Residential unit of 8ft x 8 ft dimensions cannot be treated as Building – Section 54

CA Sandeep Kanoi

Issue, Submission before A.O. and Decision by A.O.

As regards the addition of Long Term Capital Gains, the assessee during the relevant assessment year sold a residential property bearing D.No 8-2-293/82/L/78C, Road No 12, Jubliee Hills, Hyderabad admeasuring 450 square yards with a built up area of 64 square feet for a gross consideration of Rs.2,41 ,00,000/- . After considering the expenses on transfer of Rs.4,82,000/- the net sale consideration is Rs.2,36,18,000/-. The said property was purchased by the assessee on 26/08/1989 for a consideration of Rs.1,04,661/- break up of which is as follows :

The assessee incurred an expenditure of Rs. 14,00,000/-towards cost of improvement in the year 1989, by way of construction of the residential unit, its boundaries, etc. The cost of improvement is supported by certificate from government certified engineer.

The Long Term capital Gains on sale of the above residential house, works out to Rs. 1,87,97,836/- and was re-invested in another residential house property. Accordingly, exemption under section 54, was claimed in the Return of Income. The details of the reinvestment are as follows:

• Purchase of a Semi-finished house with a built up area of 4000 square feet and land admeasuring 400 Square Yard on 31 .07.2008 for an amount of Rs.64,81 ,000/-.
• Stamp duty Stamp duty paid for Rs. 5,83,193/-.
• Construction agreement with Sri Ranjith Reddy and Lumbini Constructions Limited for Rs 66,00,000/- vide dated 23.01.2009.
• And the balance amount of Rs. 51,43,643/-was reinvested in a new property within 3 years from the sale of the said property. The addition of balance amount of. 51,43,643/- is supported by a certificate from government approved engineer/valuer.

The Assessing Officer has disallowed commission of Rs. 20,000/- paid for purchasing the above house. Further, the expenses on transfer of Rs. 4,82,000/- was also disallowed in spite of producing receipts for the same.

The indexed cost of improvement of Rs. 44,84,884/- was disallowed after examining the engineer and recording his statement on oath, stating that there is no basis for estimating the cost of improvement.

Further, the exemption u/s 54 was not allowed as what was transferred is a residential unit with 8ft x 8 ft dimensions and holding that such structure cannot be treated as building. However, exemption u/s 54F was allowed to the extent of amount spent within six months from the date of transfer of the asset.

Submission Before CIT (A) & Decision

As regards long term capital gains, before the CIT(A) it was submitted that the assessee had sold another property at D. No. 8-2- 293/82/L/78C, Road No. 12, Jubilee Hills, Hyderabad for a consideration of Rs. 2,41 ,00,000/-. The SRO also had adopted the said amount as the Fair Market Value. The said property had been purchased for Rs. 80,000/- on 26/08/1989. Besides, the assessee had claimed Rs. 4,82,000/- as expenses on transfer and commission at Rs. 20,000/- at the time of acquisition. Accordingly, the indexed cost of acquisition of Rs. 3,35,280/- had been deducted from the sale value. In addition to the above, the assessee had also claimed indexed cost of improvement amounting to Rs. 44,84,884/-. Finally, the LTCG had been determined at Rs. 1,87,97,836/-, the entirety of which was claimed exempt u/s 54 on account of reinvestment in residential house. The assessee had furnished the receipts in respect of expenses on transfer of Rs.4,82,000/-, as also the commission expenses of Rs.20,000/-, vide letter dated 11.3.2010, the A.R. submitted that a detailed estimation had also  been given by the approved valuer regarding the cost of improvement at Rs.44,84,884/- and the valuer had also been examined on oath.

With regard to the observation of the Assessing Officer that the 8 ft x 8 ft structure could not be considered as a building / residential house, the representative cited the decision of the Hon’ble ITAT, Hyderabad in the case of Dr. Uma Challa holding that a residential house means ‘a house or hut or super-structure, which is fit for human habitation’ and the learned AR claimed exemption u/s 54.

