Advance for property – Is the perplexity over??. Provisions of section 54 of the Income tax Act, 1961, which provide an exemption from capital gains tax, requires fulfillment of certain conditions for availment of exemption. The conditionalities, in brief, are either to purchase a house property 1 year before the date of transfer or within 2 years from the date of transfer or construction within 3 years from the date of transfer.
A controversy which has been luring around this provision is that whether the exemption benefit is available where the transaction of purchase/ construction, inspite of making payment, is not completed within the given time frame. To put it differently, the issue is ‘Whether exemption benefit would be available in cases where advance payments are made?’ This issue has been covered in many judicial precedents and has mostly resulted in favor of assessee. An attempt is being made to cover the issue with help of some recent judicial pronouncements.
Recently, the Chennai tribunal in case of ACIT v. Kannan Santhanam, 76 taxmann.com 35 held that advance payment for purchase of residential flat would amount to utilization of capital gain, thereby making it eligible for exemption.
The facts of the case were such that the assessee had transferred a house property for a consideration, thereby giving rise to capital gains. The assessee had before the due date of filing return invested money in another property and thereby claimed exemption u/s 54. The transaction of sale and investing took place in the year 2011. The possession of the new property was received in 2014. The Assessing officer did not give the exemption benefit to the assessee on the ground that the assessee had neither purchased nor constructed a house property within the time span provided under section 54. The advance made was not considered to be synonymous with purchase.
Interestingly, the bench had questioned the approach of the revenue by asking them that if the assessee has already made advance payment for the house, from where is the assessee going to get money to deposit in the Capital gain account, as is being insisted by the department. To this it was replied by the department that it was a statutory requirement which should have been complied with.
The tribunal, while deciding the plea in assessee’s favor relied on the decision of the Apex Court in the case of Fibre Boards (P.) Ltd. v. CIT, 376 ITR 596, wherein it was held that advance payment made for purchase or construction of asset would amount to utilization of capital gain for the purpose of purchasing or constructing a new asset. Sub section 2 of section 54, uses the phrase “towards the purchase of new asset”. It is provided in the subsection that the sum not used towards the purchase of new asset, would have to be deposited in Capital gains account scheme.
The tribunal held that the provisions of section 54G and 54 are pari materia and hence the principle emanating from the decision of Fibre Board can be applied to the present case. Interestingly, if the decision of High Court in the case of Fibre Board is referred to, it clearly provides a silver lining for the purpose of section 54 and 54F. Thus, the High Court as well as the decision of the SC is in favor of the assessee, thereby giving them an entitlement to exemption even when possession of flat is not received. With regard to provisions of section 54F, the same beneficial treatment should be given as section 54 and 54F are also pari materia [(CIT v.Ravinder Kumar Arora 342 ITR 38) (Delhi HC)].
Also the decision of High Court in the case of Fibre Board clearly brings out the above aspect of applicability of the beneficial interpretation to section 54F. It may be noted that what has been overturned by the Apex Court in the case of Fibre Boards India, is the observation and conclusion of the high court with respect to section 54G. The observation with respect to section 54 and 54F still hold good.
Similar rulings have been pronounced by several judicial authorities, wherein they have held that investing the money towards purchase of new house property would amount to sufficient compliance for claiming exemption.
Another aspect in this regard is the quantum of advance. In many cases, entire consideration for purchase of property is paid and the property is not received due to delay from the side of the builder. In such cases, exemption is allowed to assessee. In many situations, complete payments are not made. Part payment is made for purchase of property. Even in such cases, the above ratio of availability of exemption would hold good. This can be recognised from a simple fact that until a purchase transaction is complete, any consideration made is considered as advance.
There are many judicial precedents wherein exemption has been provided to the assessee even when part consideration is invested for purchase of property. The quantum of exemption available would surely depend on the quantum of investment being made. If advance made is less than the capital gains, only proportionate exemption would be available. Reference can be made to the decision of Karnataka High Court in the case of CIT v. Mrs Shakuntala Devi, 75 taxmann.com 222.
It is also important to take into consideration of the fact that for the purpose of section 54, it is not the legal formalities which are to be taken into consideration. The domain and control aspect of the transaction is observed and accordingly the eligibility for exemption is decided. Thus, if the assessee has domain and control over the property/proposed property for which advance is given, the requirement for purchase of property for availing exemption benefit, is considered as complied with. Undoubtedly, the concept of domain and control would be based on facts of each case. Reference can be made to some of the following decisions: CIT v. Hilla J B Wadia (1995) 216 ITR 376(Bom), CIT v. J.R. Subramanya Bhat (1987)165 ITR 571(Kar), CIT v. Smt. Bharati C Kothari (2000) 244 ITR 352 (Cal).
Thus, it was held that the advance payment made for purchase of flat would be construed as purchase of flat by the assessee, thereby providing an entitlement for exemption under the relative provisions. As explained above, this case is similar to cases wherein, the delivery of flat is not given on time by the builder or the property is not habitable. The important aspect is to identify when a purchase is completed. Merely in terms of making advance payments does not amount to purchase, however the same may be sufficient for claiming of exemption.
Another aspect which needs to be considered is that when an agreement to sale has been entered into and an advance has been received for the same, a transfer is assumed to have been taken. This is irrespective of the fact that possession is not given. Thus when a transfer/sale is assumed on entering into an agreement and payment thereof, the same principle should be applied to the other side of the transaction i.e. a purchase should be considered and given effect to when an agreement is entered into an advance is made towards it. The rules of the game should be similar for purchase and sale transaction. Reference is drawn to the decision of Nagpur tribunal in the case of Bhikulal Chandak (HUF) v. ITO 126 TTJ 545, wherein the benefit for exemption under section 54EC was provided even when amount was invested before registration of the sale deed.
The view was that the amount which is deposited is the advance money received based on an agreement, viz. before execution of the sale deed, would be eligible for exemption. There are various judicial pronouncements on the aspect of when a transfer takes place and when a purchase is deemed to be completed. There are various factors considered such as date of agreement, payment, possession, registration etc. However an important aspect is that if a transaction is being considered as transfer for the transferor, then the same the same lines, the transaction should be considered as a purchase for the transferee.
Having analysed the above, it would be needless to say that these provisions being beneficial provisions such be interpreted widely.
Also, with due regards, the approach of the revenue of going into needless appeals and litigation needs to be relooked. When having enough judicial pronouncements which are headed in a similar direction, the approach of the revenue in not following the same should be changed. The CBDT should come up with a position paper and thereby clarify its stand on these aspects.
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