Conclusion: Assessee was not entitled to capital gain exemption under section 54 for purchase of houseboat as the same could not be equated with the residential house which was immovable property.
Held: In the present case, AO disallowed capital gain exemption under section 54 on assessee’s investment towards the purchase of houseboat as houseboat was not a residential property within the meaning of section 54. It was noticed that assessee had not produced the registered sale deed for purchase of houseboat, therefore it could not be said that assessee had purchased a residential house. Further, there was a ban in the purchase of immovable property as well as a boat by the non-state subject of the J & K State. Therefore, assessee was not legally entitled to purchase houseboat, which was movable property but held to be land by J & K Land Revenue Act, 1939. Hence, the same could not be equated with the residential house which was immovable property. Therefore, capital gain exemption was rightly denied by AO.
FULL TEXT OF THE ITAT JUDGEMENT
1. These cross appeals filed by the Assessee and Revenue are directed against the order of learned Commissioner of Income Tax (Appeals)-IV, Rajkot(in short “the CIT (A)”) dated 28.03.2007 pertaining to Assessment Year 1999-2000 which in turn has arisen from the order passed by the ACIT, Junagadh Circle-1, Junagadh(in short “the AO”) dated 27.03.2006 under section 143(3) r.w.s. 147 of Income Tax Act,1961 (in short ‘the Act’).
2. Assessee raised the following ground of appeal :
“ 1.0 The grounds of appeal mentioned hereunder are without prejudice to one another:
2.0 The learned Commissioner of Income-tax (Appeals)-IV, Rajkot [hereinafter referred to as the CIT(A)] erred on facts as also in law in dismissing the appelant’s ground of appeal relating as to validity of issue of notice u/s.148 of the Income Tax Act, 1961 (hereinafter referred to as the Äct”) and consequent assessment made by the AO. The notice u/s 148 of the Act and the assessment may kindly be held as invalid and void-ab-initio and may kindly be quashed.
3.0 The learned CIT(A) further erred on facts as also in law in confirming the action of the AO in rejecting the valuation report and estimating fair value as on 01.04.1981 at Rs.1,750/- per sq. ft. as against value determined at Rs.2,200/- by the registered valuer as per valuation report and directing the AO to adopt such value in respect of 1,675 Sq. fts. The valuation may kindly be directed to accept as per the report of the registered valuer.
4.0 The ld.CIT(A) erred on facts as also in law in confirming the disalowance of Rs. 1,90,000/- made in respect of cost of improvement. The disalowance being totally unjustified on facts as also in law and may kindly be deleted.
5.0 The learned CIT(A) erred on facts as also in law in confirming the disalowance of deduction u/s. 54 of the Act on the alleged ground that the House Boat is not a residential property within the meaning of section 54 of the Act. The disallowance confirmed is totally unjustified on facts as also in law and deserves to be deleted and may kindly be deleted.”
3. Revenue raised the following ground of appeal :
“ 1. The Ld.CIT(A) has erred in law and on facts in directing the Assessing Officer to recomputed the value as on 01.04.1981 after taking the area at 1675 sq. ft. against 1340 sq.ft. and then take the rate per sq.ft. at Rs.1,750/- and calculate the value accordingly.
2. The Ld.CIT(A) has erred in law and on facts in giving an opinion that the properties in Mumbai are sold on the basis of built up area and not on carpet area without any basis whatsoever.
3. The Ld.CIT(A) has erred in law and on facts in assuming 25% as the increase in carpet area to arrive at the built up area without any basis.
4. On the facts of the case and in law, the Ld.CIT(A) ought to have upheld the order of the A.O.
5. Any other ground that the revenue may raise before or during hearing proceedings before Hon’ble I.T.AT., the order of the Ld. CIT(A) is to be set aside on this point.
6. It is therefore, prayed that the order of the CIT(A) may be set-aside and that of Assessing Officer be restored to the above extent.”
ITA No.352/RJT/2007 for A.Y. 1999-2000 (by the Assessee):
4. Ground No.1 is general, hence not required any adjudication.
5. Ground No.2 relates to validity of issue of notice u/s. 148 of the Act is not pressed before us hence same is treated as dismissed.
6. Ground No.3 relates to confirming the action of the AO in rejecting the valuation report and estimating Fair Market Value (FMV) as on 01.04.1981 at Rs.1750 per sq.ft. as against value considered at 2200 by the assessee based on the Registered Valuer valuation report, and directing the AO to adopt such value in respect of 1675 sq.ft. of carpet area.
