The recent case, Mohan Lal Jain vs. ACIT (ITA No. 746/Del/2023), concerning the Assessment Year (A.Y.) 2017-18, deals with Section 54 of the Income Tax Act, 1961. This section provides an exemption for taxpayers who reinvest the proceeds from a property sale into another residential property within the stipulated time frame.
Case Background
The appellant, Mr. Mohan Lal Jain, filed his return of income declaring Rs.94,02,280 on 30th October 2017. A revised return was filed on 30th March 2019, declaring Rs.1,04,01,920, including Long-Term Capital Gains (LTCG) of Rs.35,58,612 from the sale of a residential property in Dwarka, Delhi.
The property in question was sold for Rs.1,36,00,000. However, the deduction under Section 54 was disallowed by the Assessing Officer (AO), who concluded that the appellant failed to meet the stipulated conditions for reinvestment.
Arguments by the Assessee
The appellant contended that:
- The new property, a villa in La-Tropicana, Civil Lines, Delhi, was acquired through an agreement dated 18th February 2014, but possession of a “bare-shell” property was received on 13th August 2016.
- An additional ₹75 lakhs was spent to make the villa habitable, which was completed in 2018.
- The delay in making the property habitable should not disqualify the exemption under Section 54.
Arguments by the Department
The Department argued that:
- The agreement to sell in 2014 transferred ownership rights to the assessee, negating claims of acquiring a new property within the required timeline.
- There was no supporting evidence for the claim that the property was a bare-shell flat, nor any documentation to substantiate additional construction expenses.
- The assessee failed to meet either the purchase or construction timelines as specified under Section 54.
Tribunal’s Observations
The tribunal reviewed the sequence of events and key legal provisions:
- Section 54 mandates that taxpayers reinvest proceeds from the sale of a residential property into a new residential house—either purchased within one year prior or two years post-transfer, or constructed within three years post-transfer.
- The tribunal noted discrepancies in the appellant’s claims:
- The 2014 agreement effectively transferred significant rights, undermining the claim of purchasing a new property in 2016.
- No documentary proof supported the claim of additional construction expenses or delays.
Tribunal’s Decision
The tribunal upheld the disallowance of Rs.35,58,612 under Section 54, affirming the orders of the lower authorities. It ruled that the assessee failed to demonstrate compliance with the requisite conditions under Section 54.
Key Takeaways
This case serves as a crucial reminder for taxpayers claiming deductions under Section 54:
- Ensure documentary evidence for all claims, including purchase or construction timelines.
- Clearly distinguish between purchase of a new property and mere transfer of rights under an agreement.
- Maintain compliance with the timelines specified in the Act.
The dismissal of the appeal underscores the importance of adhering to procedural and evidentiary requirements. Taxpayers must carefully document transactions and substantiate claims to avail of exemptions under the Income Tax Act effectively.
For further clarity on Section 54 or assistance with tax filings, feel free to reach out to us!
