2024 (10) TMI 1203 - AT - Income Tax

Assessee gets LTCG exemption under section 54 for investing in incomplete residential construction project

DCIT, Circle - 7 (1) (1), Bangalore Versus Bagalur Krishnaiah Shetty Vijay Shanker

The ITAT Bangalore dismissed the Revenue's appeal regarding LTCG exemption under section 54. The assessee had invested capital gains in constructing a ... LTCG - exemption u/s. 54 towards investment in house property which was under construction and not completed - utilization of the capital gain in construction of a residential house - HELD THAT:- As relying on C. Gopalaswamy [2016 (6) TMI 643 - KARNATAKA HIGH COURT] there is no infirmity in the decision of the CIT(A) in allowing the exemption u/s. 54 of the Act based on the amount utilised by the assessee towards construction of new house property where the construction is not complete. Appeal filed by the Revenue is dismissed. Issues Involved:1. Whether the CIT(A) was correct in law by deleting the disallowance made under Section 54 when the construction of the residential house was not complete.2. Whether the CIT(A) was justified in allowing the deduction under Section 54 when the construction of the property was incomplete and there was no residential house.Detailed Analysis:Issue 1: Disallowance under Section 54 due to Incomplete ConstructionThe core issue revolves around the interpretation of Section 54 of the Income Tax Act, which provides for exemption from capital gains tax on the sale of a property if the proceeds are reinvested in a residential house. The Revenue argued that the CIT(A) erred in deleting the disallowance made by the Assessing Officer (AO) because the construction of the residential house was not complete. The AO had relied on the Supreme Court's decision in Giridhar G. Yadalam vs. Commissioner of Wealth Tax, which emphasized that the benefit is only applicable to a building 'which has been constructed'.The CIT(A), however, relied on the Karnataka High Court's decision in Sambandam Uday Kumar, which clarified that the intention of the legislature is to encourage investment in residential houses, and completion of construction is not a strict requirement. The CIT(A) found that the assessee had indeed invested the capital gains in the construction of a residential house, fulfilling the condition under Section 54. The CIT(A) concluded that the AO's estimation of construction cost and subsequent disallowance were not justified, as the assessee had demonstrated sufficient investment in the construction process.Issue 2: Justification of Deduction under Section 54 for Incomplete PropertyThe Revenue contended that the CIT(A) erred in allowing the deduction under Section 54 since the property was not completed and there was no residential house. The learned Departmental Representative (D.R.) cited the Supreme Court's interpretation in the Giridhar G. Yadalam case, emphasizing that the exemption should only apply to fully constructed buildings.Conversely, the assessee's representative argued that the CIT(A) correctly allowed the deduction based on the Karnataka High Court's ruling in PCIT vs. C. Gopalaswamy, which distinguished the Supreme Court's decision in Giridhar G. Yadalam. The High Court held that the critical factor is the utilization of capital gains for constructing a residential house, regardless of whether the construction is complete.The Tribunal, after reviewing the arguments and precedents, upheld the CIT(A)'s decision, noting that the Karnataka High Court's decisions in Sambandam Uday Kumar and C. Gopalaswamy support the view that completion of construction is not a prerequisite for claiming exemption under Section 54. The Tribunal emphasized that the assessee had utilized the capital gains for construction, satisfying the legislative intent behind Section 54.Conclusion:The Tribunal dismissed the Revenue's appeal, affirming that the CIT(A) was correct in allowing the exemption under Section 54 based on the amount utilized for constructing the new house, even though the construction was incomplete. The decision underscores the legislative intent to promote investment in residential properties and clarifies that the exemption under Section 54 is not contingent upon the completion of construction.