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Facts
The assessee, engaged in the business of sales services of computers, sold an inherited immovable property for Rs. 1,58,00,000, declaring a capital gain and claiming exemption under Section 54. The Assessing Officer (AO) denied the exemption, stating the conditions were not fulfilled, and computed a higher capital gain.
Held
The Tribunal held that the indexed cost of improvement should be allowed as a deduction. Regarding the Section 54 exemption, the Tribunal directed the AO to re-examine the expenses incurred by the assessee for the purchase and construction of the new residential property, allowing the deduction after verification.
Key Issues
Whether the assessee is eligible for exemption under Section 54 of the Income Tax Act, and whether the indexed cost of improvement claimed by the assessee is allowable.
Sections Cited
143(3), 142(1), 143(2), 54, 45
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PUNE BENCHES “SMC”, PUNE
Before: DR.MANISH BORAD
आदेश / ORDER
PER DR. MANISH BORAD, ACCOUNTANT MEMBER :
This appeal filed by the assessee pertaining to the Assessment Year 2011-12 is directed against the order dated 29.05.2024 passed by the National Faceless Appeal Centre, Delhi [in short ‘NFAC’) which in turn is arising out of the Assessment order passed u/s.143(3) of the Act dated 25.03.2014.
The brief facts anent to this appeal are that the assessee is an individual and is stated to be engaged in the business of Sales Services of Computers and Data Processing under the name & Style “True Line Computers. Income of Rs.4,59,700/- declared in the return of income filed for the A.Y. 2011-12. Case selected for scrutiny followed by validly serving statutory notices u/s.143(2) and 142(1) of the Act. Based on the information available in ITS data, the Assessing Officer noticed that the assessee along with her mother and sister sold inherited Sheela Deepak Gundecha immovable property situated near to Panvel city on 24.02.2011 for a consideration of Rs.1,58,00,000/-. Assessee furnished computation of capital gain in the return of income claiming exemption of Rs.9,27,468/- u/s.54 of the Act. In the course of the assessment, ld. AO asked the assessee to produce supporting evidences in respect of cost of improvement for the years 1985, 1995 and 2007. The assessee submitted the details of cost of acquisition however expressed inability to produce purchase bills, expense vouchers, payment proof for improvement. The assessee also could not complete full construction of residential house claiming benefit u/s.54 of the Act. Ld. AO made reference to the Valuation Officer but report not received. In the event of assessment getting time barred, ld. AO worked out the Capital Gain at Rs.41,98,389/- denying the exemption claimed by the assessee u/s.54 of the Act, assessed income at Rs.46,58,090/- as against Rs.4,59,700/- declared by the assessee.
Aggrieved assessee preferred appeal before the ld.CIT(A) challenging the assessment order. The ld.CIT(A) partly allowed the appeal by holding that since the matter of valuation of the property has been referred to the Valuation Officer, the AO is directed to adopt the figures in accordance with the valuation report of the Valuation Officer. As far as the withdrawal of exemption u/s.54 of the Act, he held that the AO has rightly denied it as the assessee has not fulfilled the conditions laid down under the section. The finding of the CIT(A) is reproduced below :
“5.5 I have gone into the facts of the case, submissions made by the appellant and also the findings of the AO. It is an admitted fact that during the year under consideration, the assessee has sold immovable property alongwith two other family members for consideration of Rs.1,58,00,000/-. During the assessment proceedings, the assessee failed to produce supporting evidences i.e. material purchased bills, expenses vouchers, payments proof, registration in local authority etc for the year 1985, 1995, 2007 and thus failed to substantiate the claim made. Accordingly, the AO was justified in computing the capital gains by adopting the indexed cost of acquisition at Rs. 32,04,834/- subject to rectification as the matter has been referred to the Valuation Officer Thane. Since the matter of valuation of the property has been referred to the valuation officer, The AO is directed to adopt the figures in accordance with the valuation report of the VO. The AO is, directed to allow deduction on account of indexed cost of acquisition based on the valuation report by the valuation officer after duly affording opportunity to the appellant of being heard regarding the valuation done by the Valuation Officer. This ground of appeal is, therefore, partly allowed.
