RUSTOM HOMI VAKIL,MUMBAI vs. ACIT CIR 12(3), MUMBAI

PER RAMIT KOCHAR, Accountant Member

This appeal, filed by the assessee, being ITA No. 4450/Mum/2014, is directed against the order dated 19-03-2014 passed by the learned Commissioner of Income Tax (Appeals)- 23, Mumbai (Hereinafter called “the CIT(A)”), the appellate proceedings before the CIT(A) arose from the assessment order dated 21-11-2011 passed by the learned assessing officer (Hereinafter called “the AO”) u/s. 143(3) of the Income Tax Act,1961(Hereinafter called “the Act”), for the assessment year 2009-10. 2. The grounds raised by the assessee in the memo of appeal filed with the Tribunal read as under:-

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“1. The Order u/s 250 dated 19th March 2014, of the Commissioner of Income Tax(Appeals)-23 ,Mumbai , is bad in law, contrary to the facts of the case and evidence of record.

Add: Registration Charges Rs.30,380/- Stamp Duty Rs.5,32,700/- Transfer Charges Rs.33,640/- Brokerage Paid Rs.1,23,596/- Legal Charges Rs.20,000/- Add: Legal Charges Rs.11,236/- Rs.7,51,552/-

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Add: Improvement to property Purchased(As per bills) Rs.14,26,705/- Rs.1,31,78,257/- ---------------------- ------------------- Taxable long term capital gains Rs.68,21,743/- ------------------ Thus, it was observed by the AO that the assessee has claimed Rs.14,26,705/- towards improvement of purchased property as a deduction u/s 54(1)(i) of the Act. The assessee was asked to explain why the improvement made to the purchased house and claimed as deduction should not be disallowed and added to income of the assessee.

The assessee submitted that soon after purchasing , to make the new house property , habitable by incurring further expenditure in July, 2008 to January, 2009 by engaging the services of a interior decorator , plumber, electrician to the extent of Rs.14,26,705/-. The assessee filed copies of bills for expenses made for improvement of the bought residential property.

The AO rejected the contentions of the assessee and held that ‘cost of improvement’ as provided under the Act will be taken into account at time of calculating capital gains when the property is sold. The assessee in the instant case is claiming ‘cost of improvement’ of Rs.14,26,705/- not at the time of selling his property but with respect of the property bought by the assessee against the receipt of selling the tenancy rights. Thus, the claim of the assessee towards cost of making a new house property habitable amounting to Rs.14,26,705/- was disallowed and added to the long term capital gains of the assessee, vide assessment orders dated 21-11-2011 passed by the AO u/s.143(3) of the Act.

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The CIT(A) called for remand report from AO. The AO submitted remand report stating that on perusal of the photographs of the property at the time of purchase , the property cannot be said to be completely inhabitable. However, it does seem to be in need of repairs, refurbishing and improvement. The exact amount of expenditure required to improve it to a state of habitability is a subjective matter, as it depends on the quality of material preferred and other such matters. The AO further reported in remand report that upon perusal of list of works done by the contractors, it was seen that some items involve dismantling and demolition of the existing structures, flooring, tiles etc. and laying new better quality items in place of them. Similarly , some items involve painting of furniture’s, enameling of bamboo fencing, removal and re-fitting of frames, making of new cabinets etc which appear more in the nature of making the house more comfortable than what

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is required to make it merely habitable. Further, as per sub-para (ix) of para 8 of the purchase agreement dated 23-07-2008 , the expenses of repairs and restoration are estimated at Rs.7,00,000/- by mutual agreement of the seller of the property and the assessee while the expenditure incurred and claimed as cost u/s. 54 of the Act is Rs.14,26,705/- . Thus, the AO stated in remand report that the excess expenses appears to be beyond mere repairs and restoration to a habitable condition, and rather make the house comfortable. Thus, the AO stated in remand report that out of the total expenditure of Rs.14,26,705/- claimed by the assessee , Rs.7,00,000/- (as per purchase agreement ) be treated as towards making the new house habitable , and the remaining Rs.7,26,705/- be treated as making the new house comfortable. Thus as per AO the amount eligible for exemption as cost u/s.54 of the Act is only Rs.7,00,000/- .

