset. 2.10 The Ld.AR submitted that the term “cost” under section 54F includes the cost in relation to the new asset. In the present facts of the case, assessee invested the sale proceeds from ESOP shares towards registration charges, stamp duty charges, interior works. It was submitted that, all these form part of the cost that is incurred out of the capital gains received from transfer of original asset. It has been submitted that all these expenses formed part of the cost of acquisition. The stamp duty charges and the registration expenses incurred forms part of the agreement and therefore it was submitted by the Ld.AR, that the authorities below were right in excluding these expenses as not forming part of cost. 3. On the contrary, the Ld.Sr.DR placed reliance on the decisions referred by the Ld.CIT(A) and observations therein.

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4.2 The Ld.AR has submitted that the sale of ESOP shares was on 13/11/2015 and assessee had invested the capital gain arising out of the sale of shares towards stamp duty & registration + increased the balance CG toward interior works of new residential house within one year before the date of transfer of the original capital asset being the ESOP shares. He submitted that the primary condition for being eligible for deduction under section 54F stands satisfied. 4.3 The Ld.AR placed reliance on the decisions of Hon’ble Karnataka High Court in case of CIT vs K Ramachandra Rao reported in (2015) 230 Taxmann 334. The Hon’ble Court observed and held as under: "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."

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4.4 It is also noted that Hon’ble Karnataka High Court in case of CIT vs Sambandam Udaykumar reported in (2012) 345 ITR 389 observed as under: "11. Section 45 of the Act makes it very clear that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save or otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H is chargeable to income tax under the head 'capital gains' and shall be deemed to be income of the previous year in which the transfer took place. The aforesaid sections which form part of section 54 of the Act are cases where capital gain on transfer of capital asset not to be charged in those cases. Section 54F of the Act is a beneficial provision of promoting the construction of residential house. Therefore, the said provision has to be construed liberally for achieving the purpose for which it was incorporated in the statute. 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'. For such purpose, the capital gain realized should have been invested in a residential house. The condition precedent for claiming benefit under the said provision is the capital gain realized from sale of capital asset should have been parted by the assessee and invested either in purchasing a residential house or in constructing a residential house. If after making the entire payment, merely because a registered sale deed had not been executed and registered in favour of the assessee before the period stipulated, he cannot be denied the benefit of section 54F of the Act. Similarly, if he has invested the money in construction of a residential house, merely because the construction was not complete in all respects and it was not in a fit condition to be occupied within the period stipulated, that would not disentitle the assessee from claiming the benefit under section 54F of the Act. The essence of the said provision is whether the assessee who received capital gains has invested in a residential house. Once it is demonstrated that the consideration received on transfer has been invested either in purchasing a residential house or in construction of a residential house even though the transactions are not complete in all respects and as required under the law, that would not disentitle the assessee from the said benefit."

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4.5 The conditions precedent for exemption of capital gain from being charged to income tax are:

(i)The assessee should have purchased a residential house in India either one year before or two years after the date of transfer of the residential house which resulted in capital gain or alternatively constructed a new residential house in India within a period of three years from the date of the transfer of the residential property which resulted in the capital gain. (ii)If the amount of capital gain is greater than the cost of the residential house so purchased or constructed, the difference between the amount of the capital gain and the cost of the new asset is to be charged under Section 45 as the income of the previous year. (iii)If the amount of the capital gain is equal to or less than the cost of the new residential house, the capital gain shall not be charged under Section 45. 4.6 Hon'ble Karnataka High Court analysed the conditions that needs to be fulfilled to enter exemption clause and thereafter applicability was liberally interpreted. 4.7 Similar is the analysis by Hon'ble Madras High Court in decisions of M/s Moturi Laxmi Vs. ITO in ITA No.181 of 2019 by order dated 17/08/2020. Hon'ble Delhi High Court in case of CIT Vs. Bharti Mishra reported in (2014) 41 taxmann.com 50, decisions of Hon'ble Karnataka High Court in case of CIT Vs J.R Subramnya Bhat reported in (1986) 28 Taxman 578 and CIT Vs. K

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Ramachandra Rao reported in (2015) 56 taxmann.com 163, all principally allowed exemption u/s 54/54F, only on substantial satisfaction of required conditions therein. Hon'ble Karnataka High Court and Hon'ble Madras High Court has widely interpreted the provision, consequent to strict satisfaction of conditions therein. 4.8 It is pertinent to note that, there is no strict requirement regarding completion of construction under section 54F(1) to be entitled for availing exemption. The passport to derive benefit under sec.54F(1) is investment in construction of property within the period required u/s 54(1)F or to invest in residential property within the stipulated time for enabling deduction under section 5 4F of the Act. Hon'ble Karnataka High Court in decision of CIT vs.Sambandam Udaykumar (supra) took the view that, under provisions of section 54F of the Act, the condition preceded is that, capital gains realised from sale of capital asset should have been parted by assessee and invested or constructed a residential house, as the case may be. Hon'ble court also observed that, the essence of the purpose of section 54F, is whether, the assessee who received the capital gain has invested in a house. Once it is demonstrated that the consideration received on transfer of capital asset has been invested in or construction of residential house, even though the construction is not complete in all respect as required under law, assessee cannot be denied benefit under section 54F.

