Letter of allotment cannot be considered as investment in residential house – Section 54F

The assessee surrendered tenancy right on 13.9.2005 for a sum of Rs. 1.67 crores after deducting the legal fees , the net consideration came to Rs. 1.66 crores which was also the amount of net capital gain. As per provisions of Sec. 54F, the assessee was supposed to construct the residential house within three years or purchase within two years , to save himself from the liability of paying capital gain tax. The assessee heavily relied upon the letter of allotment dt. 7.10.2005. However, on that date, no agreement was entered between the developer and the assessee. The assessee entered into an agreement for sale on 24.11.2008 which is more than three years from the date of the surrender of the tenancy right. The allotment letter relied upon by the assessee only suggests that there is a proposal and acceptance of something which would come in-existence in future.
The assessee has booked flat on the 9th floor of ‘C’ Wing of the project whereas as per the commencement certificate work upto podium + stilt slab level of Wing A, B & C were approved as per noting dt. 28.3.2005, which means that on the date of issue of allotment letter, there was no approval from the Municipal authorities for the construction of the 9th floor. As per the noting dt. 18.3.2008, the certificate of commencement was further extended for the Wing ‘B’. Stilt + Podium + 1st to 17th floor, which means that even after the lapse of 5 months from the date of allotment, there was no approval for the construction of 9th floor of ‘C’ Wing. It is only on 7th September, 2010, the commencement certificate is made valid and further extended for entire work for Wing ‘C’ Stilt + Podium + 1st to 9th Floor as per amended plan dt. 7.7.2008. These facts clearly suggest that the allotment was only for a future event which was not even in existence at the time of the issuing the allotment letter. Although the tenancy right was surrendered on 13.9.2005, the agreement for sale was entered on 24.11.2008 which itself is beyond the period of limitation prescribed u/s. 54F of the Act. The contention of the Ld. Counsel that the assessee has invested a sum of Rs. 1.33 crores towards the construction of the flat before the due date for filing the return u/s. 139(4) of the Act cannot be accepted for the simple reason that clause (4) of Sec. 54 clearly mention that the amount of net consideration which is not appropriated by the assessee towards the construction of the new asset before the date of furnishing the return of income u/s. 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 Sec. 139). This view is also supported by the departmental Circular No. 495 dt. 22.9.1987 by which the Board has clarified that the amount has to be deposited before the due date of filing of the return u/s. 139(1) of the Act. The assessee fails on this count also.
INCOME TAX APPELLATE TRIBUNAL, MUMBAI
Shri Rasiklal M. Parikh Vs. ACIT
ITA No. 2647/Mum/2011 – Assessment Year-2006-07
Date of pronouncement:31.10.2012
ORDER
PER N.K. BILLAIYA, AM:
With this appeal the assessee has challenged the correctness of the order of the Ld. CIT(A)-30 Mumbai dt.7.1.2011 pertaining to assessment year 2006-07.
2. The only grievance of the assessee is that the Ld. CIT(A) erred in confirming the denial of the exemption u/s. 54F of the Act.
3. Briefly stated the facts of the case are that for the year under consideration the assessee filed return declaring total income at Rs. 21,05,164/- on 20.2.2007. During the course of the assessment proceedings, the Assessing Officer noticed that the assessee has claimed exemption u/s. 54F of the Act being investment in residential house. The AO observed that the assessee has received a sum of Rs. 1.67 crores on surrender of tenancy right on which legal fees paid amounted to Rs. 1,00,000/-. The AO found that the assessee has claimed investment of Rs. 1,38,32,000/- towards purchase of four residential flats and computed capital gains by claiming full exemption on the invested amount of Rs. 1,38,32,000/- u/s. 54F of the Act. The AO sought clarification from the assessee in respect of the exemption so claimed on the following points:
a) The amount of capital gain has not been appropriated before the due date for filing the return as the amount has not been deposited in a designated capital account scheme by the due date of filing u/s. 139(1) of the Act.
b) No agreement has been entered during the period of 3 years
c) The capital gain is invested in 4 flats whereas the exemption is available in respect of one residential house as per Sec. 54F of the Act.
The assessee filed a detailed reply in response to the queries raised by the AO as under:
a) Section 54F is a beneficial provision. The assessee has already invested the entire amount in the acquisition of premises within the stipulated time as per Sec. 54F of the Act as the assessee has complied with investment in new premises , stipulation regarding investment in Capital Gain Deposit Scheme, 1988 before the due date as per Sec. 139(1) has to be construed liberally.
b) Although no agreement was entered with the builder, the assessee has received four allotment letters all dt. 7.10.2005 which clearly establishes the right to purchase the said flats.
c) Out of the four units booked, one flat bearing No. 1001 has been surrendered to the builder with the condition that additional amenities are to be provided for in the remaining flats which condition has been accepted by the developer vide their letter dt. 6.2.2008 and 20.3.2008.
4. The assessee further submitted that it has also been agreed with the developer that the three units are to be made one unit as they are adjacent to each other. Reliance was placed on certain judicial pronouncement wherein it has been held that contiguous units are to be treated as one residential house. The above submissions of the assessee were rejected by the AO. The AO was of the opinion that the assessee has not purchased one house but three different houses for which agreements were not executed till November, 2008, even the agreement which was subsequently entered are neither stamped nor registered. Further the assessee has not deposited the amount of capital gain in a designated capital gain account scheme by the due date of filing of return u/s. 139(1) of the Act. The AO concluded that the assessee went on violating the provisions of law one after the other therefore the claim of the assessee is not acceptable. The AO finally concluded that the case of the assessee does not fit in the four corners of the provisions of Sec. 54F of the Act and the exemption claimed is hereby disallowed.
