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Income Tax Appellate Tribunal (ITAT) Mumbai in a recent judgment has held that benefit of deduction u/s 54(1) of the Income Tax Act, 1961 can not be denied on the ground that construction of house was not complete, possession not given or not transferred in the name of the assesse.

Case Details:
ITA Nos.5329 & 6293/M/2012 Assessment Years: 2008-09 & 2009-10
Dr. Ashwin Balchand Mehta (Appellant) vs Joint Commissioner of Income Tax (Respondent)
Date of Order: 06-11-2015

Brief facts of the Case:
The appellant assessee had sold one residential flat on 17.12.07 for a sale consideration of Rs.1.65 crores on which the capital gains had been computed at Rs.61,38,810/-. The assessee claimed deduction of Rs. 16,81,790/- under section 54(1) and deduction of Rs. 35 lakhs under section 54E of the Act. Regarding the deduction u/s 54(1), the assessee submitted that he had entered into an agreement with M/s. Ideal Hights Pvt. Ltd. for purchase of a flat at Kolkata. The assessee also furnished a copy of allotment letter dated 20.03.07. The amount of Rs. 16,81,790/- was paid as an advance for the purchase of the said flat and the total amount of sale consideration was settled at Rs.43,35,850/-. The Assessing Officer (AO) noticed that the assessee had neither executed any agreement of purchase of the flat nor had furnished any certification of completion or occupation of the said flat. Also the assessee had not taken the possession of the said flat till December 2010. Considering the above facts, AO rejected the claim of deduction under section 54(1).

Before CIT(Appeals), the assessee claimed that what was required to claim deduction under section 54(1), was only to make investment in residential house for purchase of house within a period of one year before or two years after the date of transfer of original asset or for construction of residential house within a period of three years from the date of transfer of original asset and the condition of the completion or occupation of the new residential house is not envisaged in the section. The assessee also furnished a chart giving details of payment beginning from the date of 22.03.07 and ending on 15.03.12 and submitted that the purchase deed had been completed on 16.03.12.

However, CIT(A) held that the house in question was not transferred in the name of the assessee within three years from the date of sale of the house by the assessee. He also held that the assessee had not acquired interest in the house which was allegedly purchased on a subsequent date. Hence, he upheld the disallowance of the claim of the deduction under section 54(1) of the Act.

Important Excerpt from ITAT Judgment:
We find that in a very recent decision, the Hon’ble Karnataka High Court in the case of “CIT vs. B.S. Shantakumari” in ITA No.165 of 2014 vide order dated 13.07.2015 has held that section 54F of the Act is a beneficial provision which permits for construction of residential house. Such provision has to be construed liberally for achieving the purpose for which it is incorporated in the statute. The intention of the legislature, as could be discerned from the reading of the provision, would clearly indicate that it was to encourage investments in the acquisition of a residential plot and completion of construction of a residential house in the plot so acquired. A bare perusal of said provision does not even remotely suggest that it intends to convey that such construction should be completed in all respects in three years and/or make it habitable. The essence of said provision is to ensure that assessee who received capital gains would invest same by constructing a residential house and once it is established that consideration so received on transfer of his Long Term capital asset has invested in constructing a residential house, it would satisfy the ingredients of Section 54F. If the assessee is able to establish that he had invested the entire net consideration within the stipulated period, it would meet the requirement of Section 54F and as such, assessee would be entitled to get the benefit of Section 54F of the Act. Though such construction of building may not be complete in all respect that by itself would not disentitle the assessee to the benefit flowing from Section, 54F.

In view of the above decision of the Hon’ble Karnataka High Court (supra), we examine the facts of the present case and find that the assessee had booked the flat with the builder and an allotment letter was given to the assessee. The house was under construction. Under such circumstances it can be safely presumed that the assessee had invested the money for construction of the house through the builder. So the money invested by the assessee within three years from the date of transfer is allowable as deduction under section 54 of the Act. The assessee has claimed that up to the due date of filing of the return for the year under consideration, he had invested an amount of Rs.25,46,760/-. Therefore, the assessee is entitled to claim the said sum as deduction under section 54(1)/54F for the year under consideration.

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Deduction u/s 54(1) available even if construction of residential house not complete, possession not taken or it is not transferred in the name of assessee-ITAT | 27-12-2015 |