IT : Building under construction cannot be considered as an existing residential house on date of transfer of original asset for purpose of section 54F
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[2013] 35 taxmann.com 547 (Cochin - Trib.)
IN THE ITAT COCHIN BENCH
Geroge Dominic
v.
Assistant Commissioner of Income-tax, Circle - 3(1)*
N.R.S. GANESAN, JUDICIAL MEMBER
AND B.R. BASKARAN, ACCOUNTANT MEMBER
AND B.R. BASKARAN, ACCOUNTANT MEMBER
IT APPEAL NO. 176 (COCH.) OF 2012
[ASSESSMENT YEAR 2007-08]
[ASSESSMENT YEAR 2007-08]
APRIL 26, 2013
Section 54F of the Income-tax Act, 1961 - Capital gains - Exemption of, in case of investment in residential house [Conditions precedent] - Assessment year 2007-08 - Assessee claimed deduction under section 54F in respect of a flat booked - Admittedly, assessee had also constructed another residential house at place 'K' within three years from date of transfer of original asset, on which long-term capital gain arose - Assessee claimed that construction of said house commenced before transfer of original asset and, therefore, same should be considered as an existing residential asset on date of transfer of original asset - Whether word 'constructs' in clause (iii) of section 54F(1) denotes completion of construction and for that purpose, date of commencement of construction is irrelevant - Held, yes - Whether, thus, there was a clear violation of one of conditions prescribed in proviso to section 54F(1) and it disentitled assessee from claiming deduction under section 54F in respect of flat booked - Held, yes [Paras 11 and 12] [In favour of revenue]
Section 2(1A) of the Income-tax Act, 1961 - Agricultural income [Estimation of income] - Assessment year 2007-08 - Assessee declared certain agricultural income - Expenses claimed by assessee worked out to 40 per cent of gross receipts - Assessing Officer noticed that another assessee, who was also closely related to assessee, had claimed expenditure to tune of 77 per cent of gross receipts - He took view that assessee had considerably reduced expenditure in order to boost up agricultural income - Hence, he estimated expenses at rate of 60 per cent of gross receipts and, determined net agricultural income at lesser amount and treated difference as income from undisclosed sources - Whether natural justice called for providing necessary opportunity of being heard to assessee in order to explain his case before taking any adverse decision against him - Held, yes [Paras 14 and 15] [Matter remanded]
Words and Phrases: Word 'Constructs' as occurring in clause (iii) of section 54F(1) of the Income-tax Act, 1961
FACTS
Facts
| ■ | The assessee sold a land. While computing the capital gain, the assessee claimed deduction under section 54F in respect of a flat booked with JC. | |
| ■ | The Assessing Officer noticed that the assessee had also constructed another residential building at place 'K' and the construction of the same was not completed by 31-3-2007. The assessee also submitted that he occupied that above said building only in May, 2009. The Assessing Officer held that by constructing another residential building at 'K' within three years from the date of transfer of original asset, on which the long-term capital gain arose, the assessee had violated condition put by proviso to section 54F and, therefore, he was not entitled to deduction under section 54F. | |
| ■ | On appeal, the Commissioner (Appeals) upheld the view taken by the Assessing Officer. |
Assessee's argument
| ■ | Construction of building at 'K' started before sale of land in question and, therefore, though the assessee occupied the said building only in March, 2009, the same should be considered as an existing residential asset on the date of transfer of original asset. |
Issue involved
| ■ | Whether for purpose of section 54F, building under construction can be considered as an existing residential house on the date of transfer of the original asset? |
HELD
| ■ | The provisions of section 54F permit the assessee to own one residential house on the date of transfer of the original asset. In order to avail deduction under section 54F, he should purchase or construct a new residential house within the period prescribed in section 54F. In the instant case, it was an admitted fact that the construction of the building located at 'K' was in progress on the date of transfer of the original asset and the assessee could occupy it only in March, 2009. The residential building under construction cannot be considered as 'a residential house', since a residential house should be capable of residing therein. Accordingly, it cannot be said that the assessee owned a residential house, i.e., the building under construction at 'K' on the date of transfer of the land. [Para 11] | |
| ■ | The words 'constructs any residential house' contemplate 'completion' of construction. Only upon completion of the construction of the building, it acquires the status of a 'residential house', since it becomes capable of residing therein. This view is reinforced on reading clause (b) of section 54F(1), which states that the income from such residential house is chargeable under the head 'income from house property'. The income from a residential house can be charged to income-tax under the head 'Income from house property' only upon completion of the construction. Since importance is given to the completion of construction, the commencement of construction is not material or relevant here. [Para 12] | |
| ■ | In the instant case, the assessee has claimed deduction under section 54F in respect of the flat booked with JC. The construction of the residential building located at 'K' was completed within three years from the date of transfer of the original asset. Hence, there is a clear violation of one of the conditions prescribed in the proviso to section 54F(1) and it disentitles the assessee from claiming deduction under section 54F in respect of the flat booked with JC. Accordingly, there is no infirmity in the decision of Commissioner (Appeals) in rejecting the claim made under section 54F. [Para 13] |
P.K. Sasidharan for the Appellant. Smt. S. Vijayaprabha for the Respondent.
