SRI PRADEEP SINGH GURUNG,SILIGURI vs. DCIT, CIRCLE-3, SILIGURI, SILIGURI

Per Shri A.T.Varkey, JM This appeal preferred by the assessee is against the order of Ld. CIT(A), Siliguri dated 16.12.2016 for AY 2011-12.

2 ITA No. 374/Kol/2017 Pradeep Singh Gurung, AY 2011-12 report. According to AO, on 10.01.2014, the AR of the assessee appeared and in course of hearing admitted that though the assessee claimed deduction u/s 54 of the Act with an intention of making investment in construction of his own house building during the F.Y. 2010-11, 2011-12, & 2012-13 but the assessee has made an investment of Rs.13,61,727/- in the F. Y. 2010-11 for construction of house building but the balance amount the assessee failed to invest in construction of residential house property in subsequent two financial years. According to AO, the assessee admitted his mistake that he failed to make investment in construction of house property and stated that he would pay full tax thereon with interest. Accordingly the AO took note of the difference of amount the assessee’s failure to make investment in construction of house property and computed it at Rs.22,19,177/- (Rs.35,80,904/- - Rs. 13,61727/-). According to AO, the assessee failed to invest Rs.22,19,177/- in construction of residential house property within stipulated time frame so the said sum of Rs.22,19,177/- was added to assessee’s income. Aggrieved, assessee preferred an appeal before the Ld. CIT(A), who restricted the deduction u/s. 54 of the Act to the extent of Rs.16,97,479/- (Rs.13,61,727/- + Rs.3,35,752/-) out of the total claim of Rs.35,80,905/- by observing as under: “I have perused the assessment order and submissions made by the Ld. A/R of the appellant. It has been observed that during the assessment proceedings before the AO, the erstwhile A/R of the appellant made a written submission dated 10.01.2014 that investment u/s 54 for exemption of Long Term Capital Gain could not be done in full before the due date of filing of Income Tax Return for the AY 2011-12 and part of claim of exemption u/s 54 of the Act has been made out of oversight. He also offered the part of said excess claim for taxation. However, during this appeal, Ld. A/R of the appellant contradicted the submission made before AO and stated that during the course of hearing of the-scrutiny case the assessee could not explain his case-properly before the A.O and was guided by the opinion of the A.O regarding allowability of deduction u/s 54 and admitted that he has claimed excess deduction by mistake. Careful reading of Section 54(1) of the Act makes it clear that the assessee, to claim deduction under this section, should within a period of one year before or two year after the date on which the transfer took place purchase, or within a period of three years after that date constructed one residential house in India. Therefore, contention of the Ld. A/R that conditions laid down under section 54 provides only for completion of construction of house property within three years of transfer of original asset, does not hold good. As the law clearly mentions that the house property should be constructed within a period of three years after the date on which transfer took place, it prima facie excludes construction made before the date of transfer of original asset.

3 ITA No. 374/Kol/2017 Pradeep Singh Gurung, AY 2011-12 The Ld. AR of the appellant cited some judicial pronouncements in support of grounds of appeal in this behalf. Facts of the case in Ishar Singh Chawla v. CIT [20l0] 130 TTJ (Mum)(UO) 108, does not match with facts of this case, as in that case, purchase of new house property was made within time frame stipulated u/s 54(1) of the Act and only the matter was related to source of fund invested under this section. In CIT v. J.R. Subramanya Bhat (1987) 165 ITR 571 (Karn), it was held that date of commencement of construction of new building is immaterial for being eligible for deduction u/s 54 of the Act. But, in this case also, the Hon'ble High court made the house building eligible for exemption under this, construction of which has been started before the date of transfer of original asset and not the amount spent before that date. The principle laid down in that case has been rightly followed by the AO in this case by allowing exemption for expenses incurred during FY 2010-11 on construction of the same residential house, construction of which was started before the date of transfer of original asset. If the interpretation taken by the assessee was to be accepted then it would lead to absurd result. Take a case where construction of house starts in year 2000, in year 2011 the assessee say transfers a house, as per assessee's interpretation he can claim exemption u/s 54 for all the expenses incurred from year 2000 to year 2011, i.e. for last 11 years. This would be an absurd result which could not have been intended by the legislature. There is an economic rationale for existence of section 54. This provision is for facilitating movement of housing . If someone wants to change his house, it should be tax neutral. Apparently allowing past construction expenses could not have been intended. In view of the above discussion, disallowance made b: the AO on account of amount spent for construction in earlier year then the year of transfer is hereby upheld and all the grounds of the appellant in this behalf are dismissed. It has been admitted by the appellant that Rs.3,35,752/- has been spent during the period from 01-04-11 to 31-07-12 (Due date of filing of Return for A.Y. 11-12) for construction of said residential house. By virtue of sub-section 2 of the section 54, amount utilized by the assessee for the purchase or construction of the new asset before the date of furnishing the return of income under section 139 for the year in which transfer took place, shall qualify for deduction u/s 54 of the Act. Therefore, the AO is hereby directed to enhance the amount of exemption u/s 54 of the Act by Rs.3,35,752/- and grounds of appellant in this behalf is allowed to the extent of this amount.”

