Case Law Details

Case Name : V.V.V. Satyanarayana Vs. Income Tax Officer (ITAT Hyderabad)
Appeal Number : I.T.A. No. 1231/HYD/2016
Date of Judgement/Order : 17/11/2017
Related Assessment Year : 2003- 04
Courts : All ITAT (4457) ITAT Hyderabad (256)

V.V.V. Satyanarayana Vs. Income Tax Officer (ITAT Hyderabad)

With reference to the deduction u/s. 54/54F, the AO’s contention that assessee owns more than two residences was not correct. Assessee got eight apartments subsequently, on transfer of one residential house property, by way of development agreement. Nowhere the AO contends that assessee had more than one building as on the date of transfer i.e., on 19-06-200 1. Subsequent acquisition of any number of houses will not prevent assessee claiming the deduction for transfer as on 19-06-2001. Therefore, the AO’s view can not be upheld. Assessee is entitled for deduction u/s. 54/54F. With reference to the claim of deduction, assessee has claimed only for contiguous flats. But law on this as propounded by the Hon’ble High Court of AP in the case of CIT Vs. Syed Ali Adil in ITA No. 410 of 2012, date 20-12-2012 is as under:

“10. We see no force in the said contention. As held in D.Ananda Basappa’s case (1 supra) by the Kamataka High Court, the expression “a residential house” in Section 54 (1) of the Act has to be understood in a sense that the building should be of residential nature and “a” should not be understood to indicate a singular number and where an assessee had purchased two residential flats, he is entitled to exemption under Section 54 in respect of capital gains on sale of its property on purchase of both the flats, more so, when the flats are situated side by side and the builder has effected modification of the flats to make it as one unit, despite the fact that the flats were purchased by separate sale deeds. This decision was followed by the Karnataka High Court in CIT Vs. Smt. K. G.Rukminiamma where a residential house was transferred and four flats in a single residential complex were purchased by the assessee, it was held that all four residential flats constituted “a residential house” for the purpose of Section 54 and that the four residential flats cannot be construed as four residential houses for the purpose of Section 54. Admittedly the two flats purchased by the assessee are adjacent to one another and have a common meeting point. It was held that exemption under Section 54 only requires that the property should be of residential nature and the fact that the residential house consists of several independent units cannot be an impediment to grant relief under Section 54 even if such independent units were on different floors. The decision in Suseela M.Jhaveri’s case (5 supra) holding that only one residential house should be given the relief under Section 54 does not appear to be correct and we disapprove of it. We agree with the interpretation placed on Section 54 by the High Court of Kamataka in D.Ananda Basappa’s case (l supra) and Smt. K.G.Rukminiamma’s case (6 supra) and the decisions of the Mumbai, Chennai and Delhi Benches of the Tribunal in K.G. Vyas (2 supra), P.C.Ramakrishna, HUF (3 supra) and Prakash Bhutani (4 supra). We therefore hold that the CIT (Appeals) was correct in setting aside the order of the assessing officer and the Tribunal rightly confirmed the decision of the CIT (Appeals)”.

Respectfully following the same, I hold that assessee is entitled for claim u/s. 54/54F on all the flats. AO is directed to allow the deduction as claimed.

Full Text of the ITAT Order is as follows:-

This is an appeal by assessee against the order of the Commissioner of Income Tax (Appeals)-4, Hyderabad, dated 29-06-20 16, for the AY. 2003-04.

2. The grounds raised by assessee are as under:

“1. The order of the learned Commissioner of Income-Tax (Appeals) is erroneous both on facts and in law.

2. The learned Commissioner of Income-Tax (Appeals) erred in confirming the action of the Assessing Officer in adopting the market value of the land transferred as the consideration instead of adopting the cost of construction of the area allotted to the appellant as the sale consideration.

3. The The learned Commissioner of Income-Tax (Appeals) erred in confirming the action of the Assessing officer in adopting the market value of the land as on 1.4.1981 at Rs.7 per sq. yard.

4. The learned Commissioner of Income-Tax (Appeals) erred in not considering the fact that the indexed cost of the value of the building on the said land also should have been taken into consideration for determining the capital gain.

