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Income Tax Appellate Tribunal, MUMBAI BENCHES “A”, MUMBAI
Before: SHRI SHAMIM YAHYA (AM) & SHRI RAM LAL NEGI (JM)
O R D E R
PER RAM LAL NEGI, JM
The assessee has filed the present appeal against the order dated 28.07.2016 passed by the Commissioner of Income Tax (Appeals)-29 (for short ‘the CIT(A), Mumbai, for the assessment year 2012-13, whereby the Ld. CIT(A) has partly allowed the appeal filed by the assessee against the assessment order passed u/s 143 (3) of the Income Tax Act, 1961 (for short the ‘Act’).
The brief facts of the case are that the assessee filed its return of income for the assessment year under consideration declaring the total income of Rs. 29,10,957/-. Since, the case was selected for scrutiny, the AO issued notice u/s 143 (2) and 142 (1) of the Act. In response to the said notices, the authorized representative of the assessee appeared before the AO and submitted the details and explanations. Since, the assessee had shown long Assessment Year: 2012-13 term capital gain of Rs. 19,39,554/- on sale of immovable property and claimed deduction u/s 54F of the Act, the AO asked the AR to furnish the details regarding the transaction. In response thereof the AR submitted that the assessee was having 50% share in a plot measuring 3589.40 square meters in Devchand Nagar Bhayendar (West), Thane, he sold the plot to SDC Developers and in lieu of the same the assessee agreed to receive two residential flats with inter connected stair case and Rs. 25,00,000/- in cash. The cash of Rs. 25,00,000/-was received by the assessee, however, the possession of flat was to be handed over by the developer within three years in terms of the Deed of Development executed between the parties. For calculating the capital gain the assessee took the stamp duty valuation rate as the full value of consideration received which is Rs. 1,34,23,565/- i.e. 50% of the total consideration. The assessee reduced the cost of acquisition and computed the capital gain of Rs. 1,04,14,291/- out of which he claimed deduction of Rs. 84,74,737/- u/s 54F and declared the taxable capital gain of Rs. 19,39,554/-
Since, two flats with a built up area of 1917 Sq. ft., were to be transferred by the developer, the AO computed the value of flat at Rs. 59,12,754/- adopting the value per meter @ 33,200. The appellant had also received Rs. 25,00,000/- in cash and two parking spaces value of which was adopted by the AO at Rs. 2,00,000/-. Accordingly, the AO computed the sale consideration received by the assessee at Rs. 86,12,754/. Since, the stamp duty value of the plot of land was Rs. 1,34,23,565/- the AO added the difference of Rs. 48,10,811/- u/s 50C of the Act. The AO also made disallowance of Rs. 46,27,884/- claimed by the assessee u/s 54F after deducting cost of acquisition and cost of improvement from the total sale consideration. Accordingly, the AO determined the total income of the assessee at Rs. 1,24,71,730/-. The assessee challenged the assessment order before the Ld. CIT (A). The Ld. CIT (A) after hearing the assessee partly allowed the appeal Assessment Year: 2012-13 and deleted the addition made u/s 50C, however, made disallowance of deduction claimed u/s 54F of the Act. The assessee is in appeal against the said findings of the Ld. CIT (A).
The assessee has challenged the impugned order passed by the Ld. CIT (A) on the following effective grounds:-
1. 1. In not taxing the appellant based on the capital gains returned by him.
2. In denying the appellant any relief u/s 54F including the relief that was accorded by the AO herself in the assessment.
3. In denying the appellant a deduction u/s 54F only because the residential house was not completed and handed over within 3 years, notwithstanding that there was nothing more pending from the appellant and that the agreement provided for construction to be handed over within 3 years.
4. In holding that he appellant had not given peaceful possession of the land in which case the capital gains from sale of land would then not even be taxable.
5. In not appreciating that the appellant had given development rights and the same agreement provided fro the receipt of an identified residential flat in return and that hence that there was nothing that was within the appellant’s control so as to deny him a deduction u/s 54F 6. In making various presumptions about the reasons for the delay in completion of the project which were not relevant to determine the deduction.
7. In not adjudicating that if a deduction u/s 54F is available, the cost of the new asset purchased can only be the value of the asset ceded (as adjusted only for the Rs. 25,00,000 received in money) and that the value of the new asset purchased cannot be imputed in any other manner.
