Assessee gets section 54 deduction as possession date counts as purchase date for under-construction property

The ITAT Mumbai allowed the assessee's appeal for deduction under section 54 for LTCG. The assessee had entered into an agreement on 25/07/2009 for an under-construction property and received possession on 2/2/2011. The tribunal held that for under-construction properties, the date of possession when the property becomes inhabitable constitutes the date of purchase, not the agreement date. Following precedents including Akshay Sobti and Bastimal K Jain, the tribunal ruled that booking a bare shell constitutes construction, not purchase, and the completion date should be considered for section 54 purposes. The deduction was allowed as the possession date fell within the prescribed one-year window.

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Issues Involved:

1. Eligibility for deduction u/s 54 of the Income Tax Act.
2. Initiation of penalty proceedings u/s 271(1)(c) of the Act.

Summary:

Issue 1: Eligibility for Deduction u/s 54

01. These appeals concern the claim of exemption u/s 54 of the Income Tax Act by spouses, with identical assessment and appellate orders, thus disposed of by a common order.

02. ITA number 4069/M/2023 is filed by Mr. Sunil A Shah for AY 2011-12 against the assessment order passed u/s 144C(13) read with sections 147 and 254 of the Income Tax Act, 1961, dated 3/10/2023, determining total income at Rs. 3,597,395, denying the claim of deduction u/s 54.

03. ITA number 4070/M/2023 is filed by Mrs. Rita Sunil Shah for AY 2011-12 against the assessment order passed u/s 144C(13) read with sections 147 and 254 of the Income Tax Act, 1961, dated 3/10/2023, determining total income at Rs. 3,597,395, denying the claim of deduction u/s 54.

06. The assessee, a non-resident, sold a jointly owned flat for Rs. 138 lakhs on 10/2/2011. The assessment was completed u/s 144(1) treating the gain as short-term capital gain. The CIT(A) confirmed this addition, which was challenged before the ITAT, which set aside the matter for de novo adjudication.

08. The AO accepted the date of allotment (31/1/2006) as the date of acquisition, thus considering the gain as long-term capital gain. The indexed cost of acquisition was disputed but settled.

09. The assessee claimed deduction u/s 54 for a new flat purchased from Runwal CapitaLand India Pvt Ltd, with the agreement dated 25/07/2009 and possession granted on 02/02/2011.

010. As per section 54, the assessee must purchase a new residential house within one year before or two years after the date of transfer, or construct within three years.

011. The AO considered the date of the purchase agreement (25/07/2009) as the purchase date, thus denying the deduction u/s 54.

013. The dispute is whether the date of the agreement (25/07/2009) or the date of possession (02/02/2011) should be considered for deduction u/s 54.

016. The assessee relied on the Bombay High Court decision in CIT vs. Beena K Jain, where the date of possession was considered for exemption u/s 54F. Similar decisions were cited from various judicial precedents.

018. The Tribunal considered the rival contentions and judicial precedents, concluding that the date of possession (02/02/2011) should be considered the date of purchase for deduction u/s 54.

026. The Tribunal held that the assessee is entitled to deduction u/s 54, considering the date of possession as the date of purchase, as the agreement was for an under-construction property.

027. Ground no. 1 of both appeals was allowed.

Issue 2: Initiation of Penalty Proceedings u/s 271(1)(c)

04. Grounds 2 and 3 in ITA No. 4069/MUM/2023 pertain to the initiation of penalty proceedings u/s 271(1)(c) on account of disallowance of deduction u/s 54 and variance in the calculation of indexed cost of acquisition.

028. The Tribunal found these grounds premature and dismissed them for both appeals.

029. Accordingly, both appeals were partly allowed.

Order pronounced in the open court on 13.05.2024.

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