S. 54F do not differentiate between House in good or bad condition

ITAT CHANDIGARH BENCH ‘A’

Smt. Kuldip Kaur Chatha

Versus

Income-tax Officer, Ward 3(4), Chandigarh

IT Appeal No. 852 (Chd.) of 2010
[ASSESSMENT YEAR 2006-07]

JANUARY 29, 2013

ORDER

Ms. Sushma Chowla, Judicial Member

The appeal filed by the assessee is against the order of the Commissioner of Income-tax (Appeals), Chandigarh dated 29.03.2010 relating to assessment year 2006-07 against the order passed u/s 143(3) of the Income Tax Act, 1961 (in short ‘the Act’).

2. The grounds of appeal raised by the assessee read as under:

“1. That the order of the Ld. Commissioner of Income Tax (Appeals) has erred in upholding the addition of Rs. 38,73,010/- on account of long term capital gains denying the exemption claimed under section 54-F of the Act which is arbitrary & unjustified.

2. The Ld. Commissioner of Income Tax (Appeals) has further erred in upholding that the new asset for the purposes of section 54F of the Act was the investment made in the plot No.158 (New No.1198) in Sector 8, Chandigarh and not the Flat in Manimajra is against the factual position and as such the order is arbitrary and unjustified.

3. The Ld. Commissioner of Income Tax (Appeals) has further erred in not adjudicating grounds Nos.3 & 4 raised before her in respect of disallowance of expenses incurred on payment of stamp duty, commission, cost of improvement at Rs. 1,88,600/- which are allowable for computation of capital gains which is arbitrary & unjustified.”

3. The brief facts of the case are that during the year under consideration the assessee had sold land at village Garha, Jalandhar for total consideration of Rs. 15 lacs and had also sold land at village Chouma, Distt. Gurgaon for total consideration of Rs. 35 lacs. The capital gains arising on the sale of the asset was claimed as exempt on the ground that the assessee had made investment in purchase of two houses and also on account of investment in TDR with Vijaya Bank, capital gains account. The assessee had declared income from long term capital gains at nil. During the course of assessment proceedings, the Assessing Officer noted the assessee to have invested the sale proceeds in purchase of two separate houses on sale of two separate pieces of land. In addition, the amount invested in the capital gains account totaling Rs. 12,04,410/- was later on withdrawn and utilized in reconstruction of new asset. The Assessing Officer in view of the provisions of section 54F of the Act observed the assessee to have purchased another asset other than the new asset within one year from the transfer of the original asset and hence the assessee was not entitled to exemption under section 54 of the Act. The alternate claim of the assessee that the first house purchased by it was a plot of land and was not a house and the second asset purchased by it was new asset, was found false by the Assessing Officer and consequently the exemption claimed under section 54 of the Act was withdrawn. The Assessing Officer did not allow the benefit of indexed cost of improvement claimed at Rs. 1,88,600/- in the absence of the nature and details of improvement made and the year in which such improvement took place or any other evidence of the sources of the amounts spent by the assessee.

4. In appeal the CIT (Appeals) upheld the order of the Assessing Officer in respect of the denial of deduction under section 54F of the Act.

5. The assessee is in appeal against the order of the CIT (Appeals) and has pointed out that the first investment made by the assessee in purchase of house in Sector 8, Chandigarh was for the purchase of dilapidated asset which was brought down by the assessee and reconstructed in the later years. Consequently, the said investment in the purchase of the first asset i.e. house in Sector 8, Chandigarh could be ignored while computing deduction under section 54 of the Act. The learned A.R. for the assessee further pointed out that deduction under section 54F of the Act should be allowed in relation to the investment made by the assessee for purchase of flat in Manimajra. The learned A.R. for the assessee drew our attention to the computation of income filed before the Assessing Officer which is reproduced by the Assessing Officer at page 2 of the assessment order and also revised computation of income filed during the course of assessment proceedings, placed at page 20 of the assessment order. Further reliance was placed on the decision of Hon’ble Supreme Court in CIT v. K.R. Sadayappan [1990] 185 ITR 49. The learned A.R. for the assessee though fairly conceded that the said decision was in relation to claim of deduction under section 54 of the Act.

6. The learned D.R. for the Revenue placed reliance on the orders of the authorities below.

7. We have heard the rival contentions and perused the record. The assessee during the year under consideration had declared income from capital gains on sale of two different plots of land, one in Garha, Jalandhar for total consideration of Rs.15 lacs and second in village Chouma, Distt. Gurgaon for total consideration of Rs. 35 lacs. The income from long term capital gains was computed on sale of the said asset. The assessee against the said income from long term capital gains claimed exemption under section 54F of the Act being the benefit available for investment in purchase of new asset.

8. Section 54F(1) of the Act reads as under:

“54F. (1) [Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family], the capital gain arises from the transfer of any long-term capital asset, not being a residential house (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, a residential house (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,—

(a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45 ;

(b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45:

[Provided that nothing contained in this sub-section shall apply where—

(a) the assessee,—

(i) owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or

(ii) purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or

(iii) constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and

(b) the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head “Income from house property”.]

Explanation.—For the purposes of this section,—

“net consideration”, in relation to the transfer of a capital asset, means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.”

