Abraham P. George, Accountant Member
1. In this appeal filed by the assessee it has altogether raised six grounds of which ground no. 6 is general in nature and ground nos. 4 & 5 are consequential. Main grievance of the assessee raised through its grounds 1 to 3 is regarding an addition of Rs. 40,50,000/- made under long term capital gain denying the claim u/s 54 of the IT Act, 1961 and also not considering the cost of acquisition of Rs. 23.80 lakhs claimed by the assessee.
2.The appeal has been filed with a delay of 333 days. Pleading of the assessee in the affidavit filed is that he was pursuing a proceeding before the Central Administrative Tribunal (CAT) and was also pre-occupied due to a serious illness of his daughter. Assessee has also filed evidence in this regard. Learned DR submitted that the department had no objection in condoning the delay. The delay is condoned and the appeal is admitted.
3.Facts apropos are that the assessee a salaried individual had filed his return of income for the assessment year : 2009-10 declaring an income of Rs. 2,98,718/-. During the course of assessment proceedings, the AO noted that the assessee had sold a property bearing plot no. 506, situated at Hosur Sarjapur Road Layout, Bangalore along with semi-finished building therein for a sum of Rs. 66,50,000/-. The conveyance deed was executed on 15-04-2008. However, assessee did not show any capital gains in his return of income. Explanation of the assessee was sought. Reply of the assessee was that the entire sum of Rs. 66,50,000/- realized on sale was given by him to his brother Shri T. Vijayakumar for acquiring a house bearing No. 199, 12th Main , 4th Block, Koramangala, Bangalore-560 034. The payments to his brother Shri T. Vijayakumar, were through a cheque dated 19-04-2008 for Rs. 64,18,225/- and balance sum of Rs. 5,21,775/- in cash. Submission of the assessee was that the transaction did not go through since his brother was reluctant to go through the deal as his family members were objecting to the sale. Thus, as per the assessee the amount was refunded by him to his brother on 02-03-2010. Out of the refunded amount submission of the assessee was that a sum of Rs. 40.00 lakhs was deposited with SBI, Austin Town Branch, Bangalore in a capital gains deposit scheme. As per the assessee the said sum was later paid to one Mrs. Mary Susan for acquiring a residence owned by the latter at No. 828, 2nd Block, 4th Stage, BTM Layout, Bangalore based on an agreement entered with her on 10-03-2010. The consideration agreed as per the agreement was Rs. 70.00 lakhs which was re-negotiated down to Rs. 45.00 lakhs through an addendum agreement entered on 30-03-2011. Nevertheless, it seems the said transaction also did not eventually materialize.
4.The AO was of the opinion, that initial oral agreement entered by the assessee with his brother Shri T. Vijayakumar, could not be believed since the money was returned by Shri T. Vijayakumar after 23 months. It is to be noted that Shri T. Vijayakumar, was summoned by the AO and examined and the said person had confirmed the oral agreement he had entered with the assessee for selling his house to the assessee. Nevertheless, as per the AO the version of the having an agreement with Shri T. Vijayakumar, was only an afterthought. Insofar as the deposit of Rs. 40.00 lakhs refunded by Shri T. Vijayakumar in capital gains deposit account was concerned, learned AO made enquiries with the bank and as per the learned AO, the bank had confirmed that there was no such deposit made by the assessee.
5.As for the claim of the assessee that he had entered into an agreement with Mrs Mary Susan on 10-03-2010 for acquiring property at No. 828, 2nd Block, 4th Stage, BTM Layout, Bangalore, learned AO was of the opinion that the schedule of the agreement mentioned the property to be a semi-finished building. As per the AO the addendum dated 30-03-2011 was only for overcoming this lacunae. In any case, according to learned AO, even the last mentioned property was never registered in the name of assessee. He therefore, denied the exemption claimed u/s 54 of the Act, 1961.
6.While computing the capital gains the AO also did not consider the acquisition of the property sold by the assessee claimed at Rs. 23.80 lakhs.