A copy of remand report was forwarded to the assessee for his comments and the assessee submitted before the CIT (A) in response to remand report that the expenditure was incurred to make new house habitable and not comfortable than what was required to make it habitable. It was submitted that remand report of the AO did not spell out the expenditure which could be considered as abnormal or expenditure and did not required to be incurred in making the house habitable. It was submitted that comfort in the house can come by comfortable bedding, air conditioning, furniture etc. and not by painted walls in a house will a proper flooring, bathroom and kitchen. The assessee submitted that house was bought in a dilapidated condition and to make it habitable , the assessee spent Rs.14,26,705/- which is actually spent by the assessee and the expenditure is supported by bills of the contractors , while the AO remand report is based on merely surmises.

The CIT(A) held that the assessee was aware that the extensive civil, plumbing, electrical and painting work was required to be done in the house.

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With the said knowledge, the assessee bought the house for Rs.1,10,00,000/- towards the cost of the asset. The assessee did not paid the amount towards plumbing, electrical works etc to the seller but to the third party and the cost was borne by the assessee himself after purchase of the house. This cost towards extensive repairs cannot be considered to be cost of house purchase by the assessee. The flooring, plumbing work and electrical work etc. was already there in the house. These were merely repaired and renovated to suit the requirements of the assessee. Thus, action of the AO was confirmed with respect of not considering the amount of expenditure incurred of Rs.14,26,705/- for making improvements in the house for granting deduction u/s.54 of the Act, vide orders dated 19-03-2014. It was also held by the CIT(A) without prejudice that the assessee has incurred expenditure of Rs.4,89,428/- on fixing marbonite flooring and marble skirting in the bedroom, dining rooms and sitting rooms . The expenses are towards repairs and renovation and not to make house habitable. No evidence is submitted that the flooring did not exist at the time of purchase of house. Thus, the entire expenditure of Rs.14,26,705/- was considered not allowable for deduction u/s.54 of the Act , vide orders dated 19-03-2014. 7. Aggrieved by the orders dated 19-03-2014 passed by the CIT(A), the assessee filed an appeal with the Tribunal.

Pune habitable and claimed benefit u/s. 54 of the Act which has been denied by Revenue because as per authorities below the same is ‘cost of improvement’ which can be allowed as deduction u/s. 48 of the Act when the assessee will sell the new residential house but deduction u/s. 54 of the Act could not be allowed as per Revenue. Further, the Revenue is contending that the said expenditure has not been incurred to make the house habitable but renovation was carried out by the assessee which is to make house comfortable rather than habitable. The assessee’s counsel submitted that expenditure of Rs.14.26 lacs was incurred to make the house habitable. Section 54 of the Act is a beneficial provision and should be construed liberally. The expenditure was incurred to make the house habitable from July 2008 to January 2009 , immediately after acquiring the house in July 2008. All the invoices for expenditure for making the house habitable were submitted before the authorities below and were also submitted before the Tribunal in paper book filed. The assessee relied upon the following case law to support its contentions :

9 Ld. DR relied upon the orders of CIT(A) and drew our attention to the details of expenditure of Rs.14.26 lacs incurred by the assessee to contend that these expenses are merely renovation expenses which cannot be allowed by way of benefit u/s. 54 of the Act.

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comfortable rather than making the house in habitable state. The assessee has thus undertaken repairs and renovation of the house as per needs of the assessee and is not cost of acquiring the new residential house property and hence as per Revenue, benefit u/s. 54 of the Act cannot be allowed to the assessee. The dispute between the assessee and the revenue is, thus, within this narrow compass.

It will be profitable at this stage to reproduce Section 54 of the Act , as under:

“Profit on sale of property used for residence. 54. [(1)] [ [Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family], the capital gain arises from the transfer of a long-term capital asset [***], being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head "Income from house property" (hereafter in this section referred to as the original asset), 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 has within a period of three years after that date [constructed, one residential house in India], then], instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—

(i) if the amount of the capital gain [is greater than the cost of [the residential house] so purchased or constructed (hereafter in this section referred to as the new asset)], the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the ITA 4450/Mum/2014 10

purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or (ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain . [(2) The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme9 which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub- section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset :

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Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,—

(i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and (ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.”

