R.UPENDRAN (HUF),CHENNAI vs. ITO, CHENNAI

आदेश / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: This appeal is filed by the assessee, aggrieved by the order of the Learned Commissioner of Income Tax(A)-2, Chennai dated 20.02.2015 pertaining to assessment year 2010-11.

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to non-granting of deduction u/s.54 of the Act.

filed the Return of Income for the A.Y. 2010-11 on 21.03.2012

admitting ‘NIL’ income. The case was selected for scrutiny and notice

u/s 143(2) of the Act was issued on 07.09.2012..After hearing the

appellant, the AO completed the assessment u/s 143(3) of the IT Act on 28.03.2013 determining the total income of `41,43,907/-. During

the Financial Year relevant to the Assessment Year 2010-11, the

assessee has sold a property at Flat T2, GLand Marvel Lakshmi

Nivas’ Ill Floor, Old Door No.25, New No.2/8, 7th Main Road, Raja Annamalaipuram, Chennai-28 for a consideration of `81,00,000/-.

The sale was registered Old No. 18.11.2009. The assessee has claimed exemption u/s. 54 of `45,26,045/- for the Capital Gain arisen

out of the above sale. It is claimed by the assessee that he has

invested for additional construction in the First Floor, Second Floor

and Third Floor at 54 & 55 Kutchery Road, Mylapore. The details for

the same were called for. It is noticed that the assessee has started

the construction of Third Floor and Fourth Floor on 23.01.2009, which

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is prior to the date of sale of the property. Further the assessee has

not deposited any unutilized amount in any Capital Gain Tax. From

the foregoing, it is clear that the assessee has violated the provisions

u/s. 54 on the following counts:

(a) The construction started much earlier to the date of transfer which

is contraiy to the condition laid down u/s. 54(1) of the Income Tax Act

(b) The assessee has not deposited the amount not utilized for the

construction in the capital gain account thereby violating the

provisions of 54(2) of the Income Tax Act.

Hence, the AO rejected the claim u/s.54 of the Act. Aggrieved, the

assessee has preferred the appeal before the First Appellate

Authority i.e CIT(A) for the rejection of exemption u/s.54 to the tune of `45,26,045/- claimed by it.

3.1 On appeal, the Ld.CIT(A) confirmed the order of ld. Assessing

Officer and observed that the assessee submitted before the AO that

out of Rs.81 lakhs received from the sale of the property, Rs.45.26 lakhs were used for the construction of 3rd & 4th floor. There was no

evidence before the AO on the treatment given to the balance

amount. The ld.A.R reiterated the only point that the construction of

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second property was completed within 3 years from the date of sale

of the first property.

3.2 According to Ld.CIT(A), the sale proceeds of one property are

to be utilized in the purchase or construction of another property to

avail the benefit. In other words, the capital gains benefit u/s 54 is not

available automatically when the funds were not used for purchase or

construction of another new property. Since in the instant case the

assessee has constructed the property with own funds before the

sale of the old property and as he has not demonstrated that the sale

proceeds were utilized for the construction, the appellant cannot get

the benefit u/s 54 automatically. Admittedly, it is not a case of use of

sale proceeds in the construction of a new property, simpliciter. In the

instant case, the new construction is a multi-storied building where

Ground + 2 floors were already built much prior to the sale of the old property with own funds. The construction of 3rd and 4th floor has

fallen between 23.1.09 to 12.11.12 which means that even

construction of these two floors has been started 10 months prior to

the date of sale. In a sense, the 3d and 4th floor are an extension of

existing Ground + 2 floors but not a fresh construction. According to

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Ld.CIT(A), the purpose of the benefit available in Sec.54 of the Act

is that the assessee should not go homeless after the sale of a

residential property and the emphasis is on the use of the sale

proceeds of the purchase or construction of a subsequent residential

property. Hence, the Ld.CIT(A) dismissed the appeal on the ground

that the assessee failed to furnish any evidence with regard to the balance amount of `35,74,000/-. Against the order of Ld.CIT(A),

now the Assessee is in appeal before us.

record. The assessee sold the property on 18.11.2009 for consideration of `81/- lakhs at Flat T2, GLand Marvel Lakshmi Nivas’

