16 Section 54 – Acquisition of a flat in a building under construction is a case of `construction’ and not `purchase’. Construction of new house may commence before transfer of old house but should be completed within a period of 3 years from the date of transfer of old house.

[2017] 88 taxmann.com 275 (Mumbai-Trib.)

Mustansir I Tehsildar vs. ITO

ITA No. : 6108/Mum/2017

A.Y. : 2013-14     Date of Order: 18^th December, 2017

FACTS 

During the previous year relevant to the
assessment year under consideration, on 5-12-2012, the assessee sold his 1/3^rd
share in Flat No.2902 of an apartment named Planet Godrej located at Byculla,
Mumbai, for a consideration of Rs.126.83 lakh. Long term capital of Rs. 78.36
lakh accrued to the assessee on transfer of his flat in
Planet Godrej. 

The assessee had earlier, vide agreement
dated 5.2.2010, booked a flat at Elegant Tower, which was under construction.
The details of payments made to the builder are as detailed below:-

Thus, the aggregate payments made by the
assessee towards the new flat were Rs.104.07 lakh. Since the aggregate of
payments made was more than the amount of Capital gain, the assessee claimed
that entire amount of capital gain of Rs.78.36 lakh was deductible u/s. 54 of
the Act. The assessee treated the acquisition of new flat as a case of “Construction”.  As per the provisions of section 54, the new
flat is required to be constructed within 3 years from the date of transfer of
old flat. Since the old flat was transferred on 05-12-2012, the assessee submitted
that the time limit was available up to December, 2015 and the new flat was
acquired before that date.

The Assessing Officer (AO) treated the case
of acquisition of new house by the assessee as a case of purchase and not of
construction. He, accordingly, held that the purchase should have been between
06-11-2011 to 04-12-2014.  Accordingly, he held that –

(a) the payments aggregating to
Rs.86.38 lakh made between 12-04-2007 to 03-11-2009 falls outside the period
mentioned above and hence not eligible for deduction u/s. 54 of the Act;

(b) the capital gains not
utilised for purchase of new asset before the due date for filing return of
income should have been deposited in Capital gains Account Scheme as per the
provisions of section 54 of the Act. The payments of Rs.3,12,225/- and Rs.7,28,525/-made
on 14.6.2014 and 22.10.2014 respectively have violated the provisions of
section 54 of the Act, since the assessee did not deposit them in Capital gains
Account scheme. Accordingly, the AO held that the above said two payments are
not eligible for deduction u/s. 54 of the Act;

(c) The payment of
Rs.7,28,525/- made on 21-04-2012 was within the range of period mentioned by
him. Accordingly, he allowed deduction u/s. 54 of the Act only to the extent of
Rs.7,28,525.

Aggrieved, the assessee preferred an appeal
before CIT(A) who following the decision of the Bombay High Court in the case
of CIT vs. Smt. Beena K. Jain (217 ITR 363)(Bom.) held that the
acquisition of the new house by the assessee was a case of purchase and not
construction.  He, confirmed the action
of the AO.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal noted that the Hon’ble Bombay
High Court in the case of Mrs. Hilla J. B. Wadia (216 ITR 376)(Bom.) has held
that booking of flat in an apartment under construction must also be viewed as
a method of constructing residential tenements.

Accordingly, the co-ordinate bench has taken
the view in the case of Sagar Nitin Parikh (ITA No.6399/Mum/2011 dated
03-06-2015) that booking of flat in an apartment under construction is a
case of “construction”. In view of the above said decision of the
Hon’ble Bombay High Court and the Tribunal, the acquisition of new flat in an
apartment under construction should be considered as a case of “construction”
and not “purchase”. The Tribunal set aside the view taken by the tax
authorities and held that the assessee has constructed a flat and the
provisions of section 54 should be applied accordingly.

It also noted that section 54 of the Act
provides the condition that the construction of new residential house should be
completed within 3 years from the date of transfer of old residential house.

It noted that the Hon’ble Karnataka High
Court has held in the case of CIT vs. J. R. Subramanya Bhat [1987](165 ITR
571) that commencement of construction is not relevant for the purpose of
section 54 and it is only the completion of construction. The above said ratio
has been followed in the case of Asst. CIT vs. Subhash Sevaram Bhavnani
[2012](23 taxmann.com 94)(Ahd. Trib.). Both these cases support the
contentions of the assessee.

The Tribunal held that, for the purpose of
section 54 of the Act, it has to be seen whether the assessee has completed the
construction within three years from the date of transfer of old asset. It noted
that there is no dispute that the assessee took possession of the new flat
within three years from the date of sale of old residential flat.

The Tribunal held that the assessee has
complied with the time limit prescribed u/s. 54 of the Act. Since the amount
invested in the new flat prior to the due date for furnishing return of income
was more than the amount of capital gain, the requirements of depositing any
money under capital gains account scheme does not arise in the instant case.
Further, the Hon’ble High Court has held in the case of K.C.Gopalan [(1999)
107 Taxman 591 (Kerala)] that there is no requirement that the sale
proceeds realised on sale of old residential house alone should be utilised.

The Tribunal held that the assessee is
entitled for deduction of full amount of capital gains u/s. 54 of the Act, as
he has complied with the conditions prescribed in that section.  It set aside the order passed by Ld CIT(A)
and directed the AO to allow the deduction u/s. 54 of the Act as claimed by the
assessee.