2013 (12) TMI 1411 - AT - Income Tax

Tribunal affirms Section 54F exemption for property transfer with borrowed funds

The Tribunal upheld the CIT(A)'s decision, confirming the assessee's eligibility for the Section 54F exemption. It was determined that the property ... Allowance of the claim of exemption under Section 54F of the Act – Held that:- The possession of the property has already been given by the assessee - the registration which was made on 1-9-2005 was a formality - the crucial date of transfer has to be taken into consideration as 16-4-2005 - Even and otherwise, the assessee has invested huge amounts before this date and the assessee claimed deduction only of Rs.33 lakhs or odd – there was no infirmity in the order of CIT(A) – The deduction u/s 54F allowed - Relying upon ACIT Vs. Dr. P.S.Pasricha [2008 (1) TMI 649 - ITAT MUMBAI] - the deduction under Section 54F is allowable even the funds were taken on loan – decided against Revenue. Issues Involved:1. Eligibility for exemption under Section 54F of the Income Tax Act.2. Determination of the date of transfer of property.3. Investment of capital gains in the construction of a new residential house.4. Use of borrowed funds for construction and its impact on Section 54F exemption.Detailed Analysis:1. Eligibility for Exemption under Section 54F:The primary issue in the appeal is the department's objection to the assessee's claim for exemption under Section 54F of the Income Tax Act. The assessee claimed an exemption on the capital gains arising from the sale of land, which was invested in constructing a new residential house. The Assessing Officer (AO) denied the exemption, arguing that the construction was completed before the sale and that borrowed funds were used for the construction.2. Determination of the Date of Transfer of Property:The AO contended that the transfer of property was complete only upon the registration of the conveyance deed on 1.9.2005. The assessee argued that the transfer was complete with the Civil Court's order on 16.4.2005. The CIT(A) agreed with the assessee, noting that the High Court had allowed the purchaser to carry out activities on the property with an undertaking to demolish the construction if the Civil Court ruled in favor of the seller. The Civil Court's order on 16.4.2005 finalized the transaction, making the registration on 1.9.2005 a mere formality. Thus, the CIT(A) concluded that the property was transferred with the Civil Court's order in April 2005.3. Investment of Capital Gains in the Construction of a New Residential House:The AO observed that the assessee invested substantial amounts in the construction of the house over several financial years and completed the construction in August 2005. The CIT(A) found that the construction was completed after the date of transfer (16.4.2005) and within the three-year period allowed under Section 54F. The CIT(A) cited case laws supporting the view that commencement of construction before the date of sale is permissible, provided the construction is completed after the transfer and within the stipulated period.4. Use of Borrowed Funds for Construction and Its Impact on Section 54F Exemption:The department argued that the use of borrowed funds for construction disqualified the assessee from claiming exemption under Section 54F, citing precedents like Milan Sharad Ruparel Vs. ACIT and CIT Vs. V.R. Desai. The assessee countered with case laws where borrowed funds were allowed for Section 54F exemption, including ACIT Vs. Dr. P.S. Pasricha, which was confirmed by the Bombay High Court. The CIT(A) and the Tribunal found that the use of borrowed funds did not preclude the exemption, as supported by various judicial precedents.Conclusion:The Tribunal upheld the CIT(A)'s decision, confirming that the assessee was eligible for the Section 54F exemption. The Tribunal agreed that the transfer of property was complete with the Civil Court's order on 16.4.2005 and that the construction of the new residential house was completed within the required period. The use of borrowed funds for construction did not affect the eligibility for exemption. Consequently, the department's appeal was dismissed, and the cross-objection filed by the assessee was also dismissed as infructuous.