ORDER
B.R. Baskaran, Accountant Member - The appeal filed by the assessee is directed against the order dated 31-05-2012 passed by the Ld. CIT(A)-II, Kochi and it relates to the assessment year 2007-08.
2. The grounds urged by the assessee give rise to the following two issues:-
| (a) | Whether the Ld. CIT(A) is justified in holding that the assessee is not entitled for deduction u/s. 54F of the Act. | |
| (b) | Whether the Ld CIT(A) is justified in confirming the reduction of agricultural income and consequent assessment of such reduction as income under the head "income from other sources". |
3. The facts relating to both the issues are stated in brief. During the year under consideration, the assessee, along with other co-owners, sold a land and received a sum of Rs.1,85,06,635/- as his share in the sale consideration. In consonance with the provisions of sec. 54F of the Act, we shall also refer the land sold by the assessee as "original asset". While computing the capital gain, the assessee claimed deduction u/s. 54F of the Act in respect of a flat acquired from M/s. JGT Constructions. The Assessing Officer noticed that the assessee has also constructed another residential building at a place called "Kadavanthara" and the construction of the same was not completed by 31-03-2007. The assessee also submitted that he occupied the above said building only in May, 2009. The assessing officer noticed that the proviso to section 54F puts a condition that the assessee should not purchase any other residential house within the period of one year after the date of transfer of original asset or construct any other residential house within a period of three years after the date of transfer of original asset and violation of the said condition disentitles the assessee from claiming deduction u/s 54F of the Act. Accordingly, the Assessing Officer held that the assessee has violated the above said condition by constructing a residential building at Kadavanthara within three years from the date of transfer of original asset, on which the long term capital gain arose. Accordingly, he rejected the claim of deduction u/s. 54F of the Act. The Ld. CIT(A) also upheld the view taken by the assessing officer. The next issue relates to the reduction of agricultural income declared by the assessee. The assessee had declared the agricultural income for the year under consideration as under:-
| Gross receipts | 13,31,668 | |
| Less:- Expenses | 5,45,386 | |
| Net Agricultural income | 7,86,282 |
The expenses claimed by the assessee worked out to 40% of the Gross receipts. The assessing officer noticed that another assessee named Sri Jose Dominic, who is also closely related to the assessee herein, had claimed expenditure to the tune of 77% of the Gross receipts. Accordingly, the AO took the view that the assessee herein is in the process of Capital building and hence the assessee has considerably reduced the expenditure in order to boost up the agricultural income. Hence, the assessing officer estimated the expenses @ 60% of the gross receipts and accordingly determined the net agricultural income at Rs.5,32,667/-. The difference between the agricultural income declared by the assessee and that quantified by the assessing officer, which amounted to Rs.2,53,615/-, was treated as income derived from undisclosed sources. The Ld CIT(A) also confirmed the same. Aggrieved, the assessee has filed this appeal before us.
4. We have heard the rival contentions on the first issue and carefully perused the record. It relates to the eligibility of the assessee to avail deduction u/s 54F of the Act in respect of the flat acquired from M/s JGT Constructions. The doubt arises in view of construction of another residential house at "Kadavanthara".
5. Before us, the Ld A.R contended that the provisions of sec. 54F permits owning of two residential houses, viz., one house existing on the date of transfer of original asset and another house on which the deduction u/s 54F is claimed. He submitted that the permit for construction of Kadavanthara Building was given in December, 2005 and the construction was started without much delay. Though the assessee occupied the said building only in March, 2009, the same should be considered as an existing residential asset on the date of transfer of original asset. The Ld A.R further submitted that the provisions of sec. 54F should be given harmonious construction and accordingly, contended that the assessee is eligible to claim deduction u/s 54F of the Act in respect of flat purchased from M/s JGT Constructions.
6. On the contrary, the Ld D.R submitted that the assessee did not possess any residential house on the date of transfer of the land. Only thereafter, the assessee has purchased a flat from M/s JGT Constructions and claimed deduction u/s 54F of the Act. The assessee also completed the construction of the building located at Kadavanthara within three years after the date of transfer of original asset. Hence the assessee has violated the condition prescribed in the proviso to sec. 54F of the Act by constructing another residential building within three years of transfer of original asset.
7. In the rejoinder, the Ld A.R submitted that the words "constructs any residential house" used in the proviso have not been defined in the Act. Accordingly, the Ld A.R submitted that the said condition shall be attracted only if the construction of any residential building is commenced after the transfer of the original asset and completed within three years from the date of transfer of the original asset. The Ld A.R submitted that the construction of the building located at Kadavanthara was commenced before the date of transfer of land and major portion thereof was also completed by that date. Accordingly, the Ld A.R contended that the condition prescribed in the proviso shall not apply to the facts and circumstances of the instant case.