7.Aggrieved on the above, assessee moved in appeal before the CIT(A). Submission before the CIT(A) was that on cancellation of agreement entered by the assessee with Mrs. Mary Susan, he had utilized the refund received from Mrs. Mary Susan for purchasing a flat in Sobha Garrison Project, Yeshwanthpur Hobli, Bangalore North through agreement dated 24-03-2011 from M/s Sobha Builders. Argument of the assessee was that even this investment would qualify for claim of exemption u/s 54F of the Act. However, the CIT(A) was not impressed by the above argument. According to him, the original agreement stated to have been entered with Shri T. Vijayakumar did not create enforceable right in favour of the assessee. According to learned CIT(A), assessee had given the money to his brother for helping the latter to acquire a BDA site. When the site was sold by Shri T. Vijayakumar, after two years, he had returned the money. Further, as per the learned CIT(A), the documents produced in support of the transaction with Mrs Mary Susan were also not reliable. As per the learned CIT(A) the condition in the said agreement that cheque given by the assessee could be encashed only after completion of the residential building appeared contrary to vendors assertion that she selling due to paucity of funds. Even the agreement entered by the assessee with M/s. Shobha Developers would not qualify for deduction u/s 54, as per the learned CIT(A). Further according to him, assessee had not deposited the capital gains under the capital gains account scheme as stipulated under section 54(2) of the Act. He held that the assessee did not satisfy the essential conditions required for making a claim u/s 54 of the IT Act, 1961. Assessee could not show that he purchased a house within two years within the date of transfer of the original asset nor could he show that he had constructed a residential house within three years of such transfer. He therefore, upheld the order of the AO.
8.Now before us, learned AR strongly assailing the order of the lower authorities submitted that the intention of the assessee to invest in a residential house building was clear from the very beginning. According to him, assessee believed his brother and paid money to him for acquiring a house from him. When his brother was reluctant to transfer the house he got a refund from his brother. Such refunded money was deposited by him in the capital gains account scheme and later used for paying advance to Mrs. Mary Susan for acquiring a residential house from her. It might be true that residential house was not fully completed when the assessee paid the money to Mrs Mary Susan. However, there was still time left for completing the construction. In any case, according to him, assessee had entered into a construction agreement with M/s Shobha Developers Ltd on 24-03-2011. Assessee had on 30-11-2010 paid a sum of Rs. 7,80,000/- and on 12-10-2011 paid a sum of Rs. 11,76,600/- to M/s Shobha Developers Ltd. Thus, according to him, the failure of the persons to whom assessee had in good faith paid money for acquiring a residential premise to honour their commitments, could not fastened on the assessee as a reason for denying a legitimate claim made u/s 54 of the IT Act, 1961.
9.We have perused the orders and heard the rival contentions.
10.The date of which the transfer giving rise to the capital gains was effected on 15-04-2008. Section 54 of the IT Act, 1961 which allows an exemption on profit on sale of property used for residence is reproduced hereunder;
"Profit on sale of property used for residence.
54.(1) Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head "Income from house property" (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, one residential house in India, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,-
(i) if the amount of the capital gain is greater than the cost of the residential house so purchased or constructed (hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or
(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain.
(2) The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 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 section 139] in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset :
Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,-
(i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and
(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid".
