Capital Gains Exemption Upheld Despite Delayed Construction

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Case Name:

Principal Commissioner of Income Tax and Another vs. C. Gopalaswamy (High Court of Karnataka)

ITA No. 303 of 2015

Date: 15th February 2016

Key Takeaways:

- Section 54F (of Income Tax Act, 1961): This section provides tax exemption on capital gains if the gains are reinvested in a residential property.

- Intention Matters: The court highlighted that the intention to invest in a residential property is crucial, even if the construction is incomplete.

- Liberal Interpretation: The provision is meant to encourage investment in residential properties and should be interpreted liberally.

Issue

Can an assessee claim an exemption under Section 54F (of Income Tax Act, 1961) if the construction of the residential house is not completed within the stipulated time?

Facts

- The assessee sold equity shares, resulting in a long-term capital gain.

- The assessee invested the capital gains in a residential house but the construction was not completed within the time frame specified by Section 54F (of Income Tax Act, 1961).

- The tax authorities denied the exemption, leading to an appeal.

Arguments

- Assessee's Argument: The entire capital gain was reinvested in a residential property, fulfilling the intention of Section 54F (of Income Tax Act, 1961).

- Revenue's Argument: The exemption should be denied because the construction was not completed within the stipulated time.

Key Legal Precedents

- CIT vs. Sambandham Udayakumar: This case established that the intention to invest in a residential property is sufficient for claiming an exemption under Section 54F (of Income Tax Act, 1961), even if the construction is incomplete.

Judgement

The court ruled in favor of the assessee, stating that the intention to invest in a residential property is sufficient for claiming an exemption under Section 54F (of Income Tax Act, 1961). The court emphasized that the provision should be interpreted liberally to promote investment in residential properties.

FAQs

Q1: What is Section 54F (of Income Tax Act, 1961)?

A1: Section 54F (of Income Tax Act, 1961) provides an exemption on capital gains if the gains are reinvested in a residential property.

Q2: Why was the exemption initially denied? 

A2: The exemption was denied because the construction of the residential house was not completed within the stipulated time.

Q3: What did the court decide?

A3: The court decided that the intention to invest in a residential property is sufficient for claiming an exemption under Section 54F (of Income Tax Act, 1961), even if the construction is incomplete.

Q4: How does this case impact future cases?

A4: This case reinforces the liberal interpretation of Section 54F (of Income Tax Act, 1961), emphasizing the importance of the intention to invest in residential properties.

The appellant revenue has preferred the appeal on the following substantial question of law:

“Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that assesee is entitled for exemption under

section 54F (of Income Tax Act, 1961) just because the assessee has re-invested entire capital gains by making payment in full to the builder and builder has not handed over the possession within the time limit prescribed under section 54F (of Income Tax Act, 1961) notwithstanding the fact that section being treated as beneficial provision,

the exemption claimed by the assessee is disallowed since the initial agreement of construction itself spoke completion time being 31/12/2011 against available time of construction by 1/8/2010 and assessee had

failed to satisfy the specific condition to get exemption”?

Tax effect 1.61 crore.

2. We have heard Mr.E.I.Sanmathi, learned

Advocate appearing for the appellant-Revenue. As

appears from the record that the assessee along

with his son had effected sale of certain equity

shares which resulted in long term capital gain of

Rs.13,55,84,748/- and the son Sri Navin Kumar

had the share of Rs.4,20,283/-.

3. Out of this capital gains, Rs.50,00,000/-

each were deposited by the respective assessee in

REC Bond and claimed exemption under Section

54-F of the Income Tax Act. As per the assessee, the

balance amount was invested in the residential

house. The assessing authority in the course of

assessment order, dis-allowed the claim of

exemption of Rs.5.23 crore under Section 54-F (of Income Tax Act, 1961) of

the Income Tax Act (hereinafter referred to as `the

Act’) on the ground that the construction of villas

was not completed within the stipulated time

allowed under Section 54-F (of Income Tax Act, 1961).

4. Being aggrieved by the said order, the

assessee preferred an appeal before the CIT(A)

which came to be dismissed. The assessee carried

the matter before the Tribunal in ITA

933(BNG)/2012 and the Tribunal after considering

the submissions of the revenue observed at para-8

as under:

“8. We have perused the orders

and heard the rival

contentions. There is no

dispute that on 28-07-2008,

the builder gave an allotment

letter to the assessee which

clearly mentions that Rs.7.70

Crores for villa no.75 stood

paid by the assesses. The sale

of shares giving rise to the

capital gains was on 20-07-

2007. May be it is true that

the agreement for construction

entered by assessee with

builder gave an outer date,

which went beyond the three

year period from the date of

sale of the shares. However,

assesses had done what all it

could do for acquiring the villa

by paying the whole of the

price on 28-07.2007 itself.

There is no case for the

revenue that the construction

itself was not started. Only

grievance of the revenue is that

the unit numbers have

changed and the outer limit for

completing the construction

went beyond three years limit

mentioned in Section 54F (of Income Tax Act, 1961) of

the Act. In our opinion, none

of these would disentitle the

assessee from claiming the

benefit u/s 54F (of Income Tax Act, 1961).