8. We have heard the rival contentions and perused the record. The undisputed fact remains that the commencement of the residential building located at Kadavanthara was commenced prior to the date of transfer of original asset, on which capital gain arose. The date of completion of the said building was not brought on record, but the assessee has admitted that he occupied the said building in March, 2009. Hence, there is no dispute with regard to the fact that the construction of the building located at Kadavanthara was completed within three years from the date of transfer of the original asset. The assessee also purchased a flat constructed by M/s JGT constructions, in respect of which the assessee has claimed exemption u/s 54F of the Act.
9. The dispute arises because of the conditions prescribed in the proviso to sec. 54F of the Act, which states that the deduction prescribed under sub. sec. (1) of sec. 54F cannot availed where-
| (a) | the assessee,-- |
| (i) | owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or | |
| (ii) | purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or | |
| (iii) | constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and | |
| (b) | the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head "Income from house property". |
10. There should not be any dispute that the residential building constructed at Kadavanthara is chargeable under the head "Income from house property". The dispute between the parties is with regard to the interpretation of clause (iii) stated above. According to the revenue, the word "constructs" denote completion of construction and for that purpose, the date of commencement of construction is irrelevant. However, according to the assessee, the construction should have commenced after the date of transfer of the original asset and should have been completed within three years thereof.
11. Let us first examine whether the residential building constructed at Kadavanthara can be considered as an existing residential house on the date of transfer of the original asset, since the provisions of sec. 54F of the Act permits the assessee to own one residential house on the date of transfer of the original asset. In order to avail deduction u/s 54F of the Act, he should purchase or construct a new residential house within the period in sec. 54F of the Act. In the instant case, it is an admitted fact that the construction of the building located at Kadavanthara was in progress on the date of transfer of the original asset and the assessee could occupy it only in March, 2009. In our considered view, the residential building under construction cannot be considered as "a residential house", since a residential house should be capable of residing therein. Accordingly, in our view, it cannot be said that the assessee owned a residential house, i.e., the building under construction at Kadavanthara, on the date of transfer of the land. Accordingly, we reject the contentions raised in this regard by the assessee.
12. Now we shall examine the dispute relating to the interpretation of the words "constructs any residential house" used in clause (iii), referred above. On a careful perusal of the relevant provisions, we are of the view that the words "constructs any residential house" contemplate 'completion' of construction. Only upon completion of the construction of the building, it acquires the status of a "residential house", since it becomes capable of residing therein. Our view is reinforced on reading clause (b) extracted supra, which states that the income from such residential house is chargeable under the head Income from house property. The income from a residential house can be charged to income tax under the head "Income from house property" only upon completion of the construction. Since importance is given to the completion of construction, in our view, the commencement of construction is not material or relevant here. Accordingly, we reject the contentions raised by the assessee on this point also.
13. In the instant case, the assessee has claimed deduction u/s 54F of the Act in respect of the flat booked with M/s JGT Constructions. The construction of the residential building located at Kadavanthara was completed within three years from the date of transfer of the original asset. Hence there is a clear violation of one of the conditions prescribed in the proviso to sec. 54F(1) and it disentitles the assessee from claiming deduction u/s 54F of the Act in respect of the flat booked with M/s JGT Constructions. Accordingly, we do not find any infirmity in the decision of Ld CIT(A) in rejecting the claim made u/s 54F of the Act.
14. The next issue relates to the assessment of part of agricultural income as income under the head "Income from other sources". The Ld A.R submitted that the assessee owns 15 acres of agricultural land, which includes rubber estate. He further submitted that the expenditure incurred in a rubber estate would depend upon various factors like location, the age of tree, type of rubber trees, quality of field latex etc. Accordingly, he submitted that the expenditure claimed in any other comparable case cannot be considered to examine the expenses claimed by the assessee, unless parity of facts are established. He further submitted that the assessing officer has determined the expenses @ 60% of gross receipts in the place of 40% claimed by the assessee, without any basis. He further submitted that the assessing officer has made the estimate arbitrarily without calling for any explanation from the assessee. On the contrary, the Ld D.R submitted that the assessee could not contradict the findings given by the assessing officer by bringing any material on record. Accordingly, the Ld D.R strongly placed reliance on the order of Ld CIT(A) on this issue.
15. We have heard the rival contentions on this issue and perused the record. Admittedly, the AO did not discuss about the explanations, if any, called for from the assessee with regard to the claim of low expenses. The natural justice calls for providing necessary opportunity of being heard to the assessee in order to explain his case before taking any adverse decision against the assessee. It was not shown to us that the assessee was given an opportunity by the assessing officer with regard to this issue. Accordingly, in our view, the assessee should be given necessary opportunity in this regard. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore the same to the file of the assessing officer with the direction to examine the issue afresh by providing necessary opportunity of being heard to the assessee and thereafter decide the issue in accordance with the law.
16. In the result, the appeal filed by the assessee is treated as partly allowed for statistical purposes.
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