[Opinion] Pay Capital Gains Tax Only On Unspent Money For Under Construction House

Meenakshi Subramaniam – [2024] 163 taxmann.com 683 (Article)

Man to friend

“A strange thing has happened. Because time was running out, for capital gains exemption, I got my house constructed in great hurry. It’s now like no other house in world. On entering, you first land in kitchen. Then, a bedroom comes. Next, a store room is seen. Then, a swimming pool emerges. After that, a study room is built. Another bedroom appears. The back verandah is seen, next. The drawing room is last! “

Providing relief to many taxpayers, the Mumbai Tribunal has upheld in recent Sheela Ramchand Uttamchandani v. ITO [2024] 163 taxmann.com 265 (Mum.-Trib) case that only unspent amounts for under construction house would be subject to capital gains tax.

The only grievance of the assessee, in the present appeal, is against the denial of exemption claimed u/s 54 of the Act.

The assessee is an individual and for the year under consideration filed her original return of income on 25/07/2019 declaring a total income of Rs. 6,26,210/-. During the assessment proceedings, for assessment year 2013-14, it was observed that the assessee had sold a residential property, Flat No. 504, Tower No. 4, Raheja Tipco House CHS Ltd, on 31/07/2012 for a sale consideration of Rs. 1,80,00,000/-, which was purchased by assessee on 26/06/2008 for Rs. 54,73,095/-. It was observed that the assessee, in her return of income had not offered the Long Term Capital Gain of Rs. 99,35,840/- earned from the aforesaid sale transaction, claiming the same as exempt u/s 54 of the Act and deposited the entire capital gain in the Capital Gains Account Scheme on 29/07/2013. Further, it was noticed that the assessee purchased a new residential flat and had made certain payments. Since the construction of the project had not started till 31/07/2015, i.e. till the completion of a period of three years, the Assessing Officer (“AO”), vide assessment order disallowed the claim of the assessee u/s 54 of Act. The learned CIT(A) dismissed the appeal filed by the assessee and, inter alia, directed that remedial action may be initiated. Accordingly, proceedings u/s 147 of the Act were initiated for the year under consideration, and notice u/s 148 was issued. In response to notice, the assessee filed her return of income declaring total income similar to the original return. It was observed that the assessee had deposited an amount of Rs. 1 crore under the Capital Gains Account Scheme with the State Bank of India on 29/07/2013. It was further observed that though the assessee had partly invested the Long Term Capital Gain in buying a new house property, however, no construction has taken place and the money invested with the developer is still lying idle. Accordingly, the assessee was asked to show cause as to why the entire amount of Long Term Capital Gain of Rs. 99,35,840/- be not added to the total income of the assessee. In the absence of any response from assessee, the AO vide order dated 20/12/2019 passed order u/s 143(3) read with section 147 making an addition of the entire amount of Long Term Capital Gain of Rs. 99,35,840/- to the total income of the assessee on the basis that the assessee has neither purchased nor constructed any residential house/property as required for claiming relief u/s 54 of Act.

The learned CIT(A) dismissed the appeal of assessee and held that at the time of booking of the residential property on 10/09/2014, the assessee was under no doubt that the expected time period for completion of the project is 30 months, i.e. much beyond the time of three years permitted u/s 54 of the Act from the sale of original asset. Being aggrieved, the assessee made appeal before Tribunal.

During hearing, the learned AR submitted that for reasons beyond the control of the assessee the construction of the property got delayed, and due to the same, the assessee should not be denied exemption for which she is rightly eligible u/s 54 of Act.

The assessee had deposited the entire amount of capital gain under the Capital Gains Account Scheme and therefore, the amount can be withdrawn from the bank only for the purpose of purchase of the residential flat.

The AR also referred to correspondence between the assessee and the builder, wherein the assessee requested the builder to execute the agreement for sale and had refused to accept the refund of money paid by her.

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