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Income Tax Appellate Tribunal, B / SMC BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI S. JAYARAMAN
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
This appeal of the assessee is directed against the order of the Commissioner of Income Tax (Appeals) -13, Chennai, dated 17.11.2017 and pertains to assessment year 2010-11.
Shri N. Arjun Raj, the Ld. representative for the assessee, submitted that the assessee claimed deduction under Section 54F of the Income-tax Act, 1961 (in short 'the Act') in respect of capital gain arising out of the sale of vacant plot. According to the Ld. representative, the Assessing Officer disallowed the claim of the assessee on the ground that the construction of new building was completed well before the date of sale of vacant land, therefore, the assessee is not entitled for deduction under Section 54F of the Act.
Referring to the judgment of Madras High Court in C. Aryama Sundaram v. CIT (2018) 97 taxmann.com 74, the Ld. representative submitted that on identical situation, the Madras High Court found that it is not a requisite of Section 54 of the Act that construction could not have commenced prior to the date of transfer of the asset resulting in capital gain. In view of this judgment of Madras High Court, according to the Ld. representative, even though the construction was commenced prior to the sale of subject land on which the capital gain arises and the construction was completed on the date of sale, still the assessee is eligible for exemption under Section 54(1) of the Act. Therefore, according to the Ld. representative, the CIT(Appeals) is not justified in confirming the order of the Assessing Officer.
On the contrary, Shri B. Sagadevan, the Ld. Departmental Representative, submitted that the judgment of Madras High Court in C. Aryama Sundaram (supra) is distinguishable. Referring to the question of law framed by the Madras High Court, which is reproduced at para 11 of the judgment, the Ld. D.R., submitted that the issue before the Madras High Court was with regard to cost of land, in case such land was purchased three years prior to the sale of property from which the capital gain arose. According to the Ld. D.R., the completion of construction of building was not the subject matter of appeal before the Madras High Court. Therefore, according to the Ld. D.R., the observation made by the Madras High Court with regard to completion of construction prior to the date of transfer may be a passing reference.
Placing reliance on the judgment of Gujarat High Court in Ushaben Jayantilal Sodhan v. ITO (2018) 93 taxmann.com 453, Shri B. Sagadevan, the Ld. D.R. submitted that an identical question was considered by the Gujarat High Court and held that the construction which was stated to have been carried out before the transfer of capital asset is not eligible for exemption under Section 54F of the Act. According to the Ld. D.R., in view of this judgment of Gujarat High Court, the judgment of Madras High Court in C. Aryama Sundaram (supra) may not be applicable to the facts of the case.
We have considered the rival submissions on either side and perused the relevant material available on record. The assessee before the Tribunal transferred the capital asset, namely, vacant plot of land for ₹1,15,29,000/-. The assessee’s share of capital gain works out to ₹34,76,585/-. The assessee, in fact, claims this amount of ₹34,76,585/- as exemption under Section 54F of the Act. It is not in dispute that the assessee purchased 1068.11 sq.ft. of undivided share of the land at Sholinganallur on 28.01.2008. The assessee has also entered into an agreement for construction of building with M/s Vishranthi Sabari Constructions in April, 2008 for construction of 1723 sq.ft. of super built up area. The construction was also completed on 15.02.2010 on the date on which the capital asset was admittedly transferred. The Assessing Officer as well as the CIT(Appeals) found that the assessee commenced the construction and completed the same before the transfer of capital asset on 15.02.2010, therefore, not eligible for exemption under Section 54F of the Act.
The question now arises for consideration is when the assessee invested his funds in purchasing land and constructing residential premises before the date of transfer of capital asset, whether he is eligible for exemption under Section 54F of the Act?
