Section 54 Exemption 54 Exemption not require utilisation of sale proceeds of original capital asset only – ITAT

Section 54 Exemption not require utilisation of sale proceeds of original capital asset only. Investment out of bank loan and owned fund allowable- ITAT

ABCAUS Case Law Citation:
ABCAUS 2421 (2018) 07 ITAT

The instant appeal was filed by the assessee against an order passed by the Commissioner of Income Tax (Appeals) confirming the action of the AO in disallowing the claim of deduction under section 54 of the Income Tax Act, 1961 (the Act) on purchase of new residential flat

The assessee had sold an immovable property and earned long term capital gain. The assessee claimed deduction u/s 54 towards residential flat purchased by investing amount more than the capital gain earned.

The Assessing Officer (AO) noted that the assessee had purchased the residenatial flat approx eight months prior to the sale of the immovable property. As explained by the assessee, the source of the investment in purchase of residential flat was by utilising own funds laying in savings bank account and bank loan obtained.

The AO required the assessee to explain as to why the claim of exemption under section 54 of the Act be not disallowed, on the grounds that the investment made out of borrowed funds. The assessee claimed that in view of the provisions of section 54 of the Act, the assessee was entitled for claim of exemption on the investment/ purchase of new residential house i.e. before the sale of the another residential house.

However, the AO did not accept the explanation of the assessee and disallowed the claim of exemption of long term capital gain by observing that the assessee had not utilized the amount of capital gains for purchase of new residential house contending that the new residential house had been purchased out of own sources i.e. savings from saving bank account and bank loans.

According to AO, the assessee had not utilized this long term capital gain for the purchase of new assets and was not eligible for claim of deduction under section 54 of the act.

Aggrieved, assessee preferred the appeal before CIT(A).

The CIT(A) held that the assessee was not eligible for claim of deduction under section 54 of the Act since neither he had not utilized the sale consideration for the purpose of purchase of the new property or towards repayment of the loan. Also, the assessee had not deposited the capital gain in the capital gain account scheme. Thus he confirmed the disallowance.

The Tribunal noted that the assessee had first purchase residential house within one year from the sale of the residential house on which capital had accrued. The assessee had purchased residential house with its own funds in saving bank account and balance amount was taken as loan from bank.

The Tribunal observed that Revenue’s main contention was that the amount of LTCG was accrued later and investment was made prior out of own sources and therefore the capital gain was never invested. In other words, the amount long term capital gain had not been utilized in purchase of residential house.

The ITAT observed that under the provision of section 54(1) of the Act, the capital gains arising on the transfer of a house property which in the two years immediately preceding the date of its transfer was used by the assessee or a parent of his for self-residence is exempted from income tax if the assessee, within a period of one year before or after that date, purchases or within a period of two years after the date of such transfer constructs a house property for the purpose of his own residence. The exemption of capital gains restricted to the amount of such capital gain utilized for the purchase or construction of the new house property. Where the amount of capital gain is greater than the cost of the house property so purchased or constructed, the balance amount of the capital gains is charged to tax. If, however, the amount of capital gain is equal to or less than the cost of the house property purchased or constructed, the capital gain is completely exempted from income-tax. If such house property purchased or constructed is transferred within a period of three years of its purchase or construction the capital gain on the property so transferred is calculated by reducing the cost of its acquisition by the amount of the capital gain exempted from income –tax.

It was observed that the issue in dispute had been dealt by Hon’ble Kerala High Court wherein the Hon’ble High Court had held that the wording of the section 54 itself makes it clear that the law does not insist that the sale consideration obtained by the assessee itself should be utilised for the purchase of house property.

Further, a co-ordinate Bench of this Tribunal had interpreted the provision of section and opined that nowhere, it had been mentioned that the same funds must be utilized for the purchase of the another residential house.

Again, the Tribunal observed that the Bombay High Court had approved the view taken by the ITAT and dismissed the appeal filed by the Revenue as without any substance.

Similarly, the Punjab & Haryana High Court had considered this issue in the contect of section 54F and held that there is no provision that in order to avail benefit of section 54F of the Act, the assessee has to utilize the amount received by him on sale of original capital asset for the purposes of meeting the cost of the new asset.  Similar issue also arose before Gauhati High Court followed the view taken by the Kerala High Court that no provision is made by the statue that the assessee should utilize the amount which he obtained by way of sale consideration for the purpose of meeting the cost of the new asset.

The Tribunal, in view of the various decisions, held that in the instant case, the assessee had met with all the conditions stipulated under section 54(1) of the Act and hence, the assessee was entitled to the claim of exemption under section 54 of the Act.

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