9. Under the provisions of section 54F of the Act it is provided that where the assessee being an individual or a Hindu Undivided Family transfers any long term capital gains asset, not being a residential house, then the capital gains arising on such transfer can be set off against the purchase of a new asset. The assessee can within a period of one year before or two years after the date of the transfer took place purchased or within a period of three years constructed new residential house, then under such circumstances no capital gains would be charged to tax, where the cost of the new asset is not less than the net consideration in respect of the original asset. However, where the cost of the new asset is less than the net consideration in respect of the original asset sold, then proportionate deduction is allowable under section 54F of the Act. Certain restrictions are imposed in allowing such benefit under section 54F of the Act by the proviso to section 54F (1) of the Act. It is provided that where the assessee owns more than one residential house other than the new asset, on the date of sale of the original asset, then deduction is not allowable as per the proviso (a)(i); as per clause (ii) where the assessee purchases any residential house other than new asset within the period of one year after the date of transfer of the original asset or as per clause (iii) constructs any residential house other than the new asset, within the period of three years after the date of transfer of the original asset; and as per sub-section (b) the income from such residential house is chargeable under the head ‘income from house property’, then also no deduction is allowable under section 54F of the Act.

10. Now coming to the facts of the present case the assessee during the year under consideration had in the original return of income declared income from capital gains as under:

11. The CIT (Appeals) had summarized the facts of the present case vide para 11, which are as under:

“11 I have carefully considered the rival contentions and all relevant material on record. The following are the apparent facts of the case :

(i) Sale of plot at Jallandhar on 22.7.05 : Consideration Rs. 15 lacs.

(ii) Sale of plot at Gurgaon on 22.3.06 : Consideration Rs. 35 lacs.

(iii) Purchase of share in double storey Kothi No. 1198, Sector 8-C, Chandigarh (Apparent from sale deed) on 18.7.05 : Value 17.33 lacs,

(iv) Purchase of Kothi as per agreement to sell (affidavit) in January 2005.

(v) Commencement, of new construction on this Kothi (1198/-C) as per MAP on 19.5.06.

(vi) Construction completed as apparent from address : Before 26.12.08.

(vii) Assessment/Demand Notice served on the assessee : Before 26.12.08.

(viii) Affidavit with residential address : Before 26.12.08.

(ix) Purchased flat at Manimajra on 28.7.06.”

12. Considering the facts of the present case it is apparent that the original assets were sold by the assessee on 22.7.2005 and on 22.3.2006 on which the income from long term capital gains was worked out by the assessee. The assessee before sale of its first asset i.e. plot at Jalandhar on 22.7.2005 had entered into an agreement to sell in January, 2005 to purchase the house No.1198, Sector 8-C, Chandigarh. The said house was purchased vide Sale Deed dated 18.7.2005 in which assessee’s share was 16.66% valued at Rs. 17,37,000/-. The assessee had also purchased flat at Manimajra on 28.7.2006. The first sale of asset i.e. plot at Jalandhar took place on 22.7.2005. The first new asset was purchased on 18.7.2005 and the second asset i.e. flat at Manimajra was purchased on 28.7.2006. The said asset was purchased after the gap of one year from the purchase of new asset. The second aspect of the issue is that the assessee purchased the house in Sector 8-C, Chandigarh on 18.7.2005 on which new construction was commenced on 19.5.2006 which was completed before 26.12.2008.

13. The plea of the assessee is that the first new asset purchased by it on 18.7.2005 was in a dilapidated condition and the benefit of the deduction under section 54F of the Act merits to be allowed against purchase of flat in Manimajra on 28.7.2006. We find no merit in the plea of the assessee. The assessee has placed on record Sale Deed for purchase of house No.1198, Sector 8-C, Chandigarh. The perusal of the same reflects the assessee to have purchased a house which was double storeyed and there is no record of the said building being in dilapidated condition. The assessee after purchasing the said house on 18.7.2005 had broken down the whole house and commenced new construction on 19.5.2006 which was apparently completed before 26.12.2008. Taking into consideration the proviso to section 54F(1) of the Act, where the assessee claims that the new asset purchased by it was the house in Sector 8-C, Chandigarh, which was though purchased on 18.7.2005 i.e. within the timeframe allowed under section 54F(1) of the Act but once the said house was demolished and construction was made within the period of three years after the date of transfer of the original asset, the claim of the assessee is hit by proviso (a) clause (iii) under section of the Act. The claim of the assessee that it had purchased flat at Manimajra on 28.7.2006 and the said asset be treated as new asst, is also not correct as the assessee had purchased another residential house other than the new asset within the period of one year after the date of transfer of the original asset and is hit by clause (a)(ii) of the proviso under section 54F of the Act. In view thereof, we find no merit in the claim of the assessee under section 54F of the Act and the same is rejected. Upholding the order of the CIT (Appeals) we dismiss ground Nos. 1 and 2 raised by the assessee.

14. The assessee vide ground No. 3 has raised the issue of non-adjudication of ground Nos. 3 and 4 raised before the CIT (Appeals). From the perusal of the order of the CIT (Appeals) we find that though the assessee had raised ground Nos. 3 and 4 before the CIT (Appeals), but the same have not been adjudicated. Consequently, we remit ground Nos. 3 and 4 back to the file of the CIT (Appeals) for adjudicating the same after affording reasonable opportunity of hearing to the assessee. The ground Nos. 3 and 4 raised by the assessee are allowed for statistical purposes.

15. In the result, the appeal of the assessee is partly allowed.