SURENDRA BABU SABBINENI,HYDERABAD vs. DY. COMMISSIONER OF INCOME TAX , CENTRAL CIRCLE-2(2), HYDERABAD

Facts of the case, in brief, are that the assessee is an individual and had filed his original return of income for the A.Y 2010-11 on 1.2.2011 declaring total income of Rs.10,98,93,550/- and agricultural income of Rs.6,53,800/-. A search and seizure operation was conducted in the case of the assessee on 25.11.2011. The assessee filed a revised return of income on 25.11.2011 admitting income of Rs.22,31,37,160/-. The Assessing Officer completed the assessment u/s 143(3) r.w.s.

Subsequently, in the light of the above direction, the Assessing Officer issued notice u/s 143(2) of the I.T. Act and asked the assessee to furnish certain details which were furnished by the assessee. From the details furnished by the assessee, the Assessing Officer noted that during the impugned A.Y, the assessee has earned capital gain income of Rs.19,61,62,476/- and after reducing the claim of deduction u/s 54F of Rs.9,54,10,035/- had offered the net taxable gain at Rs.10,57,52,441/-. From the various details furnished by the assessee, he noted that the assessee has the following property other than the new asset: 1. Flat at Sai Nivas, Shaikpet Village, Hyderabad 2. House at Sai Praveen Kuteer 3. Flat No.1, First Floor, Sai Lakshmi Nilayam, Serilingampally, Hyderabad 4. Flat No.4, First Floor, Sai Lakshmi Nilayam, Serilingampally, Hyderabad 5. Flat No.204, Sai Lakshmi Nilayam, Serilingampally, Hyderabad 6. Swastik Apartment, Siliguri

However, the Assessing Officer was not satisfied with the arguments advanced by the assessee. He accepted the contention of the assessee in respect of property at Sai Nivas, Shaikpet

So far as the property situated at Sai Praveen Kuteer is concerned, it was argued that the same is a guest accommodation of 500- s.ft for use by occasional guests. No income from house property has been derived or admitted. It is an accommodation used purely for accommodating guests visiting on business purposes and this is also not a residential house. Relying on various decisions, it was argued that the AO is not justified in denying the claim of deduction u/s. 54F of the I.T.Act,1961.

However, the learned CIT (A) was not satisfied with the arguments advanced by the assessee and upheld the action of the Assessing Officer in denying deduction u/s 54F of the Act by observing as under: “6.0 I have carefully considered the submissions made by the appellant as the as well observations of the A0 in the impugned order. It is the contention of the appellant's AR that the exemption u/s.54F has been wrongly denied, since the properties in question i.e., three flats in Nos.010, 104 & 204 at 1-63/126/B, Kavuri Hills, Hyderabad, and one property at Siliguri, are leased to a limited company, and further that merely showing the income from such properties under the head Income from House Property' does not prove that the units are residential units. This contention of the appellant's AR, however, does not hold any water, since as accepted by the appellant's AR himself, the properties in question are 3 flats which are clearly in the nature of residential units, and merely the fact that they have been leased out to a limited company, does not change the character or nature of the said units. As rightly pointed out by the Assessing Officer, the onus is upon the assessee to prove that the properties are commercial in nature, and merely furnishing the lease deed of the properties does not absolve the appellant of the said onus, more so when the lease deed are with Coastal Realty Limited and Coastal Projects Limited, both being companies where the appellant himself is Chairman/Director. Also, the contention of the appellant's AR that the Assessing Officer has considered the said properties as residential merely because the income has been offered under the head Income from House Property' is incorrect. This is not the only reason for denial of the exemption, as discussed above, but it is an important reason, which further proves that the said properties are residential in nature. Neither do the case laws relied upon help the case of the appellant in any manner, since the facts are entirely different in the case at hand. Moreover, for the property at Sai Praveen Kuteer (Sr.No.2), the appellant has no explanation/evidence to offer whatsoever, except stating that it is a guest accommodation. I therefore find no infirmity in the order of the Assessing Officer in denying the claim of the assessee u/s.54F. The addition made on this account is therefore confirmed.

Aggrieved with such order of the learned CIT (A) the assessee is in appeal before the Tribunal by raising the following grounds: “1. The Learned Commissioner of Income Tax (Appeals 12 [CITA)] has erred on facts and in law while passing the appellate order.

The learned Counsel for the assessee strongly challenged the order of the ld.CIT(A) in confirming the denial of deduction u/s. 54F of the I.T.Act. He submitted that the assessee has conclusively proved that the property situated at Sai Praveen Kuteer(S.No.2), Flats at Sai Lakshmi Nilayam being Flats No, 1,4 & 204 and the Flat at Swastik Apartment at Siliguri(S.No.6) are let out for commercial purpose and therefore are not residential units. The assessee does not own any house property other than the new asset purchased. Referring to the decision of the Delhi Bench of the Tribunal in the case of Sanjeev Puri vs DCIT reported in 2016 (72 taxmann.com 147), he submitted that the Tribunal in the said decision has held that it does not make any difference as to whether the property has been shown as residential house on the record of the government authority but actual user thereof by the assessee will be considered while adjudicating upon the eligibility of the deduction u/s. 54F of the I.T.Act claimed by the assessee. Referring to the decision of ITA 326 of 2018 Surendra Babu Sabbineni Hon’ble High Court of Karnataka in the case of Navin Jolly vs ITO reported in 117 taxmann.com 323, he submitted that the Hon’ble Karnataka High Court in the said decision has held that the usage of the property has to be considered for determining whether the property in question is a residential property or a commercial property. Since in that case there was no dispute that the two apartments are being put to commercial use, therefore, the aforesaid apartments were not treated as a residential apartment. He submitted that the companies who have taken the flats on lease from the assessee were using the premises for conducting their business operations. This fact is also stated in the lease agreement and the assessee has not received any adverse notice from the Municipal Authorities regarding the functioning of the office of the companies.