11. The time period allowed for making a purchase if it is done after the date of transfer is two years and if it is a construction it is three years. Thus, if the intention was to construct a residential house the period is three years, the outer limit of three years for constructing a house in the given case before us was 14-04-2011. Vide sub-sec. (2) of section 54 a deposit under capital gains scheme, if the capital gain is not appropriated for such construction has to be done before the due date for furnishing the return of income u/s (1) of sec.139 of the IT Act, 1961. Hon'ble Punjab & Haryana High Court in the case of CIT v. Ms Jagriti Aggarwal  339 ITR 610/203 Taxman 203/15 taxmann.com 146 has held that sub-sec. (4) of sec.139 can only be construed to as a proviso to sub-sec. (1) and thus, the due date furnishing the return mentioned in sec. 139(1) is subject to the extended period provided under section 139(4) of the IT Act, 1961. The impugned assessment year before us is assessment year : 2009-10, and the extended time period u/s 139(4) is before expiry of one year from the end of the relevant assessment year or before completion of assessment whichever is earlier. One year from the end of the impugned assessment year would expire only on 31-03-2011. The assessment for the impugned assessment year having been completed only on 29-12-2011 the date to be reckoned for the purpose of application of sub-sec. 2 of sec. 54 in the case before us is 31-03-2011. Thus, it is clear that the assessee by virtue of above judgment of the Hon'ble P&H High Court which view was also taken by the jurisdictional High Court in the case ofFathima Bai v. ITO [IT Appeal No. 435 of 2004, dated 17-10-2008], assessee had time upto 31-03-2011 to deposit the capital gains in capital gains account scheme, if he could not utilise it for acquiring or constructing a residence.
12. This brings us to the question of whether assessee can be considered to have constructed or acquired a residence before 31-03-2011. Leaving apart, the transaction the assessee claimed to have made with his brother Shri T. Vijayakumar, undisputedly, on 10-03-2010, he had entered into an agreement with one Mrs Mary Susan. He had also paid a post-dated cheque pursuant to such agreement. The agreement dated 30-03-2011 through which consideration originally agreed by the assessee with Mrs. Mary Susan was reduced from Rs. 70.00 lakhs to Rs. 40.00 lakhs has been placed on record. It is clearly mentioned therein that assessee had issued a cheque dated 02-12-2010 to Mrs Mary Susan for Rs. 40.00 lakhs. The bank account of the assessee placed at paper book page no. 47 show that the above cheque was encashed by Mrs. Mary Susan on 18-12-2010. The agreement clearly mentions the intention of the seller to sell a building situated at site no. 828, 2nd block, 4th stage, BTM layout, Bangalore. It is also mentioned therein that the reduction in the consideration was due to vendors inability to complete the work of the residence before the agreed date. The agreement also mentions that the vendor had delivered to the assessee the original documents of title and the vacant possession of the scheduled property. How the term purchase has to be construed in relation to interpretation of sec. 54 of the IT Act, 1961 had come up before the Hon'ble Delhi High Court in the case of CIT v. Kuldeep Singh  49 taxmann.com 167/226 Taxman 133. Their Lordship held at paras 8 to 10 of judgment dated 12-08-2014…
'8. The word "purchase" can be given both restrictive and wider meaning. A restrictive meaning would mean transactions by which legal title is finally transferred, like execution of the sale deed or any other document of title. "Purchase" can also refer to payment of consideration or part consideration along with transfer of possession under Section 53A of the Transfer of Property Act, 1882. Supreme Court way back in 1979 in CIT Andhra Pradesh v. T.N. Aravinda Reddy (1979) 4 SCC 721, however, gave it a wider meaning and it was held that the payment made for execution of release deed by the brother thereby joint ownership became separate ownership for price paid would be covered by the word "purchase". It was observed that the word "purchase" used in Section 54 of the Act should be interpreted pragmatically in a practical manner and legalism shall not be allowed to play and create confusion or linguistic distortion. The argument that "purchase" primarily meant acquisition for money paid and not adjustment, was rejected observing that it need not be restricted to conveyance of land for a price consisting wholly or partly of money's worth. The word "purchase", it was observed was of a plural semantic shades and would include buying for a price or equivalent of price by payment of kind or adjustment of old debt or other monetary considerations. It was observed that if you sell a house and make profit, pay Caesar (State) but if you buy a house or build another and thereby satisfy the conditions of Section 54, you were exempt. The purpose was plain; the symmetry was simple; the language was plain.
