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2025 (6) TMI 1546 - AT - Income TaxRestriction of deduction claimed u/s 54F - long-term capital gain earned from the transfer of tenancy/possessory rights was invested for the purchase of a residential flat - HELD THAT - In order to support its contention that the assessee s liability to pay the balance amount to Mr. Jaferali Jalal Momin was discharged within the time prescribed under section 54F assessee placed on record a letter whereby M/s. Delta Venture agreed to pay a sum of Rs. 26 lakh to Mr. Jaferali Jalal Momin for the flat purchased by the assessee. From the perusal of the said letter dated we find that the seller of the residential flat i.e. Mr. Jaferali Jalal Momin has also countersigned the said letter and also agreed that no amount is outstanding from the assessee towards the sale of said flat. The seller agreed vide letter that no amount is outstanding from the assessee towards the sale of said flat. During the hearing DR vehemently relying upon the assessment order submitted that the entire transaction of agreeing to pay Rs. 26 lakh by M/s. Delta Venture to Mr. Jaferali Jalal Momin was a mere journal entry. As pertinent to note that the entire amount of Rs. 50, 59, 270/- which was declared as long-term capital gain by the assessee was also majorly a journal entry as per the admission of facts by the AO in the foregoing paragraphs. Therefore in the absence of any material which could dispute the fact that the assessee purchased a flat from Mr. Jaferali Jalal Momin on 06.03.2012 i.e. within a period of one year from surrender of tenancy/possessory rights to M/s. Delta Venture we do not find any merit in restricting the deduction claimed u/s 54F of the Act to Rs. 25 lakh only. Accordingly duly supported by the documentary evidence we are of the considered view that the assessee is entitled to claim deduction even in respect of the balance long-term capital gain u/s 54F of the Act. Appeal by the assessee is allowed.
The core legal issue considered in this appeal pertains to the eligibility and extent of deduction claimed under section 54F of the Income Tax Act, 1961, in relation to long-term capital gains arising from the transfer of tenancy/possessory rights and subsequent investment in the purchase of a residential flat.
Specifically, the issues presented and considered are:
Detailed issue-wise analysis: 1. Restriction of Deduction under Section 54F to Rs. 25,00,000/- Legal Framework and Precedents: Section 54F provides exemption from long-term capital gains if the net consideration from the transfer of a capital asset (other than a residential house) is invested in the purchase or construction of a residential house within the prescribed time limits. The exemption is proportionate to the amount invested. Court's Interpretation and Reasoning: The Assessing Officer (AO) restricted the deduction to Rs. 25 lakh, accepting payments made by the assessee directly within one year from the transfer date but disallowing the balance Rs. 26 lakh, which was paid by M/s. Delta Venture to the seller only in 2015, beyond the prescribed time frame. The AO reasoned that the payment made by M/s. Delta Venture was a mere journal entry and not a discharge of liability within the stipulated period. The Commissioner of Income Tax (Appeals) upheld this view. Key Evidence and Findings: The AO noted that only Rs. 83,229/- was paid to the assessee during the relevant year; the balance was credited in the books of M/s. Delta Venture as a liability. The Rs. 26 lakh payment to the seller was made on 30.03.2015, beyond the one-year limit. Application of Law to Facts: The AO and CIT(A) applied the strict timeline requirement of section 54F, focusing on actual payment dates rather than agreements or confirmations. Treatment of Competing Arguments: The assessee argued that the confirmation letter and possession of the flat evidenced discharge of liability and investment within time, but these were rejected as insufficient to prove actual payment within the prescribed period. Conclusion: The lower authorities restricted the deduction to Rs. 25 lakh, disallowing the balance. 