5.6. Withdrawal of deduction claimed u/s 54: - On perusal of computation of total income of the assessee, it was noticed by the AO from the LTCG working that the assessee has claimed deduction u/s.54 of the IT Act of Rs.9,27,468/-. During the course of assessment proceedings, the AO asked the appellant to furnish the supporting evidences i.e commencement & completion certificate of local authority in respect of newly purchased residential house In response, the assessee filed his submission dated 25/03/2014 and explained the reasons for not completing the construction of residential house within stipulated time because the litigation on plot purchased by the assessee were going on before the court and the part of the construction has been completed, no final completion certificate were received from the local authority. Considering the fact that the assessee had not fulfilled conditions laid down in Sec 54 of the IT Act, deduction claimed by the assessee of Rs.9,27,468/- was not found to be t correct by the AO and accordingly, deduction claim u/s 54 was withdrawn. I have gone into the facts of the case. The AO has denied the claim u/s.54 as the appellant has not fulfilled conditions laid down in Sec 54 of the IT act.
In view of the above facts, I am of the view that the AO has rightly disallowed the claim u/s 54 of the Act as the appellant has not fulfilled the conditions laid down under the said section. Accordingly, the action of the AO is upheld and ground of appeal is dismissed.”
Now the assessee is in appeal before the Tribunal.
Ld. Counsel for the assessee referring to paper book submitted that the assessee has given all the requisite details viz. expenses, invoices of various expenditure, sathe karar, purchase deed, balance sheet, profit and loss account etc., before the authorities and therefore the cost of improvement for Sheela Deepak Gundecha the years 1985, 1995 and 2007 be considered and the benefit of exemption u/s.54 of the Act should also be allowed as necessary conditions have been fulfilled.
Ld. Departmental Representative on the other hand vehemently argued supporting the orders of the AO and the CIT(A).
I have heard both the sides and perused the material on record. First issue for my consideration raised by the assessee in Ground Nos. 1 and 2 is regarding the indexed cost of improvement claimed by the assessee for computing the long term capital gain. I observe that there is no dispute from both the sides as the indexed cost of acquisition of Rs.10,68,278/- (150250 x 711/100) declared by assessee in income-tax return has been accepted by the Assessing Officer. Similarly, there is no dispute about the 1/3rd share of sale consideration at Rs.52,66,667/-. What remains is the cost of improvement. The assessee has claimed to have incurred Rs.4,12,500, Rs.2,93,750/- and Rs.86,300/- in the years 1985, 1995 and 2007 respectively and the indexed cost of improvement claimed in the income-tax return is Rs.32,79,021/-. During the course of assessment proceedings itself, the matter was referred to the Departmental Valuation Officer but since the assessment was getting time barred ld. AO completed the assessment. Subsequently, when matter travelled before ld.CIT(A) till that time also the DVO report was not received. Therefore, ld.CIT(A) has directed the AO to calculate the indexed cost of acquisition on the basis of the valuation report issued by the DVO. Subsequently, the DVO report was finalised and as per the DVO itself placed in the paper book Rs.7,69,000/- and Rs.1,38,000/- was the cost of improvement incurred during 1985 and 2007 Sheela Deepak Gundecha from all the co-owners. The assessee’s share of indexed cost of improvement comes to Rs.14,33,340/-. Though the assessee has provided various details of the cost of improvement incurred by it but since the DVO report has been framed and cost of improvement has been calculated, the same needs to be taken into consideration. In the written submissions, assessee has stated that it has further raised objection against the report of the DVO. I however find that the DVO report was issued in the year 2014 and immediately in the next month assessee raised objection and now it is almost a decade and no further proceedings have taken place in this regard. Therefore, keeping the matter in abeyance will unnecessary prolong the litigation. I therefore considering the DVO report hold that the indexed cost of improvement is Rs.14,33,340/- and this is to be allowed as deduction against the sale consideration. Thus, Ground Nos. 1 and 2 raised by the assessee are partly allowed.
