Whether where assessee invested sale proceeds of tenancy rights in specified bonds, he was entitled to deduction under section 54EC even though his wife and daughters were co-holders of said bonds?

Primary requirement for claiming deduction u/s. 54EC of the Act was fulfilled in the instant case by virtue of the fact that the funds invested emanated from the sum received out of the transfer of long term capital asset and that it was invested within a specified time. In his opinion payment of the maturity proceeds to any one of the bond holders is not a material factor for deciding the ownership of the bonds. At this stage we may notice that in the statement of facts before learned CIT(A) the assessee stated that though rules were framed for ease of operation and not for determining ownership and/or succession rights, the fact remains that the assessee’s wife had instructed REC to remit the maturity proceeds directly to the account of the assessee and REC had agreed to the change readily without asking for any documentation for the reason that they are not concerned with the question as to who among the joint applicants are the true owners of the bonds. It was stated that the REC had confirmed the change vide their letter dated 27.7.2009. Having regard to the factual matrix, learned CIT(A) observed that the payment of the maturity deposit to any one of the bond holders is not a material factor so long as investment was made out of the sale proceeds and assessee’s name also figures as one of the investors, more particularly when REC changed the name of recipient in it’s records.

Exemption Under Section 54F if Assessee claims two units as one he has to furnish Approved Municipal Plan.

It is well-settled that in order to claim any deduction against taxable income, initial onus is cast upon the assessee to prove that he has complied with the conditions laid down therein. Under section 54F, a deduction is permissible against the consideration received on surrender of tenancy rights provided assessee has purchased a residential house within a period of two years. In the instant case, the documents produced by the assessee smacks of bona fide deal. The assessee has worked for L&T for a considerable length of period and was aware of his tenancy rights and the implications therein and hence, it cannot be said that he is not aware of what should be the precaution to be taken while entering into a sale agreement. No bona fide purchase will enter into a sale agreement which does not contain any details with regard to the plan of the property. In the instant case, sale deed for 394 sq. feet area simply mentions that the assessee is entitled to 394 sq. feet without mentioning as to whether it consists of one room, kitchen, balcony etc., or of any other dimension. Similarly, the second agreement also merely mentions about 554 sq. feet and both the sale deeds do not contain the specifications of carpet area of the flats. Even the assessee could not furnish any municipal plan or brochure to suggest that he has entered into a bona fide purchase transactions under two separate sale deeds with an intention to convert them for use as one residential house.

The assessee could not furnish the municipal approved plan. It may be noticed that some plan is annexed to the sale deeds but the assessee, has not referred to that. At any rate, it consists of wing-A and wing-B and it is not known as to how the Municipal Corporation has given its approval if the construction itself is of one flat each in the place of two flats shown in two wings in the approved plan. A person claiming a deduction should come with clean hands. In the instant case, the facts appear to be different. It is not the case of the assessee that at least some of the flats, other than his flat, consists of A-wing and B-wing and such independent small flats were separately purchased at least by some persons.

On the contrary, the Income-tax Inspector’s report indicates that two separate blocks do not exist. A sale agreement is a prima facie/valid evidence to prove that there are two separate flats. But at the same time assessee was not able to pinpoint as to whether those flats were existing. The flat in which he is staying might be registered in somebody’s else name since there is no legal evidence (sale deed) available on record to suggest that flat No. 102-A, consisting of 948 sq. feet with 3 bed rooms etc., is purchased by assessee. It is also not known as to whether Municipal Authorities have given completion certificate in respect of flat 102-A consisting of 948 sq. feet. Thus, legally assessee did not establish that he has purchased the flat. No doubt sale deeds in respect of Flat No. 102-A and 102-B were produced but it is not established that such construction was legally permitted by the Municipal Authorities i.e., by joining the two flats. Despite lack of evidence, Assessing Officer was reasonable in allowing deduction under section 54F the extent of Rs. 31,64,120.

On a conspectus of the matter, deduction under section 54F of the Act is permissible only upon furnishing admissible evidence to show that the assessee has purchased a residential house within a period of two years. In the interest of justice, the Assessing Officer was directed to give the assessee one more opportunity to prove that the sale deeds with reference to which assessee claims to have purchased the property was the same which was occupied by the assessee and it is legally permitted to be constructed by the Municipal Authorities. It may not be out of place to mention that if the construction is illegal and the same is not compounded or regularized by the Municipal Authorities, it may not, in strict legal sense, be treated as a purchase of a residential house. However, the assessee is at liberty to show that he is legally entitled to claim deduction under section 54F. With these observations claim of deduction under section 54F is set aside to the file of the Assessing Officer.