8. In not adjudicating that when a deduction u/s 54F is computed it must be based on computed taxable capital gains.” Assessment Year: 2012-13
9. The grounds raised above contain certain alternate pleas which are without prejudice to each other.”
The Ld. counsel for the assessee submitted that the Ld. CIT (A) has wrongly held that the assessee is not entitled for benefit u/s 54F of the Act on the ground that the residential house was not completed within three years. Further, the Ld. CIT (A) has wrongly held that the assessee had not handed over peaceful possession of land, contrary to the fact that the appellant had given development rights and the same and the developer agreed to give identified residential flats in return. The Ld. counsel pointed out that the assessee sold his share in plot measuring 3589.40 square meters in Devchand Nagar Bhayendar (West), Thane, to SDC Developers and received two residential flat with inter connected staircase and claimed deduction u/s 54F amounting to Rs. 84,74,736/-. The assessee being shareholder of the property sold his rights in the said land by entering into a development agreement. The gain of transfer of land has been offered to tax. The development agreement was executed on 23.05.2012 and the value of the plot was taken at Rs. 2,68,47,129/- for the purpose of stamp duty. As per the agreement, two residential flats were to be given against the said property. The value of the property mentioned in the development agreement at Rs. 2,68,47,129/- is taken as sale consideration u/s 50C. Since, the declared proceeds stands deemed re-invested on the residential property the assessee claimed deduction of Rs. 84,74,736/- u/s 54F of the Act. However, the AO allowed the deduction to the extent of Rs. 38,46,852/- and added the remaining amount to the income of the assessee.
In the first appeal, the Ld. CIT (A) held that since the assessee had not taken possession of the residential property within three years he is not entitled for deduction u/s 54F. Accordingly, the Ld. CIT (A) issued notice u/s 251 (2) of the Act directing the assessee to show cause as to why enhancement should not be made and without appreciating the contention of the assessee Assessment Year: 2012-13 made disallowance of the total amount claimed by the assessee. The Ld. counsel submitted that the assessee sold his share in the plot to SDC Developers and in lieu of the same SDC Developers agreed to transfer two residential flat in inter connected staircase and Rs. 25,00,000/- in cash. Hence, the agreement executed is sale agreement as well as agreement for acquisition of two flats. The assessee was not required to pay anything towards the cost of new flats. Therefore, in terms of the agreement, since the assessee had discharged his duty and technically became the owner of flat no. 1501 and 1601. Further, the developer had agreed to handover the possession within three years. The reason for delay in completing the construction is not attributable to the assessee. The Ld. counsel further contended that since the assessee had done, what was required to be done for acquiring new asset and the delay in getting possession was due to the circumstances beyond his control, the assessee is entitled for deduction u/s 54F of the Act. The Ld. counsel relied on the decision of the Hon’ble Karnataka High Court in the case of Sambandam Uday Kumar 257 CTR 317, decision of ITAT Mumbai in Hasmukh G Gala vs. ITO (2015) 44 CCH, (Mumbai Trib.), decision of ITAT, Hyderabad in Narsimha Raju Rudra 143 ITD 586 (Hyderabad Trib) and the decision of ITAT, Bangalore in the case of BS Shantakumari 62 SOT 53 (Bangalore Trib).
On the other hand, the Ld. Departmental Representative (DR) relying on the decision of the Ld. CIT (A) submitted that since the assessee has failed to construct/obtain possession of constructed property within three years from the date of transfer of the old property, the Ld. CIT (A) has rightly held that the assessee is not entitled for deduction u/s 54F of the Act. The Ld. counsel further pointed out that the findings of the Ld.CIT (A) are based on the decision of the ITAT, Mumbai in the case of Rashilal N Parikh vs. ACIT, upheld by the Hon’ble Bombay High Court, there is no merit in the appeal of the assessee. Assessment Year: 2012-13
We have heard the rival submissions of the parties and carefully gone through the entire material on record in the light of the rival contentions. The only grievance of the assessee is that the Ld.CIT (A) has wrongly denied the benefit of section 54F of the Act. We notice that the Ld. CIT (A) has disallowed the claim of the assessee u/s 54F of the Act holding that the assessee has not received any constructed house within the prescribed period and there is no merit in the contention of the assessee’s that since the delay is attributable to the builder, he is entitled for the deduction u/s 54F of the Act. The Ld. CIT (A) further held that to claim deduction u/s 54F, the assessee should have constructed/received possession of constructed properties within three years from the date of transfer and in this case, before 23.05.2015. However, the construction had not even started by that date. As pointed out by the Ld. counsel for the assessee, the ITAT Mumbai has dealt with the similar issue in the case of Hasmukh G. Gala. The coordinate Bench has decided the similar issue in favour of the assessee holding as under:-
“7. We have carefully considered the rival submissions. The crux of the controversy before us relates to the understanding of the expression ‘purchase’ contained in section 54 of the Act. Notably, an assessee is entitled to the benefits of section 54 of the Act, if he has purchased the new property within a period of one year before the date of transfer of the old property or within two years from the date on which the transfer of old property took-place. The exemption under section 54 of the Act is also allowed in a situation where a new residential house is constructed within three years from the date of transfer of the old property. In the present case, the appellant has sold the old property on 8/12/2009 and according to the Assessing Officer, assessee was required to purchase the new property within a period of one year before 8/12/2009 or within two years from such date, which the assessee was found not to have complied with. The Assessing Officer also noted that assessee had not constructed a new residential house within a period of three years from 8/12/2009. On the other hand, the claim of the assessee is that Assessment Year: 2012-13 it has fulfilled the requirements of section 54 of the Act because he has paid Rs.1.00 crore to the builder for acquisition of flat and the builder has issued an allotment letter in respect of the specific Flat being, Flat Nos. 1 & 2 on 4th Floor in C-Wing, Ramniwas Building, Malad (E).
