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April 15, 2021

Investment made in the name of the wife cannot be a reason for disallowance of deduction under section 54

Investment made in the name of the wife cannot be a reason for disallowance of deduction under section 54

Capital gain is the profit one earns on the sale of an asset like stocks, bonds or real estate. It results in capital gain when the selling price of an asset exceeds its purchase price. It is the difference between the selling price (higher) and cost price (lower) of the asset. Capital loss arises when the cost price is higher than the selling price.

The sale of capital assets may lead to capital gains and these gains may attract tax under the Income Tax Act. To save tax on these capital gains, a few capital gains exemption/deductions are available under sections 54, 54B, 54D, 54F etc. As per the provisions of these sections, the amount is required to be reinvested in specified investment types before the specified period. However, if the due date of filing income tax returns falls before the expiry of the specified period, the amount of capital gains is required to be invested temporarily in the Capital Gains Account Scheme which can be easily withdrawn at the time of investment in the specified instrument.

What is section 54 of the Income Tax Act, 1961?

Section 54 states that where assessee being individual or HUF has sold a long term capital asset consisting of residential house property then he shall be eligible for exemption of capital gain under this provision.

The assessee is required to purchase one residential house property in India in order to avail exemption under section 54. Where the Long term capital gain arising out of transfer is up to Rs. 2 crore then assessee can acquire two residential house properties prescribed time limit. This benefit of two house property is available to the assessee only once in lifetime.

The assessee has to purchase the new property within 1 year before or 2 years after the date of transfer of the old asset. In case the assessee conducts construction of the property then such construction must be completed within 3 years from the date of transfer of asset.

If the assessee is not able to purchase the property before the due date of filing of return than he can deposit the amount of capital gain in Capital gain account scheme in order to avail the exemption.

The assessee will get a maximum exemption of the amount of long term capital gain or the cost of new asset whichever is lower.

The assessee has to hold the asset for 3 years. In case the assessee transfer the new asset within 3 years from the date of purchase or construction, then cost of acquisition of new asset reduced by exempted capital gain.

Where the amount deposited in Capital gain account scheme is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains.

Facts of the Case:

The assessee has sold a residential house situated at Plot No.  184, Maruti Nagar, Airport Road, Sanganer, Jaipur vide sale deed dated 29.11.2017 for a consideration of Rs.  10,00,000/-  which  was  valued  by  the  Sub-Registrar (Stamps) at Rs. 10,84,691/-. The assessee did not file his return of income.  Subsequently,  notice  u/s  148  was issued  on 30.03.2015 and in response to the said notice, the assessee filed his return  of  income  on  14.01.2016  wherein  he  has  claimed  indexed cost  of  acquisition,  indexed  cost  of  construction  and  transfer expenses  amounting  to  Rs.  2,47,411/-  and  deduction u/s  54 amounting to Rs. 8,37,280/- against the deemed sale consideration u/s  50C  amounting  to  Rs.  10,84,691/-.  The Assessing Officer allowed the deduction amounting to Rs. 2,47,411/-. However, deduction u/s 54 was denied by the Assessing Officer. As per Assessing Officer, the fresh investment in the plot situated at Plot No.  184,  Maruti  Nagar,  Airport  Road,  Sanganer,  Jaipur  for  Rs. 7,16,638/- was made by the assessee in the name of his wife and secondly, no documentation has been submitted in support of cost of construction thereon. Accordingly, the deduction claimed u/s 54 amounting to Rs. 8,37,280/- was denied by the Assessing Officer.  Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) who has confirmed the action of the Assessing Officer.  Against the said findings, the assessee is in appeal before us.

Issue of the case:

The assessee filed the appeal due to denial of deduction claimed by the assessee u/s 54 of the Income Tax Act also the  assessee  has  challenged  the  levy  of  penalty  u/s 271(1)(c) of the Act imposed by the Assessing Officer

Observation by the ITAT:

Authorised Representative submitted that the assessee has purchased the plot of land for Rs.  7,16,638/- in the name of his wife and such investment was made out of the sale proceeds from sale of the original house property. In support, the reliance was placed on the Coordinate Bench decision in case of Shri Vivek  Jain,  Jaipur  vs.  DCIT. It was further submitted that the assessee constructed  a  small residential house on the aforesaid land and incurred an amount of Rs. 2,50,000/- on its construction out of the money  received  from  sale  of  land.  In support, a copy of the valuation report was also placed on record. It was further submitted that the assessee has also taken an electric connection which shows construction of a residential house and copy of the first electricity bill dated  01.03.2008  was  also  placed  on  record  which  was  not considered  by  the  Assessing  Officer.  It  was  accordingly  submitted that  the  deduction  claimed  by  the  assessee  towards the  fresh investment in terms of plot of land and construction thereon should be allowed to the assessee.

The ITAT found that the Assessing Officer has levied the penalty on account of denial of deduction claimed by the assessee u/s 54 of the Act.  In view of decision related aforesaid issue itwas directed to allow the claim of deduction u/s 54, thus the penalty u/s 271(1) (c) of the Act, being consequential in nature, is hereby directed to be deleted.

As the assessee’s total income without giving effect to the provision of section 54 come to Rs 9,37,280/- which exceeds the maximum amount not chargeable to tax.  The assessee was  therefore  required  to  furnish  his  return  of  income  and  in absence of any reasonable cause shown by the assessee for such failure to file his return of income, the penalty u/s 271F is hereby confirmed.


Hence, the ITAT has disposed off all the three appeals filed by the assessee and directed assessee to file return and imposed penalty u/s 271F as assessee does not have any reasonable cause for such failure to file the return.

Read the full order from the below Link


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