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April 25, 2022

For computing Sec. 54 deduction ‘Agreement to Sale’ can’t be considered as date of purchase of property

by CA Shivam Jaiswal in Income Tax

For computing Sec. 54 deduction ‘Agreement to Sale’ can’t be considered as date of purchase of property

FACTS OF THE CASE

In May 2011, the assessee and his wife purchased a residential apartment (Flat No 203) in the under construction Bankston’ building in Thane (a new house) for Rs 1,40,51,500. In December 2012, the assessee made the majority payments to the builders by taking out a mortgage/housing loan. Following that, on May 21, 2014, the assessee and his wife, as co-owners with a 50% share, sold a residential dwelling (original house) and used the revenues to repay a housing loan for the new property. The assessee claimed a long-term capital gain of Rs. 79,92,015 accruing on transfer of original asset as a deduction u/s 54 of the Act in his return of income for the financial year 2015-16. The new house was purchased on February 15, 2012, according to the Assessing Officer (AO), which was the date on which the agreement for sale dated February 7, 2012 was filed. Because this date was two years and three months before the original house was sold, The AO disallowed the advantage of the deduction on the grounds that the assessee had not purchased a new residential house within the time limits set out in section 54, which is one year before or two years after the original asset was sold.

Aggrieved, the assessee filed an appeal with the CIT(A), who, based on the premise that the date of registration of the agreement for sale is to be considered as the date of purchase of a new residential house, dismissed the appeal against the assessee, finding that the property was purchased after the two-year period had expired. The CIT(A) also rejected the alternative argument that because the property being purchased was under construction, the assessee could benefit from section 54 of the Act by treating the transaction as a case of “construction rather than purchase” because the construction was completed and possession of the new house was taken on April 2, 2016, which was less than three years after the original asset was purchased.

OBSERVATION

After noting that the AO and CIT(A) used the date of registration of the agreement for sale as the date of purchase, the Tribunal looked into the nature of the agreement and its provisions. It was noted that the aforesaid agreement is not a sale / conveyance deed, but rather a sale agreement entered into between the builders who agreed to sell a flat in a multi-story building to the assessee. It was also noted that when the agreement for sale was filed, the multi-story structure had not yet been erected, and the assessee’s responsibility to pay is tied to construction. The agreement had to be registered, and it was governed by MOFA requirements. Taking into account the terms of section 4 of the MOFA as well as clause 53 of the agreement for sale, the court decided that the purchaser is only placed in possession as a licensee, and that the assessee acquired an interest in the premises upon taking possession. Because the assessee had already paid the entire/majority of the consideration for purchase by that date, it was held that the assessee had purchased the property for the purposes of section 54 of the Act on the date of taking possession, as held by the Bombay High Court in CIT vs. Smt Beena K. Jain 217 ITR 363. The Tribunal rules that the date on which the assessee takes possession of the property (i.e. April 2, 2016) should be considered the date of purchase. The assessee is required under section 54 to purchase a residential property within the prescribed time frame, regardless of the source of funds. The taxpayer is eligible to the deduction u/s 54 because the date of purchase is within two years of the date of sale of the original house. It was noticed that the assessee’s alternative claim that the advantage of section 54 be accorded to the assessee by considering the transaction as a construction case is now academic and does not require examination.

CONCLUSION

The date on which the Assessee takes possession (i.e. 02.04.2016) should be used as the acquisition date. The Section 54 requirement is that the Assessee purchases a residential house within the stipulated time frame, regardless of the source of finances. It is not stated anywhere that the funds acquired as consideration for the sale of the original asset must be used to purchase a new residential property. The Assessee is entitled to benefit under Section 54 of the Act because the date of purchase is within two years of the sale of the Original Asset (i.e. 21.05.2014). The Assessee’s other argument, that the benefit of Section 54 be provided to the Assessee by treating the transaction as a “construction” case in light of the Hon’ble High Bombay Court’s decision in Hilla J B Wadia: 216 ITR 376, is now academic and does not need to be considered.

raj-easow-versus-income-tax-officer-

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