2024 (3) TMI 1118 - AT - Income Tax

LTCG exemption under Section 54 allowed despite construction starting before sale and using borrowed funds

Phillip Koshy, C/o KB Chandna & Co. Versus DCIT, Central Circle-29, Delhi.

The ITAT Delhi ruled in favor of the assessee regarding LTCG exemption under Section 54. The AO had disallowed the deduction because construction of the ... LTCG - Disallowance u/s 54 - construction of new house begun before the sale of the old house - construction with the amount borrowed instead of actual sales proceeds - relevant date for taking possession of the property - as per AO two properties sold by the assessee during the assessment year under consideration when the assessee has taken possession of the constructed property after the date of sale of the two properties - HELD THAT:- Identical issue came up in the case of C. Aryama Sundaram [2018 (8) TMI 864 - MADRAS HIGH COURT] It is not a requisite of Section 54 that construction could not have commenced prior to the date of transfer of the asset resulting in capital gain. If the amount of capital gain is greater than the cost of the new house, the difference between the amount of capital gain and the cost of the new asset is to be charged under Section 45 as the income of the previous year. If the amount of capital gain is equal to or less than the cost of the new residential house, including the land on which the residential house is constructed, the capital gain is not to be charged u/s 45. We further observed that in the case of CIT Vs. Kapil Kumar Aggarwal [2015 (12) TMI 1075 - PUNJAB AND HARYANA HIGH COURT] that section 54F of the Act, nowhere envisages that sale consideration obtained by the assessee from original capital asset is mandatorily required to be utilized for purposes of meeting cost of new asset. It was, therefore, held that where investment made by the assessee although not entirely sourced from capital gains but was within stipulated time and if more than capital gain earned by assessee, the assessee is entitled to exempt u/s 54F. Hon’ble Allahabad High Court in the case of CIT Vs. H.K. Kapoor [1997 (8) TMI 44 - ALLAHABAD HIGH COURT] held that exemption on capital gains u/s 54 of the Act could be allowed notwithstanding the fact that the construction of new house had begun before the sale of the old house. Thus direct the AO to allow deduction u/s 54 of the Act as claimed by the assessee. Decided in favour of assessee. Issues Involved:1. Disallowance of deduction u/s 54 of the Income Tax Act.2. Charging of interest u/s 234A, 234B, and 234C of the Income Tax Act.Summary:Issue 1: Disallowance of Deduction u/s 54The assessee sold two properties in Mumbai and claimed a deduction u/s 54 of the Income Tax Act amounting to Rs. 1,31,47,100/-. The Assessing Officer (AO) restricted this deduction to Rs. 1,08,23,892/- on the grounds that Rs. 23,23,208/- was paid to the builder after the sale of the properties, and that the construction cost was met from a loan obtained from Axis Bank, not from the sale proceeds. The CIT(Appeals) not only confirmed the AO's disallowance but also enhanced the disallowance by Rs. 23,23,208/-, resulting in a total disallowance of Rs. 1,31,47,100/-.The ITAT considered the assessee's argument that there is no statutory requirement for the sale proceeds to be used directly for the new asset's cost. The Tribunal referenced multiple judicial pronouncements, including CIT vs. Kapil Kumar Agarwal (Punjab & Haryana High Court), ITO vs. K.C. Gopalan (Kerala High Court), and CIT vs. J.R. Subramanya Bhat (Karnataka High Court), which supported the assessee's claim that the source of funds (whether borrowed or from sale proceeds) does not affect the eligibility for deduction u/s 54.The Tribunal also addressed the timing of the construction and possession of the new property, referencing the decision in C. Aryama Sundaram vs. CIT (Madras High Court), which clarified that the construction of a new house could commence prior to the sale of the old house, provided the new house is completed within the stipulated time.Issue 2: Charging of Interest u/s 234A, 234B, and 234CThe assessee contended that the CIT(A) erred in not reversing the AO's decision to charge interest u/s 234A, 234B, and 234C of the Income Tax Act. However, the Tribunal's primary focus remained on the disallowance of the deduction u/s 54, and no separate detailed discussion on this issue was provided in the judgment.Conclusion:The ITAT reversed the findings of the CIT(A) and directed the AO to allow the deduction u/s 54 of the Act as claimed by the assessee. The appeal of the assessee was allowed. The judgment was pronounced in the open court on 21/03/2024.