IN THE ITAT MUMBAI BENCH ‘F’

Assistant Commissioner of Income-tax, Circle 21(2)

v.

Vijay S. Shirodkar

IT APPEAL NO. 4141 (MUM.) OF 2010

[ASSESSMENT YEAR 2007-08]

AUGUST 30, 2011

ORDER

D. Manmohan, Vice-President. – This appeal is directed against the Order passed by the CIT(A)-32, Mumbai and it pertains to the assessment year 2007-2008. Assessee was an employee of M/s. L & T. During the previous year relevant to the assessment year under consideration the assessee derived income from LIC commission, interest, dividend, and capital gains. During the course of scrutiny proceedings, the Assessing Officer noticed that the assessee had surrendered his tenancy rights in favour of M/s. HBS Developers for a consideration of Rs. 1.20 crores. He claimed exemption under section 54F and 54EC of the Act on the ground that part of the sale consideration was invested in the bonds (in the name of self and his wife) and he claimed to have purchased two flats bearing 102A and 102B on the first floor in the building known as “Hercules Vasant Galaxy” for a consideration of Rs. 22,38,920 and Rs. 31,74,620 respectively. (Assessing Officer observed that purchase consideration, as per sale agreements dated 22-8-2006, was Rs. 22,31,500 for Flat 102A and Rs. 31,64,120 for Flat 102B).

2. During the course of assessment proceedings, Counsel for the assessee submitted that assessee was born in the same place and from time of his birth he was living in the ground floor portion of bungalow, known as “Mayank”, having an area of about 1300 sq. feet carpet area, as tenants. They also had the use of compound on garden area of the bungalow. Since assessee and his wife were accustomed to live in a large space for many years, as tenants, upon development and purchase of flats, they had to combine the adjacent flats to make it into one single unit. The carpet area of flat No. 102A was 394sq. feet and 102B was 554 sq. feet and thus the total carpet area works out to 948sq. feet. It was thus contended that both the residential units were treated as one residential unit and exemption under section 54F be granted.

3. Assessing Officer had sent a Ward Inspector to visit the premises on 16-1-2009 who reported that there were no modifications or alterations to the flat occupied by assessee so as to suggest that two adjacent flats have been combined into one single flat. In fact, there are no adjacent flats and there is only one flat i.e., Flat No. A-102 having one entrance, hall, kitchen, 3 bed rooms and 3 bath-rooms and there is no flat numbering 102B in the ‘A’ Wing of the building. It was also sated that Secretary of “Vasant Galaxy Hercules Coop. Housing Society” has confirmed that there is no flat bearing No. 102B and furnished copy of agreement of Flat No. 102A. Based on the said report the Assessing Officer concluded that the assessee has not purchased Flat No. 102B as per the records of the society. In otherwords, there was no bona fide purchase and consequently assessee is not entitled to deduction under section 54F on the purchase consideration shown against Flat No. 102B. Despite this finding, Assessing Officer chose to allow the assessee’s claim of deduction referable to purchase consideration shown against Flat No. 102-B, presumably on the ground that higher of the two purchase value has to be allowed under section 54F of the Act. He thus disallowed Rs. 22,31,500; referable to purchase of Flat No. 102A (394 sq. feet), on the ground that assessee is entitled to claim deduction u/s. 54F only with reference to one residential house.

4. Assessee claimed a further deduction u/s. 54EC of the Act on the ground that he invested a total sum of Rs. 46 lakhs in REC bonds, out of the amount received in respect of surrender of his tenancy rights in the premises situated at bungalow known as ‘Mayank’. Investment was made in two different names and accordingly bond certificates were issued for a sum of Rs. 23 lakhs each. In the first certificate Shri Vijay S. Shirodkar was mentioned as the main holder of the bonds whereas Smt. Sabita V. Shirodkar and Renuka R. Jalan were shown as the joint holders. In the light of the decision of the ITAT, Mumbai Bench in the case of Dr. Mrs. Sudha S. Trivedi v. ITO [2009] 31 SOT 38 the Assessing Officer accepted the claim of deduction u/s. 54EC of the Act in respect of the aforesaid investment though his wife and daughter were co-holders.

