2008 (8) TMI 598 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessee is entitled to deduction u/s 54 of the Income-tax Act, 1961 for the sale of property.
2. Whether two non-contiguous flats can be considered as one residential unit for the purpose of exemption u/s 54.
3. Whether the property should be treated as a business asset or a long-term capital asset.
4. Determination of the extent of the assessee's share in the property.

Summary of Judgment:

Issue 1: Deduction u/s 54 of the Income-tax Act, 1961
The Assessing Officer (AO) observed that the assessee claimed deduction u/s 54 for the purchase of a house property at Bangalore after selling a property at Vishnu Vila Co-op. Hsg. Soc. Ltd. The AO denied the deduction on the grounds that the assessee owned two properties and had not offered any income under the head 'Income from house property' for either property. The CIT(A) allowed the deduction, but the ITAT reversed this decision, holding that the assessee is not entitled to deduction u/s 54 for the house property at Vishnu Vila.

Issue 2: Non-Contiguous Flats as One Residential Unit
The AO argued that the two properties were in different housing societies, acquired at different times, and sold on different dates, thus they could not be considered as one residential unit. The CIT(A) disagreed, citing the decision of the Hon'ble Allahabad High Court in Shiv Narain Chaudhari, but the ITAT found that the CIT(A) misconstrued this decision. The ITAT held that two separate buildings situated in different localities cannot be regarded as one house, even if used exclusively for residential purposes.

Issue 3: Business Asset vs. Long-Term Capital Asset
The AO treated the property at Vishnu Vila as a business asset and taxed it as short-term capital gain (STCG) u/s 50 of the Income-tax Act. The CIT(A) considered it a long-term capital asset used for residential purposes. The ITAT sided with the AO, stating that the property should be treated as a business asset and taxed accordingly.

Issue 4: Extent of Assessee's Share in the Property
The ITAT directed the AO to verify the extent of the assessee's share in the property at Vishnu Vila and tax the capital gain in that ratio only.

Conclusion:
The ITAT set aside the order of the CIT(A) and restored the order of the AO, denying the exemption u/s 54 and treating the property as a business asset. The appeal filed by the revenue was allowed.