SHEELA RAMCHAND UTTAMCHANDANI,MUMBAI vs. ITO-30(2)(3), MUMBAI

The learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee and held that at the time of booking of the residential property on 10/09/2014, the assessee was under no doubt that the expected time period for completion of the project is 30 months, i.e. much beyond the time of three years permitted u/s 54 of the Act from the sale of original asset. Being aggrieved, the assessee is in appeal before us.

During the hearing, the learned Authorised Representative (“learned AR”) submitted that the assessee had booked an under-construction residential flat within a period of three years from the date of transfer of the original asset and also made a payment of Rs.50,86,475/- to the builder against the same. It was further submitted that for reasons beyond the control of the assessee the construction of the property got delayed, and due to the same, the assessee should not denied exemption for which she is rightly eligible u/s 54 of the Act. The learned AR submitted that the assessee had deposited the entire amount of capital gain under the Capital Gains Account Page | 3 Scheme within the prescribed time limit as mentioned u/s 54 of the Act and therefore, the amount can be withdrawn from the bank only for the purpose of purchase of the residential flat. It was further submitted that out of the aforesaid deposit under the Capital Gains Account Scheme, the assessee withdrew Rs.49,86,472/- and paid the same to the builder against the demand invoice raised by the builder. The learned AR also referred to the various correspondence between the assessee and the builder, wherein the assessee has requested the builder to execute the agreement for sale and has refused to accept the refund of money paid by her.

On the other hand, the learned Departmental Representative (“learned DR”) vehemently relied upon the order passed by the lower authorities and submitted that the assessee was aware in advance that the flat could not constructed within three years from the date of sale of original asset.

We have considered the submissions of both sides and perused the material available on record. In the present case, the assessee sold her residential flat on 31/07/2012 and earned Long Term Capital Gains of Rs.99,35,840/-, after considering the indexed cost of acquisition. On 29/07/2013, the assessee deposited an amount of Rs.1 crore in her account maintained under the Capital Gain Account Scheme with the State Bank of India. On 10/09/2014, the assessee booked an under-construction residential flat for a total consideration of Rs.2,44,96,000/- and paid an amount of Rs.50,86,472/- against the same. Insofar as the aforesaid facts are concerned, there is no dispute among the parties. It is the plea of the assessee that since she has booked an under-construction residential flat within three years from the date of transfer of the original asset, therefore, she is entitled to claim exemption u/s 54 of the Act on the entire amount of Long Term Capital Gain of Rs.99,35,840/- arising from the sale of her residential flat. It is the further plea of the assessee that the construction of the flat was delayed for reasons beyond her control and due to the same exemption u/s 54 of the Act cannot be denied. On the other hand, as per the Revenue, since at the time of booking the under-construction residential flat, the assessee was aware that the construction would not be completed within three years from the date of Page | 4 transfer of the original asset, therefore, the assessee is not entitled to claim exemption u/s 54 of the Act.

In order to decide this issue at hand, it is pertinent to note the provisions of section 54 of the Act, which are reproduced as under: -

Upon perusal of section 54 of the Act, it is evident that the assessee is entitled to claim the relief in the respect of Long Term Capital Gain arising from the transfer of the original asset, only if a residential house is either purchased within one year before or within two years after the date on which the transfer took place, or the assessee has within the period of three years after that date constructed a residential house. Section 54(2) of the Act further requires that the amount of capital gain that is not appropriated or utilised by the assessee for the purchase or construction of the new residential house before the date of furnishing the return of income u/s 139 of the Act shall be deposited in the Capital Gains Scheme Account before furnishing such return. It is further pertinent to note that the proviso to section 54(2) of the Act provides that if the amount deposited under the Capital Gains Account Scheme is not utilized for the purchase or construction of the new asset then the amount not so utilized shall be charged u/s 45 of the Act as the income of the previous year in which the period of three years from the date of transfer of original asset expires.

