2025 (9) TMI 27 - AT - Income Tax

Deduction under s.54 allowed as possession and full consideration within one year satisfied LTCG exemption requirements

Payal Kishore Kulchandani Versus Income Tax Officer Ward22 (2) (5), Mumbai

Payal Kishore Kulchandani Versus Income Tax Officer Ward22 (2) (5), Mumbai - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the date relevant for determining purchase of a new residential property for exemption under section 54 of the Income-tax Act is the date of agreement/registration/initial payments or the date of receipt of possession and payment of the balance consideration. 2. Whether substantial payments made prior to the prescribed period under section 54, together with an agreement entered earlier, preclude the assessee from claiming exemption where possession and final payment fall within the prescribed period. 3. Whether and how prior judicial pronouncements interpreting the time-limit and the concept of 'purchase' under section 54 should be applied (including purposive interpretation of section 54 and the relevance of possession/full payment as the operative date). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Relevant date for 'purchase' under section 54 (agreement/initial payment versus possession/final payment) Legal framework: Section 54 permits exemption of long-term capital gain where a new residential house is purchased either one year before the transfer of the old house or within two years after such transfer; the provision requires that the assessee purchases a new house within the stipulated time. Precedent treatment: The Tribunal considered a prior decision of the Jurisdictional High Court (as cited in the record) which upheld an ITAT view that the relevant date for purchase is the date when full consideration was paid and the property became ready for occupation/possession. The Tribunal also considered an Apex Court decision emphasizing purposive interpretation of section 54 to effect legislative intent to relieve bona fide purchasers of tax burden on long-term gains. Interpretation and reasoning: The Court analyzed the chronology showing agreement and substantial part-payments before the one-year window but final payment and transfer of possession within the one-year period preceding sale of the old property. It accepted that the operative act constituting 'purchase' for the purpose of section 54 is the completion of the transaction in substance - i.e., payment of full consideration and handing over of possession such that the assessee acquires the new house for occupation. The Tribunal emphasized that the legislative purpose of section 54 is to prevent burdening the assessee with tax where the assessee has effectively replaced one residence with another within the allowed time; therefore formalistic fixation on agreement date would defeat the provision's object where possession and completion occur within the period. Ratio vs. Obiter: Ratio - the operative date for entitlement to exemption under section 54 is the date on which full consideration is paid and possession is obtained (i.e., when the new property is ready for occupation and the assessee has acquired effective control), provided that date falls within the statutory window. Observations on related formalities (registration timing, part-payments) are explanatory/obiter to the extent they do not alter the core holding. Conclusion: Possession and final payment on 06.04.2011, being within one year prior to the sale on 21.07.2011, satisfy section 54; the exemption must be allowed notwithstanding earlier agreement and part-payments. Issue 2 - Effect of substantial pre-period payments and an earlier agreement on entitlement to exemption Legal framework: Section 54 prescribes temporal limits for purchase; it does not, on its face, specify that early payments or an earlier executed agreement alone destroy entitlement if purchase is completed within the window. Precedent treatment: The Tribunal followed the Jurisdictional High Court decision (as relied upon in the record) which treated substantial advance payments and earlier agreement as not determinative where possession and full consideration were completed within the statutory period. The Tribunal also referenced the Apex Court's endorsement of purposive interpretation supporting relief in such circumstances. Interpretation and reasoning: The Tribunal reasoned that substantial payments made before the one-year period cannot be construed to negate the substantive completion of the purchase when possession and balance payment occurred later within the permissible period. The practical test is whether the assessee obtained the new residential premises for occupation and paid the full consideration within the time stipulated by section 54. Emphasis was placed on substance over form - the economic reality of acquisition rather than merely the chronology of installments or the date of agreement. Ratio vs. Obiter: Ratio - early part-payments and an earlier agreement do not preclude exemption if possession and payment completing the purchase fall within the statutory window; comments on payments flow and developer obligations are incidental. Conclusion: The existence of an agreement and substantial pre-period payments did not bar the exemption where final payment and possession occurred within one year before the sale; the deduction under section 54 must be allowed. Issue 3 - Approach to statutory interpretation and applicability of cited higher court rulings Legal framework: Interpretation of tax statutes should give effect to legislative intent; where relief provisions aim to mitigate tax burden arising from replacement of residence, a purposive approach is appropriate. Precedent treatment: The Tribunal expressly followed the Jurisdictional High Court decision on the operative date for purchase and relied on the Apex Court decision endorsing purposive interpretation of section 54. The higher court observations that the statute's purpose is to relieve an assessee who purchases/constructs a new premises within the stipulated period were treated as authoritative guidance. Interpretation and reasoning: Applying purposive interpretation, the Tribunal held that rigid formalism (focusing on agreement date or timing of initial payments) would frustrate the compassion embedded in section 54. Where the assessee completed acquisition in substance within the statutory timeframe, relief should be granted. The Tribunal considered the higher court authorities as controlling on the point and cited them as reasons to prefer a substance-over-form approach. Ratio vs. Obiter: Ratio - purposive interpretation governs the application of section 54, and the Tribunal's reliance on higher court holdings is part of the binding reasoning. Any broader remarks on legislative policy beyond application to the present facts are obiter. Conclusion: The Tribunal applied purposive interpretation consistent with higher court dicta and held that the assessee's factual completion of purchase within the statutory period triggers entitlement to exemption under section 54. Overall Disposition The Tribunal allowed the appeal and directed the assessing officer to permit the claim of deduction under section 54 in respect of the long-term capital gain, concluding that possession and final payment within the statutory one-year period constituted the relevant date of purchase for the purposes of section 54 despite earlier agreement and part-payments.