SANJEEV SINHA,MUMBAI vs. ITO 21(3)(2), MUMBAI

2 During the previous year under consideration, the assessee has sold immovable property being residential flat at Sahyadri Apartment, Pimpri Pada on 17.02.2009 for a consideration of Rs.30,35,000/- and while computing long term capital gains on sale of the aforesaid flat , the assessee had claimed expenses of Rs.25,000/- as transfer fee of Rs.30,000/- as brokerage , which was disallowed by the AO as the assessee neither submitted any explanation nor any proof of payment was submitted. The AO observed that the said flat was acquired by the assessee on 18-11-2003 i.e. in the financial year 2003-04 and was sold on 17-02-2009 i.e. in the financial year 2008-09 . The AO observed that the said flat was acquired by the assessee for Rs. 6,30,152/- whose indexed cost of acquisition worked out to be Rs. 7,92,113/- as against the indexed cost wrongly taken by the assessee at Rs. 15,03,067/- . The A.O worked out long term capital gains chargeable to tax on sale of aforesaid residential flat as under:-

3 The assessee also claimed deduction u/s. 54 from long term capital gains earned on sale of aforesaid residential flat. The assessee was asked to submit proof in support of deduction claimed u/s.

The assessee submitted payment receipt dated 29.07.2009 and allotment letter dated 28.07.2009 issued by the Builder-Neeta Developer. The assessee did not filed registered purchase agreement w.r.t. new residential flat in support of his claim for deduction u/s 54 and since the assessee was not able to produce registered purchase agreement , the assessee was show caused by the AO vide order sheet entry dated 08-11-2011 as to why deduction claimed u/s. 54 should not be disallowed . The assessee in reply to SCN submitted as under:-

4 The AO rejected contentions of the assessee . As per A.O., the assessee is required to purchase the residential unit within two years from date of sale transaction i.e. on or before 17th February, 2011 or the assessee has to construct the flat within three years from the date of said transfer, for which the AO observed that the assessee has not submitted conclusive documentary evidences. The A.O disbelieved that after lapse of 28 months of payment to the builder of Rs. 26,00,000/- out of total cost of Rs. 30,37,500/- , the assessee has not executed registered purchase agreement with builder and as per A.O the assessee may have provided finance or loan to the builder against security of the flat and it was also possible for the assessee to have cancelled the flat and got back refund of booking amount. It was held by the AO that as per provisions of Stamp Act , transaction in immovable property is not valid unless proper stamp duty is paid and property is registered. It was held that mere issue of allotment letter and payment receipt is not conclusive and sufficient evidence for allowing deduction u/s. 54 and hence the AO held that the assessee has not purchased new residential unit within the stipulated time and deduction u/s 54 was disallowed by the AO and long term capital gain on sale of the aforesaid property was computed at Rs. 22,42,887/- by the AO , vide assessment order dated 03-12-2011 passed by the AO u/s 143(3).

being aggrieved by the assessment order dated 03-12-2011 passed by AO u/s 143(3), the assessee filed first appeal before learned CIT(A) .

2 During appellate proceedings, the learned CIT(A) asked for remand report from the A.O in which elaborate findings were given by the A.O which are reproduced here under:-

3 The copy of the Remand Report was given by learned CIT(A) to the assessee for his comments and the assessee replied as under in response to remand report:- “ i. It was submitted that the AO has erred in. equating the construction of residential house with the purchases, without referring to the CBDT Circular no. 471 and 672 as per which the allotment of flat should be treated at par with the construction of house and accordingly the claim u/s. 54 should be allowed. ii. It was submitted that the investment for the construction was originally made in time i.e. on 28.07.2009 and later on when the same was shifted on 03.03.2011 was also well within the time allowed u/s.54 for the construction of residential house i.e. 3 years from the sale of original assets. iii. It was submitted that the appellant has paid almost 90% of the consideration to the builder and accordingly invested more than the capital gain realized on the sale of original residential house and the AO has failed to take cognizance of the same. The assessee further relied on the following decisions in support of his claim:-  CIT Vs. Mrs. Hilla J.B. Wadia 1993 (069)TAXMAN-0114- BOM   792 (2010) 122 ITD 212 : (2008) 24 SOT 312: (2009) 18 DTR 71  Kishore H. Galaiya v. ITO (2012) 79 DTR 201/150 TTJ 444 (Mum)(Trib)  Kishore H. Galaiya v. ITO , ITAT 'A' Bench, Mumbai in ITA No. 7326/Mum/2010 dated 13.06.2012  CIT Vs. Sri Sambandam Udaykumar 2012-(206)-TAXMAN- 0150-KAR

