THE ACIT,(OSD), CIRCLE-9,, AHMEDABAD vs. SHRI PARESHKUMAR RAMANLAL JANI,, AHMEDABAD

The revenue has raised following grounds of appeal:- 1). "Whether the Commissioner of Income-Tax (Appeals) has erred in law and on facts in deleting the disallowance made by the AO. u/s.54F of the Act, amounting of Rs.52,63,756/-." 2). On the facts and in the circumstances of the case, the Ld. Commissioner of Income-Tax (Appeals)-XV, Ahmedabad ought to have upheld the order of the Assessing Officer. 3). It is therefore, prayed that the order of the Ld. Commissioner of Income-Tax (Appeals)-XV, Ahmedabad may be set-a-side and that of the order of the Assessing Officer be restored.”

In this case, return of income declaring income of Rs. 1,23,74,797/- was filed on 28th September, 2010. Subsequently, the case was selected under scrutiny by issuing of notice u/s. 143(2) of the case on 25th August, 2011. During the course of assessment proceedings, the assessing officer noticed that assessee has shown long term capital gain in respect of sale of land at Sola, Survey No.

The sale consideration of the land was shown at Rs. 67,50,000/- and the cost of acquisition was worked out at Rs. 13,84,012/- .The net gain was shown at Rs. 53,65,988/- which was claimed as exempt u/s. 54F of the act. Regarding the claim of the assessee for exemption u/s 54 F the assessing officer stated that exemption u/s. 54F of the act is available in respect of capital gain arising from transfer of long term capital assets not being residential house and the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased or within a period of three years after the date of sale construct a residential house. The exemption is available to the extent of investment in residential house or to the extent of capital gains. He further stated that in case the net consideration is not appropriated by the assessee

Aggrieved against the order of the assessing officer, the assessee preferred appeal before the ld. CIT(A). The ld. CIT(A) has partly allowed the appeal of the assessee by observing as under:- “3.6 Section 54F of the Act has been reproduced in the submission made by the appellant. Reading the provision of Section 54F of the Act it is clear that the condition to be fulfilled is that the assessee has, within the period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house and the assessee is not hit by the proviso to Section 54F (I). The claim of the assessee is that he has constructed a residential house within a period of three years after the date of transfer. The Assessing Officer has denied on the ground that what is constructed is not a "residential house" and even otherwise the genuineness of amounts spent on construction is not established. The phrase "a residential house" is not defined under the Act. Therefore, under a common parlance meaning, the construction should answer the quality of a "residential house". In the present case it is seen that, for construction of the residential house the appellant first of all leveled the land so as to raise it from the ground level and to make it even. He has also constructed compound wall around the plot to guard the property. In my opinion the same will qualify as expenditure on construction of residential house. But for the leveling of the land, raising its level and compound wall around the plot, a proper house to be called as "residential house" cannot be constructed. Therefore the same/ are part and parcel of residential house and expenses on such factors cannot be discarded while arriving at the value of the "residential house" constructed by the appellant. From the photographs as inserted by the assessing Officer in his Assessment order it can be concluded that even as 'per Assessing Officer, as per first photogtaph there is a construction of a single room. The second photograph shows inner part of room which also have a window and the marks like paste on the wall. The third photograph is backside of the room showing certain shrubs just below the window. However, shrubs on an unoccupied house cannot discard the theory that the construction can be a "residential house". The fourth photograph shows that there is a bathroom but do not show the commode, water connection or taps. In my opinion, the construction answers the quality of "a residential house." A house is "residential house" where a person can live. There are walls, windows and there is a bathroom also. What has weighed in the mind of the Assessing Officer is that "there is no kitchen and due to shrubs it is not fit for residence." In my opinion a kitchen need not be in a separate room in a platform or other facilities to be called as a residential house. Shrubs on the plot will not disentitle a person to reside in the house once such shrubs are removed. A bathroom is also existing and a water connection is also existing. A commode is not a prerequisite condition to be called a bathroom. Since the house is not occupied, inside pipes may not be laid with taps as otherwise the same is likely residential house". The other factor which has weighed in the mind of Assessing Officer is that the appellant is a prominent Advocate and is not I.T.A No. 3022 & CO No. 308/Ahd/2014 A.Y. 2010-11 Page No 5 "for the purpose of his own residence" is not part of the provision of Section 54F. As rightly contended by the learned Counsel for the appellant the legislature was aware of such condition to be put into while allowing exemption in respect of new residential house, which was prevalent in Section 54 prior to amendment by Finance Act, 1982 with effect from 1st April, 1983. Therefore the condition now being only to purchase or construct a residential house and not necessarily for his own residence cannot be - imported into. Therefore the factor which has weighed in the mind of Assessing Officer are de horse the provision of Section 54F of the Act and hence not tenable on the facts of the ease. The appellant can construct a residential house and may still lease it out for the purpose of residence of other person or it can be used by any person but that will not disentitle from being called a "residential house". It is a fact of life, particularly under Indian condition, that majority of the populations are living in a house without facilities like separate kitchen or even bathroom with other modem facilities but still they are living answers the quality of 'a residential house". The decision of Hon'ble Punjab and Hariyana High Courts in the case of Ashok Sval relied by Assessing Officer is not applicable to the facts of the case it is seen that and even as admitted by the Assessing Officer himself there is a toilet, electricity connection, water tank and the connecting pipe lines. As per the approved plans the room includes the kitchen also. Absence of certain facilities, which can be put up when the house is going to be occupied, will not render the house other than a residential house. The decision of ITAT Amritsar Bench in the case of Smt.Usha Vaid (Supra) squarely applies to the present set of facts. Therefore, even if some facilities were not put up and the same are pending but if the construction can be occupied for the purpose of residence the appellant will be eligible for exemption u/s. 54F of the Act. Similarly, the decision of the ITAT,' Chandigarh in the case of Smt. Rajneet Sandhu (Supra) also supports the case of the appellant. Therefore, the first contention of the A.O. is that the appellant has not constructed "a residential house" is not tenable on the facts of the case. The construction carried on by the appellant answers the word "a residential house" in positive terms and hence the appellant is entitled to benefits of Section 54F of the Act.