2. Validity of Documentary Evidence and Confirmation Letter Dated 01/06/2012 Legal Framework and Precedents: The law requires that the investment be made within the specified time to claim exemption under section 54F. Documentary evidence proving investment or discharge of liability is crucial. Court's Interpretation and Reasoning: The Tribunal examined the confirmation letter dated 01/06/2012, countersigned by the seller, wherein M/s. Delta Venture agreed to pay Rs. 26 lakh on behalf of the assessee and the seller acknowledged no outstanding amount from the assessee. Key Evidence and Findings: The confirmation letter, balance sheet of M/s. Delta Venture showing the liability of Rs. 26 lakh, and the seller's subsequent confirmation in 2017 that no amount was outstanding from the assessee were considered. Application of Law to Facts: The Tribunal observed that the confirmation letter and related documents demonstrated that the assessee's obligation was discharged by M/s. Delta Venture's undertaking to pay the seller, effectively constituting an investment within the prescribed period. Treatment of Competing Arguments: The Revenue contended that the arrangement was a mere journal entry lacking actual payment within time. The Tribunal noted that the entire capital gain declared was itself largely a journal entry, weakening the Revenue's argument. Conclusion: The Tribunal found the documentary evidence credible and sufficient to establish investment within the statutory period. 3. Effect of Payment by M/s. Delta Venture on Behalf of the Assessee Legal Framework and Precedents: Section 54F requires investment of the net consideration in a residential property. The question arises whether payment by a third party on behalf of the assessee satisfies this requirement. Court's Interpretation and Reasoning: The Tribunal held that since M/s. Delta Venture was liable to pay the amount and had credited the assessee's account, the payment made by M/s. Delta Venture to the seller discharged the assessee's obligation. Key Evidence and Findings: The Joint Development Agreement, confirmation letters, balance sheet disclosures, and possession of the flat by the assessee indicated that the transaction was bona fide and that the assessee's investment obligation was met through this arrangement. Application of Law to Facts: The Tribunal applied a substance-over-form approach, recognizing the arrangement as fulfilling the conditions of section 54F despite payment by a third party. Treatment of Competing Arguments: The Revenue's reliance on timing of actual payment was balanced against the confirmation by the seller and the assessee's possession, which negated any claim of outstanding liability. Conclusion: The Tribunal concluded that payment by M/s. Delta Venture on behalf of the assessee is sufficient for claiming deduction under section 54F. 4. Possession of the Flat and Discharge of Obligation Legal Framework and Precedents: Possession of the residential property is an important factor in determining fulfillment of investment conditions under section 54F. Court's Interpretation and Reasoning: The Tribunal noted that the assessee had received vacant and peaceful possession of the flat along with the original share certificate upon execution of the agreement for sale. Key Evidence and Findings: The agreement for sale dated 06/03/2012 and the possession documents supported the assessee's claim. Application of Law to Facts: Possession coupled with confirmation of no outstanding payment supported the view that the assessee's investment obligation was discharged within the prescribed time. Treatment of Competing Arguments: The Revenue did not dispute possession but argued on payment timing; the Tribunal found possession to be a strong corroborative factor. Conclusion: Possession was a conclusive factor in favor of the assessee's eligibility for deduction. 5. Interpretation of Section 54F Legal Framework and Precedents: Section 54F provides exemption for long-term capital gain if the net consideration is invested in residential property within one year before or two years after transfer. Court's Interpretation and Reasoning: The Tribunal emphasized a purposive interpretation, considering the entire transaction and the substance of investment rather than rigid adherence to actual payment date. Key Evidence and Findings: The Tribunal relied on the confirmation letters, balance sheet entries, possession, and absence of dispute from the seller to interpret the section in favor of the assessee. Application of Law to Facts: The Tribunal applied the law flexibly to recognize the investment through third-party payment within the stipulated time. Treatment of Competing Arguments: The Tribunal rejected the Revenue's narrow interpretation that disregarded the commercial realities and documentary evidence. Conclusion: The Tribunal held that the assessee's claim under section 54F was valid and should not be restricted. Significant holdings include the following verbatim excerpts encapsulating the Tribunal's reasoning:
The core principles established are:
Final determinations:
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