Section 54F – Claim u/s. 54 is admissible in respect of flats allotted by the builder to the assessee under the terms of the Development Agreement as the same constitute consideration retained by the Developer and utilised for construction of flats on behalf of the assessee.

2.  Shilpa
Ajay Varde vs. Pr. CIT (Mumbai) Members: Joginder Singh, VP and Ramit Kochar, AM  ITA No.: 2627/Mum./2018 A.Y.: 2013-14. Dated: 14^th November, 2018 Counsel for assessee / revenue: M.
Subramanian / L. K. S. Dehiya

Section 54F – Claim u/s. 54 is admissible in respect of flats allotted by the
builder to the assessee under the terms of the Development Agreement as the
same constitute consideration retained by the Developer and utilised for
construction of flats on behalf of the assessee.

FACTS

The assesse, an individual, in his return of
income declared Capital Gains at Rs. 15,982 after claiming deduction u/s. 54F
and 54EC of the Act. The Assessing Officer (AO) completed the assessment
accepting the returned income. Subsequently, the Pr. CIT issued notice u/s. 263
of the Act and held that the order passed by the AO u/s. 143(3) of the Act was
erroneous as the same was prejudicial to the interest of the revenue. The Pr.
CIT observed that during the year under consideration, the assessee along with her
relatives entered into development agreement for the development of property
owned by the assessee with her relatives. As per the terms of agreement with
the developer, consideration for the said transfer of development rights was a
sum of Rs. 40 lakhs and four residential flats and six car parking spaces. The
assessee computed the gains by adopting Rs. 1,32,62,500 to be full value of
consideration. This sum of Rs.1,32,62,500 comprised of Rs. 40,00,000 being the
monetary consideration and Rs. 92,62,500 being the value of residential flats
which the assessee was entitled to receive from the developer. From the full
value of consideration the assessee reduced indexed cost of acquisition and the
value of two new residential houses which were to be received by the assessee
u/s. 54F of the Act.

The Pr. CIT, however, held that the assessee
could not be allowed to claim exemption u/s. 54F of the Act in respect of the
said two residential flats as the said flats were yet to be constructed by the
developer and were future properties and hence the assessee was not entitled to
claim exemption u/s. 54F of the Act. 
Further, he also observed that the assessee claimed deduction of Rs.
71,50,000 u/s. 54EC of the Act which was restricted to Rs. 50,00,000 as per the
amended provisions of the Act and therefore directed the AO to revise the order
passed u/s. 143(3) of the Act.

Against the said order passed by the Pr.CIT,
the assessee preferred an appeal to the Tribunal challenging the Pr. CIT’s
action of directing the AO to revise the order passed u/s. 143(3) of the Act.

On appeal, the Tribunal held as follows:

HELD

The Tribunal observed that the assessee,
during the course of assessment, disclosed complete details of transaction with
the developer and furnished all the details of computation of long term capital
gains and exemption claimed u/s. 54F and 54EC of the Act.  The Tribunal also observed that the AO had,
after due application of mind and considering all the details and documents on
record allowed the assessee’s claim for exemption u/s. 54F and 54EC of the Act
and it would not be correct to say that the AO did not make any inquiry or did
not make proper inquiry before allowing the claim of the assessee. The Tribunal
thus held the action of Pr. CIT of initiating section 263 of the Act to be
bad-in-law.

On merits, the Tribunal observed that flats
were specifically allotted by the developer in favour of the assessee under the
development agreement and effectively it could be said that the share of
consideration in lieu of property for development given by the assessee to the
developer to the extent of four residential flats will be retained by the
builder and invested by the developer by utilising its own funds for
constructing the flats on behalf of the assessee. Effectively, therefore
consideration under development agreement which the assessee was otherwise
entitled to receive was withheld by the developer for constructing the flats on
behalf of the assessee which satisfied the requirement of making investment in
construction of new residential flat as provided u/s. 54F of the Act. The
Tribunal also observed that CBDT in circulars had held that allotment of flat under
self-financing scheme is held to be construction for the purposes of capital
gains. Thus the Tribunal allowed the assessee’s claim for exemption u/s. 54F of
the Act. As regards assessee’s claim for exemption u/s. 54EC of the Act of Rs.
71,50,000, following the decision of the Madras High Court in CIT vs.
Jaichander [2015] 370 ITR 579 (Madras) and co-ordinate bench of the
Tribunal in Tulika Devi Dayal vs. JCIT [2018] 89 taxmann.com 442 (Mum.)
held that the exemption claimed u/s. 54EC of the Act was in accordance with the
provisions of the Act.

The Tribunal allowed the appeal filed by the
assessee.