The Mumbai Bench of ITAT, consisting of members Pramod Kumar (Vice President) and Kuldip Singh (Judicial Member), has ruled that an assessee’s claim of deduction under Section 54 of the Income Tax Act, 1961 was to be reckoned from the date of possession of the new residential house property. Also, the ITAT ruled that the source of funds for the purchase of the new house property under Section 54 is irrelevant.
The Assessing Officer (AO) had denied the benefit of deduction under Section 54 of the Act to the Assessee Reji Easow on the ground that he had not purchased the new residential house property within period specified in Section 54 of the Act, which is one year before or two years after the sale of the existing residential property. According to the AO, since the new residential house was purchased 2 years and 3 months prior to the date of transfer and sale of the original residential property, Easow could not be granted the benefit of Section 54 of the Act. The AO was also of the view that Easow had utilized his regular income to repay the loan instalments to purchase the new house and not the consideration received from the sale of the original property. The Commissioner of Income Tax (Appeals) (CIT (A)) had confirmed the disallowance of deduction claimed under Section 54 of the Income Tax Act. The CIT(A) had held that the date of registration of Sale Agreement was to be considered as the date of purchase of the new residential property, which was in the present case beyond the prescribed time limit under Section 54 of the Act. Against the order of the CIT (A), the Assessee filed an appeal before the ITAT.
The representative for Easow (Assessee) before the ITAT had averred that the date of actual physical possession should have been taken as the date of purchase of the new residential property and not the date of registration of the Sale Agreement. Since the new property was acquired for physical possession within the prescribed time, Easow was entitled to exemption under Section 54. The departmental representative had contended that the date of registration of Sale Agreement should be taken as the date of purchase. He submitted that since the property was not purchased within the specified period, the AO was justified in disallowing deduction under Section 54 of the Act.
Section 54 of Income Tax Act, 1961 provides that an individual or HUF selling a residential property can avail exemption from tax on long term capital gains if the capital gain is invested in the purchase of a residential property within a period of one year before or two years after the date of transfer of the old house, or in the construction of a new house within three years from the date of transfer of the old house.
The ITAT observed that the Sale Agreement entered into by the Assessee was not a sale or conveyance deed but only an agreement for sale entered between the Assessee and the developers. Also, at the time of registration of the said Agreement, the new residential property sought to be purchased was not yet constructed and the obligation of the Assessee with respect to payment was linked to the construction of the new property/flat.
The ITAT observed that the Bombay High Court in the case of CIT versus Smt. Beena K. Jain (1993) had held that the relevant date for the purpose of determining the date of purchase of a new residential property under Section 54 was the date on which the individual had paid the full consideration on the property, on it becoming ready for occupation, and when he consequently obtained the possession of the said property. Similarly, the ITAT observed that a co-ordinate bench of the Tribunal in the case of Bastimal K Jain versus ITO (2016) had held that an assessee’s claim of deduction under Section 54 of the Act was to be reckoned from the date of handing over of the possession of the flat by the builder to the assesse.
The ITAT held that in the present case the date on which Easow (Assessee) took possession of the property should be taken as the date of purchase for the purpose of exemption under Section 54. Since the date of possession fell within the two year time limit provided under Section 54, the Assessee was entitled to exemption. Also, the ITAT ruled that the source of funds for purchase of new property is irrelevant for the purposes of Section 54. It ruled that Section 54 does not envisage the requirement that the funds received from sale of original asset must be utilized for the purchase of the new residential house.
The ITAT, therefore, allowed the Assessee’s appeal.
Case Title: Reji Easow Versus Income Tax Officer, Thane
Source: livelaw.in
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