JOSEPH KIRAN KUMAR REDDY BASANI,HYDERABAD vs. DCIT., CIRCLE-5(1), HYDERABAD

The brief facts of the case are that the assessee, who is an individual, filed his return of income for the assessment year 2015-16 on 30-09-2016, declaring total income of Rs.33,94,060/-. The case was selected for scrutiny and during the course of assessment proceedings, the AO noticed that the assessee had entered into a Joint Development Agreement “hereinafter referred to as the “JDA” on 26-04-2012 with M/s LAL Constructions and received three flats measuring 4240 sq. ft. from the builders as his share along with 150 sq. yards of undivided land. The assessee has sold these flats on various dates along with undivided share of land on 21-05-2014, 06-11-2014 and 31-07- 2014 for a total consideration of Rs.76,32,000/- and computed long term capital gain after deducting indexed cost of acquisition of Rs. 2,90,010/- and claimed exemption under Section 54 of the Income Tax Act, 1961 for Rs. 76,83,990/- for purchase of another residential house property on 03-09-2014 for a consideration of Rs. 3,59,00,000/-. The AO observed that the assessee has wrongly computed long term capital gain from sale of three flats because if we consider the holding period of three flats from the date of JDA dated 26-04-2012 and sale deed dated 06-11-2014, the period of holding is less than 36 months and thus, the resultant gain arising out of sale of flats is short term capital gain and against this claim of deduction under Section 54 cannot be allowed. Therefore, rejected the explanation furnished by the assessee and computed short term capital gain of Rs.76,32,000/- and added it back to the total income of the assessee.

Being aggrieved by the assessment order, the assessee preferred the appeal before the ld.CIT(A).

The ld.CIT(A) after considering the submissions of the assessee, accepted the contention of the assessee regarding assessment of long-term capital gains pursuant to the JDA dated 26-04-2012 for the impugned assessment year in terms of section 54F(3) of the Act, as long-term capital gain, as against the assessment of profit under the head short-term capital gain by the Assessing Officer, however, the ld.CIT(A) rejected the alternative claim of the assessee for deduction under section 54/54F of the Act on the ground that, as per the provisions of section 54F(1), in order to get deduction, the appellant needs to invest the consideration received from the transfer of the original asset before 1 year from the date of transfer or within 2 years from the date of transfer of the original asset. Since the appellant transferred the original asset on 26-04-2012 pursuant to the JDA with M/s LAL Constructions, the reinvestment made for the purchase of another residential house dated 03-09-2014 is beyond 2 years from the period specified under the Act, and thus, not entitled for deduction under section 54F of the Act. Therefore, the ld.CIT(A) rejected the claim of the assessee and upheld the additions made by the AO towards capital gain.

Being aggrieved by the order of ld.CIT(A), the assessee is now in appeal before us.

The learned counsel for the assessee Shri Vamsi Krishna Reddy, C.A., submitted that the ld.CIT(A) erred in rejecting the claim of the assessee, even though the assessee has invested the entire amount of sale consideration received pursuant to the JDA dated 26-04-2012 for the purchase of another residential house property on 03-09-2014. The learned counsel for the assessee, referring to the sale agreement dated 09-07-2014, submitted that the assessee has received consideration of Rs.79,74,000/- whereas invested Rs.1,01,00,000/- for purchase of a new residential house. If we go by the date of payment of advances to the seller, the assessee has invested the entire sale consideration within two years from the date of transfer of the original asset and thus, eligible for deduction under Section 54F of the Act. In this regard, he relied upon the decision of ITAT Chennai Bench in the case of Ms. Sultana Nazir in ordered dated 23-03-2012 and also the decision of ITAT Jodhpur in the case of Jagan Nath Singh Lodha Vs. ITO reported in (2004) 85TTJ (JODH) 173.

The ld.DR Shri Karthik Manickam, Sr.AR, on the other hand, supporting the order of ld.CIT(A) submitted that, first of all, the appellant has not disclosed capital gain pursuant to the JDA dated 26-04-2012 for the assessment year 2013-14. Further, the appellant has not made any claim towards exemption under section 54F of the Act against long-term capital gains derived from transfer of property pursuant to the JDA. The appellant has sold 3 flats received pursuant to the JDA within 3 years from the date of acquisition and against this sale consideration, claimed deduction under section 54F on incorrect facts. Further, the subsequent claim with regard to deduction under section 54F of the Act on the original sale of the asset is beyond the date of investment under section 54F of the Act. The AO and the ld.CIT(A) after considering relevant facts, have rightly rejected the claim of the assessee. Thus, their orders should be upheld.

