No Section 54F exemption if construction not started within time prescribed. Development charges paid not start of construction-Allahabad HC

No Section 54F exemption if construction not started within time prescribed. Development charges paid not start of construction-Allahabad HC

In a recent judgment, the Hon’ble Allahabad High Court has held that capital gain exemption u/s 54F not allowable if construction not started within prescribed time.

ABCAUS Case Law Citation:
ABCAUS 1165 (2017) (03) HC

The Grievance:
The assessee has filed this appeal under Section 260A of the Income Tax Act, 1961 (‘the Act’) against the order passed by the Tribunal rejecting the exemption u/s 54F of the Act.

Question for determination:
The questions of law sought to be answered were as under:-

1. Whether in the facts and circumstances of the present case the assessee will be entitled for exemption contemplated under Section 54F of the Income Tax Act where within the stipulated period the assessee has purchased plot for construction of residential house but constructions has not been completed?
2. Whether phrase ‘constructed residential house”, inter-alia, will include investment in purchase of residential plot and investment in payment of development charges for use of plot ?
3. Whether it is necessary for application of Section 54F of the Income Tax Act that constructions should be completed within the stipulated period in order to avail the benefit of exemption under the said Section ?

Brief Facts of the Case:
The assessee was having half share in his ancestral property which was same was sold for Rs.88.00 lacs and in the year 2005-06 the assessee invested an amount of Rs.14,10,500/- for purchasing a plot of land for construction of a residential flat which inter-alia, included the amount spent by the assessee towards external development charges of Rs.68,750/-.

The assessee also spent an amount of Rs.125/- for seeking sanction of map for construction of the house from Development Authority. The assessee, therefore, claimed for exemption, inter-alia, under Section 54F of the Act as according to the assessee the capital gains from the sale of the ancestral land and due investment of the same for constructions of residential house was entitled for exemption under the said section. Accordingly, the assessee claimed deduction under the said section during the Assessment Year 2006-07. 

The Assessing Officer (‘the Act’), however, disallowed the said exemption claimed by the assessee in view of the fact that since the constructions were not done of the residential house and merely plot was purchased for construction of residential house, hence, the assessee was not entitled for claiming the aforesaid exemption under Section 54F of the Act.

Against the aforesaid disallowance, the assessee filed an appeal before the Commissioner Income Tax (Appeals), who allowed the appeal by reversing the order of the AO on Section 54F of the Act. Commissioner Income Tax (Appeals) had placed reliance upon the judgement of Hon’ble Madras High Court as well as upon CBDT Circular No.667 dated 18.10.1993. 

Against the order of the CIT(A), the Revenue filed an appeal before the Income Tax Appellate Tribunal (‘ITAT’). The Tribunal had examined the matter at length and recorded a clear finding of fact as under:- 

“We have also gone through the decision of Hon’ble Madras High Court in the case of CIT vs. Sardar Mal Kothari and Another (supra). In this case also the assessee had purchased the plot and substantially completed the constructions within the specified period, but the construction was not fully completed. When the matter traveled to the High Court, the Hon’ble High Court took the view that the assessee is entitled for the exemption. Coming to the facts of the case of assessee, in pith and substance, it is a fact that the assessee has not started the construction within the specified period and the development charges have been paid ……….  for the development of the road and other facilities in the colony where the plot is situated at a pre-determined rate depending on the size of the plot. Mere payment of the development charges to the builder does not mean that the assessee has started construction, which is essential condition or claiming exemption u/s 54F of the I.T. Act. ” 

The ITAT allowed the appeal filed by the Revenue and has restored the order passed by the assessing officer. 

Observations made by the High Court:
The High Court observed that the Tribunal had given a conclusive finding of fact that the assessee had not even started the construction between the specified period. 

It was noted that a Division Bench of the Court had held that the provisions of Section 54F of the Act specifically cover situations where the assessee in order to save himself from payment of tax of capital gains decides to either purchase or construct a house within the specified period and if he fails to do so then the statute provides as to when the capital gains are to be treated as having arisen and in which year they are to be taxed. 

The Revenue also drew the attention of the Court to a decision of Punjab and Haryana High Court wherein also it had been held that no benefit under Section 54F of the Act could be given to the assessee, who had failed to fulfil the primary ingredients of proving either the constructions of a house or the purchase of a house. In fact there is not such a whisper that the construction had been started or that any portion at all had been built. 

In view of the above facts, the Court opined that the Tribunal had rightly affirmed the order passed by the assessing officer and has denied the benefit of Section 54F of the Act to the assessee. 

Held:
The questions of law were answered in favour of the department and against the assessee and the appeal was dismissed.