2025 (6) TMI 1916 - AT - Income Tax

Appeal allowed for Section 54 deduction without mandatory filing requirement in original return

ITAT Delhi allowed the appeal regarding deduction u/s 54 of the Income Tax Act. The tribunal held that filing a claim for deduction u/s 54 in the original ... Denial of deduction u/s 54 - said claim was not made either in the original return of income or by way of a revised return of income - HELD THAT:- As per provisions of sections 54 it does not mandate that for claiming deduction u/s 54 of the Act filing of the claim in the return is a mandatory condition. Further, without going into the controversy as to whether the above transaction regarding Long Term Capital Gain in respect of Lucknow property and the investment in Delhi property for claiming deduction u/s 54 of the Act was intentional or unintentional, the fact remains that as per the provisions of section 45 of the Act, the capital gains arising on the sale of Lucknow property shall inter alia be effected in the previous year save as otherwise provided in sections 54 of the Act. Denial of deduction u/s 54 by the AO for the reasons as stated above and the finding of the CIT(A) that the Delhi property was acquired as purchased on 21.02.2005 is not correct. As noted above that in the respect of the Long Term Capital Gains in respect of sale of property a sum of Rs.22,30,000/- was paid by the assessee for the purchase of the new property beingN-1, Kailash Colony, Delhi as per the requirement u/s 54 of the Act. Therefore, as per the provision of section 45(1) and section 54(1)(ii) of the Act, the assessee will be entitled for deduction of Rs.17,13,015/- u/s 54 as claimed by him since the amount of Long Term Capital Gain of Rs.17,13,015/- is less than the purchase cost of Rs.22,30,000/- paid by the assessee for the new property being N-1, Kailash Colony, Delhi, which was paid one year prior to the purchase of the property being D-4, 1st Floor, Vivekanand puri, Lucknow, as required under the said provisions. Accordingly, we hold that the assessee is entitled for deduction of Long Term Capital Gain u/s 54 and therefore the addition made by the AO and confirmed by the Ld. CIT(A) is deleted. Accordingly, grounds no.1 and 2 of the appeal is allowed. Addition u/s 56(2)(vii)(b) - difference of stamp value and actual sale consideration - date of agreement for sale of the property at N-1 Kailash Colony, New Delhi i.e. 21.02.2005 and date of transfer i.e. 23.12.2013 are different - As agreement to sell the Delhi property in 2005 was admitted/confirmed by the Hon’ble Delhi High Court while delivering decision on specific performance of the contract is not correct. Further, the relief of Rs.86,66,666/- granted as above on the basis of available facts will be subject to the outcome of the decision of the Hon’ble Court, wherein, as noted by the Hon’ble Delhi High Court in the case no.CS(0S) No.193 of 2008, the merits of the case and/or the legality/validity of the Agreement to Sell dated 21.02.2005, relied upon by the plaintiff (assessee) and disputed by the defendant No.1(Shri R.N. Banerjee, S/o- Late Shri Shayam Pada Banerjee) is pending. The Assessing Officer will be at liberty to take necessary action as per law upon the receipt of the outcome of the Hon’ble Court on the legality/validity of the Agreement dated 21.02.2005 - Ground no.3 of the appeal is allowed with the above observations. The core legal questions considered in this appeal are:1. Whether the assessee is entitled to claim deduction under section 54 of the Income Tax Act, 1961 (hereinafter 'the Act') in respect of long-term capital gains arising from the sale of a residential property, despite not disclosing the transaction in the original return of income but filing a revised computation during assessment proceedings.2. Whether the date of acquisition of the new residential property for the purpose of section 54 should be taken as the date of the agreement to sell executed in 2005 or the date of registration of the sale deed in 2013, given the litigation surrounding the validity of the agreement.3. Whether an addition under section 56(2)(vii)(b) of the Act is justified on account of the difference between the stamp duty value and the actual sale consideration of the newly acquired property, considering the applicability of provisos relating to the date of agreement and payment of consideration.Issue-wise Detailed AnalysisIssue 1: Entitlement to Deduction under Section 54 for Long-Term Capital GainRelevant Legal Framework and Precedents: Section 54 of the Act provides exemption from capital gains tax where long-term capital gain arises from the transfer of a