SURESH DEVCHAND SHAH (HUF),MUMBAI vs. ASST CIT 14(1), MUMBAI

This appeal by the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-25, Mumbai [in short CIT(A)], in appeal No. CIT(A)-25/IT-275/14(1)/11-12 dated 01-10-2013. The Assessment was framed by the Asst. Commissioner of Income Tax, ward- 14(1), Mumbai (in short ‘ACIT) for the A.Y. 2009-10 vide order dated 29- 12-2011 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).

“1. in not considering that the value arrived at by the Valuation Officer ('VO') as of 1.4.1981 of Rs. 9,23,637 was incorrect and in not independently dealing with the objections raised by the appellant to the valuation so done by the VO.

2. In not allowing the appellant a deduction u/s 54F for amount of Rs. 30,60,000 invested in a residential property although the delay in receiving possession of that residential property was for reasons beyond the appellant's control.

3. In denying the appellant a deduction for indexed cost of improvements of Rs. 9,23,391 and in restricting the said deduction to 50% of the claim made.

5. Without prejudice, a disallowance of 50% of the said costs was excessive and needed to be substantially reduced.”

4. Before CIT(A) assessee contended that the DVO has taken the value as on 01.04.1981 as ₹ 9,23,637/- which is incorrect and aggregate value of the property as on 01.04.1981 is at ₹ 22,63,000/-. Further, the assessee also contended that the payment for purchase of a residential flat i.e. under construction flat was made payment of ₹ 30.60 lacs and as per the clause 7 of the agreement of purchase of flat the possession of flat was to be given to the assessee by the builder by June 2011. As the builder could not give the possession, the assessee entered into a new agreement on 31-12-2011 for purchase of the another flat and vide clause 2 of new agreement purchaser agree to purchase from the builder for a sum of Rs. 30.60 lacs in lieu of earlier rights. The assessee claimed deduction under section 54F of the Act, which was not allowed by the AO as the claim was made for the first time before CIT(A). Similarly, the assessee also made claim of cost of improvement and indexation of the same before the CIT(A) for the first time in respect of expenditure of Rs. 55,40,347/- and assessee’s one third shares after indexation gives to Rs. 18,46,782/-. The CIT(A) has allowed the cost of improvement after indexation at the rate of 50% of the assessee’s claim at Rs. 9,23,391/-. Aggrieved, on both the grounds the assessee came in appeal before Tribunal.

“7. We find that Section 55A(a) of the Act very clearly at the relevant time provided that a reference could be made to the Departmental Valuation Officer only when the value adopted by the assessee was less then the fair market value. In the present case, it is an undisputed position that the value adopted by the respondent-assessee of the property at Rs.35.99 lakhs was much more than the fair market value of Rs.6.68 lakhs even as determined by the Departmental Valuation Officer. In fact, the Assessing Officer referred the issue of valuation to the Departmental Valuation Officer only because in his view the valuation of the property as on 1981 as made by the respondent-assessee was higher then the fair market value. In the aforesaid circumstances, the invocation of Section 55A(a) of the Act is not justified.

8. The contention of the revenue that in view of the amendment to Section 55A(a) of the Act in 2012 by which the words "is less then the fair market value" is substituted by the words " "is at variance with its fair market value" is clarifactory and should be given retrospective effect. This submission is in face of the fact that the 2012 amendment was made effective only from 1 July 2012. The Parliament has not given retrospective effect to the amendment. Therefore, the law to be applied in the present case is Section 55A(a) of the Act as existing during the period relevant to the Assessment Year 2006-07. At the relevant time, very clearly reference could be made to Departmental Valuation Officer only if the value declared by the assessee is in the opinion of Assessing Officer less than its fair market value.

9. The contention of the revenue that the reference to the Departmental Valuation Officer by the Assessing Officer is sustainable in view of Section 55A(a) (ii) of the Act is not acceptable. This is for the reason that Section 55A(b)of the Act very clearly states that it would apply in any other case i.e. a case not covered by Section 55A(a) of the Act. In this case, it is an undisputable position that the issue is covered by Section 55A(a) of the Act. Therefore, resort cannot be had to the residuary clause provided in Section 55A(b)(ii) of the Act. In view of the above, the CBDT Circular dated 25 November 1972 can have no application in the face of the clear position in law. This is so as the understanding of the statutory provisions by the revenue as found in Circular issued by the CBDT is not binding upon the assessee and it is open to an assessee to contend to the contrary.”

“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 the assessee 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 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.

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 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.”

9. We find that the assessee in view of the given facts is entitled for the claim of deduction under section 54F of the Act and AO to allow accordingly. Needless to say, the AO will verify the quantum of investment in purchase of under construction flat and will allow the claim accordingly.

8.4 The appellant has claimed the following expenses (after indexation, wherever applicable) in computation of income:

Sl. Particulars Amount No.

Order pronounced in the open court on 11-04-2018.