No denial of exemption u/s 54 when assessee invested entire capital gain in purchasing land to construct house

When assessee invested entire capital gain in purchasing land to construct residential house, there cannot be any denial of exemption u/s 54 – ITAT

ABCAUS Case Law Citation:
ABCAUS 2647 (2018) (11) ITAT

Important Case Laws Cited/relied upon:
CIT v. Sardarmal Kothari (2008) 302 ITR 286
Mrs. Seetha Subramanian v. ACIT (1996) 59 ITD 94
D.P. Mehta vs. CIT (2001) 168 CTR (Del) 321 : (2001) 251 ITR 529 (Del),

The instant appeal of the assessee was directed against the order of the Commissioner of Income Tax (Appeals) confirming the denial of exemption claimed under Section 54 of the Income-tax Act, 1961 (the Act).

The assessee sold a flat alongwith car parking space and the capital gain arising from such sale was invested in the purchase of a land along with her husband.  A residential house was constructed in the said land.

The Assessing Officer disallowed the exemption claim u/s 54 of the assessee on two grounds. The first ground was that the capital gain was not deposited within the due date for filing return of income, in the Capital Gain Account. The second ground of disallowance of exemption was that the building was not completed and it was in progress.

Regarding the first ground, the Tribunal noted that the assessee had deposited the amount within the due date as extended by the CBDT. Therefore, there could not be any disallowance on this ground.

Regarding the second ground, the Tribunal opined that what is contemplated in the provisions of Income-tax Act for claiming exemption under Section 54 of the Act is investment of funds for the purpose of construction. The moment assessee invested the entire capital gain for the purpose of purchasing a residential house or construction of residential house, the condition stipulated in the provisions to claim exemption is satisfied, therefore, the Assessing Officer cannot disallow the claim of the assessee.

The Tribunal noted that the Assessing Officer did not dispute that the assessee invested the funds but disputed was that the construction was not completed.

In view of judgment of the High Court and the decision of the Tribunal and the CBDT circular No. 471 dated 15th October, 1986and in No. 672 dated 16th December, 1993, the Tribunal held that mere investment of the capital gain in the construction of residential premises is more than sufficient for claiming exemption under Section 54 of the Act.

The Tribunal observed that the CIT(Appeals) rejected the claim of the assessee on the ground that it was not fit for human habitation since the construction was in progress. The Tribunal pointed out that the undisputed fact was that the assessee had invested the entire capital gain in purchasing the land and to construct the building.

In view of the finding of High Court, the Tribunal opined that since the assessee had invested the entire funds in purchasing the land to construct the residential property, there could not be any denial of exemption under Section 54 of the Act. The construction was admittedly in progress and the assessee also obtained temporary electricity service connection which also supported the case of the assessee.

Accordingly, the orders of both the authorities below were set aside and the disallowance made by the Assessing Officer was deleted.

Download Full Judgment Click Here >>