In a recent ruling, the Ahmedabad Bench of the Income Tax Appellate Tribunal ( ITAT ) decreed that filing of Belated Income Tax Returns does not disentitle Assessees from claiming exemptions of Long-Term Capital Gains ( LTCG ) under Section 54 of the Income Tax Act, 1961.
The Assessee is an individual deriving income from Salary, House Property, Capital Gain and other Sources. The Assessee filed their Return of Income belatedly under Section 139(1) on 26.03.2014 declaring a total income of Rs.31,71,420/- which was refuted by the AO who proceeded to make addition of Rs.23,17,183/-, totaling the Assessed income to Rs.54,88,603/-.
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The AO attributed the addition to the income on the Assessee’s sale of a residential house on 09.01.2013 for an amount of Rs.45,00,000/- and subsequent purchase of an unfinished flat for Rs.25,60,000/- on 17.02.2014. It was determined by the AO that the Assessee had paid consideration for the unfinished flat and additional construction in 2011, much before the sale of his above-mentioned residential house.
The exemption of Rs.23,17,183/- claimed by the Assessee in their ITR under Section 54 of the Act was denied by the AO citing that the Assessee had failed to deposit the unutilized amount of capital gain from the sale of the residential property in a separate account and also failed to file ITR as per Section 139(1) of the Act.
An appeal was preferred by the Assessee before the CIT(A) which partly allowed the appeal for claiming exemptions, stating that exemptions cannot be claimed on the amount spent on the new residential flat before the sale of the old residential property. Although the CIT(A) allowed exemptions claimed on the investments made in the new property after its sale was completed.
Aggrieved by the decision of the CIT(A) disregarding expenses incurred by the Assessee on the new residential flat during the period preceding its sale, the Assessee filed the present Appeal before the Ahmedabad Bench of ITAT. The Counsel for the Appellant Assessee submitted before ITAT that though the Appellate Order by CIT(A) was pronounced on 23.07.2018, the same was served upon the Assessee only on 19.03.2020, which was during the initial COVID-19 outbreak in the nation. Despite the constraints faced due to the COVID-19 crisis, the Assessee filed their appeals towards the Assessment Order on 12.06.2020 with a delay of 672 days.
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The Ahmedabad Bench of the ITAT comprising T.R. Senthil Kumar, Judicial Member and Narendra Prasad Sinha, Accountant Member were entrusted to assess the technicalities of Section 54 of the Income Tax Act, 1961 that were availed by the Assessee while attempting to claim exemptions.
The Bench observed that the Assessee is eligible to claim deduction under Section 54 of the Income Tax Act, 1961 stating that it is not mandatory that the funds used to construct the new residential flat had to necessarily be derived from the funds received through sale of the previously held Capital Asset (i.e., the old residential house). Regarding the time window available to an Assessee to claim exemptions under Section 54, the Bench clarified that the Income Tax Act, 1961 only refers to ‘date of completion of construction of a residential house’ in order to ascertain the eligibility to avail exemptions.
Reference was made to the case of Manilal Dasbhai Makwana vs. ITO (2018)passed by the same Tribunal wherein it was held that “when an assessee furnishes return subsequent to due date of filing return under s.139(1) but within the extended time limit under s.139(4), the benefit of investment made up to the date of furnishing of return of income prior to filing return under s.139(4) cannot be denied on such beneficial construction. Thus, on first principles, we hold that the capital gains utilized towards purchase of new asset before furnishing of return of income before either under s.139(1) or under s.139(4) of the Act will be deemed to be sufficient compliance of Section 54(2) of the Act.”
In conclusion, the Coram while allowing the Appeal directed the AO to grant deductions claimed by the Assessee and to delete the additions made by him
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