7.1 The controversy is as to whether under these facts assessee can be said to have purchased the new property so as to entitle him for exemption in relation to the amount spent towards the new property under section 54 of the Act. It is not disputed by the Revenue that the sum of Rs.1.00 crore has been invested by theassessee towards acquiring new property. Of course, the legal title in the said property has not passed or transferred to the assessee within the specified period and it is also quite apparent that the new property was still under construction. So however, the allotment letter by the builder mentions the flat number and gives specific details of the property. 7.2 In this context, the Hon’ble Delhi High Court in the case of Kuldeep Singh (supra) has explained the meaning of the expression ‘ purchased’ in the context of section 54 of the Act in following words:- “8.The word 'purchase' can be given both restrictive and wider meaning. A restrictive meaning would mean transactions by which legal title is finally transferred, like execution of the sale deed or any other document of title. 'Purchase' can also refer to payment of consideration or part consideration alongwith transfer of possession under Section 53A of the Transfer of Property Act, 1882. Supreme Court way back in 1979 in CIT v. T.N Aravinda Reddy [1979] 120 ITR 46/2 Taxman 541, however, gave it a wider meaning and it was held that the payment made for execution of release deed by the brother thereby joint ownership became separate ownership for price paid would be covered by the word 'purchase'. It was observed that the word 'purchase' used in Section 54 of the Act should be interpreted pragmatically. In a practical manner and legalism shall not be allowed to play and create confusion or linguistic distortion. The argument that ‘purchase’ primarily meant acquisition for money paid and not adjustment, was rejected observing that it need not be restricted to conveyance of Assessment Year: 2012-13 land for a price consisting wholly or partly of money’s worth. The word 'purchase', it was observed was of a plural semantic shades and would include buying for a price or equivalent of price by payment of kind or adjustment of old debt or other monetary considerations. It was observed that if you sell a house and make profit, pay Caesar (State) but if you buy a house or build another and thereby satisfy the conditions of Section 54, you were exempt. The purpose was plain; the symmetry was simple; the language was plain.
9. Recently Supreme Court in Civil Appeal Nos. 5899- 5900/2014 titled Sanjeev Lal v. CIT [2014] 46 taxmann.com 300 again examined Section 54 in a case where the assessee had entered into an agreement to sell a house to a third party on 27th December, 2002 and had received RS.15 lacs by way of earnest money and subsequently received the balance sale consideration of Rs.l.17 crores (total being Rs.1.32 crores) when the sale deed was executed on 24th September, 2004. In the meanwhile, the assessee had purchased another house on 30th April, 2003. Benefit under Section 54 was denied] by the High Court observing that the new house had been purchased prior to execution of the sale and not within one year prior to sale of original asset i.e. new house has been purchased on 30th April, 2003 whereas the earlier asset was sold only on 24th September, 2004. The Supreme Court allowing the appeal noticed that the agreement to sell was executed on 27th December, 2002 but the sale deed could not be executed because of inter- se litigation between the legal heirs, as one of them had challenged the will under which the assessee had inherited the property. The agreement to sell, it was held had given some rights to the vendor and reduced or extinguished rights of the assessee. This, it was observed was sufficient the purpose of Section 2(47), which defines the term transfer in relation to a capital asset. In the light of the factual matrix, it was observed that the intention behind Section 54 was to give relief to a person who had transferred his residential house and had purchased Assessment Year: 2012-13 another residential house within two years of transfer or had purchased a residential house one year before transfer. It was only the excess amount not used for making purchase or construction of the property within the stipulated period, which was taxable as long term capital gain while on the amount