The learned CIT(A) after considering the material on record , dismissed the appeal of the assessee by holding as under:-

2 The ld. Counsel for the assessee submitted that the assessee has earned long term capital gains on sale of a residential flat at Sahyadri Apartment, Pimpri Pada on 17.02.2009 . It was submitted that investment has been made in new residential flat and the deduction u/s. 54 was claimed which was disallowed by the authorities below . It was submitted that the allotment letter for new residential flat has been issued in favour of the assessee in the month of July 2009 and payment of Rs. 26,00,000/- were made in July 2009 for purchase of new residential flat . Our attention was drawn to page no 75 of the paper book wherein letter of allotment issued by Neeta Developers dated 28/07/2009 with respect to Residential Flat No. 203/B Wing 2nd Floor, Gulraj Building, Nehru Nagar, Kurla East, Mumbai- 24 wherein payment of Rs. 26,00,000/- was made by the assessee to the Builder towards earnest money for the said flat is placed . Our attention was also drawn to page no. 76 wherein receipt is being placed for Rs. 26,00,000/- issued by Neeta Developers with respect to the above flat. Our attention was also drawn to page no. 77 wherein the letter dated 30-07-2009 requesting for cancellation of the said flat at ‘B’Wing has bee placed. Our attention was also drawn to page no. 78 where in letter of allotment dated 3rd March, 2011 issued by Neeta Developer in favour of the assessee is placed with respect to allotment of Flat no. 104/H Wing, First floor on plot bearing number CTS No. 6(Pts.) , Nehru Nagar, Kurla East, Mumbai-24 , wherein it is mentioned that the assessee has made payment of 26,00,000/- to the Builder-Neeta Developer towards EMD for the said flat . Further letter of allotment dated 15.10.2011 issued by Neeta Developer is also placed in paper book/page 79 wherein the said payment of Rs.26,00,000/- is converted into part consideration for purchase of the said residential flat bearing number CTS No. 6(Pts.) , Nehru Nagar, Kurla (East), Mumbai-24 by the Builder-Neeta Developer. The assessee placed reliance on the decision of the ITAT , Mumbai in the case of Mukesh G Desai (HUF) v. ITO (2009) 120 TTJ 792 (Mumbai). It was submitted that there was no mala fide by the assessee and the said amount of payment of Rs.26,00,000/- continued with the Neeta Developers since July 2009 although initially flat was cancelled and later new residential flat being constructed by the said builder was purchased within three years from the date of sale in lieu of earlier cancelled flat. It was submitted that strict law of evidence is not applicable to income- tax proceedings. It was submitted that payment of Rs.26,00,000/- was made to the Builder on 29.07.2009 itself which flat was cancelled on 30-07-2009 and money was shifted from one flat to the another and builder has given another flat to the assessee within three years from the date of sale of original flat . It was submitted that fault is on the part of the builder and section 54 is benevolent provision which should be liberally construed. It was submitted that there is no mala fide on the part of the assessee rather it is the fault of the Builder and the assessee should not be penalised for the same. It was submitted that allotment of the flat by the Builder shall be deemed to be construction of flat and period of three years will be applicable for construing limit for availing the benefit of Section 54. 5.3 The ld. D.R on the other hand submitted that construction should have been completed within three year while in the instant case the construction has not been completed within three years. He relied upon the appellate order of the learned CIT(A). It was submitted that no document for registration of the flat in favour of the assessee by the Builder-Neeta Developer has been executed in favour of the assessee . It was submitted that no registered documents for purchase of new residential flat has been produced before A.O or before learned CIT(A) . The learned DR relied upon the appellate order of learned CIT(A).

We have considered rival contention and perused the materials on record including case laws relied upon.

