2017 (8) TMI 843 - AT - Income Tax

Assessee wins deduction appeal under Section 54 for 2012-13, post-purchase events deemed irrelevant

The Tribunal partially allowed the appeal, determining that the assessee was eligible for the deduction under Section 54 for the assessment year 2012-13 ... Exemption u/s 54 - disposing of the new house property within one year of purchase for commercial purpose - whether by entering into the Joint Development Agreement (JDA), the property will not loose the status of being residential property? - Held that:- The assessee has invested the sale consideration in the residential property and it is not disputed that the new property is residential. It is only that assessee has not resided nor let out and in the year subsequent to purchase of property, assessee has entered into JDA. In these circumstances, we are of the opinion that the AO cannot deny the exemption u/s 54 because the assessee has not demolished the house even on the day of “JDA”. As per the provisions of section 54, when the assessee transfers the new property within a period of three years, the assessee looses the benefits u/s 54 and the capital gain so claimed is taxable in the year in which the new asset is transferred. In the given case, the assessee has demolished the new asset in the year subsequent to purchase of new asset. Hence, it is an event which occurred subsequently and the AO cannot travel back to the AY in which assessee claimed the exemption u/s 54 and deny the exemption. - Decided in favour of assessee. Issues Involved:1. Disallowance of deduction claimed under Section 54 of the Income Tax Act.2. Interpretation of Section 54 in relation to the demolition of a purchased residential property.3. The timing and impact of entering into a development agreement and subsequent demolition on the eligibility for Section 54 deduction.Issue-wise Detailed Analysis:1. Disallowance of Deduction Claimed Under Section 54:The main issue revolves around the assessee's claim for deduction under Section 54 of the Income Tax Act for the assessment year 2012-13. The assessee had declared income from a traditional family business in gold jewelry and claimed a deduction under Section 54 for capital gains on the sale of a residential house property. The Assessing Officer (AO) disallowed this deduction on the grounds that the intention behind purchasing the new residential house was not for residential purposes, as evidenced by a subsequent development agreement with a builder for a commercial complex. The AO thus disallowed the total deduction claim of Rs. 12,32,19,770/-.2. Interpretation of Section 54 in Relation to Demolition of a Purchased Residential Property:The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, observing that the assessee had purchased a residential property and subsequently entered into a development agreement with M/s. Raichandani Construction Pvt. Ltd. for constructing a commercial complex, leading to the demolition of the purchased property. The CIT(A) relied on the decision of the Hon'ble Madras High Court in the case of Neelamalai Agro Industries and the ITAT Mumbai Branch in ACIT Vs. Dilip Manhor Parekh, which established that any voluntary extinguishment of rights in a capital asset amounts to a transfer, thus disqualifying the property from Section 54 benefits.3. Timing and Impact of Entering into a Development Agreement and Subsequent Demolition:The assessee argued that the property was purchased as a residential property within the stipulated period and thus qualified for Section 54 benefits. The assessee contended that there is no requirement in the Act for the property to be used for residence or let out, only that it should be a residential property. The demolition and development agreement occurred in subsequent assessment years, which should not affect the Section 54 claim for AY 2012-13. The Tribunal considered these arguments and noted that the demolition occurred after the purchase and registration of the development agreement. The Tribunal concluded that the AO's denial of the exemption based on subsequent events was not justified since the demolition and development agreement were subsequent events and did not affect the eligibility for Section 54 deduction in AY 2012-13.Conclusion:The Tribunal allowed the appeal partly, holding that the assessee was entitled to the deduction under Section 54 for AY 2012-13 as the conditions were fulfilled at the time of purchase. The Tribunal restrained from adjudicating on the subsequent events of entering into the development agreement and demolition, as these were not relevant to the assessment year in question. The Tribunal emphasized that the AO cannot deny the exemption based on events occurring after the relevant assessment year.