7. We have heard the rival submissions, the ld.Counsel for the assessee submitted that the assessee has sold flat no.26 situated in a building named “Mount Unique”, Peddar Road, Mumbai and computed capital gains by taking the index cost of acquisition on the basis of value adopted as on 01.04.1981 at Rs.2200 per sq.ft of the built-up area of 1675 per sq.ft. as adopted by the valuer of the assessee. However, the AO found that the value adopted as on 01.04.1981 is at higher side, therefore, the matter was referred to the valuation officer. However, since the assessee has already transferred the flat, therefore the valuation officer could not receive the co-operation from the assessee, hence no valuation report was obtained from the DVO. In view of these facts, the AO computed the cost of indexation by adopting the report 1750 per sq.ft of the carpet area 1340 sq. ft. instead of Rs.2200 per sq. ft of the carpet area of 1675 sq. ft. adopted by the assessee. The ld.Counsel submitted that the CIT(A) has directed the AO to adopt the rate of 1750 per sq.ft. in respect of built up area of 1675 sq.ft as against rate of 2200 per sq.ft. taken by the assessee. The ld.Counsel therefore placing reliance on the decision of Hon’ble Gujarat High Court in the case of Hiraben Jayantilal Shah vs. ITO 310 ITR 31 (Guj) submitted that the AO was incorrect in making reference to the DVO u/s. 55A of the Act as reference can be made u/s.55A only when the AO of the opinion that the fair market value of the asset claimed by the assessee is less than its FMV and not when he was of the opinion that the FMV of the property as on 1st April 1981, as shown by the assessee was more than its actual FMV, hence reference to DVO was not valid, consequently, non accepting the valuation report of the registered valuer of the assessee is invalid. It was contended that the FMV adopted by the assessee was @2200 which is higher than market value of the property considered by the assessee hence no reference should have been made to DVO. Further, the AO was not justified in taking the rate of 1750 per sq. ft. as against the rate adopted by the valuer of the assessee at Rs.2200 per sq.ft. The AO is not a technical person to determine the valuation of the property and therefore valuation as per registered valuers report has to be accepted for this proposition. The ld.Counsel has placed reliance in the case of Shekhar Chand Jain & Sons vs. Inspecting Asst. Commissioner 32 TTJ 570 (Del) and Kaushik Sureshbhai Reshamwala vs. ITO 39 SOT 357 (Ahd). On the other hand, the CIT(A) was also not justified in directing the AO to adopt the average rate 1750 per sq.ft. as against 2200 sq.ft adopted by the assessee. Per contra, ld. Sr. DR supported the order of AO.
8. On careful consideration of the facts, we find that the assessee has shown FMV as on 01.04.1981 @2200 per sq.ft., on the basis of registered valuers report it is more than the FMV estimated by the AO. Therefore, the AO is not entitled to make a reference to DVO u/s.55A. The AO can make a reference in a case where the value of the asset as claimed by the assessee is in accordance with the estimate made by the registered value, is less than the FMV, in the opinion of the AO. The estimated value considered by the AO @1750 per sq.ft. is less than the FMV computed by the assessee by taking the rate of 2200. Therefore, in the light of decision of Hon’ble Gujarat High Court in the case of Hiraban Jayantilal Shah vs. ITO (supra) and Jaya. Shah vs. ITO  6 DTR 203 (Guj) no reference can be made by the AO to the DVO. Further, the AO is not a technical person, as held by the various decision cited (supra) to compute fair market value his own. Therefore, he cannot determine the valuation of property, hence, in the light of these facts, we direct the AO to consider the rate at 2200 per sq.ft. for considering the FMV as on 01.04.1981 in respect of built-up area 1675 sq.ft as considered in the valuation report and as shown in the sale deed. Accordingly, this ground of appeal of the assessee is allowed. Therefore, the direction of the CIT(A) to the AO to consider the area at 1675 sq.ft. are upheld department’s ground No.1 of appeal is dismissed.
9. Ground NO.4 relates to confirming disallowance of Rs.1,90,000/- made in respect of cost of improvement.
10. The ld.Counsel for the assessee submitted that the assessee has claimed a sum of Rs.1,90,000/- on account of cost of renovation carried out from 1981 to 1999. However, the same was disallowed as there was no basis or nor details were furnished. The CIT(A) has also confirmed the same since the valuer of the assessee has included the cost of improvement of Rs.1,90,000/-, therefore, the CIT(A) ought to have allowed such deduction on said account.
11. On the other hand, the ld.Senior Departmental Representative relied on the orders of the Lower Authorities.
12. We have heard the rival submissions and find that the assessee has not been able to furnish any details of cost of renovation carried out in respect of the properties sold under consideration. Therefore, the CIT(A) has rightly disallowed the same, accordingly this ground of appeal is therefore dismissed.
