In a dispute concerning capital gains arising from the sale of a residential property, which was demolished prior to the execution of the transfer/ sale, the Madras High Court granted an exemption under Section 54, holding that the execution of the JDA and permissions to the Developer to enter the premises were only for the limited purpose of development, and in such circumstances, the Department cannot expect that the house must stand in the same condition till such time the transfer/sale was executed.
The High Court clarified that the date of the Joint Development Agreement transfer cannot be considered as the ‘date of transfer’ and, rather, the transaction must be seen as a ‘continuous sequence of events’. The Court explained that the incident of transfer, for the purpose of capital gains, ought to be taken as the date on which the sale deeds for the transfer of the undivided interest were executed by the transferor (appellant).
The Division Bench comprising Justice Anita Sumanth and Justice K. Govindarajan Thilakavadi observed that the transaction must be seen in a “wholistic conspectus”. Although the house was demolished in 1995, this was a consequence of the JDA to facilitate development. Also, the property was residential, and its income was assessable under the head ‘house property’, satisfying the condition under Section 54.
The Bench also explained that Section 54(2), which requires depositing capital gains into a specified scheme, is not attracted in this case. The appellant-taxpayer had exercised the option available under Section 54(1) by re-investing in a new residential property within the stipulated time of two years. The purchase on January 30, 2001, fell within this period from the March 1999 transfer, and Section 54(2) cannot be insisted upon to efface the primary option available to an appellant.
The Bench observed that Sections 54 and 54F are not “two sides of the same coin”, but are “stand-alone provisions” with their own specific conditions. A claim under Section 54F requires the taxpayer to satisfy conditions stipulated in its proviso, such as not owning more than one residential house on the date of transfer.
The question of whether the appellant satisfied the conditions of Section 54F was not a matter of record, as the claim was not pursued before the CIT(A). The Bench, therefore, held that the Tribunal cannot be compelled to adjudicate upon issues in the absence of a proper claim supported by necessary documents and pleadings to establish compliance with statutory conditions.
Briefly, the appellant was a confirming party to a JDA, and the owners of the property were his parents (in his capacity as an individual and for his HUF). The JDA was entered into with Chaitanya Builders and Leasing Private Limited, which stipulated the sale of a 2.5% undivided share of the property to third parties, a 47.5% undivided share to the developers, and the allotment of 50% of the total super built-up area to the owners. Later, the residential property was demolished pursuant to the JDA, after which the appellant’s father passed away, and the appellant inherited a portion of the property.
While filing its ITR, the appellant and his mother executed sales of their shares of the property, and claimed relief under Section 54 of the Income Tax Act, on the ground that he had re-invested the capital gains in a new residential property in New Delhi, which was purchased via a sale deed. The AO initially accepted the return, but later subjected it to re-assessment and denied the relief under Section 54, stating there was no proof of re-investment.
On appeal, the CIT(A) accepted that the appellant had made a re-investment in the New Delhi property. However, the ITAT rejected the claim for exemption because the re-investment was not made by depositing funds into the Capital Gains Scheme as per Section 54(2). Further, the residential property had been demolished in 1995, and therefore, no residential house existed at the time of the sale. Observing that the date of transfer for computing capital gains should be taken as 1994, the date of the JDA, the ITAT also refused to consider an alternate contention for exemption under Section 54F.
Appearances:
Senior Advocate Arvind P. Datar, along with Advocates S. Raghunathan, Sharanya Vaidyanathan, and Vardhini Karthik, for the Appellant
Senior Advocate J. Narayanaswamy, for the Respondent/ Revenue
