Mumbai: In a ruling that could benefit taxpayers investing in under-construction or redevelopment projects, the Income Tax Appellate Tribunal (ITAT) has held that tax relief on capital gains cannot be denied merely because the final conveyance deed is executed after the prescribed period. The relief is granted provided the taxpayer has acquired enforceable rights in an identifiable residential property and made the investment within the statutory timeline.Section 54 of the Income-tax (I-T) Act grants relief on capital gains if the money from selling a house is reinvested in another residential property.ITAT allowed a Rs 2 crore deduction claimed by the taxpayer in respect of capital gains arising from the sale of a residential property during the financial year 2013-14. The taxpayer, represented by his legal heir, submitted that he had invested in a redevelopment project by entering into an agreement in Jan 2014 while the registered transfer deed was executed later only in Nov 2016.The I-T officer and the National Faceless Appeal Centre (NFAC) had rejected his tax benefit claim, by holding that the taxpayer had merely acquired rights in a ‘future property’ through an unregistered arrangement and had not purchased a residential house within the time prescribed under the Act.Reversing the finding, ITAT noted that the taxpayer had effectively bought a specific flat when he paid for it under the Jan 2014 agreement. The sale deed registered later only formalised that purchase.The ITAT said Section 54 is a beneficial provision intended to promote investment in residential housing and must receive a liberal interpretation. It relied on precedents set by the Supreme Court and various high courts, which held that acquisition of substantial rights in an identifiable flat can qualify as a purchase even before formal conveyance.The ITAT also allowed the taxpayer to claim the entire Rs 16.24 lakh spent by him on legal, brokerage and consultancy charges incurred while selling the old house. It held that since he had actually paid the full amount, the deduction could not be restricted merely because he owned only a 49% share in the old property.In this case, the tax tribunal also upheld the tax department’s decision to apply the clubbing provisions to the taxpayer. In simple terms, clubbing provisions prevent taxpayers from reducing their tax liability by transferring assets to a relative (say, spouse) without consideration. Since the taxpayer had gifted part of the old property to his wife before its sale, the capital gains arising from her share were taxable in his hands. However, ITAT said that if those gains are taxed in the husband’s hands, he must also be given the Section 54 tax exemption that the wife would have been entitled to. The tax department cannot transfer only the tax liability while denying the corresponding tax benefit.
