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Before: Shri Inturi Rama Rao & Shri Duvvuru RL Reddy
O R D E R
PER DUVVURU RL REDDY, JUDICIAL MEMBER:
This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 4, Chennai, dated 11.02.2017 relevant to the assessment year 2010-11. The grounds raised by the assessee are reproduced as under:
1. The Commissioner of Income tax has erred in passing the order disallowing the deduction u/s 54F claimed by the appellant in the return of income for the assessment year 2010-11 amounting to a sum of Rs.52,70,514.
2. The Commissioner of Income tax has erred in disallowing the cost of building a residential house incurred by the appellant, which was allowed by the assessing officer at the time of assessment, amounting to a sum of Rs. 20,58,712.
3. The Commissioner of income tax has erred in stating that the property constructed by the appellant was only an outhouse and not a residential house. 4. The Commissioner of income tax has erred in not considering the approved plan produced by the appellant. 5. The Commissioner of income tax' has erred in wrongly concluding that the intention of the appellant was to exploit the land properties commercially without any basis whatsoever and without considering that the appellant was only serving as an employee in a software giant during that period earning salary income only and that he was not in the business of real estate to commercially exploit the land as stated by him. 6. The commissioner of income tax has erred in failing to appreciate that the appellant, based on his salary income obtained a loan from a financial institution for the purpose of purchasing the land and constructing a building thereon. He further failed to appreciate that the repayment of the loan borrowed for the purchase of the land, out of the capital gains, also is deemed to be investment in land. 7. The Commissioner of income tax should have appreciated the explanation offered by the Appellant that but for the major scam broke out in his company he would have constructed a bungalow for which he bought that piece of land. 8. The commissioner of income tax erred in concluding that the cost incurred by the appellant towards the construction of compound wall, water pump etc., was to enhance the commercial value of the property without realizing that these costs were incurred both for safeguarding the land and also to make a dwelling unit in the land so purchased. 9. The Commissioner of income tax wrongly concluded that the dwelling unit constructed in the land purchased was only an outhouse and cannot be considered as a residential house. 10. The commissioner of income tax erred in concluding that even if the outhouse was considered as a residential house, the exemption cannot exceed the cost of construction of the same and the cost of land admeasuring the exact square foot of the building constructed without realizing that no house can be constructed without leaving sufficient space for set backs etc., 11. The Commissioner of income tax erred in concluding that the compound wall and the water sump etc., do not form part of the construction cost and failed to appreciate that no house can be safe and be in a liveable condition if the compound wall and sump are not constructed. He further failed to appreciate that the entire cost of. construction including compound wall, sump etc., amounting to a sum of Rs.20,58,712 was eligible for deduction from the capital gains earned. The Commissioner of Income tax should have appreciated that the Assessing officer having gone' through the documents furnished at the time of hearing was fully satisfied and he had allowed the entire cost of construction only after that.
12. The commissioner of income tax erred in not granting exemption for the cost of land for the reason that it was purchased in the year 2006.The Commissioner of income-tax should have considered that as per section 54F of the Act, the only condition prescribed is that, the construction of the residential house should have taken place within 3 years from the date of sale and that as the appellant had satisfied' the condition he was eligible to set off the cost of the land also against the capital gains.
The commissioner of income-tax erred in concluding that the residential house constructed by the appellant is an out house which does not qualify the definition of residential house as envisaged u/s 54/54F of the Act without attributing any reason as to how he can conclude the house to be an out house? The Commissioner of Income tax failed to refer to the provisions of section 80 IBA wherein, it was stated that, in metro cities, even a residential unit not exceeding 30 sqm which is roughly 327 sft is fit enough to be called a residential house.
The Commissioner of income tax has erred in stating that penalty proceedings have to be initiated since the appellant had furnished inaccurate particulars of income without realizing that the appellant had furnished all the information called for by the assessing officer at the time of the hearing.”