5. The learned Commissioner of Income-Tax (Appeals) erred in confirming the action of the Assessing officer in treating the amount of Rs. 1 lakhs received from the developer as a part of the consideration.

6. The learned Commissioner of Income-Tax (Appeals) erred in confirming the action of the Assessing Officer in holding that the appellant is not entitled for deduction u/s 54/54F of the I.T. Act.

7. The learned Commissioner of Income-Tax (Appeals) erred in dismissing the appeal filed by the appellant without considering various written submissions filed before him.

8. The learned Commissioner of Income-Tax (Appeals) erred in confirming the action of the Assessing Officer in charging interest u/s 234A, u/s 234B and u/s 234C of the I. T. Act”.

3. Briefly stated facts are that assessee, an individual, deriving income from pension, property, capital gains and other sources, filed his return of income for the AY. 2003-04 on 07-10- 2003, declaring total income of Rs. 31,11,025/-. The return was processed u/s. 143(1) of the Income Tax Act [Act] on 05-04-2004. The Assessing Officer (AO) on observation that there is a mistake in calculation of capital gains, issued notice u/s. 148 in response to which assessee requested the AO to treat the return of income already filed as return filed in response to notice u/s. 148.

3.1. During the course of assessment proceedings the AO observed that assessee has entered into a development agreement with Ganesh Builders for development of the site into 15 apartments in 5 floors (excluding stilt for parking and common area), wherein it was mutually agreed between the land owner and the builder (developer) that they are entitled to 51% and 49% respectively in the built up area (super structure) and parking area. The AO further observed that during the year under consideration, assessee also sold one flat out of the 8 flats allotted to him, for a consideration of Rs.9 lakhs including the value of undivided share of land of 50 sq. yards out of total area of 778 sq. yds. Long term capital gains arising out of the transfer of undivided share of land in respect of flats allotted to builder’s share and undivided share of land and short term capital gains arising out of sale of flat allotted to land owner’s share are chargeable to tax. The AO observed that in the return of income the assessee admitted the cost of 778 sq. yds., of land at Rs. 2,386/- being the cost of acquisition by assessee, but during the course of assessment proceedings, assessee revised the working of capital gains adopting the value of land as on 0 1-04-1981 at Rs. 1,000/- and arrived at long term capital gains of Rs. 8,82,957/- and short term capital gains at Rs. 2,63,420/-. The AO rejected the case laws relied upon by assessee stating that the facts of the cases relied upon by the assessee are different from that of the facts of this case. Assessee’s claim of exemption u/s. 54F was also rejected by the AO, since as per Section 54F, if the assessee owns more than one residential house other than the new asset as on the date of transfer of the original asset and since the assessee owns five residential units as on the date of transfer of capital asset(undivided) share of land, other than the two flats occupied by him, the assessee is not entitled to any exemption u/s. 54F of the Act.

3.2. AO also observed that during the year under consideration, assessee received a sum of Rs. 1,00,000/- from the developer towards residential accommodation of assessee during the period of construction as per clause No.16 of the developer’s agreement dated 19-06-2001. Assessee has admitted this receipt under the head ‘income from house property’ and claimed statutory deduction @ 30% towards repairs. The AO stated that the income received is not in the nature of rent from any property owned by assessee but only a compensation received from the developer during the period under consideration and treated the same as ‘income from other sources’ thus, rejecting the claim of deduction of 30% toward statutory repairs. The AO concluded the assessment by calculating the long term capital gains at Rs. 37,83,759/-, short term capital gains at Rs.36,470/-, income from other sources at Rs. 1,25,000/ – and determined the total taxable income at Rs.40,06,273/-.