Their Lordship’s in the case of

Sri Sambandam Udaykumar

(Supra) had held as under:

“A reading of Section 54F (of Income Tax Act, 1961) of

the Act, 1961, makes it very

clear that if a capital gain

arises from the transfer of any

long term capital asset, not

being a residential; house and

the assessee has within the

period of one year before or two

years after the date on which

transfer took place purchased

or has within a period of three

years after that date

constructed a residential

house, if the cost of the new

asset is not less than the net

consideration on respect of the

original asset the whole of

such capital gain shall not be

charged under section 45 (of Income Tax Act, 1961) of

the Act. However, if the cost of

the new asset is less than the

net consideration in respect of

the original asset, so much of

the capital gain the same

proportion as the cost of the

new asset bears to the net

consideration shall not be

charged under section 45 (of Income Tax Act, 1961) of

the Act. Section 54F (of Income Tax Act, 1961)

is a beneficial provision of

promoting the construction of

residential house. Therefore,

the provision has to be

construed liberally for

achieving the purpose for

which it was incorporated in

the statute. The intention of

the legislature was to

encourage investments in the

acquisition of a residential

house and completion of

construction or occupation is

not the requirement of law.

The words used in the section

are “purchased” or

“constructed”. For such

purpose, the capital gain

realized should have been

invested in a residential house.

The condition precedent for

claiming the benefit under the

provision is that capital gains

realized from sale of capital

asset should have been

invested either in purchasing a

residential house or in

constructing a residential

house. If after making the

entire payment, merely

because a registered sale deed

had not been executed and

registered in favour of the

assessee before the period

stipulated, he cannot be denied

the benefit of section 54F (of Income Tax Act, 1961) of

the Act. Similarly, if he has

invested the money in

construction of a residential

house, merely because the

construction was not complete

in all respects and it was not in

fit condition to be occupied

within the period under section

54F of the Act. The essence of

the provision is whether the

assessee who received capital

gains has invested in a

residential house. Once it is

demonstrated that the

consideration received on

transfer has been invested

either in purchasing a

residential house or in

construction of a residential

house even though the

transactions are not complete

in all respects are required

under the law, that would not

disentitle the assessee from

benefit.”

The wordings in Section 54 (of Income Tax Act, 1961) & 54F (of Income Tax Act, 1961) with

regard to period with in which an assessee has

to acquire or construct a residential house are

pari-materia. Assessee in any case would have

been eligible for the claim under section 54 (of Income Tax Act, 1961), if

not under section 54F (of Income Tax Act, 1961). We are

therefore, of the opinion that assessee’s could

not be denied the deduction claimed by them.”

3. Consequently, the Tribunal allowed the

appeal. Under the circumstances, the present

appeal before this Court.

4. We have heard the learned counsel for

the parties and perused the record.

5. If the reasons recorded by the Tribunal as

considered as it is, the issue is already covered by

the decision of this Court in case of CIT vs.

Sambandham Udayakumar reported in 345 ITR

389. If the Tribunal has followed the said decision of

this Court, no substantial question of law would

arise for consideration in the present appeal.

6. However, learned counsel for the

appellant raised two contentions:

i) One was that the since the earlier

decision of this Court in case of

Sambandham Udayakumar (supra), the

tax amount was less, the matter was not

carried before the Apex Court and

therefore, the said decision may not be

holding the field.

ii) The learned counsel in furtherance of his

submission contended that as the word

used is “constructed” completion of

construction is sina qua requirement and

in absence thereof, the deduction cannot

be claimed and therefore, the Tribunal

has committed error. He also relied upon

the decision of the Apex Court in case of

Giridhar Yadalam vs. Commissioner of

Wealth Tax reported (2016) 65

Taxman.com 148(SC) and contended

that, similar word was interpreted by the

Apex Court and was found that the

construction ought to have been

completed.

7. In his submission, since the

construction was not completed in the present

case, the Tribunal ought not to have allowed

the appeal and the matter may deserve

consideration.

8. In the first aspects, we are not impressed

by the submission that, since tax amount was less

and the matter having been not carried before the

Apex Court, the efficacy of the decision of this Court

in Sambandham Udayakumar case referred supra

would be lost so far as applying principles a binding

precedent is concerned. When a co-ordinate Bench

of this Court has already taken a view in normal

circumstances, the departure therefrom is not

permissible unless there are strong and valid

reasons or the Apex Court has taken a different

view.

9. Attempt to rely upon the decision of the

Apex Court in case of Giridhar G.Yadalam is ill

founded because in the said case before the Apex

Court, the question arose for making distinction

between the land and building for the purpose of

wealth tax and for the purpose of exemption.

Further, the language in the section is

“Construction is done with the approval of the

authority”. Further, in clause (b) language was

“Such a building has been constructed”. As per

clause (a), the requirement was “the land is

occupied” by any building. It is on account of said

languages, meaning of the word “constructed” came

up for consideration before the Apex Court.

Whereas, in the present case, the relevant aspect is

that, utilization of the capital gain in construction of

a residential house. Such being the basic difference,

we do not find that the said decision in case of

Giridhar G.Yadalam referred supra would be of any

help to the learned counsel for the Revenue.

10. The resultant situation would be that,

issue stands covered by the decision of a co-

ordinate Bench of this Court in case of

Sambandham Udayakumar (supra). When the issue

is already covered by the decision of this Court, we

do not find that any substantial question of law

would arise for consideration as sought to be

canvassed in the present appeal.

11. Under the circumstances, the present

appeal is dismissed.

Sd/-

JUDGE

Sd/-

JUDGE