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Income Tax Appellate Tribunal, I Bench, Mumbai
Before: Shri Saktijit Dey & ShriN.K. PradhanShri Aftab A L Furniturewala
This appeal has been filed by the assessee against the order of the Commissioner of Income Tax (Appeals)-32, Mumbai, dated 17.06.2016, for Assessment Year 2011-12.
The dispute in this appeal is confined to part disallowance of deduction claimed under Section 54 of the Income Tax Act (hereinafter “the Act”).
The brief facts of the case are that the assessee, an individual, filed his return of income for the assessment year under dispute on 04.03.2012 declaring total income of `16,60,958/-. In the course assessment proceedings the AO, while verifying the return of income and computation of income filed by the assessee, found that in the relevant previous year assessee has sold a duplex flat located at Charishma Co-operative Housing Society, Guru Nanak Road, Bandra (W) along with open car parking spaces
Shri Aftab A L Furniturewala on 29.12.2010 for a total consideration of `8.21 crores. After reducing the indexed cost of acquisition of `68,78,480/- the long term capital gain from the sale of flat was shown at `7,52,21,520/-. However, the assessee claimed deduction under Section 54 of the Act on the total amount of long term capital gain amounting to `7,52,21,520/- towards purchase of a new residential flat at Khar. For verifying assessee’s claim of deduction under Section 54 of the Act, the AO called for the necessary details and after perusing the details filed by the assessee found that the assessee has claimed deduction under Section 54 of the Act amounting to `7,52,21,520/- towards purchase of three separate flats and two garages in a building situated at RitwalCo.op. Housing Society, Khar (W), Mumbai by entering into separate agreements with different parties. On going through the sale deeds the AO found that the cost of investment in purchase of three flats amounted to `5,57,52,000/- and the cost incurred for purchase of two garages amounted to `1,06,50,000/-, total aggregating to `6,64,02,000/-. Thus, there is a difference of `88,19,520/- between the long term capital gain shown by the assessee and investments made in purchase of new flats. Therefore, the AO called upon the assessee to justify his claim of deduction under Section 54 of the Act. Further, he also called upon the assessee to explain as to how deduction under Section 54 of the Act can be allowed on purchase of garages. In response to the query raised by the AO the assessee submitted that the difference between the investment made and the long term capital gain shown was on account of cost incurred towards repair/remodelling of the new residential flat, which should be allowed as deduction. He further submitted that garages being part of residential flat, are also eligible for deduction under Section 54 of the Act. The AO, however, was not convinced by the explanation of the assessee. He held that the assessee’s claim of deduction under Section 54 of the Act in respect of garages cannot be allowed because it is a transaction distinguish from purchase/construction of residential house. He also disallowed assessee’s claim for deduction of cost incurred towards repair/remodelling of the house. Thus, he restricted the deduction under Section 54 of the Act to an amount of `5,57,52,000/-.
Shri Aftab A L Furniturewala 4. Being aggrieved by the aforesaid decision of the AO assessee preferred appeal before the CIT(A). In the course of proceedings before him the learned CIT(A), after verifying the material on record was of the view that as per provisions of Section 54 of the Act assessee is eligible to claim deduction in respect of one residential flat. The CIT(A) observed that three flats purchased by the assessee, though are in the same building, but are situated in different floors of the building and are purchased from different persons vide separate agreements. Thus, he called upon the assessee to explain as to why the deduction claimed under Section 54 of the Act should not be restricted to investment made in one residential flat. In this regard the CIT(A) also issued a notice of enhancement under Section 251(2) of the Act. Though, the assessee objected to the disallowance proposed by the CIT(A), however, rejecting the objections of the assessee he restricted the deduction claimed under Section 54 of the Act to the cost incurred by assessee towards purchase of a single flat. While doing so the learned CIT(A) observed that the three flats purchased by the assessee are located in different floors of the same building and have separate entrance and separate kitchens. Therefore, they cannot be considered as a single residential unit. Further, he observed that the assessee did not furnish approved plan of the Municipal authorities to demonstrate that the three flats are single residential unit having common entrance and common kitchen. In this context he relied upon certain decisions of the ITAT. Of course, he also upheld the view of the AO in disallowing assessee’s claim of deduction under Section 54 of the Act in respect of garages and the expenditure incurred in repair and remodelling of the flats.