4. Before the Ld.CIT(A), assessee has raised various contentions. Assessee submitted that he has entered into development agreement with Ganesh Builders for development of the property consisting of 778 sq. yards on which a 2-storey building was existed. As per the development agreement, assessee is entitled for 51% of the constructed area including the parking place and the developer is entitled for 49% of the constructed area. The existing building was demolished after the development agreement was entered into for construction of apartment. Assessee further submitted that the cost of land has to be considered as per market value as on 01-04-1981 which was Rs. 1,000/- per sq. yard and in respect of the existing structure the cost has to be taken at Rs. 100/- per sq. ft. Assessee also argued that the cost of construction to the developer has to be considered as consideration for the development agreement and not consideration for the land. Assessee also claimed exemption u/s 54/54F of the I.T. Act as he owns only that property when agreement was entered. Assessee also claimed that the amount of Rs. 1 Lakh paid by the developer due to the delay in construction towards rent payable by assessee is capital receipt and cannot be taxed as income of the assessee. The issues were remanded to AO on remand. While admitting that correct capital gain could not be calculated (para 4 of the remand report), AO, however, reiterated the adoption of various values. Ld.CIT(A) has rejected the contentions summarily stating as under:

“6.2 The remand report was given to the appellant for his comments and the case was posted for hearing several times. There was no response from the appellant or his authorized representative. Therefore, it is treated that there were no submissions to be made by the appellant. Hence, considering the assessment order, remand report of the Assessing Officer and facts of the case, the additions made by the Assessing Officer are confirmed”.

5. The present appeal is filed with a delay of five days. The reason was that assessee is 93 year old and had to depend on his nephew, who was out of station and so the delay in filing the appeal. Considering that assessee was allowed senior citizen relief, in assessment order passed in the year 2006 for AY. 2003-04 itself, the prayer for condonation was accepted and the five days delay was condoned.

6. After considering the submissions of Ld. Counsel and DR, I am of the opinion that the orders passed by the authorities can not be upheld as such. The AO himself in the remand report has expressed his difficulty in calculating the correct long term capital gain stating as under:

“4. In the grounds of appeal, the assessee has raised an objection stating that the Assessing Officer has wrongly adopted the market value of land as sale proceeds instead of cost of construction of super structure received by the assessee. The issue raised by the assessee is correct to a certain extent in view of judgement of ITAT, Hyderabad in the case of Dr. Maya Chenoy. However, it is submitted that there are various conflicting judgements on the mode of computation of capital gains arising out of development agreements and the issue has not yet reached finality. The method pointed out by the assessee is not practical in determination of quantum of capital gains, as in the year of transfer of capital asset and by the time of filing of return the assessee would not be in a position to know the actual cost of construction to the developer. Further, there is no clarity regarding the year in which capital gains arise if the method suggested by the assessee is followed. In view of this, the value of land as per SRO office on date of sale and as on 01.04.1981 would be more realistic and appropriate. Since the value of land as on the date of sale as per SRO’s records is not available on record, the correct long term capital gains could not be worked out.”

The issues for consideration can be summarized as under:

i. Adoption of sale value of land transfer;

ii. Cost of acquisition;

iii. Benefit of Section 54/54F;

iv. Compensation received at Rs. 1 Lakh;

6.1. As far as the value of sale consideration is concerned, the AO made a mistake in adopting the guide line value as at the time of sale of Flat No. 202, which was subsequent to the date of agreement i.e., 19-06-200 1 which happens to be in AY. 2002-03 and not in the impugned year. Assessee offered capital gains on completion of super structure during the year and obtained 8 flats. Therefore, there is nothing wrong in adopting the cost of super structure as full value of consideration. AO is directed accordingly.

 6.2. With reference to cost of acquisition, the value of transferred land and cost of building demolished. As far as the cost of land is concerned, the value as on 01-04-1981 has to be adopted. However, as the guidelines values are not revised upto 1995, the AO adopted Rs. 70/- after allowing 5% increase in the value as fixed in 1975. This is not correct. The value of Rs. 1,000/- claimed by assessee is also without basis. Moreover, the cost of building demolished would also become cost, as the building would reduce the freehold land value. Demolition of existing building could result in developing the land. Therefore, the cost of building will be allowable as cost of improvement. The AO’s hyper technical view that assessee transferred only ‘land’ is not correct as the demolition of existing building for developing a new structure is part of the ‘transfer’ and the cost has to be allowed while computing ‘capital gains. The AO is therefore directed to consider the cost of building demolished at Rs. 100/- per sq. ft., as claimed. The value of land can be determined approximately at Rs. 300/- keeping in mind the claim of assessee and AO’s determination on guideline values. AO is directed to adopt cost of acquisition accordingly.

