In absence of supportings addition to existing house may not be treated as construction of new house

Brief of the Case:

In the instant case, as the municipal approvals, completion certificates and authentic plans were not available, the ITAT could not conclude whether assessee had constructed new independent house and there was no evidence that the old building was ever demolished. There was significant variation in the valuation report submitted by AO and plan submitted by the assessee. Therefore, only a site inspection could conclude whether a new house was constructed or just an extension was made to the old house. Hence, ITAT directed AO to give an opportunity to the assessee and examine whether the structure as claimed by assessee is old or new, so as to consider the eligibility of deduction u/s. 54.

Facts of the Case:

The assessee is an individual filing a belated return declaring Long term capital gain on sale of House property and claiming a deduction of Rs. 1,37,07,700/- u/s 54 of the Income Tax Act, 1961 The assessee had sold a house property in Bangalore and invested the capital gain in the existing house property located in Hyderabad by constructing two additional floors. The existing house property was a plot with an old residential strucure of ground floor acquired in the year 2005. The said construction of additional floors was completed till the date of transfer of house property in Bangalore. The Assessing Officer rejected the assessee’s claim of deduction on the basis that investment was made much prior to the sale of property and also investment in an existing house could not be considered as investment in a new asset. Also the AO brought to tax the cash deposits credited in assessee’s bank account which was treated as “unexplained” even though assessee explained that the source is “sale of property”.

Held by CIT (A):

The CIT(A) relied on the judgement in various case laws wherein it is held that an extension work carried out on an existing building cannot be treated as investment in new asset and benefit of Section 54F cannot be granted. Hence, CIT(A) upheld the order of AO.

Question of Law:

Whether, deduction is available u/s 54/54F by investing the capital gains in constructing additional floors in existing house property.

Contention of the Revenue:

• The Revenue noted that the existing house property was an old structure to which assessee had made few alterations and constructed a second floor as an extension. The Assessee had furnished certain bills/invoices according to which the said renovation was completed till the date of transfer of original property at Bangalore. The said expenditure was incurred in cash and hence the genuineness could not be verified. Also there was not significant difference between the built-up area of the old building and the new one. The assessee had also failed to submit municipal approved plan for the alleged new house because of which the investment in the house property could not be verified.
• As per Section 54, an assessee is required to construct the residential house within a period of 3 years after the date of transfer and not before the date of transfer. Normally old/original asset should give way to the new asset, but in the instant case, the original asset and the supposedly new asset simultaneously existed. The capital gain arising is not at all appropriated by the assessee for the construction of the new asset (old house) because most of the renovation/extension work of the old house had been completed even before the date of transfer of the original asset. Whereas the bills/invoices pertaining after the date of transfer where merely of furniture/fittings which do not classify for deduction u/s 54.
  

Contention of the Assessee:

• The assessee contended that she had invested the long term capital gains in house property by adding additional floors to meet the residential needs of the family. The assessee tried to build the house in stages based on their own family needs and availability of funds. The additional floors constructed on an existing grounds/first floor of a residential house property form part of residential house property addition to the existing house and are in the nature of new asset. The assessee also submitted that commencement of construction was not a criteria for allowing deduction and relied on the decisions in the cases of CIT Vs. J.R. Subrahmanya Bhatt [165 ITR 571] (Kar) and H.K. Kapoor [234 ITR 73] (All).
• The assesse later on claimed that she had literally demolished /made substantial changes to the existing building to the property and not just modification. Unfortunately, she did not obtain any municipal permission for this construction nor had applied for any ‘Building regularization and therefore was unable to establish, the fact as per the records of the statutory authorities.
  

Held by the ITAT:

• The ITAT noted that there were admittedly no municipal approvals and completion certificates available to compare the changes in the old and new house plan submitted by assessee. ITAT reiterated that even though the construction commenced before the specified period but renovation work has to be commenced and completed within the specified period. As per the facts of the assessee’s case, the assessee constructed the supposedly new house even much before the sale of the original asset. In such case, the assessee cannot claim exemption u/s54 mainly because the new asset cannot be acquired before the realization of sale proceeds or in other words before the transfer of the original asset. What is relevant is the date of completion of the construction as well as the period of investment made by assessee in such construction.
• Even though the construction could start much before the sale of property giving rise to Long Term Capital Gain, what is relevant is the completion of house and investment made by assessee within the specified period i.e. 3 years after the date of transfer of old/original asset as per the provisions of the Act.
• In the instant case, as the municipal approvals, completion certificates and authentic plans were not available, the ITAT could not conclude whether assessee had constructed new independent house and there was no evidence that the old building was ever demolished. There was significant variation in the valuation report submitted by AO and plan submitted by the assessee. Therefore, only a site inspection could conclude whether a new house was constructed or just an extension was made to the old house. Hence, ITAT directed AO to give an opportunity to the assessee and examine whether the structure as claimed by assessee is old or new, so as to consider the eligibility of deduction u/s. 54.
• Also ITAT noted that there was no nexus with the cash deposits in the bank account to that of sale consideration received by assessee which was originally disclosed in the computation of income. Since assessee has not furnished any correlation with reference to sale of property, the cash deposits made into the bank account are rightly considered as ‘Unexplained investment’ by the AO.