Provisions of Section 54 of the Act are a piece of beneficial legislation being incentive provision which need to be strictly construed for bringing within its fold the entitlement of the tax-payer to the said benefit, but once the tax- payer establishes his/her entitlement to the benefit u/s 54 of the Act, then Section 54 of the Act which is a piece of beneficial legislation being incentive provision is to be liberally construed to grant the benefit to the tax-payer to fulfill the mandate of legislation which is to promote investment in residential housing construction rather than in the manner which may frustrate the object . Reference can be drawn to the following observations of Hon’ble Supreme Court in the case of Bajaj Tempo Limited v. CIT (1992) 196 ITR 188(SC) :

“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.”

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The afore-said section 54 of the Act provides for the benefit/deduction from payment of taxes with respect to long term capital gains earned on sale or transfer of long term capital asset being residential house property, if the tax- payer purchases or construct a new residential house property within the stipulated period as prescribed u/s. 54 of the Act .

The word ‘house’ has been defined in Blacks Law dictionary 7th edition, page 743 as ‘a home, dwelling or residence’ . The ‘residential accommodation’ is defined in Wharton’s Concise Law dictionary 15th edition(concise),page 909 as ‘residential accommodation, simply means that the accommodation should be capable of being used as residence or should have been built as a residence’. Thus, in other words the property should be capable of being ‘habitable’ . This word ‘habitable’ is highly subjective words and vary from person to person and time to time depending upon the socio-economic status and standing of the tax-payer in the society .

We have observed that it is an admitted position between the parties and which is not disputed by the both the parties that sub-clause (ix) of clause 8 of the purchase deed dated 23-07-2008, through which the assessee purchased a new residential house property at Pune stipulate’s that the said house required extensive civil, plumbing , electrical and painting works which is to be borne by the purchaser i.e. the assessee which was estimated to be Rs.7,00,000/-, as under:

“(8)(ix) The Purchaser is aware that the flat requires extensive civil, plumbing , & electrical , painting works & that as regards the same, it is being sold on an as is where is basis. The Purchaser is aware that expenses of repairs and restoration is estimated at Rs.7,00,000/- . Whatever may be the cost, the responsibility of the same is taken over by ITA 4450/Mum/2014 13

the purchaser and he will carry out the same at his own cost and Vendors will not be liable for the same at all.”

Thus, the new residential house property acquired/purchased by the assessee at Pune in July 2008 as contended by the assessee was in dilapidated condition which required extensive construction work to make it in a habitable state. As per assessee, he got the work done through contractors and incurred expenditure of Rs.14,26,705/- for making it habitable , for which necessary invoices were also produced by the assessee before the authorities below and also before us which are placed in paper book filed with the Tribunal. Thus, there is no dispute between assessee and Revenue as to incurring of this expenditure of Rs.14,26,705/- towards work done in the new residential house purchased by the assessee at Pune, which work is done post purchase of the said residential house , starting from the period immediately after purchasing the new residential house in July 2008 and concluding in January 2009. The new residential house at Pune was purchased in July 2008 and the work was started immediately there-after and completed in January 2009 , which is evidenced from the invoices produced by the assessee. Thus in other words, it could be said that this expenditure of Rs.14,26,705/- was part of a continuing transaction which started with purchase of the said new residential house property at Pune in dilapidated condition by the assessee in July 2008 and concluded with the extensive construction work carried out immediately post purchase of said new residential house in July 2008 and which concluded in January 2009 , comprising of civil, plumbing , electrical and painting works in the said new residential house property at Pune costing Rs.14,26,705/- , to make the house in a habitable condition with amenities fit for living for residential purposes by the assessee. The assessee has also substantiated by way of photograph’s apart from corroboration with clause 8(ix) in the sale deed that the said new residential house property in Pune acquired by the assessee was ITA 4450/Mum/2014 14

not in habitable condition and in-fact was in dilapidated condition when it was acquired by the assessee in July 2008. The AO in his remand report also stated that on perusal of the photographs of the property at the time of purchase, the property cannot be said to be completely inhabitable. However as per AO , it does seem to be in need of repairs, refurbishing and improvement. The exact amount of expenditure required to improve it to a state of habitability is a subjective matter, as it depends on the quality of material preferred and other such matters. The AO further reported in the remand report that upon perusal of list of works done by the contractors, it was seen that some items involve dismantling and demolition of the existing structures , flooring, tiles etc. and laying new better quality items in place of them. The AO in remand report has also admitted that Rs.7,00,000/- be considered towards making the house habitable and the balance be treated as towards making the house comfortable.

