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Deduction u/s 54 is allowable even when a New Residential House is Purchased within 1 year before Transfer of Capital Asset: ITAT Ahmedabad [Read Order]

Recently, the ITAT Ahedabad bench, in the case of Bhailabhai N Patel v. DCIT Baroda, held that the assessee is entitled to get deduction under section 54 of the Income Tax Act even if a new residential house is purchased within 1 year before the transfer of capital asset.

The division bench observed that the section do not stipulate that the benefit is available only if a residential house is purchased within one year before or two years after the date of transfer of old residential house.

In the instant case, the assessee purchased a new residential property, the construction of which were completed within one year before the transfer of his capital asset. After the sale of capital asset, the assessee claimed deduction u/s 54 of the Income Tax. However, the AO rejected the claim by observing that deduction for construction of residential house is allowable u/s 54 of the Act only if the assessee constructs the house within a period of three years after the date of transfer of original asset, whereas assessee commenced and almost completed the construction of new residential house much before the date of transfer of capital asset.

The bench noted that both the authorities went wrong in denying the benefit to the assessee since the provisions of . 54 do not mandates that the deduction u/s 54 of the Act can be made by assessee only if a residential house is purchased within one year before or two years after the date of transfer of old residential house. It can be allowed even if a new residential house is purchased within one year before the date of transfer of capital asset which means that assessee has to make use of funds other than the sale consideration of house sold for investing in a residential house and it is not mandatory that only the sale consideration of house sold is to be utilized for purchasing or constructing a new residential house.

“Further going through the provisions of section 54 of the Act we also observe that there is no mention about the date of start of construction of residential house but it only refers to a construction of a residential house which in our view is the date of completion of the constructed residential house habitable for the purpose of residence.”

Read the full text of the Order below.

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