2015 (1) TMI 1230 - AT - Income Tax

Disallowance made u/s. 54 - assessee has not invested in purchase/construction of the new asset as stipulated u/s.54 and the construction of the new house started way back in the year 2002-03 - Held that - Relevant provisions of section 54 makes it clear that the capital gain arising from the transfer of long term capital asset being the residential house is eligible for deduction under section 54 to the extent the same is invested or utilized during the specified period for purchase or construction of a residential house. There is however, nothing to show that such a residential house has to be only a new residential house and not a old residential house. Such a residential house is referred to as the new asset in clauses (i) and (ii) of sub-section(1) of section 54 in order to distinguish it from the similar expression a residential house , the transfer of which has given the rise to the capital gain used in the same provisions. What therefore is envisaged in section 54 for claiming deduction is the investment made in purchase or construction of residential house and not new residential house as interpreted by the A.O. As rightly held by the Ld. CIT(A), in this context, although there was an old structure on the plot of the assessee at Jubilee Hills which was demolished and the construction of new house had commenced way back in the year 2002-2003, the date of commencement of construction is not relevant for the purpose of deduction under section 54 and what is relevant is the date of completion of the construction as well as the period of investment made by the assessee in such construction. In this regard, there is no dispute that the amount in question spent by the assessee on construction of the residential house was within the specified period and that the construction of house was completed on 28.06.2010. As such, considering all the facts of the case, we are of the view that the assessee is eligible for deduction under section 54 to the extent allowed by the Ld. CIT(A) in both the years under consideration and we find no justifiable reason to interfere with the impugned orders of the Ld. CIT(A) on this issue. - Decided in favour of assessee

Summary

Issues Involved:
1. Eligibility for deduction under Section 54 of the Income Tax Act for investment in the construction of a residential house.
2. Nature of expenditures incurred and their eligibility for deduction under Section 54.
3. Relevance of the date of commencement of construction for claiming deduction under Section 54.

Detailed Analysis:

1. Eligibility for Deduction under Section 54:
The primary issue was whether the assessee was entitled to claim deduction under Section 54 of the Income Tax Act for investments made in the construction of a residential house. The Revenue argued that the construction of the house had started in 2002-03, prior to the sale of the flats, and therefore, the investment did not qualify as being made in a "new" residential house as required under Section 54. The Tribunal clarified that Section 54 does not mandate the house to be newly constructed; it only requires the capital gains to be invested in the construction or purchase of a residential house within the specified period. The Tribunal upheld the CIT(A)'s decision that the investment made by the assessee was eligible for deduction under Section 54.

2. Nature of Expenditures and Eligibility for Deduction:
The Assessing Officer (A.O.) had disallowed the deduction on the grounds that the expenditures were for providing amenities such as lifts, air conditioners, and furniture, which were not essential to make the house habitable. The CIT(A) examined the nature of the expenditures and allowed deductions for those necessary to make the house habitable, such as electrical fittings, sanitary fittings, and others. However, expenditures on items like marble statues, furniture, and decorative items were disallowed as they were not integral to making the house habitable. The Tribunal agreed with the CIT(A)'s findings and upheld the decision to allow deductions for essential expenditures while disallowing those for decorative purposes.

3. Date of Commencement of Construction:
The Revenue contended that the construction of the house had commenced in 2002-03, which was before the sale of the flats, and hence, the investment should not qualify for deduction under Section 54. The Tribunal noted that Section 54 specifies the period within which the construction should be completed but does not specify when the construction should commence. The Tribunal emphasized that the relevant factor is the completion date of the construction and the period during which the investment was made. Since the construction was completed on 28.06.2010 and the investments were made within the specified period, the Tribunal held that the assessee was eligible for the deduction under Section 54.

Conclusion:
The Tribunal dismissed the Revenue's appeals and upheld the CIT(A)'s orders, allowing the assessee's claim for deduction under Section 54 to the extent of expenditures necessary for making the house habitable and incurred within the specified period. The Tribunal clarified that the date of commencement of construction is not relevant for claiming deduction under Section 54, and the focus should be on the completion date and the period of investment.