Exemption under Section 54 to the extent that unutilized funds are not deposited in the “Capital Gain Account Program” is not accessible

Fact and issue of the case

The brief facts of the case are that during the Financial Year relevant to the AY 2015-16, the assessee has sold land & building situated at Velan Nagar, Valasaravakkam, Chennai, for a sale consideration of Rs.1,51,00,000/- vide registration document No.512/2015 dated 29.01.2015. The assessee has computed long term capital gains from the sale of land & building at Rs.89,99,443/- and claimed exemption u/s.54 of the Act, for purchase of residential house property at Plot No. A19 & A20, Govindan Nagar, 3rd Cross, Palavakkam, Chennai, for an amount of Rs.90 lakhs. During the course of assessment proceedings, the AO noticed that the assessee has purchased new house property on 29.04.2015 for a consideration of Rs.45 lakhs and also entered into a construction agreement with M/s.Keshthana Infrastructure Pvt. Ltd., and paid advance of Rs.6 lakhs on 22.05.2017. Therefore, the AO opined that the assessee has not utilized full amount of capital gains derived from sale of original asset for acquiring new asset and thus, re-computed long term capital gains and also exemption u/s.54 of the Act, and allowed exemption u/s.54 of the Act, at Rs.48,59,420/- as against total exemption claimed by the assessee at Rs.90 lakhs.

Being aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee has argued that although, he has not deposited unutilized portion of capital gains in ‘Capital Gain Account Scheme’ as required u/s.54(2) of the Act, but within a period of three years from the date of sale of original asset, the entire amount of capital gains has been utilized for construction of house property. Therefore, the AO is erred in denying the benefit of exemption u/s.54 of the Act. The Ld.CIT(A) after considering relevant submissions of the assessee and also by relying upon the decision of the Hon’ble Supreme Court in the case of Smt.Tarulata Shyam and Others v. CIT West Bengal reported in [1977] 108 ITR 345 (SC) rejected the arguments of the assessee and sustained the additions made by the AO towards disallowance of exemption claimed u/s.54 of the Act.

Observation by the tribunal

The tribunal has heard both the parties, perused the materials available on record and gone through orders of the authorities below. The facts with regard to impugned dispute are that the assessee has sold a land & building for a consideration of Rs.1,51,00,000/- on 29.01.2015 and computed long term capital gains. The assessee had claimed exemption u/s.54 of the Act, for an amount of Rs.90 lakhs for purchase of another residential house property site on 29.04.2015 and amount spent for construction of house thereon. The AO has allowed proportionate deduction towards exemption claimed u/s.54 of the Act, to the extent of Rs.48,59,420/- being consideration paid for purchase of property and stamp ®istration fees. However, denied exemption for remaining amount on the ground that the assessee has violated provisions of Sec.54(2) of the Act, in not depositing unutilized amount of capital gains in ‘Capital Gain Account Scheme’. We have given our thoughtful consideration to the reasons given by the AO in light of arguments advanced by the Ld.AR and we ourselves do not subscribe to the reasons given by the AR for simple reason that in order to get the benefit of exemption u/s.54 of the Act, the assessee should invest full amount of capital gains for purchase of new residential house property before one year from the date of sale of original asset or within three years from the date of sale of original asset, in case of construction. In case, the assessee is not able to spend full amount of capital gains on or before due date of furnishing of return of income u/s.139(1) of the Act or u/s.139(4) of the Act, then unutilized amount of capital gains should be deposited in ‘Capital Gain Account Scheme’ in a nationalized bank. In this case, the assessee has invested part of capital gains in purchase of new residential house property on or before due date of furnishing of return of income. However, did not deposit unutilized amount of capital gains in ‘Capital Gain Account Scheme’ as per the provisions of Sec.54(2) of the Act. The law is very clear in as much as the amount which is not utilized for construction and purchase of property before filing return of income must necessarily be deposited in an account duly notified by the Central Government so as to be exempted. Although, the provisions of Sec.54(2) of the Act, is a beneficial which needs to be construed liberally so as to allow benefit to the tax payer, but fact remains that if assessee demonstrate with evidences that full amount of consideration/capital gains is invested in purchase of new residential house property on or before filing return of income, if such filing is even beyond due date specified u/s.139(1) of the Act and within due date specified u/s.139(4) of the Act, then, the benefit of exemption should be allowed. However, in a case, where the assessee has filed return of income on or before due date for filing return of income u/s.139(1) of the Act, but, does not spend full amount of capital gains for purchase or construction of new house property, then, the unutilized amount of capital gains must be deposited in ‘Capital Gain Account Scheme’. This principle is supported by the decision of the Hon’ble Bombay High Court in the case of Humayun Suleman Merchant v. Chief Commissioner of Income Tax reported in [2016] 387 ITR 421 (Bombay). In this case, facts with regard to non-compliance of provisions of Sec.54(2) of the Act, are not in dispute. The assessee neither utilized full amount of capital gains for purchase or construction of house property before filing return of income u/s.139(1) of the Act, nor deposited unutilized amount in ‘Capital Gain Account Scheme’. Therefore, we are of the considered view that the AO has rightly allowed proportionate deduction towards amount invested for purchase of new house property u/s.54 of the Act. In so far as case laws relied upon by the assessee in the case of Mr.P.Shankar (supra), we find the Tribunal has recorded categorical findings that the assessee has utilized full amount of capital gains within three years from the date of sale of original asset and also complied with provisions of Sec.54 of the Act, and under those facts, it was held that when the assessee has satisfied all conditions, further not depositing unutilized amount in ‘Capital Gain Account Scheme’, benefit of exemption, cannot be denied. In this case, the assessee could not furnish any evidences with regard to completion of construction of house within three years from the date of sale of original asset and also any other evidences to prove that amount has been spent for construction of house property, except filing a statement referring certain payments to M/s.Keshthana Infrastructure Pvt. Ltd., and claimed that said payments are for construction of house property. Therefore, we are of the considered view that the assessee has failed to satisfy conditions prescribed u/s.54 of the Act, for claiming benefit of exemption u/s.54 of the Act, for remaining amount and thus, we are of the considered view that there is no error in the reasons given by the AO and the Ld.CIT(A) to reject the benefit of exemption for balance amount and thus, we are inclined to uphold the findings of the Ld.CIT(A) and dismiss the appeal filed by the assessee.

In the result, appeal filed by the assessee is dismissed.