5. However, in respect of other certificate for a sum of Rs. 23 lakhs the Assessing Officer observed that Smt. Sabita Shirodkar, wife of the assessee, was the main-holder of the certificate and the assessee alongwith his son are only the nominees of the first beneficial owner. Under the circumstances, the Assessing Officer was of the view that the decision of the ITAT in the case of Dr. Mrs. Sudha Trivedi (supra) is distinguishable since the assessee was not the main-holder of the shares. He accordingly disallowed a sum of Rs. 23 lakhs.

6. On an appeal filed before learned CIT(A) the plea of the assessee was that the occupation of the flat having not been disputed as a single unit merely because two separate agreements were entered into for the sake of registration; it should not come in the way of claiming deduction u/s. 54F of the Act. Similarly it was contended that the assessee invested a sum of Rs. 46 lakhs in REC bonds and merely because name of the wife is also appearing in the certificate claim made u/s. 54EC of the Act should not be denied.

7. Learned CIT(A) observed that the Inspector’s report clearly indicates that there is one single unit and hence it is not possible that unit No. 102B has vanished at the time of his visit. He therefore concluded that only one single unit was purchased by the assessee vide two separate agreements. Without prejudice, he assumed that even if two or more separate units were purchased and/or combined for the purpose of using as one dwelling unit it would qualify for claiming deduction u/s. 54F of the Act. The Assessing Officer was directed accordingly.

8. In respect of the assessee’s investment in REC bonds learned CIT(A) observed that the primary requirement for claiming deduction u/s. 54EC of the Act was fulfilled in the instant case by virtue of the fact that the funds invested emanated from the sum received out of the transfer of long term capital asset and that it was invested within a specified time. In his opinion payment of the maturity proceeds to any one of the bond holders is not a material factor for deciding the ownership of the bonds. At this stage we may notice that in the statement of facts before learned CIT(A) the assessee stated that though rules were framed for ease of operation and not for determining ownership and/or succession rights, the fact remains that the assessee’s wife had instructed REC to remit the maturity proceeds directly to the account of the assessee and REC had agreed to the change readily without asking for any documentation for the reason that they are not concerned with the question as to who among the joint applicants are the true owners of the bonds. It was stated that the REC had confirmed the change vide their letter dated 27.7.2009. Having regard to the factual matrix, learned CIT(A) observed that the payment of the maturity deposit to any one of the bond holders is not a material factor so long as investment was made out of the sale proceeds and assessee’s name also figures as one of the investors, more particularly when REC changed the name of recipient in it’s records. Thus, CIT(A) held that the assessee had invested in REC bonds. Under the circumstances the Assessing Officer was directed to allow claim of deduction u/s. 54EC of the Act.

9. Aggrieved, the revenue is in appeal before the Tribunal. Case of the revenue is that the claim of purchase of two properties was bogus/non-genuine and hence the assessee is not entitled to claim deduction u/s. 54EC of the Act on the strength of the registered deeds.

10. As regards the claim of deduction u/s. 54EC of the Act the revenue contended that the assessee’s wife is the first owner of the bond and hence the assessee cannot be said to have invested in the bonds so as to qualify for deduction u/s. 54EC of the Act.

11. Learned Departmental Representative submitted that u/s. 54F of the Income Tax Act the assessee has to prove that he has purchased a residential house within a period of two years from the date of transfer of a capital asset whereas in the instant case there is no proof to show that the assessee has purchased a residential property; merely because he is residing in ‘Hercules Vasant Galaxy’ flat it cannot be said that the property was purchased since there is no evidence to that effect. On the contrary, sale deeds depict that he had purchased two separate properties in the building known as ‘Hercules Vasant Galaxy’, having two wings as per building lay out/plan sanctioned by the Municipal Corporation. First sale agreement refers to an agreement to purchase carpet area of 394 sq.ft. only and nothing has been indicated with regard to the so-called flat though it was stated that it refers to flat No. 102A on Wing ‘A’. Similarly sale agreement for a carpet area 554 sq.ft., referable to Flat No. 102B, in the building known as ‘Hercules’ do not indicate specification and design of the flat. It is difficult to assume that the party would be so naive to enter into sale deeds without seeing the design of the property. It is not known as to whether Municipal authorities have given completion certificate in respect of two separate flats or one larger flat. Without any evidence on record to show that they are two separate flats which were combined together it has to be assumed that the claim of purchase of two flats was not genuine. In otherwords, it has to be held as non-genuine and hence deduction is not allowable u/s. 54F of the Act. As regards deduction u/s. 54EC of the Act, learned Departmental Representative relied on the order of the Assessing Officer.

