Capital gain

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Sahil Agrawal (Querist)
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05 January 2014 Dear All,
I have a NRI Client living in USA, They acquired a property in india by paying application money to developer of property and as per agreement developer developed the property 3 years from the date of allotment letter (09/10/2007) and consider as deemed that of acquisition/constructed (i.e 8/10/2010) but due to some uncontrollable situation construction of property is completed near about 3 years from the deemed date of construction/acquisition,(16/10/2013)which also mentioned in agreement paper that there may be delay in the construction which is beyond the control of developer.

Now the question is he sale the property one of resident assessee,so for the purpose of computing capital gain which date shall be take in to consideration for date of acquisition / Period of Holding.

Whether it is short-term capital gain or Long term Capital Gain.

What about the tax rate?

C A S.S.Agarwal, M.Com.,LL.B,

C A S.S.Agarwal, M.Com.,LL.B, (Expert)
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05 January 2014 It is to be treated from the date of the allotment letter and payment of advance. Your case is covered by the following decision. Kindly go through the same:

Muthuletchumi Janardhahanan, ... vs Assessee on 7 December, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL

COCHIN BENCH, COCHIN

BEFORE S/SHRI N.R.S.GANESAN, JM and B.R.BASKARAN, AM

I.T.A. No. 372/Coch/2011

Assessment Year : 2005-06

Muthuletchumi Janardanan Vs. The Deputy Commissioner of C/o. M/s. Balu & Anand, Income-tax, International Taxation C.A's Circle, Ernakulam, Kochi. No. 46/2, 1st Floor,

4th Cross, Malleswaram,

Bangalore-560 055.

[PAN: AGEPJ 2182J]

(Assessee -Appellant) (Revenue-Respondent)

Assessee by Shri R.E. Balasubramanyam, CA

Revenue by Smt. Susan George Varghese, Sr. DR

Date of hearing 09/10/2012

Date of pronouncement 07/12/2012

ORDER

Per B.R.BASKARAN, Accountant Member:

The appeal of the assessee is directed against the order dated 31-01-2011 passed by Ld CIT(A)-III, Kochi and it relates to the assessment year 2005-06. The solitary issue urged in this appeal is, whether the assessee is entitled to deduction u/s 54F of the Act, in the facts and circumstances of the case, from the capital gain earned on sale of a property.

2. The facts relating to the said issue are stated in brief. The assessee herein sold a piece of land on 15.04.2004 for a consideration of Rs.30.00 lakhs. The assessee was eligible to claim deduction u/s 54F of the Act on the capital gain arising on the sale of said land. As per sec. 54F of the Act, the whole amount of capital gain is exempt if the entire sale consideration is invested in purchase/ construction of a house property. In case of purchase of house property, it should be purchased within one year before or two years after the date of transfer of the land. If it is a case of construction, the house should be constructed within three years from the date of transfer of land. Though the assessee booked a flat in the year 2005, it is stated that the document for conveyance of the undivided share of land was executed only on 06-07-2007.

3. The assessee computed long term capital on sale of land at Rs.24,14,544/- and claimed the entire capital gain as exempt u/s 54F of the Act. The provisions of sub sec.(1) and sub. Sec.(4) of sec. 54F are relevant here and they read as under:-

(1) Subject to the provisions of sub-section (4), where, in the case of an assessee, being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,-......

(4) The amount of the net consideration which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilized by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return (such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub- section (1) of section 139) in an account in any such bank or institution as may be specified in, and utilized in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilized by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of new asset:...

3 I.T.A. No.372/Coch/2011

4. The AO found that the assessee's claim of deduction u/s 54F was not in accordance with the conditions stipulated in that section for the following reasons:

(a) The date of conveyance of undivided share of land and the date of signing the construction agreement was 06.7.2007 and 04.7.2007 respectively, which are beyond three years from the date of sale of land, viz., 15.04.2004.

