Real Estate and the provisions of Capital gain go hand in hand for buyers of real estate. Sharing a recent judgement passed by the Hon'ble Madras High Court on a capital gain exemption under section 54 of Income Tax Act.
C. Aryama Sundaram Vs. Commissioner of Income Tax, Chennai dated 06th August, 2018
The assessee sold a residential house property
resulting into long term capital gain of Rs.10.47 crore.
Thereafter, the assessee purchased new property with
superstructure for a consideration of Rs.15.96 crores.
After demolishing the existing superstructure,
the assessee constructed a residential house and
claimed the exemption under section 54 towards
the cost of the construction and the cost of the land.
The Assessing Officer (AO) held that only that part of the construction
expenditure which was incurred after the sale of
the original asset was eligible for exemption under
section 54. The AO, thus allowed an exemption of Rs.1.14 Crores under section 54. The Commissioner of Income Tax (Appeals) upheld
the order of the AO. Income Tax Appeallate Tribunal (ITAT) remitted the matter to
the file of AO to consider the deduction under
section 54 for construction cost incurred by the
assessee.
Aggrieved, the assessee appealed before the
Madras High Court. High Court analysed the
provisions of Section 45 and Section 54 and noted
the conditions precedent for claiming exemption
under section 54.
High Court observed that what has to be adjusted
and/or set-off against the capital gain is, the cost
of the residential house that is purchased or
constructed and not just cost of construction of
the new residential house. Thus, it is the cost of
the new residential house and not just the cost of
construction of the new residential house, which
is to be adjusted. The cost of the new residential
house would necessarily include the cost of the
land, the cost of materials used in the construction,
the cost of labour and any other cost relatable to the
acquisition and/or construction of the residential
house.
High Court stated that Section 54(1) of the said
Act does not contemplate that the same money
received from the sale of a residential house should
be used in the acquisition of new residential house.
Had it been the intention of the Legislature that
the very same money that had been received as
consideration for transfer of a residential house
should be used for acquisition of the new asset,
Section 54(1) would not have allowed adjustment
and/or exemption in respect of property purchased
one year prior to the transfer, which gave rise to
the capital gain or may be in the alternative have
expressly made the exemption in case of prior
purchase, subject to purchase from any advance
that might have been received for the transfer of
the residential house which resulted in the capital
gain.
High Court, thus held that the cost of new
residential house would include the cost of
construction as well as cost of land for the purpose
of claiming exemption under section 54.
High Court, thus ruled in favour of the assessee.
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