Capital gain exemption u/s 54 valid even if Sale deed done one year prior to capital gain but possession by the builder was handed over within one year

What is section 54 of the Income Tax Act?

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.

Fact and Issue of the case

The assessee is a senior citizen and a practicing Advocate. For the assessment year 2013-2014, the return of income was filed on 26.07.2013 declaring total income of Rs.46,75,460. The return was selected for scrutiny and assessment was completed u/s 143(3) of the I.T.Act on 04.03.2016. Subsequently, notice u/s 263 of the I.T.Act was issued by the CIT. According to the CIT, the assessment order completed u/s 143(3) of the I.T.Act on 04.03.2016 is erroneous and prejudicial to the interest of the revenue mainly for the reason that the assessee had claimed cost of indexation benefit for the entire purchase. According to the CIT properties sold were purchased in two instances (on 27.02.1989 and 29.10.2009) and for the portion which was purchased on 29.10.2019, the assessee was not entitled to the benefit of indexation as the said asset was held for less than 36 months.

Secondly, according to the CIT, the assessee was not entitled to claim for deduction u/s 54 of the I.T.Act amounting to Rs.48,81,963 for the investment made in new asset, since the investment in the new asset was made one year prior to the date of sale of the original asset. The assessee raised objections to the notice issued u/s 263 of the I.T.Act, both on jurisdictional aspect and on merits. The CIT rejected the objections raised by the assessee and passed the impugned order on 19.01.2021. Aggrieved by the order of the CIT, passed u/s 263 of the I.T.Act, the assessee has preferred this appeal before the Tribunal.

Observation of the Tribunal

The Court has heard rival submissions and perused the material on record. As mentioned in CIT’s order, the window of purchase of new asset available to the assessee and his wife is from 24.05.2011 to 24.05.2014. The CIT considered the absolute sale deed dated 06.04.2011 as the date of purchase of new assets. Therefore, according to the CIT, the purchase of new asset was one year prior to the date of sale of the original asset (sale of original asset was on 24.05.2012) and hence was not entitled to deduction u/s 54 of the I.T. Act. The assessee had submitted a confirmation of builder of the new asset (flat) stating that at the time of registration of sale deed, the apartment was not completed and after finishing all the work in apartment, the same was handed over possession to the assessee only in the month of November 2011. A copy of letter of the builder is placed at page 94 of the paper book. A copy of the invitation extended on the occasion of gruhapravesham of new flat which was performed on 12.03.2012 is also placed on record at page 95 of the paper book. It is the contention of the assessee that the registration process was completed earlier because it was expected that there would be increase in stamp duty rates.

This contention of the assessee cannot be brushed aside as untrue. In many cases, before the completion of flat the property would be registered on anticipation that there would increase in stamp duty rates. Be it as it may, the court notice that the builder has certified that the new flat was handed over to the assessee only in the month of November 2011. This fact is also acknowledged by the CIT in the impugned order at para 5.2.From the submission and evidence produced, it is seen that though the newly acquired flat gets completed and comes into existence in November 2011 and gets physically handed over to the assessee in the same month.

Admittedly, the assessee is handed over possession of new flat in the month of November 2011 and gruhapravesham was completed on 12.03.2012. Since the assessee was handed over the possession of the new flat only in November 2011, that date should be considered for all practical purposes, the date of acquisition of new flat for claiming deduction u/s 54 of the I.T. Act. As mentioned earlier, window of purchase of new asset is available to the assessee from 24.05.2011 to 24.05.2014. Therefore, handing over possession of new asset being in the month of November 2011 falls within the period of window mentioned above. Hence, I hold that the assessee is entitled to deduction u/s 54 of the I.T. Act on purchase of new asset. It is ordered accordingly.