By TIOL News Service

AHMEDABAD, MAY 07, 2018: THE issues is - Whether, for the purpose of Sec 54F benefits, the construction work must not precede the transfer of immovable property. YES is the answer.

Facts of the case:

The assessee is an individual. The assessee owned one bunglow. The assessee demolished the bunglow and constructed 8 flats on the land, 4 of which were occupied by her for own residence and rest 4 flats were sold to different buyers. The assessee considered the proportionate land apportioned to the 04 flat purchasers as sale of land belonging to her and disclosed long term capital gain of Rs. 58,87,176 in the process. The development permission was granted by the competent authority on 29.07.2006 and Building Use Permission (BUP) was granted on 23.10.2008. For 3 out of 4 flats sold, the sale deeds were executed with buyers after the date of grant of BUP. The assessee had filed return for relevant AY. During the scrutiny assessment, AO raised an objection to the assessee's claim of deduction from the capital gains received by her on the ground that no construction was carried out after 23.10.2008, which was the date on which the BUP was granted. The flats were sold after such date by executing the sale deeds. This was not in tune with the statutory requirements for claiming deduction. The issue eventually reached the Tribunal. The Tribunal, confirmed the order of the AO. According to the Tribunal, for grant of deduction u/s 54F in case of construction of a residential house, the condition was that the assessee had to, within a period of three years after the date of transfer of long term asset, construct a residential house. In case of assessee, the construction took place prior to the date of transfer and therefore, the conditions of Section 54F of the Act were not fulfilled.

High Court held that,

++ an agreement to sale immovable property does not cast obligations only on the seller. It is based on reciprocal promises to be performed by both sides. If the purchaser fails to discharge his obligations arising out of the contract, then the agreement may as well not culminate into a final sale deed. Depending on the terms of agreement, the seller may either forfeit the earnest money, rescind the contract or in a given case, sue for specific performance or damages. These are few illustrative examples to appreciate that there can be a wide gap between an agreement to sale and an actual instance of sale being evidenced under a sale deed. To therefore hold that upon mere execution of an agreement to sale of the immovable property itself gets transferred into the purchaser, even within the extended definition of Section 2(47) of the Act, would be incorrect;

++ the Supreme Court in case of Sanjeev Lal has held that in normal circumstances, by executing an agreement to sale of an immovable property, a right in personem is created in favour of the transferrer. In such situation, the vendee is restrained from selling the property to anyone else. However, the question still remains whether the entire property can be said to have been sold at the time when the agreement to sale was entered into. The Court was of the opinion that in normal circumstances, such question had to be answered in the negative. The judgment, does not lay down a blanket proposition that without there being anything else, upon execution of an agreement to sale of an immovable property, the property in question, itself stands transferred;

++ with respect to 03 out of the 04 flats sold by the assessee, the sale deeds were executed after the date of grant of Building Use permission. In plain terms, therefore, after the sale of these flats, no construction was carried out. Therefore, if the date of the sale deeds is considered the crucial date for transfer of the capital asset, the construction preceded the transfer. What subsection (1) of Section 54 of the Act requires is that the assessee, after the date of transfer, purchases or within three years after such date, constructs a residential unit, only then the benefit of deduction would be granted. This provision, therefore, provides that construction of the residential unit should be done after the date of transfer but, within three years from such date. Under the circumstances, if the sale deeds are considered on the date on which the transfer of capital asset took place, the case of the assessee would not fall within the parameters of the said provision;

++ assessee's claim for deduction u/s.54F of the Act cannot succeed except in relation to the transfer of a flat in favour of Kankuben Mansingbhai Patel, which had happened before the completion of construction. In such a case, since construction can be stated to have been carried out after the transfer of the original capital asset, the claim of deduction u/s.54F of the Act cannot be denied. To this limited extent, the appeal succeeds. The AO to recompute the deduction accordingly.

(See 2018-TIOL-838-HC-AHM-IT)