Section 54F Does Not Envisage That Sale Consideration Obtained From Original Capital Asset Is Mandatorily Utilized For Meeting Cost Of New Asset: Delhi ITAT

The Bench of the ITAT comprising of Challa Nagendra Prasad (Judicial Member) and B.R.R. Kumar (Accountant Member) observed while referring the decision of Punjab & Haryana High Court in the case of CIT Vs. Kapil Kumar Aggarwal (382 ITR 56) that “section 54F of the Act, nowhere envisages that sale consideration obtained by the assessee from original capital asset is mandatorily required to be utilized for purposes of meeting cost of new asset. It was, therefore, held that where investment made by the assessee although not entirely sourced from capital gains but was within stipulated time and if more than capital gain earned by assessee, the assessee is entitled to exempt u/s 54F.” (Para 7)

As per the brief facts of the case, the Assessee's return was selected for scrutiny, wherein AO found that during the assessment year under consideration, the assessee sold two properties in Mumbai and claimed deduction u/s 54. The assessee purchased a plot in Bangalore in 2007, and entered into a construction agreement in the same year for the construction of a residential house with a construction firm that completed the construction on the said plot and handed over the position of the building in March 2012. The assessee met part of the cost of construction in installments from a loan raised from Axis Bank. The assessee claimed deduction u/s 54 as the assessee sold two properties in the financial year relevant to the current assessment year and the possession of the building constructed was taken after the date of sale of the two properties. The AO while completing the assessment, however, restricted the deduction claimed u/s 54 claimed by the assessee on the ground that an amount was paid to the builder after the sale of the properties by the assessee. The AO also denied the claim of the assessee for deduction u/s 54 on the ground that the assessee did not meet the cost of construction from the sale proceeds of the properties but was paid from out of loan obtained by the assessee from Axis Bank.

The CIT(A) not only sustained the action of the AO in denying the deduction of Rs.1,08,23,892/- as was done by the AO he also denied the claim of deduction of Rs.23,23,208/- which was allowed u/s 54 by the AO, by enhancing the income of the assessee to that extent.

The Bench noted that the only issue to be decided is whether the assessee is entitled to deduction u/s 54 on the two properties sold by the assessee during the assessment year under consideration when the assessee has taken the position of the constructed property after the date of sale of the two properties.

The Bench reiterated while referring the decision of the Madras High Court in the case of C. Aryama Sundaram Vs. CIT, Tax Case (Appeal No.520/2017) that “It is not a requisite of Section 54 that construction could not have commenced prior to the date of transfer of the asset resulting in capital gain. If the amount of capital gain is greater than the cost of the new house, the difference between the amount of capital gain and the cost of the new asset is to be charged under Section 45 as the income of the previous year. If the amount of capital gain is equal to or less than the cost of the new residential house, including the land on which the residential house is constructed, the capital gain is not to be charged under Section 45.”

The Bench observed while referring to the decision of Allahabad High Court in the case of CIT Vs. H.K. Kapoor (234 ITR 753) that exemption on capital gains u/s 54 could be allowed even though the construction of a new house had begun before the sale of the old house.

Therefore, while relying on the decisions of the High Courts, ITAT allowed the assessee's appeal.

Counsel for Appellant/Taxpayer: Yudhister Mehtani

Counsel for Respondent/Department: Vivek Vardhan

Case Title: Phillip Koshy verses DCIT

Case Number: I.T.A No.415/Del/2022

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