ITAT allows LTCG deduction under section 54F and retrospective application of section 50C first proviso

The ITAT Delhi allowed the appeal regarding LTCG deduction under section 54F and circle rate valuation under section 50C. The tribunal held that the First Proviso to Section 50C, inserted by Finance Act 2016, applies retrospectively to agreements executed before the amendment where earnest money was paid, supported by bank statements. The CIT(A) erred in holding the provision prospective. The tribunal also found that tax authorities incorrectly denied section 54F deduction when the entire amount was paid and possession delivered under the agreement to sell. The matter was remanded to the AO for fresh computation of capital gains with proper consideration of these findings.

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Issues Involved:
1. Validity of the circle rate applied by the Assessing Officer (AO) under Section 50C of the Income Tax Act.
2. Eligibility for deduction under Section 54F of the Income Tax Act for investments in new residential property.

Detailed Analysis:

1. Validity of the Circle Rate Applied by the AO under Section 50C:

The appellant contested the AO's application of the circle rate of Rs. 29,000 per sq. meter effective from 01.09.2008, arguing that the 'Agreement to Sale' was executed on 14.08.2008 when the circle rate was Rs. 20,000 per sq. meter. The AO calculated the sale consideration at Rs. 1,30,50,000 against the declared Rs. 90,00,000 based on the revised circle rate. The appellant relied on an amendment effective from 01.04.2017, which stipulates that the date of the 'Agreement to Sale' should be considered for circle rate purposes if the agreement and registration dates differ.

The CIT(A) upheld the AO's application of the circle rate, considering the amendment to be prospective and not mandatory. The Tribunal, however, held that the First Proviso to Section 50C, inserted by the Finance Act 2016, applies retrospectively, as supported by the Hon'ble Madras High Court in CIT, Chennai Vs. Shri Vummudi. Therefore, the Tribunal found that the AO erred in applying the higher circle rate effective from 01.09.2008.

2. Eligibility for Deduction under Section 54F:

The appellant claimed a deduction under Section 54F for an investment of Rs. 75,00,000 in a new residential property at Gagan Vihar. The AO allowed a deduction only for Rs. 20,53,350, the amount paid before the due date for filing the return under Section 139(1). The CIT(A) upheld this decision, noting that the appellant failed to produce a registered sale deed and considered the higher claim as an afterthought.

The Tribunal examined the agreement to sell, which indicated that Rs. 75,00,000 was paid by cheque before the due date for filing the return. The Tribunal referenced several judicial precedents, including ITAT Delhi in ITO Ward 32(4) vs. Smt. Swati Oberoi and ITAT Bangalore in Smt. Kondamma vs. ITO, which held that the benefit of Section 54F should not be denied merely due to the absence of a registered sale deed if the payment and possession are established.

The Tribunal concluded that the appellant should be allowed the deduction under Section 54F for the investment of Rs. 75,00,000, as the payment was made and possession was delivered before the due date for filing the return. The Tribunal set aside the findings on the computation of capital gains and directed the AO to recompute the capital gains, considering the Tribunal's conclusions.

Conclusion:

The appeal was allowed for statistical purposes, with directions to the AO to recompute the capital gains afresh, considering the Tribunal's findings on the retrospective application of the First Proviso to Section 50C and the eligibility for deduction under Section 54F based on the investment in the Gagan Vihar property.

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