2016 (5) TMI 1492 - AT - Income Tax

Appeal granted for deduction under Income Tax Act despite using borrowed funds

The Tribunal allowed the appeal, holding that the appellant is entitled to the deduction under section 54 of the Income Tax Act, despite using borrowed ... Exemption claimed u/s 54 - new house is purchased from borrowed funds - diversification of sources of the funds for purchase of new house - out of sale proceeds of old assets only ₹ 6 lacs was invested in the new asset and remaining ₹ 19 lacs was arranged as loan from ICICI Bank and therefore exemption u/s 54 to be restricted to ₹ 6 lacs and remaining were charged to tax as long term capital gain - HELD THAT:- Respectfully following the decision of CIT V Dr Parsicha [2009 (10) TMI 898 - BOMBAY HIGH COURT] as approved that sources of funds are irrelevant for claiming exemption u/s 54 of the act. If a new house is purchased from borrowed funds even then the deduction u/s 54 of the act is allowable We also hold that despite assessee has borrowed funds from ICICI bank for purchase of new House property , she is entitled to deduction u/s 54 of the income tax act on capital gain of ₹ 1268494/-. - Decided in favour of assessee. Issues:Appeal against denial of deduction u/s 54 of the Income Tax Act.Analysis:1. The appellant, an individual, sold a house property for Rs. 15 lakhs and purchased another for Rs. 25 lakhs, claiming exemption of capital gain of Rs. 1268491 u/s 54 of the Income Tax Act. The Assessing Officer denied the deduction, restricting it to Rs. 6 lakhs as only that amount was invested in the new property, with the remaining Rs. 19 lakhs arranged as a loan from ICICI Bank. The CIT(A) upheld this decision, citing a Mumbai ITAT case and stating that exemption u/s 54 is only allowed to the extent capital gain is utilized for the new property.2. The appellant argued that the borrowed funds used for the new house should not disqualify them from the deduction u/s 54. The Tribunal referred to a Bombay High Court decision where it was held that even if a new house is purchased from borrowed funds, the deduction u/s 54 is allowable, emphasizing that the source of funds is irrelevant for claiming the exemption.3. The Tribunal noted that the law does not require the same funds from the sale to be used for the new property purchase, as long as the purchase is within the specified period. It highlighted that the requirement is the acquisition of a residential house within the specified time, and the source of funds is immaterial for claiming the deduction u/s 54.4. Relying on the Bombay High Court decision, the Tribunal allowed the appeal, stating that despite the appellant borrowing funds from ICICI Bank for the new property purchase, they are entitled to the deduction u/s 54 on the capital gain amount.This detailed analysis of the judgment provides a comprehensive understanding of the issues involved and the Tribunal's decision in favor of the appellant regarding the deduction u/s 54 of the Income Tax Act.