spent, relief should be granted. Principle of purposive interpretation should be applied to subserve the object and more particularly when one was concerned with exemption from payment of tax. The assessee, therefore, succeeded. The observations made in the said decision are also relevant on the question whether the payments made by the assessee to the person with whom he had entered.into.an earlier agreement to sell should be allowed to be set off as expenses incurred in relation to the sale deed which was executed.” The Hon’ble Delhi High Court further referred to the decision of Hon’ble Madhya Pradesh High Court in the case of Smt. Shashi Varma vs. CIT, 224 ITR 106(M.P) and that of the Hon’ble Calcutta High Court in the case of CIT vs. Smt. Bharati C. Kothari (Cal) 244 ITR 352 and opined that when substantial investment was made in the new property, it should be deemed that sufficient steps had been taken and it would satisfy the requirements of section 54 of the Act. As per the Hon’ble High Court, the basic purpose behind section 54 of the Act is to ensure that the assessee is not taxed on the capital gain, if he replaces his house and spend money earned on the capital gain within the stipulated period. The parity of reasoning explained by the Hon’ble Delhi High Court in the case of Kuldeep Singh (supra) squarely covers the controversy in the present case in favour of the assertions made by the assessee. Therefore, we are inclined to uphold the plea of the assessee for exemption under section 54 of the Act qua the impugned investment in acquisition of the new residential house. 7.3 The plea of the Revenue is that no purchase deed was executed by the builder and that there was only an allotment letter issued. As per the Revenue the advance could be returned at any time and, therefore, the assessee may lose the exemption Assessment Year: 2012-13 under section 54 of the Act. In our considered opinion, the aforesaid does not militate against assessee’s claim for exemption in the instant assessment year, as there is no evidence that the advance has been returned. In case, if it is found that the advance has been returned, it would certainly call for forfeiture of the assessee’s claim under section 54 of the Act. In such a situation, the proviso below section 54(2) of the Act would apply whereby it is prescribed that such amount shall be charged under section 45 as income of the previous year, in which the period of three years from the date of the transfer of the original asset expires. The aforesaid provision also does not justify the action of the Assessing Officer in denying the claim of exemption under section 54 in the instant assessment year. 7.4 In view of the aforesaid discussion and on the basis of material and evidence on record, we find that the assessee can be said to have complied with the requirement of section 54 of the Act; and, the exemption has been incorrectly denied by the lower authorities. As a matter of passing, we may also mention here the reliance placed by Ld. Representative of the assessee on the decision of our Coordinate Bench in the case of Shri Khemchand Fagwani vs. ITO, order dated 10/09/2014, wherein also claim of exemption under section 54 of the Act was allowed under similar circumstances. In the light of the precedent, we find no reason to deny the claim under section 54 of the Act. We direct accordingly.”
In the said case, the assessee sold his residential property and the claimed exempt u/s 54 of the Act on the ground that he has acquired a new residential house by making payment of Rs. 1 crore to the builder as booking advance. It was noticed that even after two years of date of transfer of old house construction of new property was not completed. Accordingly, the AO rejected the claim of the assessee u/s 54 of the Act holding that the assessee has failed to purchase new residential house within the prescribed period and the advance given could not be treated as purchase for the purpose of section 54 of the Act. The coordinate Bench held that the assessee was entitled to Assessment Year: 2012-13 benefit of section 54. The coordinate Bench has decided the said issue after taking into consideration, the principles of law laid down by the Hon’ble Supreme Court in the case of CIT vs. T.N. Arvinda Reddy 120 ITR 46, Sanjeevlal Vs. CIT 46 taxman.com 300, Hon’ble Delhi High Court in the case of CIT vs. Kuldeep Singh 270 CTR 561 (Delhi).
