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.