6.3. With reference to the deduction u/s. 54/54F, the AO’s contention that assessee owns more than two residences was not correct. Assessee got eight apartments subsequently, on transfer of one residential house property, by way of development agreement. Nowhere the AO contends that assessee had more than one building as on the date of transfer i.e., on 19-06-200 1. Subsequent acquisition of any number of houses will not prevent assessee claiming the deduction for transfer as on 19-06-2001. Therefore, the AO’s view can not be upheld. Assessee is entitled for deduction u/s. 54/54F. With reference to the claim of deduction, assessee has claimed only for contiguous flats. But law on this as propounded by the Hon’ble High Court of AP in the case of CIT Vs. Syed Ali Adil in ITA No. 410 of 2012, date 20-12-20 12 is as under:

“10. We see no force in the said contention. As held in D.Ananda Basappa’s case (1 supra) by the Kamataka High Court, the expression “a residential house” in Section 54 (1) of the Act has to be understood in a sense that the building should be of residential nature and “a” should not be understood to indicate a singular number and where an assessee had purchased two residential flats, he is entitled to exemption under Section 54 in respect of capital gains on sale of its property on purchase of both the flats, more so, when the flats are situated side by side and the builder has effected modification of the flats to make it as one unit, despite the fact that the flats were purchased by separate sale deeds. This decision was followed by the Karnataka High Court in CIT Vs. Smt. K. G.Rukminiamma where a residential house was transferred and four flats in a single residential complex were purchased by the assessee, it was held that all four residential flats constituted “a residential house” for the purpose of Section 54 and that the four residential flats cannot be construed as four residential houses for the purpose of Section 54. Admittedly the two flats purchased by the assessee are adjacent to one another and have a common meeting point. In the impugned order, the Tribunal has also relied upon the decisions in K.G. Vyas ‘s case (2 supra), P.C.Ramakrishna, HUF’s case (3 supra) and Prakash Bhutani’s case (4 supra) wherein it was held that exemption under Section 54 only requires that the property should be of residential nature and the fact that the residential house consists of several independent units cannot be an impediment to grant relief under Section 54 even if such independent units were on different floors. The decision in Suseela M.Jhaveri’s case (5 supra) holding that only one residential house should be given the relief under Section 54 does not appear to be correct and we disapprove of it. We agree with the interpretation placed on Section 54 by the High Court of Kamataka in D.Ananda Basappa’s case (l supra) and Smt. K.G.Rukminiamma’s case (6 supra) and the decisions of the Mumbai, Chennai and Delhi Benches of the Tribunal in K.G. Vyas (2 supra), P.C.Ramakrishna, HUF (3 supra) and Prakash Bhutani (4 supra). We therefore hold that the CIT (Appeals) was correct in setting aside the order of the assessing officer and the Tribunal rightly confirmed the decision of the CIT (Appeals)”.

6.3.i. Respectfully following the same, I hold that assessee is entitled for claim u/s. 54/54F on all the flats. AO is directed to allow the deduction as claimed.

6.4. The last of the issue is with reference to the compensation paid for vacating the building. This is a capital receipt. AO has to adopt the same as part of the transfer. Rs. 1 Lakh cannot be brought to tax as ‘income from other sources’. AO is directed to include the same as cost of sale consideration.

6.5. However, the facts indicate that assessee has offered capital gain in the return of income. The assessment has been reopened u/s. 147 on the reason of escapement of income. Assessee also filed the same return in response to the notice u/s. 148. Consequently, the claims settled cannot be reagitated and only that part of the income which has escaped assessment has to be considered. Following the principles laid down by the Hon’ble Supreme Court in the case of CIT Vs. Sun Engineering Works (P) Ltd., [198 ITR 297], I direct the AO to compute the capital gains as directed above and in case the same falls below the returned income, accept the returned income as such.

7. With these directions, the appeal is considered allowed partly.

Order pronounced in the open court on 17th November, 2017

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Category : Income Tax (25549)
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Tags : Capital Gain (340) ITAT Judgments (4637) section 54 (110) Section 54F (134)

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