He submitted that the Hyderabad Municipal Authorities had levied taxes as per the schedule rates for the Flats bearing Flat No.01,04 & 204 at Sai Lakshmi Nilayam, Kavuri Hills, Hyderabad based on the valuation fixed by the Corporation. The Municipal Authorities, however levied a deferential tax for commercial use of the above premises and revised the taxes w.e.f. 2015. Referring to various pages of the paper book, he submitted that the taxes so levied at commercial rates are duly paid by the assessee. So far as the property at Siliguri is concerned, he submitted that the Municipal Authorities at Siliguri has not levied any differential taxes for commercial use. He accordingly submitted that since the flats situated at Sai Praveen Kuteer, Sai Lakshmi Nilayam and at Siliguri are let out for commercial use, therefore, these are not residential in nature and therefore, the deduction u/s. 54F of the I.T.Act could not have been denied to the assessee.

The ld.DR on the other hand strongly supported the order of the AO and the ld.CIT(A). He submitted that out of the seven properties owned by the assessee two properties are not residential but the remaining five properties are in the nature of residential units. Referring to the provisions of section 54F, he submitted that as per the said provisions if a person owns more than one residential house on the date of transfer process of the long term asset, the request of tax exemption on capital gain is not valid. Since the case of the assessee in the instant case is hit by the proviso (a)(i) of section 54F of the I.T. Act, therefore, the assessee is not entitled to get the benefit of deduction u/s. 54F of the I.T.Act.

We have heard the rival arguments made by both the sides, perused the orders of the AO and the learned CIT (A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us by both sides. We find the assessee in the instant case is an individual and the Managing Director of Coastal Projects Ltd, a Private Ltd Company. On the basis of notice issued u/s. 153A, the assessee filed the revised return of income on 25.11.2011 declaring total income of Rs.22,31,37,160/- and the AO had accepted the returned income. Subsequently, the ld.PCIT invoked the provisions of section 263 on the ground that assessee has claimed deduction u/s. 54F of the I.T.Act and the AO without considering the number of flats owned by the assessee had erroneously allowed the claim of deduction u/s. 54F of the I.T.Act without making due enquiries and therefore, the order has become erroneous and prejudicial to the interest of the revenue. We find subsequent to the section 263 proceedings, the AO obtained details of properties owned by the assessee and noticed that out of seven properties, two properties are not residential but the remaining five properties namely the house at Sai Praveen Kuteer, Flat No.1,4 and 204 at Sai Lakshmi Nilayam, Sherilingampalli at Hyderabad and Swastik Apartment at Siliguri are residential units and therefore, the assessee on the date of transfer of the capital asset, was owning more than one residential unit other than the new asset acquired and therefore, Page 10 of 14

We do not find any merit in the above arguments of the ld.counsel for the assessee. A perusal of the details furnished by the assessee shows that although, the property at Siliguri, West Bengal is let out to Coastal Project Ltd. and the flats No.101, 104 & 204 at Hyderabad to M/s. Coastal Reality Ltd, however, all these properties are situated in residential societies and the ld.counsel for the assessee could not prove with evidence that these flats situated in the residential societies are in fact used for commercial purposes. On being a pointed query raised by the Bench as to whether the local authorities are charging taxes applicable to commercial properties for the flats which have been let out for commercial use, the ld.counsel for the assessee could not prove the same. In fact the ld.counsel for the assessee in his written submission has admitted that the Municipal Authorities levied the taxes applicable for commercial use of the premises only w.e.f 2015 for the property situated at Flat No.1, 4 & 204 at Sai Lakshmi Nilayam, Hyderabad. Similarly, there is no levy of tax for commercial use of the property by the Municipal Authority for the property situated at Siliguri. There is also no evidence that the electricity department has charged the electricity charges applicable to commercial properties. Under these circumstances, we are unable to accept the contention of the ld.counsel for the Page 11 of 14

So far as the various decisions relied on by the ld.counsel for the assessee are concerned, the same in our opinion are distinguishable and not applicable to the facts of the case of the assessee. In the case of Sanjeev Puri(supra) decided by the Delhi Bench of the Tribunal, the flat was utilized by the assessee for his professional purpose being a Senior Lawyer. Similarly, in the case of Navin Jolly(supra) decided by the Hon’ble Karnataka High Court, the flats were let out for commercial use being service apartments. However, in the instant case as mentioned earlier, the flats are situated in residential societies and there is no evidence on record to show that local authorities have charged the taxes applicable for commercial use of the property or the electricity department levied the charges applicable for commercial properties. Therefore, the decisions relied on by the ld.counsel for the assessee, in our opinion, are not applicable to Page 12 of 14

In the result, the appeal filed by the assessee is dismissed.