Dr. K. Shivaram, learned Sr. Counsel for the assessee submitted, before the AO assessee has furnished a plan of the architect and other relevant evidences to demonstrate that though the assessee has purchased three flats from three persons, however, he has converted all the three flats to a single residential unit with a common entrance and common kitchen. He submitted, to verify the claim of the assessee the AO made a physical enquiry through the Inspector of Income Tax, who had submitted a report
Shri Aftab A L Furniturewala stating that the three flats have been converted to a single residential unit having common entrance and common kitchen and a common internal staircase. He further submitted, on the basis of such report of the Inspector the AO allowed deduction claimed under Section 54 of the Act in respect of all the three flats converted into a single residential unit. He submitted, learned CIT(A) without properly appreciating the evidences brought on record and by misapplying the provisions of law as well as the ratio laid down in judicial precedents has exercised his power under Section 251(2) of the Act in enhancing the income, which is invalid. He submitted that the three flats have been converted to a single residential unit and assessee is entitled for deduction under Section 54 of the Act. To demonstrate the fact that the three flats are converted into a single residential unit the learned counsel for the assessee drew our attention to the floor plan of the residential property as prepared by the architecture. He also filed an application seeking to submit a letter dated 29th January, 2018 issued by Ritwal Housing Society by way of additional evidence, wherein, the Housing Society has stated that it has granted permission to the assessee to convert three flats to one residential unit having a single kitchen and private staircase. The learned counsel for the assessee submitted, the expression ‘a residential house’ used in section 54 of the Act, as it existed during the relevant period does not mean one residential house. In support of such proposition he relied upon the following decisions: - i) CIT vs. Gita Duggal (2013) 357 ITR 153 (Del.) ii) CIT vs. DevedasNaik (2014) 366 ITR 12(Bom.) iii) CIT vs. D. Ananda Basappa (2009) 309 ITR 329 (Kar.) iv) CIT vs. K.G. Rukminiamma (2011) 331 ITR 211 (Kar.) As regards the issue relating to claim of deduction under Section 54 of the Act in respect of garages, the learned counsel for the assessee submitted that as per the condition imposed by the House Society the assessee could have purchased the residential flats only if it had parking space. Therefore, the assessee was compelled to purchase the garages, otherwise, the Shri Aftab A L Furniturewala assessee would not have been allowed to purchase the residential flats. He submitted, in the given facts and circumstances the garages should be considered as part of the residential unit, hence, eligible for deduction under Section 54 of the Act. In support of such contention learned counsel for the assessee relied upon the following decisions: - i) M/s. Penelope Ann Dos Remedios vs. ITO dated 06.09.2013 ii) ACIT vs. Smt. Usha B. Madan ITA No. 4258/Mum/2011 dated 13.06.2012 Finally, learned Counsel submitted, the assessee having incurred expenditure of `88,19,520/- in remodelling the new residential flat, it is part of the cost incurred for the flat, hence, is to be allowed as deduction under Section 54 of the Act.
The learned Departmental Representative strongly relying upon the observations of the learned CIT(A) submitted that neither before the AO nor before the First Appellate Authority assessee was able to demonstrate that the three residential flats purchased by him were in fact a single residential unit having common entrance, common kitchen, etc. He submitted that the learned CIT(A), after verifying the facts and material on record has given a categorical finding that not only the flats were purchased separately under three different agreements but they are located in different floors of the same building. He submitted, though the CIT(A) called for floor plan to demonstrate that the three flats are single residential unit, assessee failed to prove the fact. Therefore, he submitted, assessee’s claim that the three flats are a single residential unit cannot be accepted. Hesubmitted, garages purchased by the assessee not being part of the residential unit, cannot be considered for the purpose of allowing deduction under Section 54 of the Act. As regards the cost incurred for remodelling, he submitted that the assessee has not argued the disallowance before the CIT(A). Therefore, assessee’s claim cannot be allowed at this stage.