13. Ground No.5 relates to confirming the disallowance of deduction u/s.54 of the Act on alleged ground that house boat is not a residential property within the meaning of section 54 of the Act. The ld.Counsel for the assessee submitted that the assessee had purchased a house boat at Srinagar for consideration for 10 lakhs from Mr.Abdul Khalil Wangnoo vide agreement for sale dated 28.03.1999. It was pointed out that as per Clause 6 & 11 of the sale deed, the assessee was having exclusive possession of the house boat and shall use the house boat as residential purpose and was full owner and use as per his own choice. The sale deed was duly attested by notary and the assessee has claimed deduction u/s.54 of the Act in respect of investment made towards purchase of house boat. However, the ld.CIT(A) has confirmed the action of the AO by observing that in Srinagar house boats are ordinarily used for catering to tourist and there has been never instances for the house boat as used as a residential house. Further, how the assessee can purchase a property in Jammu & Kashmir? Further, on the basis of agreement of sale which cannot be said that the appellant had fulfilled the conditions laid down u/s.54 / 54F of the Act. In view of these facts, the findings of the AO has discussed in detail in the assessment order, were confirmed. The ld.Counsel contended that it is a fact that the assessee had purchased a household in Srinagar for a consideration of Rs.10 lakhs. The assessee has full control over the house boat for using the same as residential house. Therefore, the assessee is entitled to claim deduction u/s.54 of the Act. The house property was not immovable property and there was no legal requirement for registration of the deed. Further, subsequent to purchase of house property the assessee is incurred expenditure of Rs.3 lakhs towards construction and designing, Rs.4 lakhs for labour and material for electrical wiring is paid. The appellant has also incurred Rs.7 lakhs for pearl expenses for furnishing of houseboat and expenditure of Rs.1 lakh for modifying the parking site and jetty and Rs.80,00/- for other expenses. The provision of section 54 of the Act envisage the purchase of residential house. The words residential house is not defined in the Act. Therefore, the ld.CIT(A) was not justified in rejecting the claim of deduction u/s.54 of the Act.
14. Per contra, the ld.Senior Departmental Representative submitted that the house boat is not a residential house within the meaning of section 54 of the Act. Further, as per Jammu & Kashmir Act, the person of other state cannot purchase an immovable property in the state of Jammu & Kashmir nor the assessee has entered into a registered sale deed, hence it cannot be said that the assessee has acquired a residential house as per provision of section 54 of the Act. In rejoinder, the ld.Counsel for the assessee submitted a Wikipedia in which a house boat is described as a accommodation for tourist in the area of Sri Nagar in Jammu & Kashmir(J & K), hence the house boat is a residential house for the purpose of deduction u/s.54 of the Act. The Sr. DR further submitted a copy of letter issued from the Assistant Commissioner (C) that Divisional Commissioner Kashmir dated 05.07.2013 in which it has been stated that a non-state subject cannot purchase a house boat in J & K as the floating bodies in Dal is classified as land, as referred in section 3 sub section 2 of J & K Land Revenue Act 1939AD.
15. We have heard the rival submissions and perused the material on record, we find that the assessee has not produced the registered sale deed for purchase of house boat, therefore it cannot be said that the assessee has purchased a residential house. Further, there is a ban in purchase of immovable property as well as boat by the non-sate subject of the J & K State. Therefore, the assessee is not legally entitled to purchase house boat, which is a movable property, but held to be land by J & K Land Revenue Act, 1939. Hence, same cannot be equated with the residential house which is an immovable property. Therefore, in these circumstances and considering the letter of the Assistant Commissioner (C), Government of Jammu & Kashmir dated 05.07.2013 we are inclined to hold the findings of the Lower Authorities are correct, accordingly this ground of assessee is dismissed.
I.T.A.No.368/RJT/2007 for AY.1999-2000 (by Revenue):
16. Ground No.1 to 5 relates to direction of the CIT(A) to consider the value 1675 sq.ft against 1340 sq.ft and then take rate of 1750 per sq.ft.
17. We have heard the rival submissions. As regards, the contention of the Revenue that 25% increase in carpet area to line at built-up area is without any basis, however, we find that assessee has sold the property by taking the carpe area, which has been mentioned in the sale deed as well as registered valuers report. Therefore, we do not find any merit in the contention of the Revenue. In view of these facts and considering the findings given by us in Ground No.3 of the assessee, this ground of appeal of the Revenue is dismissed.
18. In the result, appeal of the assessee is partly allowed and the appeal of the Revenue is dismissed.
19. The order pronounced in the open court on 11.12.2018.