7 In reference to denial of exemption on the ground that appellant incurred all the expenditure in cash and vouchers are produced with description of work and material for such expenditure but appellant failed to produce a single person who carried out such work, I am partly inclined with appellant. The existence of construction of room, bathroom, water tank, boundary wall and increase of level of ground is evident and undisputed. This work cannot be brushed aside and it cannot be held that no expenditure is carried out. The appellant as well as A.O. has not referred to any valuation report to substantiate that how much expenditure was incurred. I am inclined with A.O. that if such work was carried out by daily paid labourers with material then as per Annexure A, it is evident that work was carried out from 01.02.2010 to 12.09.2010 while payment is made in cash to such daily labour from 24/09/2010 to 27/09/2010. It is undisputed (as admitted and submitted by appellant also) that no contractor or supervisor was kept by appellant for such work otherwise such confirmation could have substantiated such payment. In this factual matrix, it is very difficult to accept that daily labour who incurred expenses of Rs. 50,000;'- (approx) will wait for about five to seven months and then he comes & claim his expenditure. How the appellant recognized the genuinity of such labour. In case the labour is known to appellant then he should have produce at least some before A.O. to evidence that. It is in this regard the expenses from 01/02/2010 to 02/08/2010 are of Rs. 22,88,433/- which appears to be doubtful being not substantiated by those labour and its payment were delayed. Surprisingly no such labours name is repeated in subsequent labour & its payment. In my view it will be appropriate to treat 50% of such expense as not evidenced i.e. Rs. 11,44,216/- say 11,50,000/- expenses claimed u/s 54F of the Act are required to be disallowed. It is therefore out of the claim u/s 54F of the Act for I.T.A No. 3022 & CO No. 308/Ahd/2014 A.Y. 2010-11 Page No 6 expenses of Rs. 66,00,000/- incurred by appellant for construction of residential property, only Rs. 54,50,000/- (66,00,000 - 11,50,000) is considered as allowable. The A.O. is directed to give deduction u/s 54F of the Act for expenses of Rs.54,50,000/-.

8 In reference to incorrect figure adopted by A.O. for cost of acquisition for sale of land at sola, survey No. 98 (para 5.13 of impunged order), I am inclined with A.O. who vide letter dt. 18/09/2012 (page 16 of P.B) called for details of purchase & sale deed of this land which were submitted. The A.O. vide show cause dt. 22/10/2012 confronted the appellant that vide purchase deed dt. 05/09/93 Regd. with Sub Register vadaj on 18/02/1993, the entire land of 5160 sq. mt. was purchase for consideration of Rs. 4,19,696/- but the sale deed executed on 30/09/2009 reflect sale of 516 sq. mt. of land being 1/6th of total land and appellant record reflect op. balance of Rs. 1,17,020/- for this land. The appellant vide reply dt. 06/12/2012 admitted that there were other co-owner and 1/6th part was of appellant share which was sold and cost of acquisition was Rs. 1,17,020/-. The A.O. therefore correctly considered the cost of acquisition at 176th of 419696 i.e. 81391. The appellant in response to inquiry from ADIT(lnv.) II, Ahmedabad in 09/08/1995 vide reply dt. 28/08/1995 while giving details of all immovable properties admitted such cost of acquisition for his share of 1/6th part of this land which was sold. The A.O. at para 5.13 of impunged order considered sale consideration of Rs. 67,50,000/- and reduced indexed cost of acquisition of Rs. 2,30,669/- (81391 X 632/223) to work out LTCG of Rs. 65,19,331/-. It is therefore, considering the deduction u/s 54F of the Act is available for the expenses of Rs. 54,50,000/- the LTCG can be worked out as follows: (i) Sale consideration Rs. 67,50,000/- (ii) Indexed cost of purchase Rs. 2,30,000/- LTCG. Rs. 65,19,331/- Less: Deduction u/s 54F 6519331 X5450000 6750000 56,63,756 LTCG 12,55,575 There is no dispute about long term capital gain reflected by appellant for land at sola Survey No. 254 at Rs. 5,02,490/- therefore the LTCG worked out to Rs. 17,58,065/- (502490 + 1255575). The A.O. has taken this LTCG in impunged order at Rs. 70,21,821/- therefore A.O. is directed to delete the addition of Rs. 52,63,756/- (7021821 - 1758065). The appellant gets part relief accordingly of Rs. 52,63,756/-. All the ground No. 1 to 7 are treated as partly allowed.”

