By TIOL News Service

BANGALORE, OCT 13, 2018: THE issue before the Bench is - Whether when assessee invested entire amount of LTCG for construction of a new residential property within a period of three years after the transfer of old asset, deduction u/s 54 is available, even if construction of the house is not complete. And the verdict is YES.

Facts of the case

THE assessee, an individual, had sold a residential property in Noida for a sale consideration of Rs.1.50 Cr and computed LTCG of around Rs 82.33 lakhs on such sale. He claimed deduction of the entire LTCG on the ground that the entire LTCG was invested in acquiring a residential property in Bangalore. The MoU for purchase of such property was entered into by the assessee much before the sale of the property at Noida which gave rise to the LTCG. As per the MOU, the cost of the new asset which was a flat was agreed to be purchased by the assessee from for a consideration of around Rs.2.50 Cr.

However, the AO was of the view that the assessee's claim for deduction u/s. 54 for investment by way of construction of another residential house could be allowed only in respect of investments made after the date of sale of the old asset. Since the Assessee entered into agreement with builder for acquiring the new asset much prior to the sale of the old asset, he was not entitled to deduction u/s.54. of the Act. On appeal, the CIT(A) upheld the decision of the AO.

The Tribunal held that,

++ deduction u/s. 54 of the Act is allowed if a property being residential house is transferred and long term capital gain is derived by the assessee. If the assessee, one year before the transfer of old asset or one year thereafter purchased a new asset, he is entitled to deduction u/s.54 of the Act. If the Assessee constructs a new house, then the construction should be completed within a period of three years after the transfer of old asset. In the present case, the expenses for constructing the new residential house, is partly incurred prior to one year before the transfer and the entire LTCG has been invested in construction within two years after the transfer of the old asset. In such circumstances, the assessee is entitled to deduction u/s. 54 of the Act for the entire LTCG that was invested in construction of the new asset, as admittedly these investments were made within the period of 3 years from the date of the old asset. The facts are identical to the facts of the case of the decision of the High Court of Karnataka in the case of J.R. Subramanya Bhat. The Assessee is therefore entitled to deduction u/s.54 of the Act on the entire LTCG invested in construction of the new asset. The order of the CIT(A) holding that the Assessee has not completed the construction within period of 3 years cannot be a ground to deny deduction u/s. 54 of the Act in the present AY 2013-14. Such a course can be adopted only in the assessment year relevant to the previous year in which the period of 3 years expires. This is laid down by the proviso to Sec.54(2) of the Act.

(See 2018-TIOL-1802-ITAT-BANG)