2015 (12) TMI 1665 - AT - Income Tax

Entitlement for deduction u/s. 54 in respect of one house only - Capital gains exemption in case of investment in a residential house property - Held that - The comprehensive reading of circular 1 of 2015 made it clear that the exemption of LTCG is also available if investment made in more than 1 residential house. In view of the judgment in CIT vs. Chand M. Makhija 2013 (12) TMI 1525 - KARNATAKA HIGH COURT and circular 1 of 2015 of CBDT the assessee was not liable for LTCG against flat no.101 and the addition made by the AO which was sustained by the CIT(A) is deleted. Since ground no.1 of appeal has been allowed by us and holding of 2 flat are not to be treated as separate investment for allowing deduction u/s 54 of the Act hence ground no.2 has become infructuous. Addition of amount received on account of alternate accommodation - Held that - CIT(A) while dealing with this addition has held that the assessee has not been able to prove any nexus between the rent received of 15, 50, 000/- and expenses claimed of 6, 36, 280/- and further held that in absence of such nexus the expenses so claimed cannot be allowed however the same was sustained to the extent of 6, 36, 280/-. Assessee drawn our attention to page 11 of the development agreement wherein it has been clearly mentioned that the assessee is entitled to 15, 50, 000/- in temporary alternative accommodation to be acquired by the owners through their own efforts and their own choice. Since this compensation of 15, 50, 000/- has been shown as income under the head Income from other Sources therefore the assessee is entitled for deduction of expenses incurred for earning this income.We accordingly direct the AO to allow the deduction of expenses claimed on account of (i) rent paid 5, 94, 000/- (ii) Brokerage 27, 280/- and (iii) Rent paid brokerage 15, 000/-

Summary

Issues:
1. Treatment of two residential flats as separate investments for deduction u/s.54
2. Discrepancy in the cost of construction for set off against long term capital gain u/s.54
3. Deduction of rent paid, brokerage, etc. against rent received for alternative accommodation
4. Taxability of cash compensation received for alternative accommodation

Analysis:

Issue 1:
The appeal concerned the treatment of two residential flats, flat no. 101 and flat no. 801, as separate investments for the purpose of claiming deduction u/s.54 of the Income-tax Act, 1961. The Assessing Officer (AO) restricted the deduction to one house only, i.e., flat no. 801, leading to a dispute. The appellant argued that the acquisition of two residential houses should be considered within the phrase "residential house" as per relevant legal interpretations. The judgment of the Hon'ble Karnataka High Court in CIT vs. Chand M. Makhija was cited to support the plural interpretation of "a residential house." Additionally, Circular no.1 of 2015 of CBDT clarified that the exemption of Long Term Capital Gain (LTCG) is available even if investment is made in more than one residential house. Consequently, the Tribunal ruled in favor of the assessee, allowing the deduction for both flats.

Issue 2:
Another aspect of the appeal involved a discrepancy in the cost of construction for set off against long term capital gain u/s.54. The AO had calculated the cost of construction for one flat at a lower amount than declared by the assessee, leading to a difference in the computation of LTCG. However, given the decision on Issue 1, where both flats were considered eligible for deduction, this discrepancy became irrelevant, rendering the second ground of appeal infructuous.

Issue 3:
The third issue revolved around the deduction of expenses, including rent paid, brokerage, etc., against the rent received for alternative accommodation. The CIT(A) had sustained a part of the addition made by the AO, citing a lack of nexus between the rent received and the expenses claimed. The Tribunal, upon reviewing the development agreement and the nature of the compensation received, directed the AO to allow the deduction of the claimed expenses, thereby ruling in favor of the assessee.

Issue 4:
Lastly, the appellant contended that the cash compensation received for alternative accommodation should not be considered a revenue receipt and should not be taxable under section 2(24) of the Act. However, this argument was not explicitly addressed in the Tribunal's judgment, as the decision primarily focused on the treatment of residential flats for deduction u/s.54 and the related expenses.

In conclusion, the Tribunal's decision favored the assessee on all grounds, allowing the appeal and directing the AO to make necessary adjustments in line with the rulings provided in the judgment.