Now I take up Ground No.3 regarding the assessee’s claim of deduction u/s.54 of the Act. In the computation of income, assessee has claimed that the sale consideration received from sale of property in question has been applied by it for purchase of a residential house within the specified time limit provided u/s.54 of the Act and accordingly claimed deduction of the net capital gain of Rs.9,27,468/-. However, now since the claim of indexed cost of improvement has been reduced, the net capital gain prior to claim of deduction u/s.54 of the Act comes to Rs.27,65,049/-. The assessee’s claim u/s.54 of the Act was denied by the lower authorities on the ground that there were some litigations going on for the residential house purchased by the assessee and only part of the construction has been completed and no final completion certificate was received from the local authority. Section 54 of the Act has direct bearing on the present issue and therefore the same is reproduced below for necessary guidance :
“Profit on sale of property used for residence. 54. (1) Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head "Income from house property" (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, one residential house in India, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,— (i) if the amount of the capital gain is greater than the cost of the residential house so purchased or constructed (hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or (ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain: Provided that where the amount of the capital gain does not exceed two crore rupees, the assessee may, at his option, purchase or construct two residential houses in India, and where such option has been exercised,— (a) the provisions of this sub-section shall have effect as if for the words "one residential house in India", the words "two residential houses in India" had been substituted; (b) any reference in this sub-section and sub-section (2)to "new asset" shall be construed as a reference to the two residential houses in India: Provided further that where during any assessment year, the assessee has exercised the option referred to in the first proviso, he shall not be subsequently entitled to exercise the option for the same or any other assessment year: [Provided also that where the cost of new asset exceeds ten crore rupees, the amount exceeding ten crore rupees shall not be taken into account for the purposes of this sub-section.]”
From perusal of the above sub-section (1) of section 54, the same provides that the assessee shall be eligible for deduction u/s.54 if the assessee has purchased a residential house one year before or two years after the date of which the transfer took place or has within a period of three years after that date constructed one residential house in India. There is no reference to any ‘completion certificate’ from the authority. What is required is that the sale consideration which is received from sale of capital asset being a residential house, has to apply for the purchase/construction of the residential house in order to get benefit of section 54 of the Act. In the instant case, the assessee has claimed to have applied the amount for purchase of a house and the consideration has been passed on. However, the completion certificate has not been received. But if the assessee has parted of the sale consideration for purchase of the residential house within the period specified u/s.54 of the Act, in my considered opinion, the assessee deserves to get the claim of deduction u/s.54 of the Act. I draw support from the judgment of Hon’ble Bombay High Court in the case of CIT Vs. Mrs. Hilla J.B. Wadia (1995) 216 ITR 376 (Bombay).
So far as the quantum of deduction is concerned, in the return of income, the assessee has claimed the deduction of Rs.9,27,468/- since it was the amount of long term capital gain but now the long term capital gain has been reworked at Rs.27,65,049/-. In the written submissions filed before the ld.CIT(A) placed in the paper book running into 354 pages, at page 13 it is claimed that the assessee spent Rs.34,13,500/- within a period of three years from the date of transfer or purchase of the plot for construction of new residential property.
Sheela Deepak Gundecha Though the assessee has placed on record the copy of purchase seed but that is not sufficient to explain the source of incurring of cost for purchase of land and construction of the new residential house at Rs.34,13,500/-. Apart from the purchase deed, no other details have been filed by the assessee. I therefore deem it proper that only for the limited purpose of verification and examination of the amount spent by the assessee towards purchase and construction of the residential house located at Mauje, Bibwewadi, Taluka Haveli, Dist. Pune, the issue is restored to the file of ld. Jurisdictional Assessing Officer who shall afford reasonable opportunity of hearing to the assessee and after examining the details of payments made towards purchase and construction of Residential House Property, shall allow the deduction us/.54 of the Act. Ground No.3 raised by the assessee is allowed for statistical purposes.
Ground No. 4 raised by the assessee is consequential in nature and therefore dismissed.
In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced on this 05th day of March, 2025.