Income Tax Taxation

Investment in Property under Construction Not To Be Treated As a Purchase

Why will Investment in under-construction property not be treated as Purchase?

As per section 54 of the Income Tax Act, 1961^[1] acquisition of new flat in an apartment under construction shall be considered as construction and not purchase. The date of commencement of construction is not relevant for the purpose of section 54. However, it is irrelevant to conclude the construction has commenced prior to the date of transfer of the old asset. Further, if the construction work is completed within 3 years from the date of transfer this exemption will be available.

Case Laws:

• Mutants I Tehsildar v/s ITO (ITAT Mumbai)
• Section 54 provides with a condition that the construction of a new residential house should be completed within 3 years from the date of transfer of the old residential house
• Further, it is noticed that section 54 is silent about the commencement of the construction and hence the commencement of construction can precede the date of sale of the old residential house.
• In the given case the assessee booked the house much earlier than the date of sale of the old residential flat.
• However, in case of the judgment of Karnataka High Court in CIT v/s J R Subramanya Bhat (1987) (165 ITR 571) it was held that commencement of the construction is not relevant for the purpose of claiming an exemption under section 54 and it is only the completion of construction.
• The same ratio was followed in the case of Asst. CIT v/s SubhashSevaramBhavnani (2012).
• However, both cases support the contention of the assessee.
• As per section 54 of the Act, we have to see whether the assessee has completed the construction of the asset within 3 years from the date of transfer of the old asset.
• In the instant case as there is no dispute that the assessee took the possession of the new flat within three years from the date of sale of the old residential flat.
• Thus we conclude that the assessee has complied with the time limit prescribed under section 54 of the Act. Also, there was no requirement of depositing any money under Capital Gain Account Scheme as the assessee invested in the new flat prior to the due date for furnishing the return of income.
• Full Text of the ITAT is as follows:
• The access Mutansir I Tehsildar has filed an appeal against ITO (ITAT Mumbai) challenging the order dated 04/07/2017 passed by LD CIT (A) 33, stating the partial rejection of claim made by the assessee for deduction under section 54 of the Income Tax Act,1961.
• The facts related to same have discussed in brief which state that assessee held 1/3^rd share in Flat 2902 of an apartment named Planet Godrej located in Byculla, Mumbai. He sold the same on 05/12/2012 for a consideration of Rs. 126.83 lakhs and consequent thereto. The Long-term capital person was computed at 78.36 lakhs. The assessee had earlier booked a flat at Elegant Tower which was under construction agreement dated 05/02/2010. The assessee has made the payments to the builder much earlier as follows:

1. From 12/04/2007 to 03/11/2009 – Rs.86,38,225/-
2. On 21/04/2012 – Rs.7,28,525/-

• The assessee also made the following payments subsequent to the transfer:

1. On 14/06/2014 – Rs.3,12,225/-
2. On 22/10/2014 – Rs.7,28,525/-

• However, the total payments made by the assessee towards new flat were Rs. 104.70 lakhs. Since the amount is more than the amount of capital gain the assessee claimed the entire amount of Rs. 78.36 lakhs as a deduction under section 54 of the Income Tax Since the old flat was transferred on 05-12-2012, the assessee submitted that the time limit was available up to December 2015 and the new flat was acquired before that date.

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