TMI Blog2002 (2) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... ) noticed that in the earlier assessment year 1980-81, the assessee was given exemption of Rs.19,018 under section 54(1)(ii) of the said Act. The Income-tax Officer held that since the assessee had sold the building which he had purchased on March 23, 1979, within three years of the transfer of the original asset on March 16, 1979, the exemption of Rs.19,018 allowed to him for the assessment year 1980-81 would go to reduce the cost of the building sold, and therefore, the amount of Rs.19,018 was required to be added to the income as short-term capital gain. The short-term capital gain was, therefore, increased to Rs.19,368 from Rs.350 which was declared by the assessee. The Income-tax Officer in the same assessment noticed that the assessee had occupied a self-acquired property constructed by the assessee. The value of the property as per the balance-sheet filed by the assessee was Rs.95,227 inclusive of land cost and accommodation. The annual letting value was shown by the assessee at Rs.1,200 per annum which was raised by the Income-tax Officer to Rs.6,000 per annum. In the appeal filed by the assessee, the Appellate Assistant Commissioner, observed that from the returns filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... showing a short-term capital gain of Rs.350 in his return for the assessment year 1981-82. It was contended by the Revenue before the Tribunal that the provisions of section 54 gave no option to the assessee as to when he should claim benefit provided thereunder or with respect to the house properties which the assessee may have purchased or constructed during the said period. The contention was that the Income-tax Officer was bound to grant benefit to the assessee in respect of the house purchased on March 23, 1979, which was treated to be the new asset within the meaning of section 54(1)(ii) of the Act, and since the new asset was sold within three years, the Income-tax Officer was justified in reducing the cost of the new asset by the amount of capital gain of Rs.19,018 under section 54(1)(ii) of the Act. The stand of the assessee was that along with the return for the assessment year 1980-81, the assessee had indicated that the capital gain earned on the first house property sold on March 16, 1979, were to be adjusted against the house property which was under construction and the construction was in fact completed on May 29, 1980. According to the assessee, the house pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat merely because purchase deed dated March 23, 1979, was produced along with the other documents as mentioned in the statement of income, it could not be inferred that though the assessee's house was constructed on May 29, 1980, before the filing of return, the assessee had claimed the exemption in respect of the house purchased by way of stop gap arrangement on March 23, 1979, and not against the house property which he constructed for his permanent residence which was in the assessment year 1981-82 in which the present question has arisen, treated as his self-occupied property. It was also submitted that the house purchased by way of a stop gap arrangement was not meant for permanent residence of the assessee, and therefore, the exemption of capital gain could not have been adjusted against that house. It was contended that, in any event, the assessee had an option either to purchase or to construct a house for residential purposes during the period allowed by the provisions of section 54(1) and when the question of withdrawing the exemption was raised in the assessment year 1981-82, the assessee was entitled to put forth his claim that the capital gain should be adjusted towar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly. Learned counsel for the Revenue supporting the reasoning of the Tribunal contended that since the assessee had in his return for the earlier assessment year 1980-81 disclosed the capital gain of Rs.19,018 on the sale of his residential house and also produced the purchase deed of "Raiya Road House", the Income-tax Officer granted exemption in respect of the capital gain under section 54(1)(ii) of the Act. It was submitted that at the end of the accounting year relevant to the assessment year 1980-81, the house which was under construction was not yet completed, and therefore, there was no question of adjusting the exemption claim against the house which was under construction. It was argued that when the factum of purchase of another house was placed on record by producing the purchase deed, it was not necessary for the Income-tax Officer to wait until the completion of the construction of the other house and on the basis of the material available, the Income-tax Officer correctly accepted the deduction claimed by the assessee by virtue of exemption under section 54(1)(ii) of the Act adjusting it towards the cost of the house purchased on March 23, 1979. It was further conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne year before or after that date purchased, or has within a period of two years after that date constructed, a house property for the purposes of his own residence, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,-- (i) if the amount of the capital gain is greater than the cost of the house property so purchased or constructed (hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or (ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two years of such transfer. The ascertainment of the difference between the cost of the house property so purchased within one year or constructed within two years of the transfer of the original asset and the amount of capital gain arising from the original asset can take place only when the new asset is purchased or constructed as the case may be. It, therefore, follows that the assessee cannot be subjected to pay income-tax on his capital gain which is not to be treated as his deemed income of the previous year in which the transfer took place until the expiry of the outer limit of one and two years in case of purchase and construction, respectively, at the end of which alone, it could be possible to compute the difference between the amount of capital gain and the cost of the new asset, and it is, at that stage, that the question of charging such difference under section 45 as income of the previous year can arise. The Income-tax Officer, unless the transfer or purchase or construction of the new asset has already taken place in the previous year, must wait till such purchase or construction takes place within the stipulated outer time limit when he can work out the difference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sset were under the existing provisions of sections 54, 54B, 54D and 54F exempt from income-tax if such gains are reinvested in new assets within the time allowed for the purpose and that "the original assessment needs rectification whenever the taxpayer fails to acquire the corresponding new asset", and that "with a view to dispense with such rectifications of assessments, the amendments made to sections 54, 54B, 54D and 54F provide for a new scheme for deposit of amounts meant for reinvestment in the new asset." Thus, even the Department has viewed the capital gains arising from the transfer of original asset as exempt from income-tax. This will also be clear from Form No. II of the return prescribed under the relevant rules then prevailing, which provided for deduction, inter alia, of the amount exempt under section 54. This is in tune with the above interpretation of section 54(1) that the capital gains cannot be charged to income-tax in the previous year in which the transfer of the original assets takes place and the Income-tax Officer can charge it only when the event of purchase or construction takes place within the time limit prescribed or when the assessee fails to purch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... occupation during the intervening period. Therefore, if an asset purchased or constructed not for residential purpose, but only for temporary accommodation, is transferred within three years, that will not affect the benefit that attaches to the purchase or construction of the new asset for residential purposes and no question of reduction of cost by the amount of capital gain will arise qua the transfer of the asset which was not purchased or constructed for residential purpose. The transfer within three years of the asset not purchased for residential purpose as contemplated by section 54(1), would be an independent transaction and sale of such asset to which no benefit of section 54(1) applied, would not attract clause (ii) of section 54(1) of the Act. In other words, entitlement to adjust capital gain qua purchase or construction for residential purposes would still operate under section 54(1) against the house property purchased or constructed for permanent residence by the assessee. The disclosure of capital gain of Rs.350 in respect of the sale of the asset which was purchased on March 23, 1979, and sold on May 14, 1980, was made by the assessee in his return for the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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