On being required to explain how the said structure should be treated as a residential house, the assessee’s representative vide letter dated 28/12/2010 contending that the land sold by the assessee consisted of a small residential house on which rent of Rs. 60,000/- had also been received during the year. It was submitted that the gain had been invested in another residential house property and exemption was claimed u/s 54. The assessee’s Representative submitted that the assessee had paid Rs. 1,30,81,000/- towards the purchase of new residential property (semi constructed) within 6 months from the date of sale of the first mentioned property and Rs. 5,83,190/- were paid towards stamp duty for the new property before the due date of filing of return, the balance capital gain of Rs. 57,15,836/- was invested in the new property within 3 years from the date of sale of the first mentioned property. Accordingly, the assessee requested to consider the exemption u/s 54F for the above investment made in the new residential house property.

After considering the submissions of the assessee, the CIT(A) held has follows:

“11. The CIT(A) held that the expenses on transfer of Rs.4,83,000/- and commission of Rs.20,000/- does not contain addresses of the recipients or their PAN so as to substantiate the evidence of payments. Besides, no evidence regarding TDS that such payments has also been furnished. Accordingly, he confirmed the Order of the Assessing Officer. With respect to the claim of index cost of improvement of Rs.44,84,884/-, the CIT(A) observed that even the Government approved valuer was not in a position to say that the compound wall AC Sheet roof toilet and underground sump was constructed in the year 1989 and the estimated cost on improvement made by the valuer was rejected by the CIT(A) upholding the Order of the Assessing Officer.

12. With respect to the claim of exemption under section 54/54 F, the CIT(A) was of the view that the term ‘residential house’ means house or a superstructure which is fit for human habitation and the built-up area of 64 sq. feet on the land is not fit for human habitation and hence, not entitled to exemption under section 54 as a residential house. The assessee’s alternative claim under section 54F was already considered by the Assessing Officer who had given a relief of a sum of Rs. 1,36,64,190/- and the same was confirmed by the CIT(A). As regards the balance capital gains of Rs.57, 16,836/- the CIT(A) held that the same was not appropriated for purchase of the new asset within one year before 29. 11.2007 nor was it deducted into the capital gains amount claimed/scheme before the due date of filing of the return of income and hence, the assessee cannot get the benefit under section 54F. Hence, the CIT(A) dismissed the assessee’s appeal.”

ITAT Decision –

As regards the issue of long term capital gains, it is observed that the the assessee sold another property at Jubilee Hills for a consideration of Rs.2.41 crores. The property was purchased in the year 1989 for Rs.80,000. The assessee claimed expenses on transfer of Rs.4,82,000. The assessee claimed expenses of Rs.44,84,884 as indexed cost of improvement. We find that the followings pointed out by the DR are relevant to the issue under consideration:

1. The assessee could not produce any evidence or, commission payment and expenses on transfer. Hence, the same was disallowed.
2. Regarding the expenses on improvement, the assessee relied on a certificate issued by a valuer. On examination of the value r by the Assessing Officer, it was found that there was no basis for estimation of development works done in the year 1989. Hence, the A.O. disallowed the entire amount of Rs.44,84,884 being the indexed cost of improvement. Value was registered in 1996-97 and it is seen that he has given certificate for the year 1989.
3. The A.O. also discovered that the house sold was to an extent of 64 sft (8 X 8 ft) only and 450 sq.yds in extent. It therefore did not fulfill the condition that it was a residential property. The assessee also claimed exemption u/s. 54/54F on reinvestment in house The assessee was therefore held to be eligible for exemption u/s 54F and not 54 though he claimed exemption under the latter section vide letter dated : l0.12.2010.
4. The assessee claimed exemption for an amount of Rs.64,81,000 towards purchase of property and Rs.66,00,000 towards improvement of 1 he said property. Though the A.O. considered the same as eligible for exemption u/s.54F, he didn’t allow the balance Rs.57,16,836 as exemption because this unutilized portion of capital gains was not invested in capital gains bonds before furnishing such return.