SHRI.JOSEPH DEVADASS,BANGALORE vs. ASST. COMMISSIONER OF INCOME TAX, BANGALORE

The assessee has raised the following grounds :

4. Ground Nos.2, 3 and 7 are regarding validity of reopening. At the time of hearing, the learned Authorised Representative has stated at Bar that the Ground Nos.2, 3 & 7 and the same are accordingly dismissed.

Before the Tribunal, the learned Authorised Representative of the assessee has submitted that the assessee has purchased a new house that was under construction for Rs.43,30,000 and spent a further sum of Rs.5,17,830 for registration. The assessee entered into an agreement for interior fittings a sum of Rs.39,70,000 thereby bringing the total cost of new house to Rs.88,17,830 out of which Rs.56 lakhs was made out of the loan. Thus the learned Authorised Representative has submitted that even if the loan amount is excluded, the rest of the investment has been made by the assessee from the amount including the capital gain of Rs.5,69,181. The learned Authorised Representative has contended that ignoring the loan amount the balance amount of investment has to be considered for deduction under Section 54 of the Act and therefore the authorities below are not justified in denying the claim of deduction under Section 54 of the Act.

On the other hand, the learned Departmental Representative relied upon the orders of the authorities below and submitted that the Assessing Officer as well as CIT (Appeals) has duly anlaysed the facts under Section 54 and it was held that if the investment in the new asset is not made from the capital gain then Section 54 is not available.

Having considered the rival submissions as well as the relevant material on record, it is noted that the Assessing Officer has denied the claim under Section 54 on the ground that the assessee has availed loan of Rs.56 lakhs for purchase of new house property. It is pertinent to note that if the reasoning given by the authorities below is accepted then it de horse the very object of this incentive of providing deduction under sub-section (1) of Section 54 as under :

It is clear from the plain reading of the Section 54(1) that the capital gains arising from transfer of long term capital asset being building or land appurtenant thereto and being a residential house, the income of which is chargeable under the head "Income from house property" and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date of construction of a residential house then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the provisions of the Act. Thus the deduction under Section 54 is available even when the assessee has purchased residential house prior to the date of transfer of the existing residential house. Which means that at the time of purchase of new house prior to the sale of the existing house the capital gain is not required to be invested as it is not arisen and available with the assessee on the date of purchase of new residential house. Therefore the provisions of Section 54 permits the investment prior to the date of sale of the existing house and thereby the condition of the investment of the sale proceeds cannot be understood in the manner that the investment has to be made only from the proceeds of the sale but it is only the amount of investment which is relevant. If the view taken by the authorities below is accepted then the purchase of the house one year prior to the sale of existing asset cannot be allowed under Section 54(1) of the Act. In view of the facts and circumstances of the case, I am of the considered opinion that the authorities below have committed a serious error in not allowing the deduction under Section 54 on the ground that the assessee has availed the loan for purchase of new house. Even otherwise when the total investment is much more than the loan as well as the capital gain then the capital gain is treated to be invested in purchase of new house.