MR. THIRUMANI,CHENNAI vs. ACIT, NCC-6(1), CHENNAI

The assessee sold a residential property at Triplicane High Road, Chennai, on 29.06.2015 for Rs.3,00,00,000/- (his share) and claimed exemption u/s.54F of the Act by investing the net capital gains in a property at Padur via Sale Deed No.14126/2015 dated 13.11.2015 (registered at Thiruporur SRO).

Subsequently, the assessee entered into a Construction Agreement dated 07.09.2017 with M/s.S.R.Builders Chennai LLP for building a single-

Before us, the ld.AR for the assessee filed a paper book and submitted that the Padur Village Panchayat house-tax receipt dated 14.12.2018 assesses the structure as a residential building, clearly demonstrating that the local body recognized it as a habitual house. The receipt was filed before the Assessing Officer as well as before the ld.CIT(A). The Assessing Officer disallowed the claim solely on the basis of an Inspector’s report dated 07.12.2018, which stated that the property was largely vacant with “a small metal-roofed shed supported with iron rod pillars at one corner of the land”. The photographs annexed to the report were taken from outside the compound and at a distance, failing to depict the actual constructed portion. In contrast, the assessee produced photographs dated 17.12.2018 taken from inside the house, clearly showing a kitchen area and two rooms with plastered walls, tiled floor, windows and electrical fittings – demonstrating the building’s residential character. These were genuine contemporaneous photos, not post-event fabrication. The structure, though modest in size, is a fully enclosed brick-walled, cement floored, asbestos-roofed dwelling capable of habitation. Section 54F of the Act does not prescribe any minimum plinth area or a construction cost. The statute only requires that the assessee construct a residential house within three years. Thus, the ld. CIT(A)’s observation that the building occupies “less than 0.5% of 92 cents is immaterial.

Per contra, the ld.DR relies upon the order of the authorities below and on the Inspector’s report dated 07.12.2018 and submits that the land was largely vacant and contained only a shed-like structure unfit for residential use. There was no residential house, constructed within three years. The alleged construction was insignificant, temporary and lacks basic amenities. The sanctioned plans or completion certificate were not produced. Cost of the structure was very negligible compared to the land cost. Shed-like structure used by a security guard lacks residential character. Reliance was placed on the judgment rendered by the Ahmedabad bench in Harshad M Thakkar v DCIT, order dated 21.01.2019. The ld.DR thus, prayed that the appeal be dismissed.

We have heard the rival contentions perused the material available on record and gone through the orders of the authorities and along with the paper book and the judicial precedents cited.

The core issue for determination is whether the assessee constructed a “residential house” within the meaning of section 54F within the prescribed time. If we look into the statutory interpretation of section 54 of the Act, we can see that it requires construction of a residential house within three years. The provision, however, does not prescribe minimum plinth area, does not mandate municipal approval, does not require occupation by the assessee and does not link exemption to cost of construction. The test is capability of habitation but not the magnitude.

Coming to the evidentiary value of the documents produced by both the parties. In the present case, the assessee has produced: 1. Panchayat house-tax receipt classifying the structure as a residential building, 2. Interior photographs showing rooms, kitchen, flooring, plastered walls, windows and electrical fittings.

These documents are contemporaneous and issued by statutory/local authorities.

On the other hand, the Inspector’s report is brief, based on external observation, photographs were taken from outside the compound and does not negate existence of a residential structure inside. The reliance placed on Harshad M. Thakkar v. DCIT is misplaced, as in that case no habitable residential unit was proved to exist. In the present case, the assessee has produced documentary, photographic, and local authority evidence establishing the residential nature of the construction.

It is settled law that an Inspector’s report cannot override documentary evidence issued by a statutory local body.

While dealing with the contention on the size of construction, we hold that it is irrelevant. The lower authorities have laid undue emphasis on the fact that the construction occupies a small portion of the total land. This approach is contrary to settled law. The observation of the ld. CIT(A) that the construction occupied less than 0.5% of 92 cents of land is legally irrelevant. Courts have consistently held that: • Size of the house is immaterial. • A small or modest dwelling still qualifies as a “residential house”.

The Hon’ble Madras High Court in CIT v. Smt. M. Kalpagam (cited supra) has held that ‘extent of construction is not decisive, and liberal interpretation must be adopted’.

Similarly, Chennai Bench in ACIT v. Anandhi Karthikeyan (cited supra) has held that ‘exemption u/s.54F of the Act cannot be denied merely because the constructed house is smaller in size or not fully as per the approved plan, so long as a genuine residential house has been built’. The Tribunal further observed, ‘relying on CBDT Circular No.667, that the investment in land forms part of the cost of the residential house for the purpose of section 54F of the Act’.

The Delhi Bench in Addl CIT vs. Narendra Mohan Uniyal (cited supra) held as follows: “It is crystal clear from the plain reading of Section 54 & 54F that exemption is allowable in respect of amount invested in the construction of a residential house. There is no any rider u/s 54F that no deduction would be allowed in respect of investment of capital gains made on acquisition of land appurtenant to the building or on the investment on land on which building is being constructed. When the land is purchased and building is constructed thereon, it is not necessary that such construction should be on the entire plot of land, meaning thereby a part of the land which is appurtenant to the building and on which no construction is made, there is no denial of exemption on such investment.”

The Bangalore bench In ACIT vs. Somchand Kanji (cited supra) held as follows: “The question that arising for consideration in this appeal is as to whether the Assessee can be said to have purchased “a residential house”. The requirement of law is that the property should be a residential house. The :-7-: ITA. No.:3351 /Chny/2024

We find merit in the assessee’s contention that selective reliance on the Inspector’s report while ignoring material evidence produced by the assessee results in a perverse finding.

In the present facts and circumstances of the case, evidence and judicial precedents, we hold that:  The assessee has constructed a residential house within the meaning of section 54F.  The size or modest nature of the construction cannot be a ground for denial.  The disallowance of Rs.2,45,95,000/- is unsustainable.

The ld.counsel for the assessee submitted that the marginal variation, representing barely 0.135% of the total transaction value, is purely notional and has arisen only due to minor estimation in valuation. There is no evidence whatsoever of any extra consideration having passed on between the parties. The difference is well within the tolerance range of 5% (subsequently raised to 10%) recognized under the Act to account for minor and inevitable valuation variations. It was thus prayed that the addition be deleted.

Per contra, the ld.DR contended that the assessee’s share of Rs.56,050/- exceeds the statutory threshold of Rs.50,000/- and therefore, the ground needs to be dismissed.

We note that the variation is marginal and purely estimation based. There is no evidence of any unaccounted consideration. The difference is well within the tolerance band subsequently recognized by the statute. The contention of the ld. DR that the addition must survive merely because the difference marginally exceeds Rs.50,000/- cannot be accepted in isolation. The threshold cannot override the substance of the transaction and must be read in harmony with the object of the provision, which is to tax real and not illusory income. A hyper-technical application in a case of insignificant variation, unsupported by evidence of extra consideration, would lead to an unjust and absurd result.

The DVO, being a technical authority, has determined the fair market value at Rs.8,29,12,000/-, which is only Rs.1,12,000/- higher than the declared consideration. This valuation virtually corroborates the assessee’s declared

We note that Section 56(2)(vii)(b) is a deeming provision, intended to tax real income arising from understatement of consideration. Such provisions must be strictly construed and cannot be applied mechanically in cases where the difference is negligible and purely technical.

In view of the above reasoning, we find it appropriate to delete the additions made by the AO by setting aside the order of the ld.CIT(A). Hence, we allow the corresponding ground raised by the assessee.

In the result, the appeal of the assessee is allowed.