We have heard the rival contentions and perused the material on record carefully. With the assistance of the Ld. Counsel we have gone through the material as per record and observed that the existence of residential house was evident from the construction of room, bathroom, water tank, boundary wall etc. There was electricity connection in the house with meter near the entry of constructed house. We have also observed that existence of these facts were I.T.A No. 3022 & CO No. 308/Ahd/2014 A.Y. 2010-11 Page No 7 not disproved by the assessing officer as he has not referred the matter to the valuation officer. After taking into consideration the specific facts of this case we are of the view that for lack of some facilities it is not appropriate to categorized the aforesaid house as non-residential house. Inter alia we are inclined with the decision of the Ld.CIT(A) that the assesse has failed to fully substantiate the claim of labour expenses by not furnishing the relevant evidences as elaborated in the findings of the Ld.CIT(A).Therefore, we do not find any error in the findings of the Ld.CIT(A) of disallowing 50% of labour expense(Rs 11,50,000/- ) which resulted in reducing the construction value of the residential property to Rs.54,50,000/- and restricting the deduction u/s 54F of the Act to Rs. 52,63,756/- on the basis of 1/6th share of the assessee. Therefore, the appeal of the revenue is dismissed.

The assessee has raised following grounds in the cross objection:- “1. Ld. CIT (A) erred in law and on facts in partly disallowing expenses incurred of Rs. 11, 50,000/- out of total expenses claimed at Rs. 22, 88, 433/- by the appellant towards construction of the residential property. Ld. CIT (A) ought to have allowed total expenses as claimed by the appellant. It be so held now.

Ld. CIT (A) erred in law and on facts in restricting deduction u/s 54F of the Act by allowing construction expenses of Rs. 54, 50, 000/- from Rs. 66, 00,000/- as claimed by the appellant. Ld. CIT (A) ought not to have held any expenses incurred by the appellant as doubtful and unsubstantiated on the basis of surmises on conjectures. It be so held now.

Ld. CIT (A) erred in law and on facts in confirming disallowance of loss made by AO of Rs. 3, 82, 678/- while invoking provisions of section 94 (7) of the Act. Ld. CIT (A) ought to have deleted such unwarranted disallowance.

Ld. CIT (A) erred in law and on facts confirming addition of Rs. 1, 25, 000/-made by AO u/s 2(22)(e) of the Act. Ld. CIT (A) erred in treating the amount received purely towards business transaction as deemed dividend. Ld. CIT(A) ought to have deleted the addition made against sanction of law.

Ld. CIT (A) erred in law in holding levy of interest u/s 234B & 234C of the Act as consequential.

Ld. CIT (A) erred in law in holding initiation of penalty proceedings u/s 271(1)(c) of the Act. as premature.”

The cross objection 1 &2 filed by the assessee are identical to the issue as discussed above in the appeal filed by the revenue. As elaborated above in the appeal of the revenue we have upheld the decision of the Ld. CIT(A), therefore, we do not find any merit in the cross objection of the assessee and the same are dismissed. In respect of cross objection no. 3 regarding invoking provision of section 94(7) of the act on account of disallowance of loss relating to short term loss on sale of Mutual Funds we find that the assessee failed to controvert the applicability the provision of section 94(7) to the fact of the case of the assessee, therefore, the cross objection filed by the assessee on this issue is rejected. The cross objection no.4 of the assessee is also dismissed in view of the applicability of provision of section 2(22)(e) for accepting loan from the company in which he was a director and beneficial owner of holding 20% shares

In the result, the appeal of the revenue and the cross objection of the assessee are dismissed.