2 We have observed that ground no. 1 raised by the assessee before us is concerning transfer fees of Rs. 25,000/- and brokerage expenses of Rs. 30000/- claimed to have been paid by the assessee in connection with sale/transfer of residential flat at Sahyadri Apartment, Pimpri Pada on 17.02.2009 which was claimed as deduction while computing long term capital gains on sale of said residential flat. The assessee did not offer any explanation before the AO nor provided any evidences before the AO with respect to said expenses which led to the disallowances of said expenses in the hands of the assessee by the AO while computing income from long term capital gains on sale of flat at Sahyadari Apartments. The assessee produced additional evidences before learned CIT(A)to substantiate said expenses to have been genuinely incurred but learned CIT(A) refused to admit such additional evidences as the assessee did not produce such evidences before the AO. The assessee claimed before learned CIT(A) that his AR did not communicated to him that these documents were called by the AO and hence the same were not furnished by the assessee to his counsel for onward submissions to the AO. It is well settled proposition of law that when technicalities are pitted against substantial justice, the courts will always lean towards promoting the cause of substantial justice unless malafide is writ large from the conduct of litigating party seeking admission of additional evidences at the appellate stage. The litigating party is not likely to gain any benefit from non production of such evidences which support and promotes its contentions and cause to seek relief rather non production of said evidences can lead Court to draw presumption against the said litigating party. The explanation offered by the assessee that he was not informed by his AR about requirement of furnishing these documents before the AO and hence he did not furnish said evidences at the assessment stage is an plausible explanation which cannot be rejected at threshold to be not a reasonable or bonafide reasonable explanation more-so on perusal of invoices for both these expenses which are placed in paper book/page 72-74 the payments were made by the assessee through cheque/banking channel. The powers of learned CIT(A) is co-terminus with the powers of the AO and while deciding the appeal the learned CIT(A) should have caused enquiry of its own or directed AO to make an enquiry to verify bonafide and genuineness of the claim of the assessee instead of rejecting the claim of the assessee at threshold . We are of the considered view and direct that these additional evidences be and are hereby admitted in the interest of justice and matter be restored to the file of the AO for necessary verification / enquiry with respect to these additional evidences as to the bonafide and genuineness of the assessee’s claim on merits to be conducted by the AO and issue be decided on merits by the AO in denovo proceedings in accordance with law. Needless to say that the AO shall provide proper and adequate opportunity of being heard to the assessee in accordance with principles of natural justice in accordance with law This ground of appeal no. 1 raised by the assessee is allowed for statistical purposes. We order accordingly.

3 With respect to the ground no.2 raised by the assessee , we have observed that assessee has sold residential flat at Sahyadri Apartment, Pimpri Pada on 17.02.2009 which was purchased on 18.11.2003 . The long term capital gains before computing deduction u/s. 54 was worked out by AO as under:-