In the instant case, the assessee has purchased the new residential house at Pune in July 2008 in dilapidated condition and immediately there-after undertaken extensive civil, plumbing , electrical & painting works to make it habitable , which tantamount to construction within the meaning of Section 54 of the Act , hence , the assessee cannot be denied the benefit u/s. 54 of the Act merely on the ground that the assessee has purchased the new residential house and there-fore benefit as available to construction of the new residential house cannot be extended to the assessee simultaneously . Perusal of Section 54 of the Act will reveal that no such restrictions are placed in the provisions of Section 54 of the Act that purchase of new residential house is mutually exclusive to the construction of new residential house , provided other conditions as stipulated u/s. 54 of the Act are fulfilled. Rather, in the instant case starting from the purchase of new residential house at Pune in July 2008 in dilapidated condition by the assessee was immediately

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followed by extensive civil, plumbing , electrical and painting works undertaken by the assessee which started immediately after purchase of the house in July 2008 and continued till January 2009 which tantamount to construction of the said residential house by spending Rs.14.26 lacs , to make the said new residential house habitable with amenities fit for living of the assessee for residential purposes . Section 54 of the Act does not stipulate any condition that if the new residential house is purchased by the tax-payer, then benefit associated with construction of the said new residential house cannot be extended simultaneously rather both purchase and construction of the same new residential house can co-exist , provided other conditions as stipulated u/s. 54 of the Act are complied with. For example, the tax-payer can purchase an residential house with one floor and later construct two more floor’s on the same residential house and in this situation benefit u/s 54 of the Act cannot be denied to the tax-payer merely on the ground that the tax-payer has purchased the residential house and hence now benefits for construction of the same residential house property are ,therefore, denied . Our above view is fortified by the judgment of Hon’ble Calcutta High Court in the case of B.B.Sarkar v. CIT (1981) 132 ITR 150(Cal.HC) .

Similarly, Section 54 of the Act does not impose any conditions or restrictions as to what constitute ‘habitable’ to get the benefit of deduction u/s 54 of the Act. The word ‘habitable’ is highly subjective and has to be understood and interpreted in the context of the socio-economic status and standing of the tax-payer in the society. Section 54 of the Act only provides that the tax- payer has to purchase or construct a new residential house . One tax-payer can purchase or construct new residential house property for say even Rs 10 lacs and another tax-payer can purchase or construct new residential house property for say Rs 500 lacs, depending upon their socio-economic status and standing in the society . In the above cases, there will be substantial and significant difference in the quality of construction material used and ITA 4450/Mum/2014 16

amenities required by both the tax-payer’s to make the house ‘habitable’ fit for living for their residential purposes, but both the tax-payer’s will be entitled for deduction u/s 54 of the Act provided other conditions as stipulated u/s 54 of the Act are fulfilled as section 54 of the Act does not stipulate any such restrictive conditions as to the ceiling on amount per-se of investment in purchase and /or construction of new residential house property which is rather linked to long term capital gain earned by the assessee on sale or transfer of residential house property , or as to type of residential house properties or quality of construction or amenities required by the tax-payer to make the house ‘habitable’ which would entitled the tax- payer for claiming the benefit u/s. 54 of the Act . The tax-payer keeping in view his socio-economic position and status in the society has to define as to what is ‘habitable’ residential house required to make the house fit for living/abode for the tax-payer for his residential purposes. Revenue cannot deny the benefit u/s 54 of the Act on the ground that expensive marble floorings or tiles are used in place of ordinary flooring or tiles etc. or a high quality expensive construction material is used by the tax-payer or more amenities are required by the tax-payer to make the house ‘habitable’ and more so when Section 54 of the Act itself does not stipulate any such restrictive conditions, thus, benefit u/s 54 of the Act cannot be denied to the tax-payer on these grounds as statute does not provide for such conditions/restrictions. Of course, the items of comfort purchased or installed in the new residential house so purchased or constructed by the tax-payer such as consumer electronic and entertainment equipments, air-conditioning equipments, furniture , beddings, electrical and other equipments etc. per-se does not fit into the definition of purchase or construction of the residential house entitling these items to the benefits u/s. 54 of the Act as these are items of comfort and are not part of the purchase or construction cost of new residential house property within the meaning of Section 54 of the Act and hence, benefits u/s 54 of the Act cannot be allowed for these items of comfort