(b) The assessee has not deposited the sale proceeds in a "Capital gains account scheme" as stipulated in sub-sec. (4) of sec. 54F.

Accordingly, the AO rejected the claim of deduction u/s 54F of the Act.

5. Before Ld CIT(A), the assessee contended as under:- (a) Booking of a flat falls in the category of "Construction". For this proposition, the assessee relied upon the circular No.471 dated 15.10.1986 and Part 2 of Circular No.672 dated 16.3.1993, wherein the CBDT has clarified that the allotment of flats under the Self-Financing scheme of the Delhi Development Authority, Co-operative societies or other institutions may also be treated as cases of construction for the purposes of sec. 54 and 54F of the Income tax Act.

(b) The assessee had already invested the entire sale consideration of Rs.30.00 lakhs realized on sale of lane, in purchase of the new property within the permitted time as stated below:-

(i) Payment made on 22.12.2005 Rs. 6.00 lakhs (ii) Payment made on 22.03.2006 Rs.28.00 lakhs --------------

Rs.34.00 lakhs

=======

(c) For determining the test of ownership, the provisions of Transfer of Property Act, Registration Act have no application. Hence the conveyance of undivided share of land on 06-07-2007 does not have any implication in this case. In this regard, the assessee relied upon following case law:- (i) CIT Vs. Podar Cements Ltd (226 ITR 625)(SC)

(ii) CIT Vs. Mysore Minerals Ltd (239 ITR 775)(SC) (iii) CIT Vs. Ajitsingh Khajanchi (2008)(297 ITR 95)(MP) (iv) CIT Vs. Mrs. Shahzada Begum (173 ITR 397)(AP) (v) Balraj Vs. CIT (254 ITR 22)(Delhi)

(vi) Smt. Shashi Varma Vs. CIT (224 ITR 106)(MP) 4 I.T.A. No.372/Coch/2011

(d) For considering the time limit for making investment in the "Capital gains Account Scheme" under sub-sec.4 of sec. 54F, the extended time limit prescribed u/s 139(4) can also be considered, as held in the following cases:-

(a) CIT Vs. Rajesh Kumar Jalan (206 CTR 361)(Guwahati) (b) CIT Vs. Fatima Bai (32 DTR 243)(Kar)

(c) CIT V Jagriti Agarwal (339 ITR 610)(P & H)

(d) Nipun Mehrotra Vs. ACIT (110 ITD 523)(Bang.)

(e) ACIT Vs. Sapna Dimri (ITA No.151/D/2012)(Delhi) However, in the instant case, there was no necessity to make investment in the Capital Gains Account scheme, since the entire sale proceeds had been invested in purchase of new house before the extended time limit, i.e. before 31.3.2007 (one year from the end of the assessment year).

(e) Sec. 54F, being a beneficial provision, it should be interpreted liberally so as to achieve the intention of encouraging housing and to provide shelter for all.

6. The Ld CIT(A) accepted the contention that the purchase of flat from a builder would fall in the category of "Construction" and hence the time limit for making investment is three years from the date of transfer of the land. However, the Ld CIT(A) did not accept the contention of the assessee that the new house was constructed within three years. The relevant observations made by Ld CIT(A) are extracted below:-

"9......The argument of the appellant is that she had booked the flat which is termed as construction of flat and had paid advance money during the period between 22.12.2005 and 22.3.2006 and therefore, the money stands invested in the booking of the flat within the period of three years. But, the fact is that there was no document of transfer of the said property in the name of the assessee within the prescribed period, i.e., upto 15.4.2007* as the sale deed for purchase of flat was executed on 04.7.2007 and 06.7.2007. The assessee has also not produced any submission or documentary evidence that before or upto 15.4.2007*, the possession of property was handed over to her, even if no registration or document of sale was executed in her favour."

(* three years period ends on 15.4.2007)

............

5 I.T.A. No.372/Coch/2011

"11 In view of the above established law, the sale actually takes place when either the possession is handed over or a document for sale of property is executed. In the present case, no such element of 'sale' existed. There was neither a valid agreement existed nor possession given to the appellant up to the prescribed period provided in the provisions of Income tax Act. The contention that the appellant paid entire money to the builder before the prescribed date cannot be termed as acquisition of flat since what was paid was only 'advance money' for an unwritten verbal contract which could have been easily broken as stated above. No valid irrevocable documentation conferring ownership existed for purchase of the said flat with the appellant. .....The appellant has not fulfilled the conditions laid down u/s 54F(4) also as the return of income was filed only after the receipt of notice u/s 148 on 9.1.2009 viz. after much of delay.

12. Therefore, in my view, the appellant failed to fulfill both the conditions of availing benefit of sec. 54F viz., the property was not purchased or constructed within the stipulated time provided in the Act and also the money was not deposited in the Capital Gain Deposit Account in time before the time allowed for filing a return u/s 139(1). Hence, on both counts, the appellant failed to convince and therefore, I do not find any reason to interfere in the order of the AO and sustain the addition of Rs.24,14,554/-."

Aggrieved by the order of Ld CIT(A), the assessee is in appeal before us.

7. We have heard the rival contentions and perused the record. There is no dispute between the parties that the purchase of flat from a builder would fall in the category of "Construction". Hence, in our view, following questions arise for our consideration:-

(a) Whether the time limit for making deposit under capital gain account scheme is the one prescribed under sub-sec.(1) of sec. 139 or under sub- sec. (4) of sec. 139.

(b) Whether the assessee can be treated as complied with the conditions prescribed u/s 54F of the Act for availing deduction under that section.

8. With regard to the first question, we feel it apposite to extract below the observations made by Hon'ble Punjab and Haryana High Court in the case of CIT Vs. Ms. Jagriti Aggarwal (339 ITR 610):-

6 I.T.A. No.372/Coch/2011

"10 Having heard learned counsel for the parties, we are of the opinion that sub-s (4) of s. 139 of the Act is, in fact, a proviso to sub-s. (1) of s. 139 of the Act. Sec. 139 of the Act fixes the different dates for filing the returns for different assessees. In the case of assessee as the st

respondent, it is 31 day of July of the assessment year in terms of cl. (c) of the Expln. 2 to sub-s. (1) of s. 139 of the Act, whereas sub-s. (4) of s. 139 provides for extension in period of due date in certain circumstances. It reads as under:

(4) Any person who has not furnished a return within the time allowed to him under sub-s. (1), or within the time allowed under a notice issued under sub-s. (1) of s. 142, may furnish the return for any previous year at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment whichever is earlier:

Provided that where the return relates to a previous year relevant to the assessment year commencing on the 1st day of April, 1988 or any earlier assessment year, the reference to one year aforesaid shall be construed as a reference to two years from the end of the relevant assessment year.

11. A reading of the aforesaid sub-section would show that if a person has not furnished the return of the previous year within the time allowed under sub-s. (1) i.e., before 31st day of July of the assessment year, the assessee can file return before the expiry of one year from the end of the relevant assessment year.

12. The sale of the asset having taken place on 13th Jan., 2006, falling in the previous (sic - assessment) year 2006-07, the return could be filed before the end of the relevant asst. yr. 2007-08 (sic.-2006-07) i.e., 31st March 2007. Thus, sub-s. (4) of s. 139 provides extended period of limitation as an exception to sub-s. (1) of s. 139 of the Act. (4) is in relation to the time allowed to an assessee under sub-s. (1) to file return. Therefore, such provision is not an independent provision, but relates to time contemplated under sub-s. (1) of s. 139. Therefore, such sub-s. (4) has to be read along with sub-s.(1). Similar is the view taken by the Division bench of Karnataka and Gauhati High Courts in Fatima Bai and Rajesh Kumar Jalan cases (supra) respectively".

By following the above cited decision, we hold that the time limit for the purpose of making investment in Capital Gains Account scheme may also be taken as the time limit prescribed u/s 139(4) of the Act. The assessment year under 7 I.T.A. No.372/Coch/2011

consideration, being assessment year 2005-06, the limitation would expire on 31.3.2007. The compliance of the provisions of sec. 54F (4) should be examined accordingly.

9. The next question is about the eligibility of the assessee to claim deduction u/s 54F of the Act. According to the assessee, she had invested the entire consideration in purchase of flat by making advance payments from time to time to the builder of the apartment. According to the assessee, the registration of the property got delayed since she was residing abroad. In various case law relied upon by the assessee, it is clearly stated that the registration (required to be done under the Registration Act) is not material, in order to decide about the ownership of the property. However, it also clearly stated that the said relaxation is permissible, provided the assessee has obtained possession of the property by paying the substantial sale consideration. The Ld CIT(A) has also come to the very same conclusion.

10. However, in the Circular issued by CBDT (referred supra), it is clearly stated that the taking the delivery of possession is only a formality. Hence, the condition of taking possession also looses its importance in the context of sec. 54F, as per the circular issued by CBDT. The Mumbai bench of Tribunal, in the case of Kishore H Galaiya Vs. ITO (2012)(137 ITD 229), has taken the view that the deduction could not be denied merely because possession had not been taken within three years, as the action of taking of possession may be delayed on account of many factors.

11. In the instant case, the assessee has furnished the account statement obtained from the builder at pages 13- 15 of the Paper book. On a perusal of the said account statement, we notice that the account of the assessee has been almost closed by the builder by 18.01.2007, i.e., within three years from the date of sale of land. Thus, it is seen that the assessee has substantially complied with 8 I.T.A. No.372/Coch/2011

the conditions prescribed in sec. 54F of the Act and hence there should not be normally any problem in allowing the deduction under that section.

12. However, in the instant case, there is contradiction about certain factual aspects. Both the tax authorities have stated that the "agreement for construction" was signed on 04.07.2007. The assessee has filed a copy of the "Construction agreement" before us and the same is found to have been executed on 22-03-2006. Thus, there is an apparent contradiction between the observations made by the tax authorities and the document produced before us. In clause (1) of the agreement filed before us (page 3), it is stated that the developers agree to deliver the Schedule 'B' Apartment (flat bearing no. B-1- 2086) by the end of August 2006 (subject to clause (13)). If this fact is true, it is confusing as to how the tax authorities have mentioned the date of construction agreement as 04.7.2007. Both the parties did not offer any explanation about this contradiction. The assessee did not furnish a copy of conveyance deed dated 04.07.2007 also before us and hence we did not have the benefit of examining the same.

13. Hence, this factual aspect requires verification, even though it appears that it may not have any effect on the eligibility of deduction u/s 54F of the Act, in view of the view expressed by us in the preceding paragraph. However, the Tribunal, being a fact finding authority cannot allow the confusion to continue as it is. At the same time, in the interest of both the parties, it is imperative that this confusion is resolved. Besides the above, the tax authorities have also not examined the account statement, referred supra, on which, we have placed reliance. The conveyance deed also needs examination to confirm that the assessee has actually acquired the flat.

14. In view of the above, the facts prevailing in the instant case require examination at the end of AO. Accordingly, we set aside the order of Ld CIT(A) and restore the matter to the file of the AO with the direction to examine the 9 I.T.A. No.372/Coch/2011

matter afresh and decide the issue in the light of discussions made supra. The assessee is free to file any other document/explanation in support of its claim u/s 54F of the Act.

15. In the result, the appeal of the assessee is treated as allowed for statistical purposes.

Pronounced accordingly on 07-12-2012.

sd/- sd/-

(N.R.S.GANESAN) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER

Place: Kochi

Dated: 7h December, 2012

GJ