Aggrieved by the aforesaid decision of the Ld. CIT(A), the assessee is before us.

4 ITA No. 374/Kol/2017 Pradeep Singh Gurung, AY 2011-12 due date of filing of the return for the relevant assessment year under consideration before us (AY 2011-12). So, the assessee claimed deduction u/s. 54 of the Act of LTCG of Rs.35,80,904/- which claim was not accepted by the AO who restricted the deduction to Rs.13,61,727/- being the amount invested in respect to the new residential house property in the assessment year under consideration (AY 2011-12 only) and thereafter, he disallowed Rs.22,19,177/- (Rs.35,80,904 – Rs.16,97,479/-) which was added to the total income of the assessee. On appeal the Ld. CIT(A) was pleased to give partial relief to the assessee by giving further deduction of Rs.3,35,752/-, which was the amount the assessee invested from 01.04.2011 to 31.07.2012 ( up-to the due date of filing of return). Thus Ld. CIT(A) gave deduction to the extent of Rs.16,97,479/- (Rs.13,61,727 + Rs.3,35,752/-) out of the total claim of Rs.35,80,905/-. According to Ld. CIT(A), an assessee in order to claim deduction under section 54 of the Act should within a period of one year before or two years after the date on which the transfer took place, purchase or within a period of three years after the date constructed one residential house in India then only the assessee qualifies for deduction u/s. 54 of the Act. According to Ld. CIT(A), the deduction cannot be allowed for construction of residential house made before the date of transfer of original asset, therefore, he disallowed the amount expended for construction of new residential house property for AY 2010-11. We do not subscribe to the said interpretation made by the Ld. CIT(A) for the simple reason that in order to claim deduction u/s. 54 of the Act the assessee has to purchase a house within a period of one year before or two years after the date on which the transfer of the old asset took place or constructed one residential house in India within a period of three years. The Parliament has given this deduction for assessee’s to invest their capital gain upon sale of old asset for acquiring residential house within the period of time as prescribed and noted above. We note that for purchase of new residential house property, the deduction is allowed in the event the assessee purchased the new residential house property takes place before one year of the transfer of old asset or purchase of new property happens two years after the date of sale of the old asset which means purchase of new residential house property can be indulged by an assessee one year before the date of sale of the old asset, then the assessee qualifies deduction u/s. 54 of the Act. However, the Ld. CIT(A) has not allowed the claim of deduction because assessee has started construction of

5 ITA No. 374/Kol/2017 Pradeep Singh Gurung, AY 2011-12 new residential house one year before the sale of property cannot be countenanced. Since it does not stand to logic that an assessee who starts constructing a new residential house within one year before the sale of the old asset cannot get the benefit of deduction u/s. 54 of the Act however, an assessee who purchases a new residential property a year before sale of property is allowed deduction u/s. 54 of the Act is illogical. The purpose of giving deduction u/s. 54 of the Act is to encourage the assessee to invest in residential property whether it is purchase or construction of residential house. Therefore, the action/interpretation of the Ld. CIT(A) to deny the claim of the assessee for the investment made by the assessee for construction of residential house property within one year before the date of sale of the old asset cannot be countenanced. Therefore, we find force in the ground raised by the assessee that the entire claim of the assessee for deduction u/s. 54 of the Act needs to be allowed and, therefore, the balance amount of Rs.18,83,426/- (Rs.35,80,905/- and Rs.16,97,479/-) also need to be allowed and we direct the AO to allow Rs,35,80,905/- as deduction u/s. 54 of the Act. In order to come to such a conclusion, we take note of the ratio decidendi laid by the Hon’ble Karnataka High Court in the case of CIT Vs. J. R. Subramaniam Bhat (1987) 165 ITR 571, the Hon’ble Allahabad High Court in the case of CIT Vs. H. K. Kapoor (Deceased) 234 ITR 753, Hon’ble Kerala High Court in the case of ITO Vs. K. C. Gopalan 107 Taxman 591 and Hon’ble Delhi High Court in the case of CIT Vs. Bharti Mishra, ITA No. 567 of 2013 and the decision of ITAT, Hyderabad Bench in the case of DCIT Vs. Vidyasagar Dontineni, ITA Nos. 632 & 1238/Hyd/2013 for AYs 2009-10 & 2010-11 dated 28.01.2015. Thus the appeal of the assessee is allowed.

Order is pronounced in the open court on 10th October, 2018. Sd/- Sd/- (Dr. A. L. Saini) (Aby. T. Varkey) Accountant Member Judicial Member

Dated : 10th October, 2018

Jd.(Sr.P.S.)

6 ITA No. 374/Kol/2017 Pradeep Singh Gurung, AY 2011-12 Copy of the order forwarded to:

/True Copy, By order,

Sr. Pvt. Secretary