Deduction of Section 54F not available if newly acquired house is instantly demolished

T.N. Seetharaman, Adv. for the Appellant. A.V. Sreekanth, JCIT for the Respondent.

ORDER

A. Mohan Alankamony, Accountant Member – These two appeals are filed by the assessee aggrieved by the order of the learned Commissioner of Income Tax (Appeals)-1, Chennai both dated 22.11.2013 in ITA Nos.651 & 650/2010-11/A-I passed under section 143(3) r.w.s. 147 & 250(6) of the Act for the assessment year 2004-05 & 2005-06 respectively.

2. The assessee has raised several grounds in both these appeals, however, the crux of the issues is as follows:—

ITA No. 455/Mds/2014 (A.Y.2004-05):

“The learned Commissioner of Income Tax (Appeals) has erred in holding that the assessee is not entitled for exemption under section 54F of the Act for Rs. 1,08,00,000/- being the amount invested in the purchase of a residential building.”

ITA No. 456/Mds/2014 (A.Y. 2005-06):

“The learned Commissioner of Income Tax (Appeals) has erred in confirming the order of the learned Assessing Officer who had made addition of Rs. 7,34,750/- under the head “unexplained investment invoking the provisions of section 69 of the Act.”

3. Brief facts of the case are that the assessee is an individual engaged in the capacity as Managing Director of M/s. Ambika Appalam Co. Pvt. Ltd., filed his return of income for the assessment years 2004-05 & 2005-06 on 30.10.2004 & 29.10.2005 declaring income of Rs. 6,17,310/- and Rs. 1,17,976/- respectively. There was a survey in the business premises of M/s. Ambika Appalam Co. P. Ltd., on 7.8.2009, thereafter the assessments in the case of the assessee were reopened for both the assessment years 2004-05 & 2005-06 and the reassessment was completed for both the assessment years on 30/12/2010.

ITA No. 455/Mds/2014:

Ground : Disallowance of expenses u/s. 54F of the Act:-

4. The assessee had sold two shops in Brindavan Society, Thane, Mumbai for an amount of Rs. 15,00,000/- and also sold the residential property no. 114, Ushman Road, T. Nagar, Chennai for an amount of Rs. 1,08,00,000/-. These amounts were deposited in the capital gains scheme account in a nationalized bank as per the provisions of the Act. During the period February 2004 to May 2004, the assessee withdrew this amount and purchased a residential property plot no. 25, Dr. Nair Road, Chennai-600 017 at a purchase concession of Rs. 1,17,53,000/- and claimed the benefit of section 54Fof the Act. However, it was revealed that the assessee had demolished the residential building that was purchased after obtaining demolition permission from the Corporation of Chennai dated 28.09.2004. Thereafter the assessee had obtained permission on 16.08.2005 from Chennai Metropolitan Development Authority for construction of a new shopping complex. Subsequently, the assessee also entered into an agreement for construction of the shopping mall with M/s. T. Subbarayalu & Co., vide agreement dated 5.9.2005. Since the new asset purchased was demolished by the assessee and had proceeded to construct a commercial complex, the learned Assessing Officer disallowed the benefit of section 54 to the assessee. The learned Commissioner of Income Tax (Appeals) also confirmed the order of the learned Assessing Officer by observing as under:—

‘5.2.2 The sequence of events show that the appellant’s intention was to buy and demolish a old house and construct a new shopping complex, but not a residential abode. Further, it is noticed that the appellant is in the business of development of properties. It is further noticed from the Finance Act, 1982 para 20.2, while introducing the 54F provisions, it is stated as under:

“With a view to encouraging house construction, the Finance Act, 1982 has inserted a new section 54F to provide that where any capital gain arises from the transfer of any long-term asset, other than a residential house, and the assessee purchases within one year before or after the date on which the transfer took place or constructs within a period of three years after the date of transfer, a residential house, the capital gain arising from the transfer will be treated in a concessional manner. . . ”

5.2.3 In the case of K.M. Natarajan v. ITO [1992] 41 ITD 266 (Mad.) (SMC), the Jurisdictional Madras High Court has held that Circular No. 346 dated 30.6.1982 of the CBDT explains that the exemption was granted with a view to encouraging house construction and obviously it was not meant to be given to a person who already owned a house.