9. Recently Supreme Court in Civil Appeal Nos. 5899-5900/2014 titled Sh. Sanjeev Lal Etc. Etc. v.CIT, Chandigarh & Anr., decided on 01/07/2014, 2014 (8) SCALE 432 again examined Section 54 in a case where the assessee had entered into an agreement to sell a house to a third party on 27th December, 2002 and had received Rs. 15 lacs by way of earnest money and subsequently received the balance sale consideration of Rs. 1.17 crores (total being Rs. 1.32 crores) when the sale deed was executed on 24th September, 2004. In the meanwhile, the assessee had purchased another house on 30th April, 2003. Benefit under Section 54 was denied by the High Court observing that the new house had been purchased prior to execution of the sale and not within one year prior to sale of original asset i.e. new house has been purchased on 30th April, 2003 whereas the earlier asset was sold only on 24th September, 2004. The Supreme Court allowing the appeal noticed that the agreement to sell was executed on 27th December, 2002 but the sale deed could not be executed because of inter-se litigation between the legal heirs, as one of them had challenged the will under which the assessee had inherited the property. The agreement to sell, it was held had given some rights to the vendor and reduced or extinguished rights of the assessee. This, it was observed was sufficient for the purpose of Section 2(47), which defines the term transfer in relation to a capital asset. In the light of the factual matrix, it was observed that the intention behind Section 54 was to give relief to a person who had transferred his residential house and had purchased another residential house within two years of transfer or had purchased a residential house one year before transfer. It was only the excess amount not used for making purchase or construction of the property within the stipulated period, which was taxable as long term capital gain while on the amount spent, relief should be granted. Principle of purposive interpretation should be applied to subserve the object and more particularly when one was concerned with exemption from payment of tax. The assessee, therefore, succeeded. The observations made in the said decision are also relevant on the question whether the payments made by the assessee to the person with whom he had entered into an earlier agreement to sell should be allowed to be set-off as expenses incurred in relation to the sale deed which was executed.
10. More direct are the two decisions of Madhya Pradesh High Court in Shashi Verma (Smt.) v. CIT 224 ITR 106 and Calcutta High Court in CIT v. Smt. Bharati C. Kothari (2000) 244 ITR 352. In Shashi Verma (supra), the assessee had invested the sale consideration for purchase of a flat from Delhi Development Authority and had paid part instalments. Reversing the decision of the Tribunal and allowing the appeal of
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the assessee, the High Court observed that the Tribunal had adopted a pedantic approach without noticing the fact that the capital gain was Rs. 31,980/- whereas the instalments paid were Rs. 71,256/-, i.e. much more than the amount of capital gain. Reference was made to Circular No. 471 dated 15th October, 1986  162 ITR (Stat.) 41. It was observed that Section 54 of the Act says that assessee could have constructed the house and not that the construction should have necessarily been completed. Noticing that it was not easy to construct a house within the time limit of three years and under the Government schemes, construction takes years. When substantial investment was made in the construction and it should be deemed that sufficient steps had been taken and it satisfied requirement of Section'. 13. In our opinion, the liberal interpretation of the term purchase as it appear in section 54 has to be given also to the term 'constructs' appearing therein, in conjunction to the former. Even the Hon'ble jurisdictional High Court in the case of CIT v. Smt B.S. Shanthakumari  233 taxmann.com 347/60 taxmann.com 74 (Kar.) held that completion of construction within three years period was not mandatory and what was necessary was that the construction should have commenced. There cannot be any dispute with the construction in the property for which agreement was entered by the assessee with Mrs Mary Susan had already began. In our view, the question whether the above agreement finally fructified is a different matter altogether. Assessee had in our opinion for all purposes satisfied the conditions u/s 54 of the IT Act, 1961, and earnestly demonstrated his intention to invest the capital gain in a residential house. We are therefore, of the considered opinion, that the assessee ought not have been denied the claim u/s 54 of the IT Act, 1961. The disallowance of such claim stands deleted. Since we have allowed the claim u/s 54 of the Act, the question of computation of cost of purchase of the property sold becomes academic. 14. In the result, the appeal filed by the assessee is treated as allowed.