Thus, in the present case, in order to claim the exemption u/s 54 of the Act, the assessee was required to invest the Long Term Capital Gain of Rs.99,35,840/- either for the purchase of a residential house within two years, i.e. upto 30/07/2014, or for the construction of a residential house within three years, i.e. upto 30/07/2015, from the date of sale of original asset. Since the assessee could not utilise the amount of Long Term Capital Gain earned on the sale of the original asset for the purchase or construction of a new residential house before the date of furnishing the return of income u/s 139(1) of the Act, we find that the assessee deposited an amount of Rs. 1 crore in her Page | 6 bank account maintained under the Capital Gains Account Scheme on 29/07/2013. In this regard, the assessee has placed on record the pay-in slip issued by the State Bank of India. Further, from the copy of the booking application, forming part of the paper book on pages 18-21, we find that on 10/09/2014, the assessee booked a flat in a building developed by M/s. Gigaplex Developers Pvt. Ltd for a total consideration of Rs.2,44,96,000/- and paid booking amount of Rs.1,00,000/-. Further, on 16/09/2014 and 07/11/2014 the assessee issued cheques amounting to Rs.11,78,025/- and Rs.38,08,447/- respectively. In this regard, the aforesaid builder also issued payment receipts on 25/09/2014 and 19/11/2014, which form part of the paper book on pages 23 & 24. From the perusal of payment receipts, we further find that apart from the name of the assessee, the names of the other two Co-applicants have also been mentioned. Placing reliance upon these payments receipts, we find that the learned CIT(A) observed that the investment total amounting to Rs.50,86,472/- cannot be said to have been made only by the assessee but the same has been made by three persons including the assessee. However, from the copy of confirmation dated 21/01/2017 issued by the State Bank of India, forming part of the paper book on page 17, we find that the bank certified that out of Rs.1 crore deposited by the assessee in her account maintained under Capital Gains Account Scheme, Rs.49,86,472/- has been paid to the builder against the demand invoice dated 10/09/2014, which also forms part of the paper book on page 22. Therefore, we find no merit in the aforesaid observation of the learned CIT(A) that the investment is done by three persons instead of only by the assessee.

We find that in ACIT v/s Smt. Sunder Kaur Sujan Singh Gadh, [2005] 3 SOT 206 (Mum.) the coordinate bench of the Tribunal, after considering CBDT’s Circular No.471 dated 15/10/1986 and Circular No.672 dated 16/12/1993, held that booking of a flat with a builder is to be considered as construction of the residential flat and not a purchase of a residential flat. Further, in CIT v/s Smt. Bharati C. Kothari, [2000] 244 ITR 352 (Cal.), the Hon’ble Calcutta High Court after analyzing the provisions of section 54 of the Act, observed as under:

Thus, in view of the aforesaid judicial pronouncements, we are of the considered view that the purchase of an under-construction flat by the assessee will tantamount to investing the money in the construction of a residential house for the purpose of section 54 of the Act. However, the lower authorities have denied the claim of exemption on the basis that the construction of the said residential flat booked by the assessee was not completed even within the period of three years from the date of sale of the original asset, therefore, the benefit of section 54 of the Act cannot be extended to the assessee. In this regard, reference has been made by the Revenue to the pre-launch offer, under which the expected time for completion of the project was mentioned as 30 months from the launch, and therefore, extends beyond 30/07/2015, i.e. three years from the date of sale of original asset on 31/07/2012. Therefore, the learned CIT(A) accordingly held that the assessee, at the time of booking, was already aware that the expected date of completion of the project is beyond three years from the date of sale of the original asset. On the other hand, as per the assessee, the delay in the construction of the property is beyond her control, since the builder could not receive the requisite approval. However, it is an accepted factual position that on the expiry of three years from the date of sale of the original asset, the flat was not constructed by the builder.