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4.9 We also refer to Full Bench decision of Hon'ble Supreme Court in case of Commissioner of Customs (Import) Vs. M/s Dilip Kumar & Sons & Ors. (Supra). This decision was relied by Ld.CIT(A) to deny exemption claimed by assessee u/s 54F. On careful study of decision by Hon'ble Supeme Court we note that, ratio has been expressly mentioned in para 27 as under: "27. Now coming to the other aspect, as we presently discuss, even with regard to exemption clauses or exemption notifications issued under a taxing statute, this Court in some cases has taken the view that the ambiguity in an exemption notification should be construed in favour of the subject. In subsequent cases, this Court diluted the principle saying that mandatory requirements of exemption clause should be interpreted strictly and the directory conditions of such exemption notification can be condoned if there is sufficient compliance with the main requirements. This, however, did not in any manner tinker with the view that an ambiguous exemption clause should be interpreted favouring the revenue. Here again this Court applied different tests when considering the ambiguity of the exemption notification which requires strict construction and after doing so at the stage of applying the notification, it came to the conclusion that one has to consider liberally." 4.10 Hon'ble Court on considering catena of decisions observed as under:- "46.The above decision, which is also a decision of two Judge Bench of this Court, for the first time took a view that liberal and strict construction of exemption provisions are to be invoked at different stages of interpreting it. The question whether a subject falls in the or in the exemption clause, has to be strictly construed. When once the ambiguity or doubt is resolved by interpreting the applicability of exemption clause strictly, the Court may construe the notification by giving full play bestowing wider and liberal construction. The ratio of Parle Exports Case (supra) deduced as follows: "Do not extend or widen the ambit at stage of applicability. But once that hurdle is crossed, construe it liberally". 47. We do not find any strong and compelling reasons to differ, taking a contra view, from this. We respectfully record our concurrence to this view which has been subsequently, elaborated by the Constitution Bench in Hari Chand Case(supra).

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4.11 Hon'ble Court summarised their observation as under:- "52.To sum up, we answer the reference holding as under: 1) Exemption notification should be interpreted strictly; the burden of Proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification. (2) When there is ambiguity in exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be cannot be claimed by the subject/assessee and it must be interpreted infavour of the revenue. (3) The ratio in Sun Export case (supra) is notcorrect and all the decisions which took similar view as in Sun Export Case (supra) stands over- ruled.

4.12 Hon'ble Court first analysed the conditions that assessee fulfilled to enter exemption clause and thereafter applicability was liberally interpreted. From the above discussion, it is clear that pre condition to be eligible for claiming exemption under section 54 F is substantial satisfaction of the following: “That, capital gains realised from sale of capital asset should have been parted by assessee and invested or constructed a residential house, as the case may be.” 4.13 In present facts admitedly assessee substantially fulfilled all necessary conditions to be entitled for liberal interpretation of sec.54F. In our view, F.B decision relied by Ld.Sr.DR and Ld.CIT(A) of Hon'ble Supreme Court in case of M/s Dilip Kumar (Supra) needs to be applied after analysing the facts in each case. In our opinion, in present facts decision by Hon'ble Supreme Court support the case of assessee.

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4.14 Respectfully applying ration of Hon'ble Karnataka High Court in case of CIT Vs. Sambandam (Supra), we hold that assesse is eligible during the year under consideration. However, the amount said to have been spent on interior decoration can’t be granted since it is not for the purpose of making the house into habitats condition. This view of ours is supported by the decision of ITAT Mumbain Bench in the case of Salin Facelbholy Vs. DCIT reported in 106 ITD 167. 4.15 The Ld.AO is directed to compute the proportionate deduction as follows :- LTCG x Amount spent for Registration & Stamp Duty --------------------------------------------------------------- Net Consideration Accordingly the grounds raised by assessee stands partly allowed. In the result appeal filed by assessee stands partly allowed. Order pronounced in the open court on 30th Sept, 2021

Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member

Bangalore, Dated, the 30th Sept, 2021.

/Vms/

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Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore 6. Guard file By order

Assistant Registrar, ITAT, Bangalore