Tribunal allows deduction under Income Tax Act for incomplete house construction

The Tribunal ruled in favor of the assessee, allowing the deduction under section 54F of the Income Tax Act. Despite the new house not being fully completed within three years, the assessee was entitled to a proportionate deduction based on their investment. Precedents from the Karnataka High Court supported the assessee's claim, emphasizing that even incomplete construction did not disqualify them from the deduction. The Tribunal directed the Assessing Officer to compute the deduction based on the construction costs incurred by the assessee, clarifying that investments made before one year of the original asset's sale were not eligible for the deduction.

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Issues:
Rectification of Tribunal's order regarding deduction u/s 54F of the Income Tax Act.

Analysis:
The Department sought rectification of the Tribunal's order, claiming that the assessee was not entitled to deduction u/s 54F as the new house was not constructed within three years from the sale of the original asset. They argued that the unspent net consideration was not invested in the capital gain account scheme before the due date for filing the return. The Tribunal had directed the AO to quantify and allow the expenditure incurred by the assessee on the construction of the new house. The AR contended that except for the mistake in the amount of total cost in the purchase of properties, there was no error in the Tribunal's order.

The Tribunal observed that the assessee was entitled to deduction u/s 54F based on judgments of the jurisdictional High Court. The main issue was that although the assessee had invested part of the net sale consideration in the construction of the new house, it was not completed in full. The Tribunal referred to various judicial pronouncements cited by the assessee to support their claim for deduction u/s 54F. As per section 54F, the assessee must construct a new residential house within three years after the transfer. Even if the house was not fully completed, the assessee was entitled to a proportionate deduction based on their investment.

Citing precedents from the Karnataka High Court, it was established that if the consideration received on the transfer of the capital asset was invested in the construction of a residential house, the assessee could not be denied the benefit under section 54F, even if the construction was not fully completed. The judgment in CIT v. K. Ramachandra Rao clarified that the assessee must invest in the bank account or construct a new residential house within the stipulated period to claim the deduction u/s 54. The Tribunal remitted the issue to the Assessing Officer for computing the deduction based on the cost of construction incurred by the assessee.

The Tribunal clarified that the investment made before one year of the sale of the original capital asset could not be considered for the deduction u/s 54F. Additionally, a typographical error in the order regarding the total cost of properties was rectified. The miscellaneous petition filed by the revenue was partly allowed, and the decision was pronounced on September 6, 2021.

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