IT Deduction available on purchase of Two Residential Houses even If Investment is not made out of Capital Gain: ITAT [Read Order]

In an assessee-favour ruling, the Income Tax Appellate Tribunal (ITAT), Mumbai bench has held that the deduction under section 54 is available on the purchase of two residential houses by the assessee from the capital gain earned from the sale of the old asset. The bench further clarified that such deduction would be available even if the investment is not made out of the capital gain.

Assessee earned a long-term capital gain on the sale of immovable property and claimed deduction under section 54 of the Act towards investment made in the purchase of new flats amounting to Rs. 68,84,388. The Assessing Officer disallowed assessee’s claim of deduction under section 54 of the Act on two grounds. Firstly, the flat was purchased in the financial year 2003–04 relevant to the assessment year 2004–05 and secondly, the investment made towards the purchase of new flats was not out of assessee’s own funds.

The department was of the view that as per the provision of section 54 of the Act, the assessee has to invest the capital gain either in purchase/construction of a new house or deposit it in capital gain account scheme. Therefore, if the investment is not made out of the capital gain, the assessee’s claim of deduction under section 54 of the Act is not allowable.

The Tribunal observed that the provision of section 54(1) of the Act allows the deduction from taxation of capital gain in a case where the assessee has invested in the purchase of new house before one year from the date of transfer of the original asset.

“Thus, at that stage, the capital gain has not accrued to the assessee. If the reasoning of the departmental authorities that the assessee has to invest the capital gain in the purchase of the new house to qualify for deduction is accepted, the provision becomes otiose. In view of the aforesaid, we hold that since the assessee has made an investment in the purchase of a new house within the period prescribed under section 54(1) of the Act, she is entitled to avail deduction under the said provision. As regards the contention of the learned Departmental Representative that the assessee has purchased two flats, it needs to be observed, assessee’s claim of deduction under section 54 of the Act has not been disallowed by the departmental authorities on the said reasoning. In any case of the matter, as per the provision of section 54 of the Act applicable to the impugned assessment year, the expression “a residential house” used in section 54(1) of the Act does not mean “one residential house”. Moreover, there is no allegation by the departmental authorities that the flats are not in the same building or are not interconnected,” the Tribunal said.