Brief facts of the case are that the assessee filed its return of income for the assessment year 2010-11 declaring total income at ₹.33,41,590/-. The case was selected for scrutiny. After considering the details filed against statutory notices, the Assessing Officer noticed that the assessee had sold away a property for ₹.1,06,75,000/- and had claimed exemption for capital gains for a sum of ₹.45,90,893/-. When the investment in the new house property for claiming exemption from capital gain was verified, the Assessing Officer noticed that the assessee had put a construction for ₹.20,58,713/- on a land which was purchased in the year 2006. The assessee submitted before the Assessing Officer that a part of sale consideration was utilized for clear the loan taken for purchasing the above mentioned land. As the conditions specified in section 54 of the Act were not satisfied since the land was purchased in the financial year 2005-06 and construction of building took place in the financial year 2009-10, a sum of ₹.25,32,180/- [45,90,893 – 20,58,713) was brought to tax under the head long term capital gains.
The assessee carried the matter in appeal before the ld. CIT(A). After considering the submissions of the assessee as well as facts of the case and considering the written submissions of the AR of the assessee in response to notice under section 251(1)(a) of the Act, besides rejecting the claim of exemption under section 54 of the Act, the ld. CIT(A) enhanced the assessment to ₹.86,95,484/- against the assessed income of ₹.58,73,770/-.
On being aggrieved, the assessee is in appeal before the Tribunal.
We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. To ascertain correct facts of the case, during the course of appellate proceedings, the ld. CIT(A) called for the assesse to furnish the following details: i. The original purchase deeds of land purchased in 2006, on which the impugned residential house was constructed. ii. The original loan sanction letter for raising the loan for the purchase of land in 2006 on which the impugned residential house was constructed. iii. The loan account statement from the date of its being sanctioned by the bank till the period of relevant assessment year. iv. The original map of the impugned residential house which was approved by the competent authority viz. Municipal Corporation, etc. The AR of the assessee furnished a copy of the map of residential house which was dated as 28.08.2016. The ld. CIT(A) noticed that the said map was not signed or attested by any concerned authority. The genuineness and authenticity of the map was not substantiated to prove that it was the map based on which the impugned residential house was constructed in the financial year 2009-10. Moreover, on perusal of the map, the ld. CIT(A) noticed that the built up area of the residential house is 452.11 sq. ft. and 0.01% of the total area of the land admeasuring 46,031 sq. ft.
On perusal of the construction chart dated 27.03.2010 furnished by the contractor – M/s. Alakhar Builders, Chennai, the ld. CIT(A) noticed that the total amount of the bills raised by the contractor was to the tune of ₹.20,58,712/- of which a sum of ₹.5,14,960/- only was incurred towards construction of an ‘Out House’. The detailed break-up of bills raised by the contractor are given below:
1.
Open well and temporary supply 63,900.00 2. Compound wall 13,74,432.52 3. Servant quarters 5,14,960.00 4. Plumbing and sanitary works 46,620.00 5. Security room and formation of approach 58,800.00 road Total 20,58,212.52 On perusal of the above chart of the contractor, the ld. CIT(A) observed that a major part of the expenditure of ₹.13,74,432.52 was incurred towards construction of compound wall around the big chunk of land admeasuring 46031 sq. ft. on which the impugned house with total built up area of 452.11 sq. ft. which comes to 0.01% of the total plot area, was constructed for ₹.5,14,960/- only. Further, the ld. CIT(A) noticed that in the chart, the contractor termed the impugned construction as “servant quarters” and the exact specification of the construction is reproduced as under: “III. Providing and construction of out-house with RR masonry foundation upto finished floor level, and super structure with hollow masonry and RCC lintel, sunshade and loft wherever necessary and 5 thick RCC roof with necessary reinforcement and shuttering. All doors and windows with country wood frame and paneled shutter with paint grade. Flooring with vitrified tiles and toilet wall dado with glazed tile and flooring with antiskid tiles weathering course olime concrete with pressed tiles. Including electrical and plumbing works at ₹.5,14,960/-.”