During the hearing, the learned AR placed reliance upon the decision of the Hon’ble Madhya Pradesh High Court in Smt. Shashi Varma v/s CIT, (1997) 224 ITR 106 (MP), wherein the Hon’ble High Court held that completion of construction and handing over of possession within the time prescribed u/s 54 of the Act is impossible and unworkable. The Hon’ble High Court further held that if substantial investment is made in the construction of the house, then it Page | 8 should be deemed that sufficient steps have been taken and this satisfies the requirement of section 54 of the Act. The relevant findings of the Hon’ble High Court, in the aforesaid decision, are reproduced as under:-

The learned AR further relied upon the decision of the Hon’ble Delhi High Court in CIT v/s Kuldeep Singh, (2014) 270 CTR 561 (Del.), wherein the Hon’ble Delhi High Court held that intention behind section 54 of the Act is to give relief to a person who has transferred his residential house and has purchased or constructed another residential house. The Hon’ble High Court further held that it is only the excess amount not used for making a purchase or construction of the property within the stipulated period, which is taxable as Long Term Capital Gain, while on the amounts spent, relief should be granted. It is pertinent to note that from the perusal of the aforesaid decisions, relied upon by the learned AR, we find that the payment made by the taxpayer was more than the capital gain earned on the transfer of the original asset. However, in the present case, it is evident from the record that though the assessee earned Long Term Capital Gain of Rs.99,35,840/- on the sale of the original asset, however, has only made a payment of Rs. 50,86,472 to the builder in respect of the purchase of under-construction flat. It is the plea of the assessee that the sum of Rs.50,86,472 constitutes more than 50% of the Long Term Capital Gain earned by it, therefore in view of the aforesaid decisions of the Hon’ble Madhya Pradesh High Court and Hon’ble Delhi High Court benefit of section 54 of the Act should be granted. However, as noted above, the aforesaid decisions have been rendered by the Hon’ble High Court in its own set of facts, wherein the payment made by the taxpayer was more than the capital gain earned on the transfer of the original asset and in any case as per the proviso to section 54(2) of the Act, the amount which is not utilised wholly or partly for the purchase of construction of the new asset shall be charged u/s 45 of the Act as the income of the previous year in which the period of three years from the date of transfer of original asset expires. At this stage, it is needless to mention that the plight of the house buyer is not hidden from anyone, and in the recent past, due to one or the other reason various housing projects by well-known builders across the country were delayed for no fault of the purchaser, who continues to await the delivery and possession of his/her flat. Even in these circumstances, the house buyer, who intends to take the benefit of section 54 of the Act, cannot be blamed if the construction of the flat is not completed within the period of three years from the sale of the original asset. However, even if we adopt the purposive interpretation in the case of the construction of a residential house by the builder, as is also adopted by the Hon’ble High Courts in the aforesaid decisions, we are of the considered view that since in the present case it is undisputed that out of Long Term Capital Gain of Rs.99,35,840/- earned by the assessee, she has only utilised Rs.50,86,472 in the new residential house, therefore, in view of the provisions of the proviso to section 54(2) of the Act the balance amount should be charged to tax u/s 45 of the Act in the year under consideration, being the year in which the period of three years from the date of transfer of the original asset expires. From the perusal of the assessment order, particularly para-8, we find that the AO though considered to tax the part of the capital gain amount which had not been utilised by the assessee for the purchase of a new residential house within the prescribed period, however, proceeded to make the addition of the entire Long Term Capital Gain of Rs.99,35,840 earned by the assessee. Accordingly, we direct the AO to restrict the addition on account of Long Term Capital Gain only in respect of the balance amount not utilised by the assessee for the purchase or construction of a new residential house. Consequently, the AO is directed to allow the exemption to the extent of Page | 10 Rs.50,86,472 being the amount paid for the new residential flat by the assessee. As a result, grounds no. 3 raised in assessee’s appeal is partly allowed, while ground No. 4 is allowed.

Ground No. 1, raised in assessee’s appeal, challenging the initiation of reassessment proceedings u/s 147 of the Act was not pressed during the hearing. Accordingly, the same is dismissed as not pressed.

Further, we find that the learned CIT(A) passed the impugned order after considering the submissions of the assessee, as noted on pages 4-8 of the impugned order. Accordingly, we find no merits in ground No. 2 raised in assessee’s appeal. As a result, the same is dismissed.

In the result, the appeal by the assessee is partly allowed. Order pronounced in the open Court on 21/05/2024