Sections 45 and 54(1) – Capital gain – Exemption u/s. 54 – Construction of residential house within stipulated time – Exemption in respect of cost of new residential house – Scope of section 54 – Does not exclude cost of land from cost of residential house

13. C.
Aryama Sundaram vs. CIT; 407 ITR 1 (Mad) :

Date of order: 6^th
August, 2018

A. Y. 2010-11

Sections 45 and 54(1) – Capital gain – Exemption u/s. 54  – 
Construction of residential house within stipulated time – Exemption in
respect of cost of new residential house – Scope of section 54 – Does not
exclude cost of land from cost of residential house

The assessee
had sold a residential house property on 15/01/2010 for a total consideration
of Rs. 12,50,00,000/- and the total long term capital gains was Rs.
10,47,95,925/. On 14/05/2007, the assessee had purchased a property with a
superstructure thereon for a total consideration of Rs. 15,96,46,446/- and
after demolishing the existing structure, the assessee constructed a
residential house at a cost of Rs. 18,73,85,491/-. For the A. Y. 2010-11, the
assessee had claimed the entire long term capital gains as exempt from tax u/s.
54 of Act. The Assessing Officer held that only that part of the construction
expenditure that was incurred after the sale of the original asset was eligible
for exemption u/s. 54 and based on records held that the cost of construction
incurred after the sale of the original asset was Rs. 1,14,81,067/- and
accordingly allowed exemption of the same amount.

The Commissioner (Appeals) upheld the decision of the Assessing Officer. The
Tribunal held that section 54 was a beneficial provision and had to be
construed liberally on compliance with the conditions. It held that the
assessee had complied with the conditions of section 54 and remitted the matter
to the Assessing Officer to consider the deduction u/s. 54 for the construction
cost incurred by the assessee.

The Madras High Court allowed the
appeal filed by the assessee and held as under:

“i)    Section
54(1) did not exclude the cost of land from the cost of the residential house.
According to the section the capital gains had to be adjusted against the cost
of the new residential house. What had to be adjusted or set off against the
capital gains was the cost of the residential house that was purchased or
constructed. Section 54(1) was specific and clear. It was the cost of the new
residential house and not just the cost of construction of the new residential
house, which was to be adjusted.

ii)    The
cost of the new residential house would necessarily include the cost of the
land, material used in the construction, labour and any other cost relatable to
the acquisition or construction of the residential house. The condition
precedent for such adjustment was that the new residential house should have
been purchased within one year before or two years after the transfer of the
residential house, which resulted in the capital gains or alternatively, a new
residential house had been constructed in India, within three years from the
date of the transfer, which resulted in the capital gains.

iii)    The new residential house had been
constructed within the time stipulated in section 54(1). It was not requisite
of section 54 that construction could not have been commenced prior to the date
of transfer of the asset that resulted in capital gains. If the amount of
capital gain is equal to or less than the cost of the new residential house,
including the land on which the residential house was constructed, the capital
gains were not to be charged u/s. 45.”