5. The assessee preferred an appeal before the Ld. CIT(A) but without any success. The Ld. CIT(A) held that the assessee has not constructed the house within the period of 3 years as allowed by Sec. 54F of the Act. Further, the claim of the assessee that the three houses are contiguous and are one unit is without any supporting evidence. The Ld. CIT(A) finally concluded that from all counts the assessee is not entitled for deduction u/s. 54F of the Act be it from the law point of view or from the point of view of the case laws relied upon by the assessee and accordingly confirmed the action of the AO.
6. Aggrieved by the finding of the Ld. CIT(A), the assessee is before us. The Ld. Counsel for the assessee reiterated the submissions made before the lower authorities arguing that as per the letter of allotment dt. 7.5.2005, the assessee has booked three flats adjacent to each other and 4th flat on the top floor. The Ld. Counsel further submitted that the 4th flat was surrendered and the amount paid for the booking of the 4th flat was appropriated towards amenities to be provided by the builder in respect of three contiguous flats which included to make three contiguous flats as one residential house. The Ld. Counsel further submitted that the assessee has paid a sum of Rs. 1,32,99,000/- before the due date of filing of return u/s. 139(4) of the Act. Ld. Counsel further contended that u/s. 54F(4) the mandate is to deposit the amount not used towards construction of house before filing of return u/s. 139. The provision nowhere specifically mentions that it has to be on or before the due date for filing of return u/s. 139(1) of the Act. Thus all the facts considered into totality would lead to only one conclusion that assessee has invested the net capital gain towards construction of a residential house and is eligible for deduction u/s. 54F of the Act.
7. Per contra, Ld. Departmental Representative relied upon the orders of the lower authorities.
8. We have considered the rival submissions and carefully perused the orders of the lower authorities. Let us first consider the factual matrix. The assessee surrendered tenancy right on 13.9.2005 for a sum of Rs. 1.67 crores after deducting the legal fees , the net consideration came to Rs. 1.66 crores which was also the amount of net capital gain. As per provisions of Sec. 54F, the assessee was supposed to construct the residential house within three years or purchase within two years , to save himself from the liability of paying capital gain tax. The assessee heavily relied upon the letter of allotment dt. 7.10.2005. However, on that date, no agreement was entered between the developer and the assessee. The assessee entered into an agreement for sale on 24.11.2008 which is more than three years from the date of the surrender of the tenancy right. The allotment letter relied upon by the assessee only suggests that there is a proposal and acceptance of something which would come in-existence in future.
9. The assessee has booked flat on the 9th floor of ‘C’ Wing of the project whereas as per the commencement certificate work upto podium + stilt slab level of Wing A, B & C were approved as per noting dt. 28.3.2005, which means that on the date of issue of allotment letter, there was no approval from the Municipal authorities for the construction of the 9th floor. As per the noting dt. 18.3.2008, the certificate of commencement was further extended for the Wing ‘B’. Stilt + Podium + 1st to 17th floor, which means that even after the lapse of 5 months from the date of allotment, there was no approval for the construction of 9th floor of ‘C’ Wing. It is only on 7th September, 2010, the commencement certificate is made valid and further extended for entire work for Wing ‘C’ Stilt + Podium + 1st to 9th Floor as per amended plan dt. 7.7.2008. These facts clearly suggest that the allotment was only for a future event which was not even in existence at the time of the issuing the allotment letter. Although the tenancy right was surrendered on 13.9.2005, the agreement for sale was entered on 24.11.2008 which itself is beyond the period of limitation prescribed u/s. 54F of the Act. The contention of the Ld. Counsel that the assessee has invested a sum of Rs. 1.33 crores towards the construction of the flat before the due date for filing the return u/s. 139(4) of the Act cannot be accepted for the simple reason that clause (4) of Sec. 54 clearly mention that the amount of net consideration which is not appropriated by the assessee towards the construction of the new asset before the date of furnishing the return of income u/s. 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 Sec. 139). This view is also supported by the departmental Circular No. 495 dt. 22.9.1987 by which the Board has clarified that the amount has to be deposited before the due date of filing of the return u/s. 139(1) of the Act. The assessee fails on this count also.
10. Coming to the last argument that the three residential flats being adjacent to each other and being contiguous should be treated as one residential unit also cannot be accepted on the basis of the factual matrix discussed hereinabove. As the construction is still under progress and even on the date of hearing when we asked the Counsel about the present status, the Counsel stated that the construction is under progress. Therefore, we fail to understand how the assessee can substantiate his claim that three flats which are adjacent to each other are nothing but one residential unit, when the construction is not completed even after a lapse of more than 7 years. By merely filing of the design in the form of an internal map, would not suffice. It is only by physical verification, the contention of the assessee could be established that three flats are one residential unit having one common passage, one electricity meter and one municipal corporation number. These mandatory things could be established by the assessee as the flats are yet to be completed.
11. It is the say of the assessee that the delay in the construction is attributable to the builder and the assessee cannot be penalized for something which is not in his hand. We do not agree with this contention because as per the entries in the certificate of commencement, the approval was given on 7.9.2010 for ‘C’ Wing whereas the assessee has filed return on 22.2.2007 claiming full exemption u/s. 54F of the Act, when on that date neither the agreement for sale was entered nor the ‘ C ‘ wing’s 9th floor was approved by the local authority. The assessee has relied upon various judicial decisions claiming that the contiguous units are to be treated as one residential unit. We do not propose to dwell in those judicial decisions for the simple reason that the assessee has failed to establish by bringing cogent material on record that the residential units are complete and one. Assessee fails on this count also.
12. Considering the facts of the case in totality, we have no hesitation to confirm the finding of the Ld. CIT(A). The appeal filed by the assessee is accordingly dismissed.
13. In the result, the appeal filed by the assessee is dismissed.
Order pronounced on this 31st day of October, 2012

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