2025 (6) TMI 1464 - AT - Income Tax

Exemption u/s 54F - computation of capital gain - long-term capital gains arising from the sale of urban agricultural land - HELD THAT - We find that the assessee has made substantial compliance by making investment in the plot even before filing the income tax return. When he had already invested the amount there could not be any occasion to deposit the same under Capital Gain Account Scheme. The objective of Section 54F is to promote investment in residential house and it is quite obvious that the cost of the plot is circumscribed into the cost of the house. There is no requirement under the law that capital gain account is to be opened by the assessee particularly when he has invested the entire sale receipts. AO has made certain modification in the computation of capital gain. While we agree in principle that the deduction u/s 54F is permissible we direct the AO to recalculate the capital gain after taking into account the submissions of the assessee in this regard. With this direction we deem it fit and proper to remit the matter back to the AO to correctly recompute the amount of capital gain if any. The appeal is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in the appeal are:

(a) Whether the assessee is entitled to exemption under Section 54F of the Income Tax Act, 1961, in respect of long-term capital gains arising from the sale of urban agricultural land, on the ground that the entire sale proceeds were invested in the purchase of a residential plot within the prescribed time.

(b) Whether the Assessing Officer (AO) was justified in denying the exemption under Section 54F on the basis that the investment was made in a plot of land and not in a constructed residential house, and consequently adding back the amount of Rs. 1,34,48,839/- as undisclosed long-term capital gain.

(c) Whether the AO was correct in requiring the assessee to deposit the capital gains amount in a Capital Gains Account Scheme (CGAS) bank account, despite the investment having already been made before filing the return of income.

(d) Whether the CIT(Appeals) erred in confirming the AO's order without providing adequate opportunity of hearing and without proper appreciation of the evidence filed under Rule 46A of the Income Tax Rules.

(e) Whether interest under Section 234D of the Income Tax Act was rightly levied on the alleged shortfall in advance tax payment.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) & (b): Entitlement to exemption under Section 54F on investment in residential plot

Relevant legal framework and precedents: Section 54F provides exemption from long-term capital gains arising from transfer of any long-term capital asset other than a residential house, if the net consideration is invested in the purchase or construction of a residential house within the prescribed time limits (one year before or two years after the date of transfer for purchase, or three years for construction). The exemption is conditional upon the assessee investing the net consideration either in purchase/construction or depositing it in a CGAS account before filing the return.

Judicial precedents have clarified that the term "residential house" includes a constructed house and not merely a plot of land. However, the exemption is available if the investment is made in a residential house, which may include a plot intended for construction, provided the assessee complies with the conditions of Section 54F.

Court's interpretation and reasoning: The AO denied exemption on the ground that the investment was made in a plot of land and not in a constructed residential house, and hence the conditions of Section 54F were not fulfilled. The AO further held that the net consideration was not deposited in a CGAS account, which is a mandatory condition if the investment is not made before filing the return.

The CIT(A) confirmed the AO's order but without detailed reasoning or proper appreciation of submissions.

The Tribunal observed that the assessee had made substantial compliance by investing the entire sale consideration in the purchase of a residential plot before filing the return. The Tribunal emphasized that the objective of Section 54F is to encourage investment in residential houses and that the cost of the plot is inherently part of the cost of the house. It was held that there is no explicit requirement under the law to open a CGAS account when the entire sale proceeds have been invested in the purchase of a residential plot within the stipulated time.

Key evidence and findings: The assessee furnished the sale deed of the urban agricultural land and the purchase deed of the residential plot. The Tribunal found that the investment was made in a plot measuring 493.706 square meters situated in Sector-76, Faridabad, and the amount invested matched the claimed exemption.

Application of law to facts: The Tribunal applied the provisions of Section 54F and found that the assessee complied with the time limits and invested the entire net consideration in a residential plot. The Tribunal disagreed with the AO's narrow interpretation that only a constructed house qualifies for exemption and held that investment in a residential plot is covered under the section.

Treatment of competing arguments: The AO's argument that the exemption is not available on investment in a plot was rejected. The Tribunal also rejected the AO's insistence on deposit in CGAS account, holding that since the investment was already made before filing the return, the condition of deposit in CGAS did not arise.

Conclusions: The Tribunal concluded that the assessee is entitled to exemption under Section 54F for the amount invested in the residential plot. However, since the AO had made modifications in the computation of capital gains, the matter was remitted back to the AO for recalculation of capital gains after considering the submissions and evidence of the assessee.

Issue (c): Requirement of deposit in Capital Gains Account Scheme

Relevant legal framework: Section 54F mandates that if the net consideration is not invested before filing the return, it must be deposited in a CGAS account to claim exemption. This is to ensure that the capital gains are earmarked for investment in residential property.

Court's reasoning: The Tribunal held that since the assessee had already invested the entire net consideration in the purchase of the residential plot before filing the return, there was no requirement to deposit the amount in CGAS. The Tribunal emphasized that the law does not require the assessee to open a CGAS account when the investment is already made.

Conclusion: The AO's requirement to deposit the amount in CGAS was found to be unwarranted in the facts of the case.

Issue (d): Adequacy of opportunity of hearing and appreciation of evidence under Rule 46A

The assessee contended that the CIT(A) passed the impugned order without providing adequate opportunity of hearing and without properly appreciating the evidence filed under Rule 46A of the Income Tax Rules.

The Tribunal noted the cryptic nature of the CIT(A)'s order and the lack of detailed reasoning. It directed that the AO should provide the assessee full opportunity to explain his case during the remand proceedings. This implicitly recognized the need for adherence to principles of natural justice and proper consideration of evidence.

Issue (e): Levy of interest under Section 234D

The assessee challenged the levy of interest under Section 234D for shortfall in advance tax payment.

The Tribunal did not expressly decide on this issue in the order but included it in the grounds of appeal. Since the matter was remanded for recomputation of capital gains and reassessment, the issue of interest would be considered in the course of further proceedings.

3. SIGNIFICANT HOLDINGS

"The objective of Section 54F is to promote investment in residential house and it is quite obvious that the cost of the plot is circumscribed into the cost of the house. There is no requirement under the law that capital gain account is to be opened by the assessee particularly when he has invested the entire sale receipts."

The Tribunal established the principle that investment in a residential plot within the prescribed time qualifies for exemption under Section 54F, even if the construction of the house is not yet completed, provided other conditions are met.

The Tribunal held that the AO's denial of exemption on the ground that the investment was in a plot and not a constructed house was erroneous.

The Tribunal remitted the matter to the AO for recomputation of capital gains after considering the submissions and evidence of the assessee, and directed that the assessee be given full opportunity to be heard.

Final determinations:

(i) The exemption under Section 54F is allowable on investment in the residential plot made within the prescribed time.

(ii) The requirement to deposit the amount in CGAS does not arise where the entire net consideration is already invested before filing the return.

(iii) The addition of Rs. 1,34,48,839/- as undisclosed capital gains is set aside and the matter is remanded for fresh computation.

(iv) The appeal is allowed for statistical purposes with directions for fresh adjudication.