AMIT BAJAJ ADVOCATE

Mumbai ITAT has held in an important case namely Shri Jatinder Kumar Madan vs ITO that exemption u/s 54 will be available for exchange of an old flat with new one as it amounts to construction of a residential house u/s 54 eligible for exemption.

It is notable here that exchange of capital asset also amounts to transfer of capital asset u/s 2(47) of Income Tax Act and consequently capital gain arises out of it.

In this case, the assessee had exchanged old flat with new flat to be constructed by the builder under development agreement which amounts to transfer under section 2(47) of the Act. Thus, the only other condition which is required to be satisfied is that assessee either purchases a new residential flat within the prescribed limit or constructs a new residential flat within a period of 3 years from the date of transfer. The acquisition of a new flat under a development agreement in exchange of the old flat amounts to construction of new flat. This view is supported by the decision of the Tribunal in the case of ITO vs. Abbas Ali Shiraz (supra). Therefore, the provisions of section 54 are applicable and assessee is entitled to exemption if the new flat had been constructed within a period of 3 years from the date of transfer. The ld. AR has also argued that cash compensation received by the assessee amounting to Rs.11,25,850/- can not be taxed as capital gain as assessee had invested a sum of Rs.12.00 lacs in REC bonds under section 54EC. Since cash compensation was part of consideration for transfer of the old flat and the assessee had invested the money in REC bonds, the exemption under section 54 EC will be available. In any case, the long term capital gain computed by the AO including cash compensation as part of sale consideration is  much below the cost of new flat and therefore, the cash component is also exempt under section 54. As regards the completion of new flat within a period of 3 years, assessee has filed a copy of letter dated 30.5.2007 of the builder in which it has been mentioned that the builder had applied for occupation certificate and possession was to be given on 14.6.2007. This letter was not available before lower authorities. The exact date of taking possession of the flat is also not clear. This aspect therefore, requires verification by the AO as to whether assessee had taken possession of new flat within a period of 3 years. We, therefore, allow the claim of exemption under section 54 subject to verification of above aspects by the AO after providing opportunity to the assessee.

INCOME TAX APPELLATE TRIBUNAL, MUMBAI

ITA No. : 6921/Mum/2010

Assessment Year : 2006-07

Date of Pronouncement – 25.4.2012

PER RAJENDRA SINGH, AM:

This appeal by the assessee is directed against the order dated 2.8.2010 of CIT(A) for the assessment year 2006-07. The assessee in this appeal has raised disputes on two different grounds.

2. The first dispute is regarding addition of Rs.43,91,866/- as long term capital gain on account of surrender of flat. The facts in brief are that the assessee vide development agreement dated 8.7.2005, had surrendered his own flat of carpet area 866 sq.ft. to the builder and in lieu of the surrender of the flat, the assessee had been allotted new flat of carpet area 1040 sq.ft. and also given cash compensation of Rs.11,25,800/-. The cash compensation had been invested by the assessee in REC bonds which was claimed as exempt under section 54EC. Since the assessee had acquired the new flat in lieu of the old flat, capital gain arising on account of the transfer of the old flat was treated as exempt under section 54 of the Income tax Act, 1961 (the Act). The assessee submitted before AO that the capital gain computed at Rs.55,91,866/- was less than the value of the new flat and, therefore, the same was exempt under section 54 of the Act.

2.1 The AO however, observed that for applicability of provisions of section 54, the assessee should have purchased a house property within one year before or two years after the date of transfer or constructed a new residential house within a period of 3 years from the date of transfer. In this case, the assessee had neither purchased nor constructed the house property. The AO, therefore, held that the assessee was not entitled for exemption under section 54 of the Act. He, therefore, did not allow the claim of deduction under section 54. The sale consideration in respect of transfer of the old flat was computed by the AO at Rs.86,96,760/- consisting of sum of Rs.75,64,960/- being market value of the new flat and Rs.11,25,800/- being cash compensation and long term capital gain was computed at  Rs.55,91,866/- after deducting the indexed cost of acquisition from the sale consideration

2.2 In appeal, CIT(A) agreed with the AO that exchange of old flat with new flat constituted transfer and the capital gain was therefore taxable. He also agreed with the AO that the assessee had not fulfilled the conditions of section 54 for allowing exemption under the said section. He therefore, confirmed the disallowance made by AO aggrieved by which the assessee is in appeal before the Tribunal.

3. Before us, the ld. AR for the assessee submitted that the provisions of section 54 are applicable in case the assessee transfers a residential house and purchases a new house within a period of one year before or after 2 years after date of transfer or constructs a residential house within a period of 3 years from the date of transfer. In this case, the assessee had exchanged the old flat with a new flat which amounted to transfer, which was also admitted by the authorities below. Thereafter, the new flat had been built by the builder and possession handed over to the assessee which amounted to construction of a new flat which had been done within a period of 3 years from the date of transfer as the construction of the new flat was completed on 14.6.2007. In this connection, he referred to the letter dated 30.5.2007, of the builder addressed to society in which it was  mentioned that possession of the flat would be given on 14.6.2007. The ld. AR also referred to the decision of the Tribunal in the case of ITO vs. Abbas Ali Shiraz (5 SOT 422), in which it was held that acquisition of new flat under a development agreement with a builder in exchange of old flat amounted to construction of new flat and therefore, the time period of 3 years from the date of transfer as mentioned in section 54 would apply for the acquisition of new flat. The ld. DR on the other hand supported the order of authorities below and argued that provisions of section 54 were not applicable as the assessee had neither purchased a new residential house nor constructed a new residential house.

