2016 (10) TMI 60 - HC - Income Tax

Court affirms exemption under Section 54 for reinvestment in new property

The Commissioner of Income Tax, The Dy. Director of Income-tax (Intl. Taxn.) Versus Mrs. Shakuntala Devi Since Deceased By Her Lr's, Ms. Anupama Banerji Shakunthala Devi Educational Foundation Public Trust

The Karnataka High Court affirmed the Income Tax Appellate Tribunal's decision granting exemption to the assessee under Section 54 of the Income Tax Act, ... Entitlement to benefit under Sec.54 - adoption of date to be taken as the basis for reckoning the period of two years prescribed under Section 54 - consideration of capital gains portion - Held that:- Facts on hand would disclose that assessee had owned a flat at Mumbai and sold the same on 04.02.2003 for a total consideration of ₹ 1,70,00,000/-. Subsequent to such sale she entered into an agreement for purchasing another property for a total consideration of ₹ 3,25,00,000/- by agreement dated 08.09.2003. Said agreement came to be entered into within six months from the date of sale i.e., 04.02.2003 and assessee had paid a total consideration of ₹ 2,40,00,000/- between April' 2003 to September' 2003. After making the payment, a registered sale deed had not been executed in favour of the assessee before completion of two years period pursuant to Memorandum of Understanding dated 08.09.2003. The consideration received by her under sale dated 04.02.2003 has been paid by the assessee for purchasing another property and reinvestment has been made within two years as contemplated under Section 54 of the Act. These facts are not in dispute. Thus, long- term capital gains computed by virtue of sale deed stood adjusted by virtue of payment made by assessee for purchasing another property under Memorandum of Understanding dated 08.09.2003. As such, Tribunal has rightly held that date of purchase was to be taken as the basis for reckoning the period of two years prescribed under Section 54 of the Act for extending the benefit flowing therefrom. In the instant case consideration paid by assessee under Memorandum of Understanding dated 08.09.2003 would fully cover the consideration of capital gains portion for being eligible to claim exemption under Section 54 of the Act. Coordinate Bench of this Court in the case of PRINCIPAL COMMISSIONER OF INCOME-TAX vs. C. GOPALASWAMY reported in [2016 (6) TMI 643 - KARNATAKA HIGH COURT] has held that utilization of capital gains in construction of residential house would suffice to claim the benefit of Section 54 of the Act. - Decided in favour of assessee and against the revenue Issues Involved:1. Interpretation of Section 54 of the Income Tax Act, 1961 regarding exemption for reinvestment in residential property.2. Determination of eligibility for exemption under Section 54 based on reinvestment conditions.3. Consideration of whether possession or completion of sale is necessary for claiming exemption under Section 54.Analysis:1. The appeal before the Karnataka High Court questioned the correctness of the Income Tax Appellate Tribunal's order allowing the assessee's claim for exemption under Section 54 of the Income Tax Act, 1961. The Tribunal had concluded that the assessee fulfilled all conditions prescribed under the said section for exemption.2. The facts leading to the appeal involved the assessee selling a flat in Mumbai and claiming exemption under Section 54 by reinvesting the proceeds in another property. The assessing officer disallowed the deduction, stating the sale transaction was not concluded. The Commissioner of Income Tax (Appeals) upheld this decision, leading to the appeal before the ITAT.3. The ITAT held in favor of the assessee, stating that the date of purchase should be considered for claiming exemption under Section 54. The Tribunal emphasized that physical possession or registration of the sale deed was immaterial for claiming the exemption. The High Court admitted the appeal to consider the substantial question of law regarding the completion of the sale transaction for entitlement to benefit under Section 54.4. The arguments presented before the High Court included the revenue's contention that the assessee did not pay the entire sale consideration for the new property and did not receive possession within two years, thus not qualifying for Section 54 benefits. The assessee's counsel argued that reinvestment of the sale proceeds was the key factor for claiming the exemption, supported by a relevant court judgment.5. The High Court analyzed Section 54 of the Act, emphasizing that reinvestment of the capital gains in purchasing or constructing a residential property is essential for claiming exemption. The conditions to be fulfilled for Section 54 benefits were outlined, and it was noted that the assessee had reinvested the sale proceeds within the stipulated time frame.6. The Court concluded that the assessee had met the conditions under Section 54 by reinvesting the sale proceeds in a new property within the required period. Referring to a previous judgment, the Court affirmed that utilizing capital gains for residential property construction was sufficient for claiming the Section 54 benefit.7. Consequently, the High Court dismissed the appeal, affirmed the ITAT's order granting exemption to the assessee under Section 54, and ruled in favor of the assessee against the revenue, with no costs awarded.This detailed analysis of the judgment provides a comprehensive understanding of the legal issues involved and the High Court's decision regarding the interpretation and application of Section 54 of the Income Tax Act, 1961.