Section 54 – Where assessee after selling residential property; pays sale consideration to another person, within the time limit prescribed under section 54, for purchase of house property then assessee’s claim for deduction under section 54 is to be allowed even though the said purchase transaction does not eventually materialise and another person refunds the consideration paid by the assessee.
FACTS
For the relevant assessment year, the assessee had filed his return declaring income of about 3 lakhs. During the course of assessment proceedings, the AO noted that the assessee had sold a house property and the conveyance deed in relation to the said sale was executed on 15-4- 2008. However, the assessee had not shown any capital gains in his return of income.
The assessee’s case was that it had intention to invest in a residential house building from the very beginning as the entire sum realized on sale was given by him to his brother for acquiring a house property owned by his brother. However, the transaction did not go through and the amount was returned to the assessee.
Subsequently, said sum was paid to one ‘M’ for acquiring a residence owned by her on basis of agreement entered into on 10-3-2010. The said transaction also did not eventually materialise.
The AO thus denied the exemption claimed by assessee u/s. 54 as the assessee could neither show that he purchased a house within two years from the date of transfer of the original asset nor could the assessee show that he had constructed a residential house within three years of such transfer.
The CIT(A) confirmed the order of the AO.
On second appeal before the Tribunal.
HELD
The time period allowed for making a purchase if it is done after the date of transfer is two years and if it is construction it is three years. Thus, if the intention was to construct a residential house the period is three years, the outer limit of three years for constructing a house in the given case was 14-4-2011. Vide sub-section (2) of section 54 a deposit under capital gains scheme, if the capital gain is not appropriated for such construction, has to be done before the due date for furnishing the return of income under section (1) of section 139.
The Hon’ble Punjab & Haryana High Court in the case of CIT vs. Ms Jagriti Aggarwal [2011] 339 ITR 610 has held that sub-section (4) of section 139 can only be construed as a proviso to sub-section (1) and thus, the due date of furnishing the return mentioned in section 139(1) is subject to the extended period provided under section 139(4). The impugned assessment year is assessment year 2009-10, and the extended time period under section 139(4) is before expiry of one year from the end of the relevant assessment year or before completion of assessment whichever is earlier. One year from the end of the impugned assessment year would expire only on 31-3-2011.
The assessment for the impugned assessment year having been completed only on 29-12-2011 the date to be reckoned for the purpose of application of sub-section (2) of section 54 in this case is 31-3-2011. Thus, it is clear that the assessee had time upto 31-3-2011 to deposit the capital gains in capital gains account scheme, if he could not utilise it for acquiring or constructing a residence.
This brings us to the question of whether assessee can be considered to have constructed or acquired a residence before 31-3-2011. Apart from the transaction that assessee claimed to have made with his brother, the assessee had undisputedly entered into a purchase agreement with one ‘M’ on 10-3-2010. The assessee had also paid a post-dated cheque pursuant to such agreement. The agreement dated 30-3-2011 through which consideration originally agreed by the assessee with ‘M’ was reduced from Rs. 70 lakhs to Rs. 40 lakhs has been placed on record. It is clearly mentioned therein that assessee had issued a cheque dated 2-12-2010 to ‘M’ for Rs. 40 lakhs. The bank account of the assessee shows that the above cheque was encashed by ‘M’ on 18- 12-2010. The agreement clearly mentions the intention of the seller to sell a building. It is also mentioned therein that the reduction in the consideration was due to vendor’s inability to complete the work of the residence before the agreed date. The agreement also mentions that the vendor had delivered to the assessee the original documents of title and the vacant possession of the scheduled property.
The liberal interpretation of the term purchase as it appears in section 54 has to be given also to the term ‘constructs’ appearing therein, in conjunction to the former. The Hon’ble Karnataka High Court in the case of CIT vs. Smt. B. S. Shanthakumari [2015] 233 Taxman 347 has held that the completion of construction within three years period was not mandatory and what was necessary was that the construction should have commenced. There is no dispute that the construction of the property for which agreement was entered by the assessee with ‘M’ had already begun. The question whether the above agreement finally fructified is a different matter altogether. Assessee had for all purposes satisfied the conditions u/s. 54 and earnestly demonstrated his intention to invest the capital gain in a residential house. Therefore, the disallowance of such claim stands deleted.
In the result, the appeal filed by the assessee is treated as allowed.