5.2.4 In the case of ACIT v. Oilip Manhar Parekh (2013) (31 Taxmann. Com 386), the IT AT Mumbai Bench D has decided against the assess on issues similar to the present case. In the referred case, the appellant has purchased a new residential house with the sale proceeds and claimed deduction u/s. 54F on such new residential house. The said residential house was demolished within two years from the date of purchase. The AO has disallowed the benefit u/s. 54F (3), since the new residential house was ‘transferred’ within three years from the date of purchase. The ITAT has observed as under,

“7.We have heard ld. Departmental Representative whose main contention was that section 54F is a beneficial provision which has to be considered strictly. The object was to encourage assesses to utilize funds for construction of a new residential house whereas, in the instant case, though residential bunglow was purchased it was demolished within two years which does not serve the purpose.”

It was also held that the demolition of house would fall within the definition of transfer. It was held by the Tribunal as under:

“13. . . . . From the reading of the decision of Apex Court in the case of Vania Silk Mills (P.) Ltd. v. CIT (1991) (191 ITR 647 as well as later decision of Madras High Court in the case of Neelamalai Agro Industries Ltd. v. CIT (2003) 259 ITR 651 t can be seen that any extinguishment on account of act of the assessee would amount transfer and the only exception provided therein was the extinguishment on account of act of God such as destruction of the capital asset in a fire, complete loss in the case of sinking of a vessel of the assessee etc. In the instant case, it is not in dispute that the demolition of the building took place at the behest of the assessee and it is not an act of God in which event, it has to be said that demolition of house would fall within the definition of ‘Transfer”.

It was further held in the above referred case by Mumbai ITAT that deduction u/s. 54F is available for purchase of residential house and such house should be real and not symbolic. In this context it is held by the Tribunal as under:

“14. No doubt the assessee raised the ground, by way of cross objection, that subsequent transfer would not effect the eligibility to claim deduction u/s 54F of the Act because the disallowance, if any, can only be made in the year of transfer, if it is within the period, but the fact remains that at that time, when purchase of house was made, there was a building in existence which satisfied the conditions laid down u/s 54F of the Act. It is not out of place to mention here that in the case of CIT v. Pradeep Kumar (2006) 153 Taxman 138, the Madras High Court observed that,

. . . . . . . construction must be real one. It should not be a symbolic construction”

Drawing analogy from the afore cited decision, in the case of the assessee, the deduction under section 54F is available for purchase of residential house and such house should be real and not symbolic. If old house is only meant for demolition, it may not satisfy the test of purchase of residential house, more particularly when it was demolished within two years. Thus, it may be a symbolic purchase of bungalow which may not pass the test of ‘purchase’ under section 54F of the Act or if it is treated as purchased, then demolition, being a voluntary act, may amount to ‘transfer’ as per the decision of the Supreme Court in the case of Grace Collis (2001) 248 ITR 323 (SC).”

5.2.5 In view of the above discussion, I am of the considered opinion that even though the sale proceeds of the capital gains were used in the purchase of a residential building within the time limit prescribed, the appellant is not entitled for the exemption available under 54F of the Act since the same was demolished within no time and shopping complex of six floors was constructed on that site. The disallowance made by the A.O is in order. The ground is dismissed.’

5. Before us, the learned Authorized Representative vehemently argued stating that the assessee has complied with the provisions of the Act and therefore he is entitled to the benefits under section 54 of the Act. The learned Authorized Representative further relied in the decision of the Mumbai Bench of the Tribunal in the case Dilip Manhar Parekh v. Dy. CIT [IT Appeal No. 6169 (Mds) of 2013, dated 15-4-2016], The decision of the Hon’ble Bombay High Court in the case CIT v. Abhay Ahuja [IT Appeal (L) No. 1583 of 2012, dated 24.1.2013], and the decision of the Mumbay Bench of the Tribunal in the case Asstt. CIT v. Dilip Manhar Parekh [2013] 56 SOT 487

6. The learned Departmental Representative, on the other hand, relied on the orders of the Revenue and also the decisions cited by the Ld. CIT (A) in his order.