Admittedly, in the present case the assessee sold his share in the property referred above to SDC Developers and in lieu of the same, the assessee was to receive two residential flats with inter connected staircase and Rs. 25 lacs in cash. For calculating the capital gains, the assessee took the stamp duty valuation rate as full value of the consideration received which comes to Rs. 1,34,23,656/- . From the said amount, the assessee reduced the cost of acquisition and computed the capital gain at Rs. 1,04,14,291/-. Out of the said amount, the assessee claim deduction of Rs. 84,74,737/- u/s 54F and offered the remaining amount to tax. The AO restricted the deduction to Rs. 38,46,852/- and added back the remaining amount to the income of the assessee u/s 50C of the Act. In the first appeal, the Ld.CIT (A) deleted the addition made u/s 50C of the Act, however, disallowed the claim of the assessee u/s 54F of the Act as discussed above. The Ld. CIT (A) has based his findings on the decision of the coordinate Bench rendered in the case of Rashilal Parikh vs. ACIT upheld by the Hon’ble Bombay High Court. In the said case, the assessee had surrendered his tenancy rights on 30.09.2005 and the developer issued an allotment letter on 07.10.2005 in favour of the assessee and the agreement for purchase was entered on 24.11.2008 which was beyond the period of limitation prescribed u/s 54F of the Act. The coordinate Bench held that the assessee was not eligible for deduction u/s 54F of the Act. The Hon’ble High Court affirmed the findings of the ITAT holding that the assessee had not complied with section 54F of the Act. 11. In our considered view, the facts of the present case are different from the facts of the case of Rashilal N Parikh (supra). In the present case, the Assessment Year: 2012-13 assessee was not required to pay in cash to the developer as the full and final consideration for the two flats which were to be transferred to the assessee by the builder had been settled vide MoU executed between the parties on 23rd day of March 2012 and the assessee received the balance amount of Rs. 25 lacs in cash from the builder. As per clause sub clause (c) of clause 4 of the deed of development dated 23.03.2012, the developer has agreed to handover possession of the flats to each of the owners within three years from the date of execution of the agreement. The relevant clauses of para 4 of the agreement read as under:- (a) In consideration of the Owners having granted development rights unto the Developers to develop the said property more particularly described in the Schedule annexed hereto and marked as Annexure-A, the Developers have paid a sum of Rs. 10,00,000/- (Rupees Ten Lakhs Only) and to pay to each of the Owners further sum of Rs. 15,00,000/- (Rupees Fifteen Lakhs only) on or before 31st July, 2012 and over and above the monetary consideration agreed to be paid by the Developers to the Owners, the Developers have at their own costs, charges and expenses agreed to construct and to provide to First Owner Flat No. 1402 on the 14th Floor and Flat No. 1502 on the 15th Floor with internal staircase joining both the flats in aggregate admeasuring 1,975 sq.feet of built up area along with one four wheel parking on 1st podium floor for parking shown on the plan annexed hereto and marked as “Annexure E” and (ii) Second Owner Flat No. 1501 on the 15th Floor and 1601 on the 16th Floor with internal staircase joining both the flats in aggregate admeasuring 1,917 sq.feet of built up area alongwith two four wheel parking on 1st podium floor for parking shown on the plan annexed hereto and marked as “Annexure-F” in aggregate admeasuring 3892 sq.ft. of built area free of costs and on ownership basis in the new building to be constructed by the Developers on the said property more particularly described in the Scheduled annexed hereto and marked as Annexure ‘A’. Assessment Year: 2012-13 “(c) In the event of area of the flat to be constructed and provided by the Developers to each of the Owners either being less or more than 5% of the agreed area than in that event neither the Owners nor the developers shall be entitled to either receive/pay any consideration/compensation in any manner however provided however the area of such flat being more ore less beyond 5% of the agreed area as set out hereinabove than in that event for such excess/less area beyond 5% shall be compensated by one to other at the construction cost (to be mutually agreed upon) of such additional/less area. Agreed and recorded that the Developers shall subject to Force Majure and Vis Majure hand over possession of the flat to be constructed and provided to each of the Owners within 3 years from the date thereof.”
The aforesaid paras of the agreement make it clear that the assessee has performed his obligation contemplated in the agreement aforesaid. Nothing was to be paid by the assessee before or after handing over of the possession of the two flats. The flats were to be transferred to the assessee within three years from the date of execution of the agreement aforesaid. In our considered view, the assessee had paid full and final cost of the flats which were to be acquired in terms of the agreement on the date of execution of the agreement as the assessee apart from the said two flats, received Rs. 25 lacs in cash from the developer towards full and final consideration of his share in the plot. The revenue has not disputed the transaction of sale of plot and the consideration received/to be received by the assessee. Moreover, the Ld. CIT (A) has deleted the addition made by the AO u/s 50C of the Act. In the case of Sambandam Uday Kumar (supra), the Hon’ble Kerala High Court has held that where the assessee has made the entire payment but the registered sale deed was not executed in favour of the assessee before the stipulated period, even though the transactions are not complete in all respects, that could not disentitle the assessee from the benefit u/s 54F. The coordinate Bench has also followed the same principle in the case of Hasmukh G. Gala vs. ITO (supra). Hence, Assessment Year: 2012-13 respectfully following the decision of the coordinate Bench, we set aside the findings of the Ld. CIT (A) and allow the appeal of the assessee. Accordingly, we direct the AO to allow deduction claimed by the assessee u/s 54F of the Act.