Capital gain exemption: A property may have been purchased as a readymade unit but that does not restricts the buyer from incurring any bonafide construction expenditure on improvisation or supplementary work
Shriniwas R.Desai, Ahmedabad vs Assessee on 1 May, 2013
ITA No. 1245 and 2432/Ahd/2010
Assessment year: 2007 -08
Page 1 of 5
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD B BENCH, AHMEDABAD
[Coram : Shri Pramod Kumar A.M. and Shri Kul Bharat J.M.]
ITA No. 1245 and 2432/Ahd/2010
Assessment year: 2007-08
Shrinivas R Desai ` ………………..Appellant
20, Golden Tulip Banglow B/h Shreyas Foundation,
Ambawadi, Ahmedabad [ PAN : ADWPD 2313 G]
Assistant Commissioner of Income Tax
(OSD), Circle 10, Ahmedabad …………..Respondent
S N Divetia, for the appellant
Y P Verma, for the respondent
Date of hearing : May 1, 2013
Date of pronouncement : June , 2013
O R D E R
Per Pramod Kumar:
- It is a recalled matter. Originally, both of these appeals were disposed of vide consolidated order dated 7 th September 2002, but, pursuant to a rectification petition filed by the assessee, the said order was recalled While so recalling the matter, the Tribunal, vide order 4 th January 2013, inter alia, observed that “we find that there is a mistake apparent from the record in not referring to various evidence relied upon by the assessee in support of the case that the house was made inhabitable from September 2007”, and, accordingly, the order, so far as it pertained to the quantum addition, was recalled. It is in this backdrop that we have come to be in sesin of the matter.
- The quantum appeal, i.e. recalled appeal, is directed against the order dated 26 th February 2010, passed by the learned CIT(A), in the ITA No. 1245 and 2432/Ahd/2010 Assessment year: 2007 -08 matter of assessment under section 143(3)of the Income Tax Act, 1961, for the assessment year 207-08. The short issue that we are required to adjudicate in this appeal is whether or not the learned CIT(A) was justified in upholding in denial of exemption under section 54in respect of the cost of improvement, in the new house property, aggregating to Rs 15,48,773.
- The relevant material facts are like this. The assessee before us is a retired salaried employee. During the relevant previous year, the assessee sold his house property at “5, Government Servants’Society, Ahmedabad” for a consideration of Rs 1,50,86,452, and, after deducting indexed cost of acquisition which worked out to Rs 52,09,597 from sale proceeds, the assessee earned capital gains of Rs 98,76,855. Thereafter the assessee purchased another property at “20, Golden Tulip Co operative Housi ng Society, Ahmedabad” for Rs 71,94,570, and claimed to have spent on another Rs 15,48,773 on its improvement. However, in the course of the assessment proceedings, the Assessing Officer took the stand that the cost of improvement’ is to be allowed as a deduction in the hands of the transferor and not in the hands of the transferee. Accordingly, the Assessing Officer required the assessee to show cause as to why deduction claimed for cost of improvement not be disallowed. It was submitted by the assessee that “the cost of improvement, as per section 55(1)(b), in any other case, means all the expenditure of capital nature incurred in making any addition or alteration to the capital asset by the assessee, after it becomes his property”. This submission, as also other elaborate arguments made by the assessee, did not impress the Assessing Officer. He noted that the assessee has purchased a ready made property, that since the assessee had sold his house in August 2006, whereas the new property was purchased in May 2006, these facts donot indicate that the house was not in a livable condition at the point of time of purchase. The Assessing Officer further noted that the expenses were claimed to have been ITA No. 1245 and 2432/Ahd/2010 Assessment year: 2007 -08 incurred by the assessee till 31 st March 2007, i.e. much after purchasing the house. On the strength of these observations, the Assessing Officer rejected assessee’s claim for the cost of improvement in the new house property being taken into account for computation of Section 54benefit. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) noted that the assessee had sold his house in August 2006 and since the assessee had incurred expenses of only Rs 25,315 till August 2006, it could not be believed that t he entire expenditure of Rs 15,48,773 was made to make the new house property inhabitable. Learned CIT(A) thus upheld the action of the Assessing Officer and declined to interfere in the matter. The assessee is not satisfied and is in further appeal before us.
- We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case in the light of applicable legal position.
- We have noticed that while the authorities below have laid lot of emphasis on the fact that as the original house property was sold by the assessee in August 2006, it cannot be believed that new house property was not habitable till September 2007. This observations proceeds on the assumption that on sale of old house property, assessee ha d to essentially shift in the new house. However, this overlooks the uncontroverted fact that the assessee had, during the period August 2006 to June 2007, lived in a residential unit leased from one Shri Atul Verma. All the lease rental payments were made by cheque and a copy of the lease agreement, evidencing this arrangement, was also placed before us in the paperbook at pages 26 to 33. A copy of the brokerage note, in connection with the said lease agreement, was also placed on record before us. Learned Departmental Representative could not point out any errors or inconsistencies in this material. In this view of the matter, the very foundation of assumption by the authorities below to the effect that the new house property was habitable, at the point of time when it was purchased, is unsustainable. It is also important to bear in mind the fact ITA No. 1245 and 2432/Ahd/2010 Assessment year: 2007 -08 that merely because a person has moved into the new property does not mean that the construction work is complete. One can, after all, move in a new property even when work is partly complete, and it does happen in the real life. We also find that Section 54(1)of the Act, provides that , ” subject to the provisions of sub-section (2), where in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head “Income from house property” (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, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say, – (i) If the amount of the capital gain is greater than the cost of the residential house so purchased or constructed (hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or (ii) If the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain.” In our considered view, the cost of purchases does include any capital expenditure incurred on the assessee on such property to make it liveable. As long as the costs are of such a nature as would be includible in the cost of construction in the normal course, even if the assessee has bought a readymade unit and incurred those costs after so purchasing the readymade unit – as per his taste and requirements, the costs so incurred will form integral part of the qualifying amount of investment in the house property. The use of words ‘purchased or construed’ does not mean that the property can either be purchased or ITA No. 1245 and 2432/Ahd/2010 Assessment year: 2007 -08 constructed and not a combination of both the actions. A property may have been purchased as a readymade unit but that does not restricts the buyer from incurring any bonafide construction expenditure on improvisation or supplementary work. Accordingly, in our considered view, as long as the assessee has incurred the bonafide construction expenditure, even after purchasing the unit, the additional expenses so incurred would be eligible for qualifying investment under Section 54. However, as the relevant factual verifications have not been carried out by any of the authorities below, we deem it fit and proper to restore the matter to the file of the Assessing Officer for fresh adjudication in the light of our above observations, in accordance with the law and by way of a speaking order, after giving yet another opportunity of hearing to the assessee. We order so.
- For the reasons set out above, the matter stands restored to the file of the Assessing Officer, and, to that extent, quantum appeal is allowed for statistical purposes in the terms indicated above.
- To the above extent, the order dated 7 th October 2012 stands modified. Pronounced in the open court today on 28 th day of June, 2013.
(Kul Bharat ) (Pramod Kumar)
Judicial Member Accountant Member
Ahmedabad: 28 th day of June 2013.
Copy forwarded to :
- The appellant
- The respondent
- Commissioner , Ahmedabad
- Departmental Representative, bench, Ahmedabad
- Guard File
By Order etc.