Shri Aftab A L Furniturewala 7. We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. The dispute between the assessee and the Department is restricted to the claim of deduction under Section 54 of the Act in respect of investment of capital gain in a new residential house. Further, the dispute between the parties can be narrowed down to three issues, i.e. (i) whether the investment made by the assessee in three residential flats are eligible for deduction under Section 54 of the Act, (ii) whether assessee can claim deduction under Section 54 of the Act in respect of garages, and (iii) whether the claim of expenditure incurred for remodelling of the new residential flat can be allowed under Section 54 of the Act.
As far as the first issue, i.e. claim of deduction in respect of residential flat, at the outset we must observe that we do not find any merit in the submission of the learned counsel for the assessee with regard to the exercise of powers under Section 251(2) of the Act. On perusal of facts on record we are of the view that the learned CIT(A) has exercised his powers under Section 251(2) of the Act by following the statutory mandate. Therefore, the ground raised by the assessee in this regard is dismissed.
As regards assessee’s claim of deduction under Section 54 of the Act in respect of three flats claimed to have been converted into a single residential unit, going through the facts on record we find that the observation of the AO and learned CIT(A) are contradictory on facts. While the AO has accepted assessee’s claim that the three residential flats are a single residential unit, the CIT(A) has held that since the three residential flats are located on different floors of the same building and nothing has been brought on record to show that they have been converted into a single residential unit, assessee’s claim of deduction under Section 54 of the Act in respect of all the three flats cannot be allowed. In this context, though, learned counsel for the assessee has submitted before us that during assessment proceedings the AO has conducted physical enquiry through Inspector and has found that the three residential flats have been converted to one residential unit having common entrance, common kitchen and Shri Aftab A L Furniturewala internal staircase,however, no such observation of the AO is forthcoming in the assessment order. Even, the enquiry report of the Inspector, if at all there is one, has not been submitted before us. Of course, learned Counsel for the assessee has submitted before us the plan of the architect, which was claimed to have been produced before the CIT(A). Besides that, a letter dated 29th January, 2018 issued by the Housing Society is sought to be produced by way of additional evidence. In the said letter it has been stated that permission has been granted to the assessee to convert all the three flats into one residential unit having a single kitchen and private staircase. In our considered opinion, the additional evidence filed by the assessee, since, is crucial for deciding the issue in dispute, needs to be admitted. However, since, the Departmental authorities did not have the opportunity to examine the aforesaid evidence, the same requires to be looked into by them. Moreover, assessee’s claim that the three residential units haves been converted into a single unit having common kitchen, common entrance, etc. not only has to be proved through documentary evidence but an enquiry is also required to be made to find out the veracity of assessee’s claim. In case assessee’s claim is found to be correct, then applying the ratio laid down in the judicial precedents cited before us assessee’s claim of deduction under Section 54 of the Act in respect of the three flats converted into a single residential unit is allowable. However, for factually verifying the claim of the assessee that the three flats have been converted into a single residential unit, we restore the issue to the file of the AO for deciding afresh after proper enquiry.
As regards the issue of claim of deduction under Section 54 of the Act in respect of garages, in our view the issue has to be decided keeping in view the judicial precedents cited before us, which have not been considered by the departmental authorities. Therefore, this issue also requires to be restored to the file of the AO for fresh adjudication.
Similarly, the issue relating to assessee’s claim of deduction under Section 54 of the Act in respect of the cost incurred for remodelling of the new residential house requires re-examination.
Shri Aftab A L Furniturewala 12. In view of the above we restore the issue relating to assessee’s claim of deduction under Section 54 of the Act to the AO for de novo adjudication keeping in view our observations hereinabove and onlyafter due opportunity of being heard to the assessee.