Capital Gain Exemption Allowable On Construction Of Residential House Completed Within 3 Years: ITAT

The assessee, Hemant Shridhar Phatak, in its return of income claimed exemption of Rs.45,46,285/- u/s. 54 of the Act on long term capital gains from sale of a residential house. The assessee had sold a flat on 04/08/2012.

The flat sold by the assessee was jointly owned by the assessee with his wife. The assessee booked two flats in the joint name with his wife on 18/4/2011. The possession of the flats was received by the assessee on 26/11/2014 (possession letters at page 315 and 318 of the paper book).

The assessee claimed that since assessee has utilized long term capital gain arising from sale of residential house towards purchase of new residential house within the time specified u/s. 54(1) of the Act, the assessee is eligible to claim exemption u/s. 54 of the Act.

The Assessing Officer held that the assessee had booked the residential flats, beyond one year before the date of transfer of a residential house and the possession of flat was received after two years from transfer of a residential house, hence, the assessee is not eligible to claim exemption u/s. 54 of the Act.

Aggrieved against the assessment order dated 21/03/2016 passed u/s. 143(3) of the Act, the assessee filed appeal before CIT(A). The CIT(A) vide impugned order upheld the findings of the Assessing Officer and dismissed appeal of the assessee. Seeking further recourse, the assessee filed an appeal before the ITAT.

The Authorised Representative of the assessee, Devang Divecha, emphasised that when the flats were booked, they were still under construction. It was only upon the completion of construction in 2014 that the assessee received possession of the flats.

He contended that one of the conditions under Section 54 of the Income Tax Act to claim exemption was the construction of one residential house in India within three years after the date of transfer of the long-term capital asset.

On the other hand, the Departmental Representative, Dinesh Chourasia, argued that the assessee acquired the new property beyond the specified time limit outlined in Section 54 of the Income Tax Act to claim the exemption.

"No contrary decision is brought to the notice of the Bench. In light of facts of the case and decisions referred above, we accept the appeal of assessee. The assessee is eligible to claim exemption u/s. 54 of the Act as the construction of residential house completed within three years from the relevant date," the bench consisting of Vikas Awasthy, Judicial Member, and Amarjit Singh, Accountant Member said while setting aside the impugned order and allowed the appeal of the assessee.

Additionally, the Tribunal noted that merely because the Assessing Officer rejected the assessee’s claim for exemption under Section 54 of the Income Tax Act, it did not warrant the imposition of a penalty under Section 271(1)(c) of the Income Tax Act. Consequently, the penalty levied under Section 271(1)(c) of the Income Tax Act was removed.

Case Title Hemant Shridhar Phatak Vs. The Asst. Commissioner of Income Tax ITA NO.267 & 268/MUM/2023(A.Y.2013-14)

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