7. The other plumbing and sanitary works [supply and laying of 11/4 PVC pipe line for garden line all-round the plot] (as per row No. IV) as well as security room and formation of approach road as per row No. V, pertains to development of the plot. In order the make marketable development in the land admeasuring 46031 sq. ft., the assessee has put construction of compound wall, out-house/servant quarter for the use of security person and not for assessee’s dwelling purpose, but for commercial exploitation. In this case, the assessee has not provided any approved map/plan or any structural design. Thus, it is clear that the assessee did not construct any residential house on the said property as envisaged under section 54/54F of the Act. We find that at para 14 of the appellate order, on the date of hearing on 23.11.2016, the ld. CIT(A) has very well requisitioned the AR of the assessee to furnish construction agreement along with the map or the structural design provided to the contractor. At para 18 of the appellate order, the ld. CIT(A) has given a concrete findings that “In the present case of the appellant, neither the approved map was provided nor did he submit any structural design”. However, before the Tribunal, the assessee filed out-house plan [not residential house plan], which was approved by the Village President of 35, Kanathur Reddykuppam on 22.08.2016 and what prevented the assessee to furnish the same before the ld. CIT(A) during the course of appellate proceedings. Even otherwise also it is of no use because after construction of the compound wall, out-house, etc. approval of the existing structure was obtained, which is an after-thought, it pertains to out-house and not residential house in terms of section 54/54F of the Act.
The assessee has raised loan of ₹.1,41,01,000/- from HDFC Bank for purchase of plot Nos. 10 to 13, 16 and 17 totaling to 46,031 sq. ft. On the other hand, the area sold by the assessee during the year under consideration was in respect of plot No. 10 & 11 to the extent of 7330 sq. ft. only which comes to 15.92% of the total area of 46,031 sq. ft. Therefore, the ld. CIT(A) observed that even if any claim of repayment of borrowed funds was allowable as cost of construction of impugned property, the same has to be restricted to 15.92% of the total borrowed funds. However, the assessee did not furnish any evidence of bank account statement to substantiate the source of repayment of EMIs originated and that the assessee had adjusted the borrowed amount against the sale consideration of long term capital asset either before the ld. CIT(A) or before the Tribunal.
Admittedly, the assessee has not constructed the compound wall exclusively on the plot in which the out-house [452.11 sq. ft.] was constructed. The assessee has created gated compound wall of the entire property of plot Nos. 10 to 13, 16 and 17 totaling to 46,031 sq. ft. for the purpose of its commercial exploitation and moreover, after construction of gated compound wall, the assessee sold plot Nos. 10 and 11. Therefore, the entire cost of construction including compound wall, sump etc., amounting to a sum of ₹.20,58,712/- cannot be held as eligible for claiming deduction from the capital gains earned.
We have also perused the case law relied on by the ld. Counsel for the assessee in the case of C. Aryama Sundaram v. CIT 407 ITR 1 (Mad) as well as M.K. Kuppuraj (HUF) v. CIT 257 ITR 718 and find that both the case law have no application to the facts of the present case because, both the case law relates to residential house and not relating to any other construction as was done by the assessee.
Since the assessee did not construct the residential house as stipulated under section 54F of the Act, the ld. CIT(A) has opined that the assessee is neither eligible to set off the capital gain of ₹.53,53,894/- against the cost of construction of the ‘out-house’ at ₹.5,14,960/- nor against the cost of land at ₹.1,78,97,923/- as claimed by the assessee on which the outhouse was constructed. Accordingly, the ld. CIT(A) rightly rejected the entire capital gain exemption claimed by the assessee in the return of income at ₹.45,90,893/- and enhanced the assessment to ₹.86,95,484/- [₹.33,41,590/- returned income + ₹.53,53,894/- LTCG] as against the assessed income of ₹.58,73,770/-. We find no infirmity in the order passed by the ld. CIT(A). Thus, the ground raised by the assessee stands dismissed.
In the result, the appeal filed by the assessee is dismissed. Order pronounced on the 25th April, 2019 in Chennai.