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so purchased/installed by the tax-payer in the new residential house so purchased or constructed. If the tax-payer is allowed to purchase or construct the residential house without any ceilings as to the amount of investment u/s 54 of the Act , then merely because the tax-payer has purchased a residential house and thereafter followed it with alterations , additions and modifications carried out to construct the said purchased residential house to make it habitable for the tax-payer, benefits cannot be denied by the Revenue u/s 54 of the Act. It will be like treating equals as un- equals and treating un-equals as equals which is not permissible. Our view is also supported and fortified by decision of Hon’ble Karnatka High Court in the case of Rahan Siraj v. CIT (2015) 58 taxmann.com 333(Kar. HC) whereby Hon’ble Karnatka High Court held as under:

“6. In the light of the aforesaid rival contentions, the substantial questions of law that arise for our consideration in this appeal are as under:

"(i) *****

(ii) Whether the Tribunal is right in holding that the appellant is not entitled to make a deduction in respect of additions/alterations made to the property after purchase in order to have a normal living in computing the deduction under Section 54F of the Act, when no such restriction has been provided under Section 54F of the Act?" 7. *****

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protecting the property with grill work and attending to other repairs. Section 54F of the Act provides that if the cost of the new asset, which is to be taken into consideration while determining the capital gain, the words used is "cost of new asset" and not "the consideration for acquisition of the new asset". In law, it is permissible for an assessee to acquire a vacant site and put up a construction thereon and the cost of the new asset would be cost of land plus (+) cost of construction On the same analogy, even though he purchased a new asset, which is habitable but which requires additions, alterations, modifications and improvements and if money is spent on those aspects, it becomes the cost of the new asset and therefore, he would be entitled to the benefit of deduction in determining the capital gains. The approach of the authorities that once a habitable asset is acquired, any additions or improvements made on that habitable asset is not eligible for deduction, is contrary to the statutory provisions. The said reasoning is unsustainable. To that extent, the impugned order passed by the Tribunal as well as the Lower authorities require to be set-aside and it is to be held that in arriving at cost of the new asset, Rs. 18 lakhs spent by the assessee for modification, alterations and improvements of the asset acquired is to be taken note of. Thus, the second substantial question of law is answered in favour of the assessee and against the Revenue. Hence, we pass the following order:

Appeal is allowed in part”

We have also carefully perused the invoices of contractors submitted by the assessee in paper book filed with the Tribunal and we have found that the expenditure incurred by the assessee are towards the extensive civil, plumbing , electrical and painting works including new flooring , tiles , fittings in the new residential house property purchased by the assessee in ITA 4450/Mum/2014 19

Pune in July 2008 and are not towards purchase or installation of items of comfort such as air-conditioners, consumer electronics and entertainment equipments, electrical and other equipments, furniture etc. We have also seen the photographs of the new residential house at Pune when it was purchased by the assessee in July 2008 which is also placed in paper book which clearly reflects that the said house was not in the habitable conditions and was in dilapidated condition when it was purchased by the assessee in July 2008, which is also corroborated by the clause 8(ix) in the purchase agreement dated 23-07-2008 entered into by the assessee for acquiring the new residential house property at Pune in July 2008. Thus based on the peculiar facts and circumstances of this case and on the basis of our discussion and reasoning above , we hold that the assessee is entitled for claim of benefit u/s 54 of the Act of expenditure of Rs.14,26,705/- incurred by the assessee to make the said new residential house purchased by the assessee at Pune in July 2008 ‘habitable’ fit for living for residential purposes by the assesse. We order accordingly.

Order pronounced in the open court on 30th March, 2016. आदेश क" घोषणा खुले "यायालय म" "दनांकः 30-03-2016 को क" गई । (AMIT SHUKLA) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER मुंबई Mumbai; "दनांक Dated 30-06-2016 [ व."न.स./ R.K. R.K. R.K., Ex. Sr. PS R.K.

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आदेश क" ""त"ल"प अ"े"षत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant