No deduction u/s 54 is allowed where assessee has constructed a house prior to the date of transfer of original house

Case Law Citation

ACIT Vs. Sagar Nitin Parikh (ITAT Mumbai), ITA No. 6399/MUM/2011, Date of Decision: 03.06.2015

Brief of the case:

The sole issue to be decided by ITAT is that whether the transaction of entering into an agreement with a builder for purchase of a flat that is going to be constructed is a case of “Purchase” or “Construction”. In the instant case, the assessee has constructed a house prior to the date of transfer of original house, in which case, the assessee is not entitled to claim deduction u/s 54 of the Act in respect of the cost of new flat.

Brief facts:

The facts that are relevant to the issue under consideration are that the assessee sold a flat located at Fionika on 27.03.2008 and generated Long term capital gain of Rs.1.55 crores thereon.
The assessee claimed deduction u/s 54 of the Act pertaining to the cost of another flat. The assessee had booked the flat with M/s Life Style Property Venture in the year 2004 and the agreement was registered on 01-12-2004.
He paid the consideration in instalments as per the agreement. He finally got the possession on 30.06.2007.
The assessee claimed that the date of possession of flat should be considered as the date of purchase of flat, where as the AO took the view that the date of purchase should be considered as the date of entering of agreement, viz., 1.12.2004.
The AO rejected the claim for deduction u/s 54 of the Act.
Held by the CIT (A)

CIT(A) being agreed with the contentions of the assessee, allowed the deduction u/s 54 of the Act.

Contention of the revenue:

Since the deduction u/s 54 of the Act could be availed only if the residential house was purchased within one year prior to the date of house giving rise to capital gain and since the date of purchase of flat fell beyond the period of one year assessee is not entitled for the deduction u/s 54.

Contention of the assessee:

The date of possession should be considered as the date of purchase of new house, since the assessee obtained a habitable house only on the date of possession.

Held by the tribunal:

There is no dispute with regard to the fact that the assessee can purchase a new house within one year before the date of transfer of the original residential house in order to avail deduction u/s 54 of the Act.
The said deduction is also available if a new house
(a) is purchased within two years after the date on which the transfer of original house took place or

(b) is constructed within a period of three years after the date on which the transfer took place.

The deduction is available only if a new house is purchased within one year before the date of transfer of the original residential house. Thus, if a new house is constructed within one year prior to the date of transfer of the original residential house, the deduction u/s 54 is not available.
In the instant case, the assessee has constructed a house prior to the date of transfer of original house, in which case, the assessee is not entitled to claim deduction u/s 54 of the Act in respect of the cost of new flat.
Comments of the author:

Tribunal while deciding this issue against the assessee used “construction” in place of “purchase” due to the findings of Hon’ble Bombay HC in matter of Mrs. Hilla J.B.Wadia (216 ITR 376) where court held assessee’s activity of transfer of property in which she had half share as construction. Further, ITAT Mumbai Bench in case of ACIT Vs. Sunder Kaur Sujan Singh (3 SOT 206) held booking of flat with builder as construction.

Jagjeet singh