We have carefully gone through the provisions of Section 54F of the Act and also the judgment of Madras High Court in C. Aryama Sundaram (supra). In the case before the Madras High Court, the assessee sold a residential house at New Delhi on 15.01.2010. The assessee purchased the property with superstructure on 14.05.2007. After demolishing the existing superstructure, the assessee constructed a residential house and claimed the capital gain as exemption from taxation under Section 54F of the Act. The Assessing Officer found that a part of expenditure incurred on construction after the sale of original asset would be eligible for exemption under Section 54F of the Act. However, the cost of construction incurred before the sale of original asset was found to be not eligible. In those factual circumstances, the Madras High Court found that it is not a requisite of Section 54F of the Act that construction could not have commenced prior to the date of transfer of asset resulting in capital gain. In fact, the Madras High Court observed as follows at paragraphs 19 to 13:-
“19. 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.
What has to be adjusted and/or set off against the capital gain is, the cost of the residential house that is purchased or constructed. Section 54(1) of the said Act is specific and clear. It is the cost of the new residential house and not just the cost of construction of the new residential house, which is to be adjusted. The cost of the new residential house would necessarily include the cost of the land, the cost of materials used in the construction, the cost of labour and any other cost relatable to the acquisition and/or construction of the residential house.
A reading of Section 54(1) makes it amply clear that capital gain is to be adjusted against the cost of new residential house. The condition precedent for such adjustment is that the new residential house should have been purchased within one year before or two years after the transfer of the residential house, which resulted in the capital gain or alternatively, a new residential house has been constructed in India, within three years from the date of the transfer, which resulted in the capital gain. The said section does not exclude the cost of land from the cost of residential house.
It is axiomatic that Section 54(1) of the said Act does not contemplate that the same money received from the sale of a residential house should be used in the acquisition of new residential house. Had it been the intention of the Legislature that the very same money that had been received as consideration for transfer of a residential house should be used for acquisition of the new asset, Section 54(1) would not have allowed adjustment and/or exemption in respect of property purchased one year prior to the transfer, which gave rise to the capital gain or may be in the alternative have expressly made the exemption in case of prior purchase, subject to purchase from any advance that might have been received for the transfer of the residential house which resulted in the capital gain.
At the cost of repetition, it it reiterated that exemption of capital gain from being charged to income tax
as income of the 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 a requisite of Section 54 that construction could not have commenced prior to the date of transfer of the asset resulting in capital gain. If the amount of capital gain is greater than the cost of the new house, the difference between the amount of capital gain and the cost of the 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 the new residential house, including the land on which the residential house is constructed, the capital gain is not to be charged under Section 45 of the said Act.
Therefore, this Tribunal is of the considered opinion that the factual aspect arises for consideration before the Madras High Court is identical as it arises for consideration before this Tribunal.
This Tribunal is of the considered opinion that the judgment of Madras High Court is binding on all the authorities in the State of Tamil Nadu and Union Territory of Puducherry including this Tribunal.
We have carefully gone through the judgment of Gujarat High Court in the case of UshabenJayantilalSodhan (supra). In almost similar circumstances, the Gujarat High Court has taken a contrary view and held that the expenditure incurred before the date of transfer is not eligible for exemption under Section 54F of the Act.
The Gujarat High Court is not a jurisdictional High Court. However, the findings recorded by Gujarat High Court have persuasive value to decide the case before this Tribunal, whereas, the judgment of Madras High Court, which is a jurisdictional High Court, is binding on this Tribunal. Therefore, this Tribunal is expected to followthe binding judgment of Madras High Court rather than the judgment of Gujarat High Court which has persuasive value.
In view of the above, by respectfully following the judgment of Madras High Court in C. AryamaSundaram (supra), this Tribunal is of the considered opinion that the assessee is eligible for exemption under Section 54F of the Act even though the construction of the building commenced and completed before the date of transfer of capital asset. In view of this, we are unable to uphold the orders of the lower authorities. Accordingly, orders of both the authorities below are set aside and the Assessing Officer is directed to grant exemption under Section 54F of the Act.
In the result, the appeal filed by the assessee stands allowed. Order pronounced in the court on 20th November, 2018 at Chennai.