C. Aryama Sundaram
Vs
Commissioner of Income Tax, Chennai
6th August, 2018
Capital gains exemption under section 54 shall also include the cost of land on which the house is constructed
The assessee sold a residential house property resulting into long term capital gain of Rs. 10.47 crore. Thereafter, the assessee purchased new property with superstructure for a consideration of Rs. 15.96 crores. After demolishing the existing superstructure, the assessee constructed a residential house and claimed the exemption under section 54 towards the cost of the construction and the cost of the land.
The AO held that only that part of the construction expenditure which was incurred after the sale of the original asset was eligible for exemption under section 54. The AO, thus allowed an exemption of Rs. 1.14 crores under Section 54. The CIT(A) upheld the order of the AO. ITAT remitted the matter to the file of AO to consider the deduction under section 54 for construction cost incurred by the assessee.
Aggrieved, the assessee appealed before the Madras High Court. High Court analysed the provisions of Section 45 and Section 54 and noted the conditions precedent for claiming exemption under section 54.
High Court observed that what has to be adjusted and/or set-off against the capital gain is, the cost of the residential house that is purchased or constructed and not just cost of construction of the new residential house. Thus, it is the cost of the new residential house and not just the cost of construction of the new residential house which is to be adjusted. The cost of the new residential house would necessarily include the cost of the land, the cost of materials used in the construction, the cost of labour and any other cost relatable to the acquisition and/or construction of the residential house.
High Court stated that Section 54(1) of the said Act does not contemplate that the same money received from the sale of a residential house should be used in the acquisition of new residential house. Had it been the intention of the Legislature that the very same money that had been received as consideration for transfer of a residential house should be used for acquisition of the new asset, Section 54(1) would not have allowed adjustment and/or exemption in respect of property purchased one year prior to the transfer, which gave rise to the capital gain or may be in the alternative have expressly made the exemption in case of prior purchase, subject to purchase from any advance that might have been received for the transfer of the residential house which resulted in the capital gain.
High Court, thus held that the cost of new residential house would include the cost of construction as well as cost of land for the purpose of claiming exemption under section 54.
High Court, thus ruled in favour of the assessee.
© 2018 CA Chandan Agarwal. All rights reserved.