7. We have heard the rival submission and carefully perused the materials on record. The moot question before us is whether the assessee will be entitled for the benefit of deduction U/s. 54F of the Act if he demolished the new asset being the residential house purchased by him within the period of three years from the date of purchase in violation to Section 54F(3) of the Act. The prime argument advanced by the Ld. A.R before us is that the provisions of Section 54F(3) of the Act only provides that the new asset should not be transferred in terms of Section 2(47) of the Act within the period of three years from the date of purchase and does not specify a situation where the new asset is demolished. He relied on the case laws cited by him supra in support of his arguments. It is pertinent to mention here that the Hon’ble Bench of the Mumbai Tribunal in the case of Manhar Parikh, cited by the learned Authorized Representative, had remitted back the matter to the file of the learned Commissioner of Income Tax (Appeals) to decide the identical issue in the light of the decision rendered by the Hon’ble Madras High Court in the case CIT v. Pradeep Kumar [2007] 290 ITR 90 wherein it was held that “. . . . . . construction must be real one. It should not be a symbolic construction.” Therefore, the decision relied by the learned Authorized Representative in fact, supports the decision of the learned Assessing Officer. Further, the decision of the Hon’ble Apex Court in the case Vania Silk Mills (P.) Ltd. v. CIT [1991] 191 ITR 647  the issue was with respect to the insurance amount received by the assessee towards destruction of its machinery due to fire, wherein the Revenue held it to be taxable under section 45 of the Act. In that situation, the Hon’ble Apex Court had held that “capital gains tax was attracted under section 45 by transfer and not merely by extinguishment of rights howsoever brought about. Whatever the mode by which the transfer was brought about, the existence of the asset during the process of transfer was a precondition: unless the asset existed in fact there could not be a transfer of it. The extinguishment of a right or rights should in any case be on account of its or their transfer in order to attract the provisions of section 45. If it was not and was on account of the destruction or loss of the asset, it was not a transfer and did not attract the provisions of section 45 which related to transfer and not to mere extinguishment of a right. Hence, an extinguishment of right not brought about by transfer was outside the purview of section 45.” On identical situation the Hon’ble jurisdictional Madras High Court in the case Neelamalai Agro Industries Ltd. v. CIT [2003] 259 ITR 651  had followed the aforesaid order of the Hon’ble Apex Court. However, in the present case before us, the issue is with respect to claiming of deduction under section 54F of the Act. The Parliament in its wisdom had enacted Section 54F of the Act in the Finance Act, 1982 with a view to encourage housing construction. Thus the intention of the legislation was not for destruction of residential building but for promoting the construction of the residential housing units. If the benefit of section 54 is extended where the new residential building is demolished without constructing another residential building within the time limit prescribed under the Act, then the purpose of the Act is defeated. Further, as rightly pointed out by the learned Commissioner of Income Tax (Appeals), the Hon’ble jurisdictional Madras High Court in the case V. Pradeep Kumar (supra), it has been categorically held that “the burden is on the assessee to prove that he had actually constructed a new residential house for the purpose of the exemption under section 54F. Section 54F emphasizes construction of residential house. The construction must be a real one. It should not be a symbolic construction. Mere construction by way of extension of the old existing house would not mean constructing a residential house as contemplated under section 54F.” In view of intentions of the Act, decisions of the Hon’ble Jurisdictional High Court and the facts and circumstances of the case, we do not find it necessary to interfere with the order of the learned Commissioner of Income Tax (Appeals) on this issue wherein he has held that in the case of the assessee exemption under section 54F cannot be granted since he has demolished the newly acquired residential house instantly for the purpose of construction of a six floored shopping complex.

ITA No. 456/Mds/2014 (A.Y.2005-06):

Ground : Unexplained investment u/s. 69 of the Act of Rs. 7,34,750/-.

8. The assessee had entered into an agreement with M/s. Aditya Construction on 14.01.2013 for purchase of a flat at Arcot Road and paid Rs. 17,56,000/-. The above transaction was declared in his return of income. However, during the course of survey under section 133A of the Act on 7.8.2009, it was revealed from the impounded documents that the assessee had purchased the flat for Rs. 24,91,250/-. Since the assessee could not substantiate the reason for the discrepancy, the learned Assessing Officer added the difference amount of Rs. 7,34,750/- as his unexplained investment under section 69 of the Act.

9. On appeal, the learned Commissioner of Income Tax (Appeals) confirmed the order of the learned Assessing Officer agreeing with his view.

10. Even before us, at this stage, the assessee has not produced any evidence or advanced any argument justifying his stand. Therefore, we do not have any option but to confirm the order of the learned Commissioner of Income Tax (Appeals) on this issue also. It is ordered accordingly.

11. In the result, both the appeals of the assessee are dismissed.