4. We have perused the records and considered the rival contentions carefully. The dispute is regarding allowability of exemption under section 54 of the Act and computation of long term capital gain in respect of exchange of old flat with a new flat and cash compensation under development agreement with the builder. The authorities below have held that since assessee had neither purchased a new flat or constructed a new flat, the provisions of section 54 are not applicable. We, however, are not able to agree with the view taken by authorities below. The exemption under section 54 is allowable in case the assessee transfers a residential house and within a period of 1 year before or 2 years after the date of transfer,  purchases a new residential house or constructs a new residential house within a period of 3 years from the date of transfer. In this case, the assessee had exchanged old flat with new flat to be constructed by the builder under development agreement which amounts to transfer under section 2(47) of the Act. Thus, the only other condition which is required to be satisfied is that assessee either purchases a new residential flat within the prescribed limit or constructs a new residential flat within a period of 3 years from the date of transfer. The acquisition of a new flat under a development agreement in exchange of the old flat amounts to construction of new flat. This view is supported by the decision of the Tribunal in the case of ITO vs. Abbas Ali Shiraz (supra). Therefore, the provisions of section 54 are applicable and assessee is entitled to exemption if the new flat had been constructed within a period of 3 years from the date of transfer. The ld. AR has also argued that cash compensation received by the assessee amounting to Rs.11,25,850/- can not be taxed as capital gain as assessee had invested a sum of Rs.12.00 lacs in REC bonds under section 54EC. Since cash compensation was part of consideration for transfer of the old flat and the assessee had invested the money in REC bonds, the exemption under section 54 EC will be available. In any case, the long term capital gain computed by the AO including cash compensation as part of sale consideration is  much below the cost of new flat and therefore, the cash component is also exempt under section 54. As regards the completion of new flat within a period of 3 years, assessee has filed a copy of letter dated 30.5.2007 of the builder in which it has been mentioned that the builder had applied for occupation certificate and possession was to be given on 14.6.2007. This letter was not available before lower authorities. The exact date of taking possession of the flat is also not clear. This aspect therefore, requires verification by the AO as to whether assessee had taken possession of new flat within a period of 3 years. We, therefore, allow the claim of exemption under section 54 subject to verification of above aspects by the AO after providing opportunity to the assessee.

5. The second dispute is regarding taxability of compensation of Rs.7,01,460/- received by the assessee for alternate accommodation during the period of construction of property for 18 months. The AO treated its income as income from other sources and after deducting the rent paid by the assessee for the said period, the sum of Rs.2,05,706/- was assessed as income from other sources. The assessee disputed the decision of AO and submitted before CIT(A) that the compensation received by the assessee for alternate accommodation was of the nature of capital receipt and, therefore, not taxable. CIT(A) however did not accept the contentions and agreed  with the AO that the amount received was revenue receipt taxable under the provisions of the Act. CIT(A) accordingly confirmed the order of AO aggrieved by which assessee is in appeal before us.

6. Before us, the ld. AR for the assessee argued that the compensation received for alternate accommodation was capital receipt and was not taxable under the provisions of the Act. He referred to the decision of the Tribunal in the case of Kaushal K. Bangia vs. ITO in ITA No.2349/Mum/2011 for assessment year 2007- 08 order dated 31.1.2012 in which, it was pointed out, that the Tribunal had held that cash compensation received in connection with construction of new flat in exchange of the old flat under development agreement was a capital receipt and was not taxable. The ld. Departmental Representative on the other hand submitted that compensation had been received for alternate accommodation and was not referable to any capital asset and therefore, the same had been rightly taxed as income from other sources.

7. We have perused the records and considered the rival contentions carefully. The dispute is regarding taxability of compensation received by the assessee from the builder for providing alternate accommodation during the period of construction of the building as per development/building agreement. The assessee had  received compensation of Rs.7,01,460/- and after deducting the rent paid by the assessee during the period of construction, net amount of Rs.2,05,766/- has been taxed by the AO as income from other sources which has also been confirmed by CIT(A). The ld. AR has argued that the said amount could not be taxed as income from other sources. He placed reliance on the decision of the Tribunal in the case of Kaushal K. Bangia vs. ITO (supra).

7.1 We have perused the said order of the Tribunal. In that case the issue was taxability of cash compensation of Rs.11,75,000/- as income from other sources. The Tribunal held that the said amount was referable to the capital asset and thus a capital receipt which was not taxable as income from other sources. In that case, the assessee had also received displacement compensation for Rs.6,12,000/-. However, there was no dispute raised on this issue in the said case. In the present case, cash compensation of Rs.11,25,800/- had been offered by the assessee as part of consideration of the old flat which has been claimed as exempt on the ground that entire amount had been invested in REC bonds under section 54EC. The dispute is in relation to displacement compensation or compensation received for alternate accommodation which has been taxed as income from other sources after deducting the expenses incurred in relation to the said compensation. In our view displacement compensation is not related  to any capital asset. The compensation had been paid in connection with the alternate accommodation given to the assessee to facilitate construction of the flat. Since the actual rent paid by the assessee for the alternate accommodation was lower than the amount received, there was net income to the assessee which has been rightly taxed as income from other sources. We, therefore, see no infirmity in the order of CIT(A in confirming the addition and the same is, therefore, upheld.

8. In the result, appeal of the assessee is partly allowed

Order pronounced in the open court on 25.4.2012.