We have heard both the parties, perused the material available on record and also gone through the orders of authorities below. There is no dispute with regard to the date of JDA with M/s LAL Constructions i.e., on 26-04-2012. If you go by the JDA dated 26-04-2012, the capital gain arising out of the surrender of 389 square yards of land in exchange of three flats measuring 4240 sq. ft. shall be assessable to tax for the assessment year 2013-14. Admittedly, the assessee has not computed any capital gain for the assessment year 2013-14 in consequent to the JDA dated 26- 04-2012. The appellant has sold three flats received pursuant to the JDA dated 26-04-2012 on various dates starting from 21-05- 2014 to 06-11-2014 and received total consideration of Rs. 76,32,000/-. The appellant has computed long-term capital gain of Rs. 76,83,990/- and claimed deduction under Section 54 of the Act for reinvestment of consideration for purchase of another residential house property at Gopanapalli village, Serlingampalli Mandal, Hyderabad for a consideration of Rs.3,59,00,000/-. The AO disallowed the deduction claimed under Section 54 of the Act on the ground that three flats sold by the assessee is a short-term capital gain, as the holding period was less than 36 months and therefore, deduction under Section 54 of the Act cannot be allowed. The assessee has made an alternative claim before the ld.CIT(A) and argued that reinvestment made by the assessee for purchase of a residential house vide sale agreement dated 09-07- 2014 and sale deed dated 03-09-2014, is eligible for deduction u/s 54F of the Act, because, the entire sale consideration received or accrued pursuant to the JDA dated 26-04-2012 has been fully reinvested within two years from the date of transfer of the original asset.

We have given our thoughtful consideration to the reasons given by the ld.CIT(A) to reject the claim of the assessee in light of various arguments advanced by the learned counsel for the assessee and in light of provisions of Section 54F of the Income Tax Act, 1961. The provisions of Section 54F deal with exemption from capital gains towards sale of any capital asset other than the residential house property and reinvestment of sale consideration for purchase of another residential house property. As per the said provisions, capital gain derived from transfer of property is exempt in case the sale consideration is reinvested in purchase of another residential house property before one year from the date of transfer of original asset or within two years from the date of transfer of original asset or within three years from the date of transfer of original asset for construction of any residential house property. In the present case, although the appellant has wrongly claimed deduction under Section 54 of the Act against sale consideration received for sale of three flats received pursuant to JDA dated 26-04-2012 and rightly so disallowed by the AO, but has made an alternative claim before the ld.CIT(A) under Section 54F of the Act against long-term capital gains derived from transfer of land pursuant to JDA dated 26-04-2012 and claimed that reinvestment made for purchase of a villa at Gopanpalli Village, Serlingampalli Mandal, Hyderabad is eligible for deduction under Section 54F of the Act. We find that the appellant has transferred 389 square yards of land pursuant to JDA dated 26- 04-2012 and received sale consideration of Rs. 76,32,000/-. In order to get deduction under Section 54F of the Act, the assessee shall invest sale consideration for purchase of another residential house property (new house property), one year before the date of transfer or within two years from the date of transfer of original asset. In other words, in order to get deduction under Section 54F of the Act, the assessee shall invest sale consideration on or before 25-04-2014.

In the present case, the appellant has entered into sale agreement dated 09-07-2014 for purchase of villa at Gopanpalli village and the said villa has been registered by way of sale deed dated 03-09-2014 for a total consideration of Rs. 3,59,00,000/-. If you go by the date of sale agreement dated 09-07-2014 and date of sale deed dated 03-09-2014, both are beyond two years from the date of transfer of original asset and thus, reinvestment made for purchase of new asset is not eligible for deduction under Section 54F of the Act. However, it was the argument of the learned counsel for the assessee in light of the sale agreement dated 09-07-2014 that, the appellant has paid a substantial amount of consideration of Rs. 1,01,00,000/- in the financial year 2012-13, i.e., within two years from the date of transfer of original asset and thus, entitled for deduction under Section 54F of the Act. In our considered view, if at all the appellant has paid the entire sale consideration of Rs. 76,32,000/- within two years from the date of transfer of original asset, then the appellant is eligible for deduction under Section 54F of the Act, irrespective of the fact that the sale agreement and sale deed are subsequent to the period of two years from the date of transfer of original asset, because the appellant has claimed to have invested the entire sale consideration within two years from the date of transfer of original asset and the cost of new asset is more than the amount of sale consideration. Therefore, we are of the considered view that the matter needs to be re-examined by the AO in light of claim of the assessee that, he has invested entire amount of sale consideration within two years from the date of transfer of original asset. Thus, we set aside the issue to the file of AO and direct the AO to verify the claim of the assessee in light of any evidence that may be filed by the assessee to justify his claim. In case, the AO finds that the assessee has invested the entire amount of sale consideration accrued or received as a result of transfer of original asset in pursuant to JDA dated 26-04-2012 within two years from the date of transfer of original asset, then the AO is directed to allow deduction under Section 54F of the Act towards amount reinvested for purchase of residential house property at Gopanpalli Village, Serlingampally Mandal, Hyderaad. Accordingly, the appeal of the assessee is allowed for statistical purposes.

In the result, the appeal of the assessee is allowed for statistical purposes.