residential house and the assessee purchases another residential house within prescribed time limits. The exemption is conditional upon the capital gain amount being invested in the new asset either within one year before or two years after the date of transfer.Precedents such as CIT v. Jai Parabolic Springs Ltd. and CIT v. Sam Global Securities Ltd. establish that a new claim for exemption can be made during assessment proceedings even if not disclosed in the original return, provided the claim is otherwise valid.Court's Interpretation and Reasoning: The Assessing Officer (AO) initially denied the exemption under section 54 on the ground that the claim was not made in the original or revised return within the statutory time. The AO rejected the assessee's explanation of unintentional non-disclosure and treated the capital gain as income.The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, relying on the fact that the new property was purchased in 2013 but the date of acquisition was claimed as 2005 based on the agreement to sell, which was disputed in litigation.The Tribunal examined the facts and found that the possession of the new property was taken only on the date of registration in 2013 and not in 2005 when the agreement was executed. The Tribunal held that the date of purchase for section 54 purposes is the date of registration, i.e., 23.12.2013, and that the payment of Rs.22.30 lakhs was made within one year before the sale of the old property in December 2013.Application of Law to Facts: Since the capital gain of Rs.17,13,015/- was less than the amount invested in the new property (Rs.22,30,000/-), the assessee was entitled to claim exemption under section 54(1)(ii). The Tribunal relied on the statutory provisions and held that the denial of exemption by the AO and CIT(A) was incorrect.Treatment of Competing Arguments: The AO and CIT(A) emphasized the non-disclosure in the original return and the disputed date of acquisition based on the agreement. The Tribunal acknowledged these but gave primacy to the actual date of registration and possession, supported by documentary evidence and legal principles under section 54.Conclusion: The Tribunal allowed the claim of deduction under section 54 and deleted the addition of Rs.17,13,015/- made by the AO and confirmed by the CIT(A).Issue 2: Date of Acquisition of New Property for Section 54 PurposesRelevant Legal Framework: Section 2(47)(v) of the Act includes transfer by allowing possession in part performance of a contract under section 53A of the Transfer of Property Act. The date of acquisition is critical for determining eligibility for exemption under section 54.Court's Interpretation and Reasoning: The assessee contended that the date of acquisition was 21.02.2005, the date of agreement to sell. However, the agreement was disputed in litigation, and possession was not delivered until the sale deed was registered on 23.12.2013.The Hon'ble Delhi High Court, in the related litigation, expressly stated it did not express any opinion on the legality or validity of the agreement dated 21.02.2005. The Tribunal noted that possession was taken only on the date of registration and that the agreement to sell was not a conclusive transfer under section 2(47)(v).Application of Law to Facts: The Tribunal held that the date of acquisition for the new property is the date of registration, not the disputed agreement date. This was consistent with the statutory definition of transfer and the facts that possession was not delivered earlier.Treatment of Competing Arguments: The assessee relied on the agreement date and the High Court's order permitting sale under specific performance. The AO and CIT(A) relied on the registration date and the disputed nature of the agreement. The Tribunal sided with the latter, emphasizing possession and registration as determinative.Conclusion: The date of acquisition for the new property was held to be 23.12.2013, the date of registration of the sale deed, for the purposes of section 54.Issue 3: Addition under Section 56(2)(vii)(b) on Difference Between Stamp Duty Value and Sale ConsiderationRelevant Legal Framework: Section 56(2)(vii)(b) of the Act provides that if an individual receives immovable property for consideration less than the stamp duty value by an amount exceeding Rs.50,000/-, the difference is taxable as income from other sources. However, provisos to this section provide that if the date of agreement and date of registration differ, the stamp duty value on the date of agreement may be taken, provided part or full consideration was paid by non-cash mode on or before the date of agreement.Court's Interpretation and