12. On the other hand learned counsel, appearing on behalf of the assessee, submitted that the Income Tax Inspector inspected the premises of the assessee and found one flat known as flat No. 102A. Therefore it cannot be said that they are two separate flats and thus he strongly relied upon the order passed by learned CIT(A). As regards claim of deduction u/s. 54EC of the Act, learned counsel submitted that the assessee is a co-holder of REC bonds and in fact a letter was obtained from REC to prove that the maturity proceeds would directly be sent to the account of the assessee. Under the circumstances, decision of ITAT, Mumbai Bench in the case of Dr. Mrs. Sudha Trivedi (supra) squarely covers the issue. He thus supported the order of learned CIT(A).

13. We have carefully considered the rival submission and perused the record. It is well settled that in order to claim any deduction against taxable income, initial onus is cast upon the assessee to prove that he has complied with the conditions laid down therein. Under section 54F of the I.T. Act, a deduction is permissible against the consideration received on surrender of tenancy rights provided assessee has purchased a residential house within a period of two years. In the instant case, the documents produced by the assessee smacks of bona fide deal. Assessee has worked for L & T for a considerable length of period and was aware of his tenancy rights and the implications therein and hence, it cannot be said that he is not aware of what should be the precaution to be taken while entering into a sale agreement. No bona fide purchaser will enter into a sale agreement which does not contain any details with regard to the plan of the property. In the instant case, sale deed for 394 sq. feet area simply mentions that the assessee is entitled to 394 sq. feet without mentioning as to whether it consists of one room, kitchen, balcony etc., or of any other dimension. Similarly, the second agreement also merely mentions about 554 sq. feet and both the sale deeds do not contain the specifications of carpet area of the flats. Even before us assessee could not furnish any municipal plan or brochure to suggest that he has entered into a bona fide purchase transactions under two separate sale deeds with an intention to convert them for use as one residential house.

14. We have called for the municipal approved plan and the assessee could not furnish the same. It may be noticed that some plan is annexed to the sale deeds (at pages 93, 94 and 173 and 174) but the learned Counsel, appearing on behalf of the assessee, has not referred to that. At any rate, it consists of wing-A and wing-B and it is not known as to how the Municipal Corporation has given its approval if the construction itself is of one flat each in the place of two flats shown in two wings in the approved plan. A person claiming a deduction should come with clean hands. In the instant case, the facts appear to be different. It is not the case of the assessee that atleast some of the flats, other than his flat, consists of A-wing and B-wing and such independent small flats were separately purchased atleast by some persons.

15. On the contrary, the Income Tax Inspector’s Report indicates that two separate blocks do not exist. A sale agreement is a prima facie/valid evidence to prove that there are two separate flats. But at the same time assessee was not able to pinpoint as to whether those flats were existing. The flat in which he is staying might be registered in somebody’s else name since there is no legal evidence (sale deed) available on record to suggest that Flat No. 102-A, consisting of 948 sq. feet with 3 bed rooms etc., is purchased by assessee. It is also not known as to whether municipal authorities have given completion certificate in respect of Flat 102-A consisting of 948 sq. feet. Thus, legally assessee did not establish that he has purchased the flat. No doubt sale deeds in respect of Flat No. 102-A and 102-B were produced but it is not established that such construction was legally permitted by the Municipal Authorities i.e., by joining the two flats. Despite lack of evidence, Assessing Officer was reasonable in allowing deduction under section 54F of the Act to the extent of Rs. 31,64,120.

16. On a conspectus of the matter, we are of the view that deduction under section 54F of the Act is permissible only upon furnishing admissible evidence to show that the assessee has purchased a residential house within a period of two years. In the interest of justice, we direct the Assessing Officer to give the assessee one more opportunity to prove that the sale deeds with reference to which assessee claims to have purchased the property was the same which was occupied by the assessee and it is legally permitted to be constructed by the municipal authorities. It may not be out of place to mention that if the construction is illegal and the same is not compounded or regularized by the municipal authorities, it may not, in strict legal sense, be treated as a purchase of a residential house. However, the assessee is at liberty to show that he is legally entitled to claim deduction under section 54F. With these observations claim of deduction under section 54F of the Act is set aside to the file of the Assessing Officer.

17. As regards the purchase of RAC bonds in the name of assessee and his wife, in the light of decision of the ITAT, Mumbai Bench cited (supra) we do not find any infirmity in the Order passed by the learned CIT(A).

18. In the result, the appeal filed by the Revenue is treated as partly allowed.