Wednesday, June 19, 2013

ITAT disallows sec. 54F exemption to the extent sum invested in construction before transfer of original asset

Investment made by assessee in new residential property was not entitled to deduction under section 54F to extent same was made before the sale of existing property

In the instant case, the assessee had filed its return for the relevant assessment year and had claimed deduction under section 54F in respect of amount invested in construction of a residential house property. During assessment, AO was of the view that the assessee was not entitled to deduction, as construction of house was substantially completed before the sale of capital asset. Therefore, the moot question that arose for consideration of the Tribunal was as under:

Whether the cost of construction incurred by the assessee after the sale of capital asset was entitled to deduction under section 54F, even if, the construction was commenced before the sale of capital asset and was completed within two years from the sale of capital asset?

The Tribunal held as under:

1) As per the ratio laid down by Karnataka High Court in the case of CIT v. J.R. Subrahmanya Bhatt [1986] 28 Taxman 578, the assessee was entitled to deduction under section 54F of the Act, though the assessee has commenced construction before the sale but completed the construction within two years after the sale. The commencement of construction prior to the sale of capital asset was immaterial and the assessee was entitled to deduction under section 54F of the Act;

2) In the case of Chandru L. Raheja v. ITO [1988] 27 ITD 551 (Bom.), it was held that when the assessee had already purchased land, started construction of a building then only that part of the investment in new house that was made out of the sale proceeds received after the transfer of the old house would qualify for exemption under section  54 of the Act;

3) The investment in residential house which had taken place after the sale of existing capital asset was to be considered only for deduction under section 54F;

4) Thus, whatever investment was made by the assessee in construction of new property within the period stipulated under section 54F, after the sale of existing property, would be entitled to deduction, but, the assessee was not entitled to deduction under sec. 54F in respect of the investment made in new property to the extent of investment made before the sale of existing property. Thus, the appeal of the assessee was partly allowed - Smt. Nimmagadda Sridevi v. Dy.CIT [2013] 33 taxmann.com 306 (Hyderabad - Trib.)