2024 (2) TMI 1042 - AT - Income Tax

Assessee denied Section 54 exemption for failing to purchase new property within statutory timeframe despite property rights agreement

The ITAT Delhi denied the assessee's claim for exemption under Section 54 for long-term capital gains. Despite an agreement dated 18/02/2014 granting full ... LTCG - Denial of exemption u/s 54 - assessee has not purchased any new property within the time specified in the provision of Section 54 - HELD THAT:- In the present case, as per the Agreement dated 18/02/2014, the Assessee has been given full right to use, to hold, enjoy, sell, mortgage the Property to be purchased by the Assessee. On the other hand, the first party will not have any right, title or interest over the said property. It is also obverted that as per the Assessee, the new Flat was purchased by sale endorsement dated 18/02/2014, but later on contended that the Assessee has purchased Bare-Shell flat on 13/08/2016, which is not supported by any of the documents. On the contrary, the Assessee has entered into Agreement to Sell on 18/02/2014 which itself given with certain absolute rights to the assessee as mentioned above. For the purpose of claiming the benefit u/s 54 of the Act, within a period of one year before or two year after the date of transfer of old house, the tax payer should acquire another residential house or should construct a residential house within a specified period of three years from the date of transfer of old house. Considering the fact that assessee has not fulfilled either of the conditions mentioned in Section 54 of the Act, we find no error or infirmity in the orders of the Lower Authorities in denying the benefit of deduction to the assessee u/s 54 - Decided against assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether the assessee is entitled to deduction under section 54 for long-term capital gain where the alleged acquisition/possession/construction of the new residential property occurred relative to the statutory time-limits (one year before or two years after transfer for acquisition; three years after transfer for construction). 2. Whether an agreement of sale/endorsement executed prior to the date of transfer of the old residential property can constitute acquisition of the new asset for the purpose of section 54 when actual possession, completion status (bare shell vs. habitable house) and documentary proof of possession/completion are disputed. 3. Whether the assessee discharged the evidentiary onus to demonstrate compliance with the conditions of section 54 (timing and nature of acquisition/construction) so as to attract exemption. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of section 54 time-limits for acquisition and construction Legal framework: Section 54 permits exemption of long-term capital gain where the taxpayer, within prescribed time limits, (a) acquires a residential house within one year before or two years after the date of transfer of the old house, or (b) constructs a residential house within three years from the date of transfer. Precedent treatment: The Tribunal and CIT(A) refer to authority generally relied upon by the assessee but find such precedents inapplicable because the factual matrix and documentary support were lacking; no specific precedent was followed or overruled in the reasoning recorded. Interpretation and reasoning: The Tribunal examined the chronology: agreement/endorsement dated 18/02/2014 (purported acquisition right), alleged possession of a bare shell on 13/08/2016, date of transfer of old asset 28/02/2017, and completion of new flat claimed around end of January 2018. The statutory provisions require acquisition within one year before or two years after 28/02/2017, or completion of construction within three years thereafter. The authorities found that the alleged acquisition dates and claimed possession/completion did not satisfy the statutory timelines when tested against supporting documentary evidence and the factual record showing construction was already in progress before transfer. The Tribunal accepted the CIT(A)'s conclusion that the assessee failed to prove that a completed habitable residential house was acquired or constructed within the statutory period entitling him to deduction. Ratio vs. Obiter: Ratio - where the assessee fails to establish, by credible documentary evidence and consistent chronology, that acquisition or construction of the new residential property occurred within the statutory time limits, exemption under section 54 cannot be allowed. Obiter - observations about cause of construction delay and general comments on what constitutes 'possession' of a bare shell are factual adjuncts to the ratio. Conclusion: Exemption under section 54 was correctly denied because the assessee did not establish acquisition or construction of the new residential property within the statutory periods stipulated by the provision. Issue 2 - Effect of pre-existing agreement/endorsement and possession of a 'bare shell' on entitlement under section 54 Legal framework: For section 54 purposes, the relevant inquiry is whether, in the relevant statutory period, the taxpayer has in fact acquired the residential house (legal title/ownership or effective acquisition) or completed construction within three years; mere antecedent contractual rights or an incomplete structure not meeting the character of a residential house may be insufficient unless they amount to acquisition or construction within prescribed time limits. Precedent treatment: The assessee relied on various judgments to treat endorsement/agreement and possession of a bare shell as sufficient; however, the authorities found the reliance unsupported by documentary proof and did not apply any such precedents to allow the exemption. No recorded precedent was held binding in favor of the assessee. Interpretation and reasoning: The Tribunal accepted the CIT(A)'s finding that the agreement dated 18/02/2014 conferred certain rights but did not, on the material before the authorities, demonstrate that the new property was either (a) acquired within one year before or two years after transfer, or (b) completed by way of construction within three years. The assessee's inconsistent assertions (sale endorsement 2014 vs. possession of bare shell in 2016) and absence of corroborative documentary evidence (e.g., possession certificates, completion certificates, contemporaneous conveyance/registration within statutory windows) undermined the claim. The Tribunal also noted that the construction reportedly commenced before the sale of the old asset, and that the incomplete nature of the property (bare shell) and subsequent expenditures to make it habitable did not substitute for acquisition/completion within the statutory times without documentary proof showing that the statutory conditions were in fact met. Ratio vs. Obiter: Ratio - an agreement of sale/endorsement alone, without documentary evidence showing effective acquisition or completion within the statutory period, does not establish entitlement to deduction under section 54. Obiter - the Court's remark that a bare shell is not necessarily a 'house' for the purpose of section 54 unless its acquisition/possession/construction falls within the statutory framework and is supported by evidence. Conclusion: The agreement/endorsement and claimed bare-shell possession did not, on the record, satisfy the statutory conditions for section 54 relief; therefore the exemption was properly disallowed. Issue 3 - Evidentiary burden and sufficiency of proof to claim section 54 exemption Legal framework: The assessee bears the onus of proving compliance with conditions of statutory exemptions, including timing and nature of acquisition/construction for section 54. Precedent treatment: The authorities observed that the assessee cited case law but failed to produce documentary proof; hence such precedents could not remedy the lack of evidence. The decision applies the settled principle that entitlement to statutory exemptions depends on factually proving compliance. Interpretation and reasoning: The Tribunal endorsed the CIT(A)'s factual finding that the assessee's claims regarding dates (endorsement 2014 vs. possession 2016) and completion (end of January 2018) were inconsistent and unsupported. The absence of documentary proof to substantiate possession/acquisition/completion within statutory time-limits led to rejection of the claim. The Tribunal concluded there was no material error in the lower authorities' evaluation of evidence and their consequent denial of the exemption. Ratio vs. Obiter: Ratio - denial of section 54 relief is justified where the assessee fails to discharge the evidentiary burden of proving compliance with statutory timelines and the nature of the acquisition/construction. Obiter - procedural comments regarding the specific documents that would have been persuasive (not enumerated) are ancillary. Conclusion: The assessee failed to discharge the burden of proof required for claiming exemption under section 54; the disallowance of Rs. 35,58,612 was upheld. Overall Conclusion of the Court The Tribunal found no infirmity in the findings of the lower authorities: the assessee did not establish acquisition or completion of the new residential house within the statutory periods prescribed by section 54, and documentary evidence was inadequate and internally inconsistent. The appeal was dismissed and the section 54 exemption denied.