NANDAKUMAR SUBBURAMAN,CHENNAI vs. DCIT CORPORATE CIRCLE 5(2), CHENNAI

This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 3, Chennai, dated 27.10.2017 relevant to the assessment year 2013-14. In his appeal, the assessee has raised various grounds and the only effective ground is with regard to eligibility of deduction claimed under section 54 of the Income Tax Act, 1961 [“Act” in short] and the rejection of alternative plea of the assessee by the ld. CIT(A) with regard to recomputation of capital gains.

Brief facts of the case are that the assessee filed his return admitting income of ₹.40,50,370/-. The case of the assessee was selected for scrutiny and against the statutory notices, the assessee filed various details. The Assessing Officer noticed from the details filed by the assessee that the assessee has claimed deduction under section 54 of the Act at ₹.1,63,50,515/-. As per sale deed, the assessee sold a residential property for a sale consideration of ₹.2,55,00,000/-. Subsequently, the assessee is stated to have purchased another residential property for a consideration of ₹.5,90,00,000/- at Injambakkam. The assessee worked out the capital gains out of sale of original asset amount to ₹.1,63,50,515/- and claimed deduction under section 54 of the Act. In order to verify as to whether the assessee has actually invested the capital gains of ₹.1,63,50,515/- in a residential property as mandated by section 54 of the Act, the Assessing Officer deputed the Inspector and furnish report. Along with copy of the report, the Assessing Officer called for the following details:

On being aggrieved, the assessee is in appeal before the Tribunal. By reiterating the submissions as made before the ld. CIT(A), the ld. Counsel for the assessee pleaded that the assessee is eligible to claim deduction under section 54 of the Act and prayed for deleting the addition made under long term capital gains. On the other hand, the ld. DR strongly supported the orders of authorities below.

We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. We have also perused the paper book filed by the assessee. With regard to the claim of deduction under section 54 of the Act, it is not in dispute that the assessee has purchased property at Neelankarai out of sale of property comprising of land and building at Okkiam Thoraipakkam. But to claim the deduction under section 54 of the Act, it is required to be examined as to what was purchased by the assessee. The provisions of section 54 of the Act envisages purchase of residential house only and not of any other kind for claiming capital gains exemption. In this case, as per sale deed, the assessee has purchased a new asset of 12000 sq. ft. along with built up area comprises of ACC sheet of 100 sq. ft. The previous owner of the property Shri S. Balasubramanian has never stayed in that 100 sq. ft. shed as there was no basic amenities exist in the shed and moreover, it was used for the security guard to stay in. It is worth mention here that when the above property was purchased by the previous owner Shri S. Balasubramanian, the property came with the above shed. As on the date of purchase of the new asset by the assessee, there were no electrical connections or a septic tank which proves that the said structure of about 100 sq. ft. can be categorized as a residential property. No property tax has been paid by the assessee. No approval for the construction of residential property has been obtained from the CMDA atleast within the time allowed under section 54 of the Act. Under the above facts, the Assessing Officer rejected the claim of deduction under section 54 of the Act. On appeal, after considering the Inspector’s report, who has physically verified existence of residential property with all basis amenities, the ld. CIT(A) was of the opinion that the shed is clearly not a habitable residence since Courts have repeatedly pointed out that deduction under section 54 or 54F of the Act cannot be claimed unless a habitable residence having proper toilet, kitchen, water supply, electricity supply, etc. are purchased or built. In the absence of these basis amenities, the ld. CIT(A) was of the opinion that the structure existing at the property cannot be called as residential property by any stretch of the imagination. The case law relied upon by the assessee in the case of CIT v. Dr. R. Balaji [2014] 41 taxmann.com 411(Kar.), the ld. CIT(A) observed in that case that the vendor used to live in that property and all property taxes, etc. were paid on it treating as a residential house, whereas, in the assessee’s case, even the vendor has admitted that though he got the CMDA approval to build a house, a house was not actually constructed and he never stay in that shed and thus, the ld. CIT(A) held that the above said case law has no application. Moreover, the facts emanating from the assessment order have not been rebutted by the ld. AR of the assessee rather conceded the ground. Under the above facts and circumstances, the ld. CIT(A) sustained the disallowance of claim of deduction under section 54 of the Act. Accordingly, we find no infirmity in the order passed by the ld. CIT(A) on this issue.

With regard to the alternative plea raised before the ld. CIT(A) with regard to recomputation of capital gain is concerned, it was the submission of the assessee that the sale of land alone would give rise to long term capital gains and sale of building and equipment would give rise to short term capital gains. Before sale of assessee’s property at Okkiam Thoraipakkam, the assessee has constructed ground floor structure measuring 1345 sq. ft. Over and above the construction of the building structure, it was the submissions that additionally, the assessee has done the following works in the building: • Decorative items being murals on the walls and mirror works, fused class chandelier and painting; • Joinery works being teak wood work across the building; • False ceiling; • Flooring; • Modular kitchen work; • Satin finish painting; • Toilet and sanitary fittings; • Water heater, A/C, electrical fittings and DG; • Installation of security system; • Landscaping; • Fully furnished house with sofa, dining table and wardrobes; • Appliances like LED lighting, TV’s, DTH, refrigerator, microwave, water purified, dishwasher, etc. It was the submission of the ld. Counsel that the capital gains had earlier being computed considering the cost of the land alone, while the assessee had invested in construction of building and additional utilities and furnishings. It was the submissions that the cost of the above items also needs to be included in the computation of capital gains and accordingly, capital gains needs to be recomputed. It was further submission that during the remand proceedings, neither the case was posted for hearing nor the assessee was given an opportunity to present its case before the Assessing Officer. It was further submission that in the remand report, the Assessing Officer has specifically mentioned that for the other assets, a short term capital gain of ₹.78,24,878/- will arise. It was further submissions that without considering the rejoinder filed by the assessee as well as remand report, the ld. CIT(A) erroneously held that there is no need to consider at the alternative submissions of the Assessing officer relating to the recomputation of capital gains and thus, prayed for recomputation of capital gains.

In the result, the appeal filed by the assessee is partly allowed for statistical purposes.