Reasoning: The AO made an addition of Rs.86,66,666/- being the difference between the circle rate valuation (stamp duty value) of Rs.1,32,00,000/- and the sale consideration of Rs.45,33,334/-. The CIT(A) confirmed this addition, rejecting the assessee's contention regarding the applicability of the provisos.The Tribunal examined the facts and found that the date of agreement was 21.02.2005 and the date of registration was 23.12.2013. The assessee had paid Rs.2,00,000/- by cheque on the date of agreement, satisfying the condition of payment by a mode other than cash on or before the date of agreement.The stamp duty value on the date of agreement was Rs.39,87,384/-, which was less than the sale consideration of Rs.45,33,334/-. Therefore, the provisos to section 56(2)(vii)(b) applied, and the addition was not warranted.The Tribunal relied on a precedent from the Pune Tribunal where similar facts led to deletion of such addition, emphasizing the applicability of the provisos.Application of Law to Facts: The Tribunal held that the AO and CIT(A) erred in applying the provision without considering the provisos. Since the conditions of the provisos were met, the addition under section 56(2)(vii)(b) did not arise.Treatment of Competing Arguments: The AO and CIT(A) relied on the stamp duty value as on date of registration and disregarded the agreement date and payment mode. The assessee argued for application of the provisos, supported by documentary evidence and judicial precedents. The Tribunal accepted the assessee's submissions.Conclusion: The addition of Rs.86,66,666/- under section 56(2)(vii)(b) was deleted. However, the Tribunal observed that the legality and validity of the agreement dated 21.02.2005 was still pending adjudication in the Hon'ble Delhi High Court, and the revenue was free to take action based on that outcome.Significant Holdings'The denial of deduction u/s 54 by the AO for the reasons as stated above and the finding of the ld. CIT(A) that the Delhi property was acquired as purchased on 21.02.2005 is not correct... the possession was taken on the day of registration of the sale deed i.e. 23.12.2013... As per the provision of section 45(1) and section 54(1)(ii) of the Act, the assessee will be entitled for deduction of Rs.17,13,015/- u/s 54 as claimed by him since the amount of Long Term Capital Gain of Rs.17,13,015/- is less than the purchase cost of Rs.22,30,000/- paid by the assessee for the new property...''First proviso to section 56(2)(vii)(b) of the Act categorically provides that where the date of agreement fixing the amount of consideration for the transfer of immovable property and the date of registration are not the same, the stamp duty value on the date of the agreement may be taken for the purpose of this provision... The stamp duty value on the date of agreement was Rs.39,87,384/- which is less than the consideration of Rs.45,33,334/- paid by the assessee. Therefore, the provisions of section 56(2)(vii)(b) of the Act will not be applicable in this case.''The Hon'ble Delhi High Court... has not expressed any opinion on the merits of the case and/or the legality/validity of the Agreement to Sell dated 21.02.2005, relied upon by the plaintiff and disputed by the defendant No.1.'Core principles established include:A claim for exemption under section 54 can be made during assessment proceedings even if not disclosed in the original return, subject to validity.The date of acquisition of a property for section 54 purposes is the date of actual transfer and possession, not merely the date of agreement, especially where the agreement is disputed.The provisos to section 56(2)(vii)(b) must be carefully applied, considering the date of agreement, date of registration, and mode and timing of payment, before making additions on account of difference between stamp duty value and sale consideration.The validity of an agreement to sell disputed in civil litigation cannot be conclusively presumed for income tax purposes without judicial determination.Final determinations on each issue were:1. The assessee is entitled to claim exemption under section 54 for long-term capital gains arising from sale of the Lucknow property, as the investment in the new Delhi property was made within the prescribed time and amount.2. The date of acquisition of the new property for section 54 purposes is the date of registration (23.12.2013), not the disputed agreement date (21.02.2005).3. The addition of Rs.86,66,666/- under section 56(2)(vii)(b) is deleted as the provisos apply, given the payment made by cheque on the date of agreement and the stamp duty value on that date being less than the sale consideration.