The assessee claimed deduction u/s. 54 of the Act from long term capital gains earned on sale of residential flat at Sahyadri Apartment, Pimpri Pada as the assessee booked flat no. 203/B Wing , 2nd Floor, Gulraj Building, Plot No. CTS No. 6(Pt) and 4(Pt.) , Nehru Nagar, Kurla East, Mumbai-400024 wherein payment of Rs. 26,00,000/- was made by the assessee as EMD for booking of said residential flat as against total cost of Rs. 30,37,500/- and the Builder Neeta Developer issued allotment letter dated 28.07.2009 along with receipt dated 29.07.2009 acknowledging receipt of Rs. 26 lacs ( page no. 75-76/paper book) . The assessee cancelled the said booking of residential flat no. 203/B Wing , 2nd Floor, Gulraj Building, Plot No. CTS No. 6(Pt) and 4(Pt.), Nehru Nagar, Kurla East, Mumbai-400024 on 30.07.2009 on personal reasons (page 77/pb) . The said amount of Rs. 26 lacs paid by the assessee as EMD for booking aforesaid flat continued to be retained with the builder as is emerging from records. The assessee made fresh booking of fresh residential flat with Builder Neeta Developers bearing flat no. 104 in Wing H(A) on the 1st Floor having area of 455 sq. Ft in the proposed building at plot no. 6(pt.) situated at Nehru Nagar, Kurla East, Mumbai-400024. The builder –Neeta Developer allotted said new residential flat to the assessee on 3rd March, 2011 and acknowledged receipt of Rs. 26.00 lacs as EMD towards the said residential flat (page 78/pb). The Builder Neeta Developer issued allotment letter dated 15-10-2011 and appropriated Rs. 26 lacs as part consideration towards said new residential flat as against total consideration of Rs. 32.76 lacs (page 79/pb). The said builder also issued one receipt dated 25-07-2012 of Rs. 66,950/- towards service tax w.r.t. above flat which was paid by the assessee vide cheque issued from his Allahabad bank (page 80/pb). The assessee has also produced approval letters from Slum Rehabilitation Authority issued in favour of Neeta Developers dated 17-07-2007 and 27-07-2011 for approval for development permission and grant of commencement certificate which , inter-alia, included ‘B’ Wing as also ‘H’ of the Building being developed by the Builder-Neeta Developr . The assessee has also produced letter dated 20- 08-2013 issued by Neeta Developer to the ITO, Ward 21(3)(2), Mumbai confirming all the aforesaid facts in reply to enquiry made u/s 250(4). The authorities below denied deduction to the assessee u/s. 54 of the Act on the ground that assessee has not purchased the residential flat within two years from the date of transfer /sale of residential flat on 17-02-2009 . The assessee booked the flat in ‘B’ Wing which was allotted by the builder on 28- 07-2009 and later the same was cancelled by the assessee on 30-07-2009 on personal reasons and in the intervening period from 30.07.2009 till 03.03.2011 , the booking amount of Rs. 26 lacs for ‘B’ Wing cancelled residential flat was lying with the builder while no residential flat was being held by the assessee in the intervening period from 30-07-2009 till 03-03- 2011, while it is only on 03-03-2011 the builder Neeta Developer allotted new residential flat at ‘H’ Wing(page 78/pb) which is beyond 2 years from the date of sale of residential flat on 17-02-2009 but is within three years from the date of sale of flat at Sahaydri Apartments. The builder continue to hold the payment of Rs 26 lacs made by the assessee from July 2009 till March 2011 which was appropriated by Builder towards ‘H’ Wing residential flat on 3-3-2011 as EMD by allotting flat in ‘H’ wing vide allotment letter dated 3-3- 2011. The said EMD was later converted by the Builder into part consideration towards ‘H’ wing flat on 15-10-2011 vide letter of allotment dated 15-10-2011. Section 54 is a beneficial provision which was legislated in order to encourage people to invest in housing sector and granted deduction from long term capital gains earned on sale of residential property provided the same is re-invested in new residential property within specified time limits as provided u/s 54. Till recently, in big cities like Mumbai there was a huge shortage of housing and concept of builder flat is very popular due to acute shortage of land and skyrocketing prices of land in the large cities like Mumbai. The owning and possessing of a residential flat was a distant dream to large section of middle income and lower income group people who have to depend on builders/societies for satisfying their housing need in city of Mumbai . These middle income and lower income group people did not have much bargaining power vis-a-vis builders while buying residential houses , while builders hold a dominating position keeping in view financial resources of builder as well as acute shortage of housing in Mumbai. No doubt presently the real estate demand and supply position has changed which is tilted in favour of buyers and there is also an advent of stringent laws like establishment of Real Estate Regulatory Authorities to protect buyers from unscrupulous builders. Under these circumstances buyers in that era wherein regulation over builders were not stringent had to accept standard conditions imposed by the builders , wherein flat buyers has to sign on the standard documentation, agreements , contracts as prepared by the builder and the timing of registration was also decided by the builders due to their strong dominating positions vis-a-vis middle income and low income group buyers , wherein it was not uncommon that builders used to delay delivery of homes to the buyers. Thus to read Section 54 which is a beneficial provision in an absolutely strictest terms will lead to denial of benefits u/s. 54 to many of the legitimate and genuine buyers of residential flats and its strict interpretation will lead to the defeat of the very purpose for which Section 54 was legislated. No doubt that exemption provisions at the initial stages is to be construed strictly and onus is on the tax-payer to establish its entitlement to exemption but once the tax payers establish its entitlement to the exemption provision, full benefit is to be given to the exemption provision to achieve the intended purposes for which the said provisions are legislated which in the case of Section 54 was to encourage housing but to interpret Section 54 in a very strictest , narrower and restricted terms will defeat the basic purpose for which the said provision was legislated to encourage people to invest in housing to satisfy their need for housing and even genuine and bonafide buyers will be denied the benefit as they are otherwise entitled to u/s 54. Reference can be drawn to the following observations of Hon'ble Supreme Court in the case of Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480 : "The provision in a taxing statute granting incentives for promoting growth and development should be construed liberally; since the provision for promoting economic growth has to be interpreted liberally , restrictions on it too has to be construed so as to advance the objective of the provisions and not to frustrate it." We have observed that the assessee invested 26,00,000/- with Neeta Developers in July 2009 itself to buy a residential flat in B wing which due to personal reasons the assessee cancelled the said flat but allowed builder- Neeta Developer to continue to hold the said booking amount of Rs. 26 lacs till 2011 when a new flat in ‘H’ Wing was allotted by the Builder-Neeta Developer to the assessee and the same amount which was held by the Builder was duly appropriated towards new residential flat allotted to the assessee in ‘H’ wing on 03-03-2011 as EMD which was later treated as part consideration on 15-10-2011 by the Builder. The assessee has made substantial portion of the payment to the tune of Rs. 26 lacs as against total cost of Rs. 32.76 lacs of the flat in ‘H’Wing on 03-03-2011 and has acquired right , title and interest over said flat within 3 years from the sale of flat. Circular no. 471 dated 15-10-1986 and circular no 672 dated 16-12-1993 issued by the CBDT supports the contention of the assessee . The circular no 471 dated 15-10-1986 issued by CBDT is reproduced hereunder :

In the result, appeal of the Assessee in ITA No. 1131/Mum/2014 for assessment year 2009-10 is allowed as indicated above.