10 Section 54 – If agreement for purchase of residential flat is made and the entire amount is paid within three years from the date of sale, the basic requirement for claiming relief u/s. 54(1) of the Act is taken as fulfilled.

In a case where agreement is entered into and amount paid within the period mentioned in section 54, the claim for relief cannot be denied on the ground that as per the agreement with the builder, the house was to be completed within 4 years, whereas, as per provisions of section 54 of the Act, the house should have been constructed within 3 years from the date of transfer of original asset.

The procedural and enabling provisions of s/s. (2) cannot be strictly construed to impose strict limitations on the assessee and in default thereof to deny him the benefit of exemption provisions.  If assessee at the time of assessment proceedings proves that he has already invested the capital gains on the purchase / construction of the new residential house within the stipulated period, the benefit under the substantive provisions of section 54(1) cannot be denied to the assessee.

FACTS  

The assessee sold a residential flat on 17.9.2012 for a consideration of Rs. 5,20,00,000.  Long term capital gain arising on sale of this flat was Rs. 2,97,78,977.  The Assessing Officer (AO) noticed that the assessee had claimed exemption for Rs. 3,00,00,000 on account of investment in another flat on 11.9.2014.  On perusal of the purchase deed, the AO noticed that the assessee was to get possession of the flat on or before August, 2016.  The AO concluded that the assessee had only purchased the right to purchase the flat which was proposed to be given after 4 years from the date of transfer in August 2016.  He held that the conditions of section 54 had not been complied with and, therefore, he denied the claim of Rs. 2,97,78,977.

Aggrieved, the assessee preferred an appeal to the CIT(A) where it contended that in various cases it has been held that if assessee invests capital gains in a house which is under construction and due to some reasons, the possession is delivered late to the assessee, even then the investment of the amount will be considered towards the purchase / consideration of the house and that the assessee will be eligible to claim deduction u/s. 54 of the Act.

The CIT(A) held that the case laws relied upon were distinguishable and were relating to claim of deduction u/s. 54F and not under section 54 as is the present case.  He held that while section 54F requires that the investment is to be made, section 54 requires the purchase / construction to be completed. He further observed that even the assessee was supposed to deposit the proceeds from the sale of house property in specified scheme / capital gains account, however, the assessee in this case did not deposit the same in the capital gain account / scheme with the bank rather the assessee had deposited the amount in FDRs. The assessee had failed to comply with the conditions stipulated u/s. 54(2) of the Act.  He confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD  

The Tribunal observed that various courts have held that if the assessee invests the amount in purchase / construction of building within the stipulated period and the construction is in progress, then the benefits of exemptions, cannot be denied to the assessee.  Reliance in this respect can be placed on the decision of the jurisdictional High Court of Punjab & Haryana in the case of Mrs. Madhu Kaul vs. CIT, ITA No. 89 of 1999 vide order dated 17.1.2014 and further on the decision of the Calcutta High Court in the case of CIT vs. Bharati C. Kothari (2000) 160 CTR 165 and also on the decisions of the various co-ordinate Benches of the Tribunal. 

On going through the provisions of sections 54 and 54F of the Act, the Tribunal did not find any such distinction as drawn by CIT(A) or any such dissimilarity in the wordings of the provisions from which any such conclusion can be drawn that u/s. 54F of the Act the investment is to be considered and/or that u/s. 54 off the Act, the house must be completed within the stipulated period of three years or that investment is not to be considered. 

It observed that the decision of the Calcutta High Court has categorically held that if the agreement for purchase of residential flat is made and the entire amount is paid within three years from the date of sale, the basic requirement for claiming relief u/s. 54(1) of the Act is to be taken as fulfilled.  The Tribunal held that this issue is squarely covered in favor of the assessee by the various decisions of the Hon’ble High Court.

As regards non-deposit of the amount in capital gains account scheme before the due date for filing of return u/s. 139(1) of the Act, the Tribunal held that sub-section (1) of section 54 is a substantive provision enacted with the purposes of promoting purchase / construction of residential houses. However, sub-section (2) of section 54 is an enabling provision which provides that the assessee should deposit the amount earned from capital gains in a scheme framed in this respect by the Central Government till the amount is invested for the purchase / construction of the residential house.  This provision, according to the Tribunal, has been enacted to gather the real intention of the assessee to invest the amount in purchase / construction of a residential house.

S/s. (2) puts an embargo on the assessee to casually claim the benefit of section 54 at the time of assessment, without there being any act done to show his real intention of purchasing / constructing a new residential unit. S/s. (2) governs the conduct of the assessee that the assessee should put the amount of capital gains in an account in any such bank or institution specifically notified in this respect and that the return of the assessee should be accompanied by submitting a proof of such deposit, hence, s/s. (2) is an enabling provision which governs the act of the assessee, who intends to claim the benefit of exemption provisions of section 54. 

The enabling provision of s/s. (2) cannot abridge or modify the substantive rights given vide sub-section (1) of section 54 of the Act, otherwise, the real purpose of substantive provision i.e. s/s. (1) will get defeated. The primary goal of exemption provisions of section 54 is to promote housing.  The procedural and enabling provisions of s/s.(2) thus cannot be strictly construed to impose strict limitations on the assessee and in default thereof to deny him the benefit of exemption provisions. 

The Tribunal held that if the assessee at the time of assessment proceedings, proves that he has already invested the capital gains on the purchase / construction of the new residential house within the stipulated period, the benefit under substantive provisions of section 54(1) cannot be denied to the assessee.  Any different or otherwise strict construction of s/s. (2) will defeat the very purpose and object of the exemption provisions of section 54 of the Act.  The Tribunal observed that this view is fortified by the decision of the Karnataka High Court in the case of CIT vs. Shri K. Ramachandra Rao, ITA No. 47 of 2014 c/w ITA No. 46/2014, ITA No. 494/2013 and ITA No. 495/2013, decided vide order dated 14.7.2014 where the High Court has directly dealt with this issue while interpreting the identical worded provisions of section 54F(2) of the Act.

Since the assessee had invested the amount and had complied with the requirement of substantive provisions, the Tribunal held that the assessee is entitled to the claim of exemption u/s. 54 of the Act. 

The appeal filed by the assessee was allowed.