The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) recently ruled that deduction under section 54 of Income Tax Act 1961 ( ITA ) is allowable even if proceeds from sale of old property is not reinvested in the acquisition of new asset/property.
The assessee, Jignesh Jaysukhlal, is a taxpayer who owned a residential property, which he decided to sell.
The sale of this property resulted in capital gains. Seeking to reinvest these gains in a new residential property, the assessee initiated the construction of a new house.
However, the land on which this new house was constructed had been purchased earlier, and the construction had begun before the sale of the original property.
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Upon filing their tax returns, the assessee claimed a deduction under Section 54 of ITA
This section allows for an exemption from capital gains tax if the gains are reinvested in the purchase or construction of another residential property within specific timeframes: the new property must be purchased within one year before or two years after the sale, or constructed within three years after the sale.
The Assessing Officer (AO), during the scrutiny of the assessee’s returns, disallowed the claimed deduction under Section 54 of ITA.
The AO argued that because the construction of the new house had commenced prior to the sale of the original property, the exemption under Section 54 should not be granted.
The AO believed that the law intended for the new house to be constructed only after the sale, utilizing the funds obtained from the sale.
The AO further observed that the cost of the land on which the new house was built should not be included in the calculation of the exemption, holding the position that only the cost of the construction, excluding the land, should be considered for the deduction under Section 54 of ITA.
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Based on these inferences, the AO added the capital gains to the taxable income of the assessee, resulting in a higher tax liability.
Aggrieved with the AO’s interpretation, the assessee appealed the decision to the Commissioner of Income Tax (Appeals) [CIT(A)], but the appeal was dismissed, upholding the AO’s view.
Subsequently, the assessee filed an appeal with the Income Tax Appellate Tribunal (ITAT).
The ITAT bench comprising of Mr Senthil Kumar and Mr Narendra Prasad Sinha, upon reviewing the facts and the legal provisions, referred to the specific language of Section 54(1) of ITA which clearly stipulates that the exemption is available if the new residential property is purchased within one year before or two years after the sale, or if it is constructed within three years after the sale.
The Tribunal observed that the law does not mandate that the construction of the new house must begin only after the sale of the original property. The primary condition is that the construction should be completed within three years after the sale, which was met in this case.
Additionally, the tribunal pointed out that the purpose of Section 54 of ITA is to encourage the reinvestment of capital gains into residential properties, and the timing of the commencement of construction is irrelevant as long as the house is completed within the stipulated period.
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Addressing the AO’s observation that the exemption should be limited to the amount of capital gains actually used for constructing the new house, the Tribunal further noted that Section 54 of ITA does not require the specific sale proceeds to be used in the construction or purchase of the new property.
It was concluded that the exemption is based on the acquisition of a new residential property within the allowed timeframe, irrespective of whether the funds used are the direct proceeds from the sale.
In result, ITAT allowed the appeal filed by the assessee, directing the AO to grant the deduction under Section 54 of ITA and to delete the addition made to the assessee’s income.
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