Ill Floor, Old Door No.25, New No.2/8, 7th Main Road, Raja

Annamalaipuram, Chennai-28. The assessee filed its return of

income on 21.03.2012 and admitted the capital gains derived from this sale transaction at `37,48,593/-. The assessee commenced

construction of third floor on 23.01.2009 , which was completed on

28.07.2010 & fourth floor, which was completed on 12.11.2012. The

plea of the ld.A.R is that even expansion of existing residential house

is also entitled for deduction u/s.54 of the Act. In my opinion, “House

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property” in Section 54 takes into account all independent residential

unit and complete house. Independent residential units, particularly in

these days when multi-storeyed flats are becoming the order of the

day. In this case, if the assessee invested the capital gains in the

construction of further floor in the existing building and even if it was

commenced before the sale of the original residential house, benefit

of Sec.54 to be given. For this purpose, I place reliance in the

judgement of Delhi High Court in the case of Additional CIT Vs. Vidya

Prakash Talwar in [1981] 132 ITR 661 (Del). Further, we make it

clear that even the commencement of construction of a residential

house before transfer of the property does not disentitle the

assessee claim deduction u/s.54 of the Act. For this proposition, we

take support the decision of Karnataka High Court in the case of CIT

Vs. J.R.Subramanya Bhat in [1986] 28 Taxman 578(Kar.). Further,

the objection of the ld.D.R is that the assessee had not utilized the

consideration received on the sale of original property to construct the

new residential property. As rightly pointed out by the ld.A.R, the law

does not contemplate the identity of funds for investment in the

construction of a new house or residential property, if the assessee

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started the construction before the transfer of property by borrowing

the funds or using his own funds, the assessee cannot be precluded

from claim deduction u/s.54/54F of the Act. This view is also taken by

the Co-ordinate Bench in the case of Muneer Khan Vs. INCOME TAX

OFFICER in 92010) 41 SOT 504 (ITAT Hyd.). Further, it is also

noted that the Co-ordinate Bench of Chennai recently in the case of

Smt.Usha in ITA No.2033/Mds./2016 vide order dated 26.04.2017

observed herein under:-

“ 8.1 We find a force in the argument of the assessee for the reason that the Act does not describe any condition as to the date of commencement of construction of a new house property. The only condition is that construction of house property should be completed within three years from the date of transfer. The date of commencement of construction is irrelevant and the construction may be commenced even before the transfer of asset as held by Delhi High Court in the case of CIT Vs. Bharti Mishra reported in [2014] 41 taxmann.com.50(Delhi). Further, High Court of Karnataka in the case of CIT Vs.J.R.Subramanya Bhat in [1986] 28 Taxman 578 (Kar.) has taken a similar view, which was in turn followed by Allahabad High Court in the case of CIT Vs. H.K.Kapoor in [1998] 234 ITR 753 (Allahabad). Further, the Andhra Pradesh High Court and Telangana in the case of Learned Commissioner of Income Tax Vs. Smt. V.Venkata Laxmi in [2015] 59 Taxmann.com 216 held that where investment in construction of a new building is made within 3 years of sale of the property, the benefit of Sec.54 is to be given. Thus, as seen from the facts brought on record, the assessee completed the construction in December,

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2006 as evidenced by the letter dated 19.03.2017 issued by M/s.Arun Excello builder. Further, in the present case, the ld. Learned Commissioner of Income Tax(A) accepted that the construction was completed within 3 years from the date of sale of capital asset. However, he restricted the exemption 20% of cost of construction, which is not appropriate. There is no question of giving partial relief to the assessee, even after appreciating the fact that the assessee has completed the construction within three years on sale of the capital asset. Further, as rightly argued by the ld. A.R, the law does not contemplate the identity of the funds for investments in construction of new house of residential property. If the assessee started the construction before the transfer of property by borrowing the funds, the assessee cannot be precluded from claiming deduction u/s.54 or u/s.54F of the Act. This view was fortified by the decision of Co-ordinate Bench of Tribunal in the case of Muneer Khan Vs. ITO in [2010] 41 SOT 504 (ITAT[Hyd]). Being so, we are of the opinion that the assessee is entitled for deduction u/s.54 or u/s.54F of the Act for the entire cost of the construction incurred by the assessee and not any part. Further, similar consistent view was also taken by Chennai Tribunal in the case of Mr.C.Arya Sundaram for Assessment Year :2010-11 in I.T.A.No.1208/Mds./2015 vide order dated 27.12.2016. Accordingly, this ground raised by the assessee is allowed.”

Accordingly, in principle, we are agreeing that the assessee is entitled

for deduction u/s.54 of the Act. However, the assessee has to place

necessary bills/vouchers and to substantiate the incurring cost

towards construction of further floors in the existing residential

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building and the AO has to verify the same and decide in accordance with the above proposition.

Sd/- (चं� पूजार�) (CHANDRA POOJARI) लेखा सद�य /ACCOUNTANT MEMBER

Chennai, Dated the 03rd June, 2017. K s sundaram.

आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF