2012 (7) TMI 718 - AT - Income Tax

Deduction / exemption u/s 54 or 54F - recognition of partition of HUF - conditions regarding transfer of capital asset by an Individual or a HUF - held that - it is established that all the parties mentioned in the sale deed had become joint owners of the residential property. - There is no prohibition for oral partitions in the eye of law and they are valid. - the members of the HUFS were holding the property as co-owners in their individual capacity and not in the status of HUF. - AO has erred to hold that the conditions regarding transfer of residential building and land appurtenant thereto prescribed in section 54 of the Act in order to avail exemption is not fulfilled. - Decided in favor of assessee. Large portion of area being land - Whether the asset was residential house with land appurtenant thereto or predominantly land - held that - Though the Government had allotted 3.85 Acres of land to the assessee s Great Grand Father, the land falls in the residential zone wherein construction is possible for a restricted area of residential building. The assessee s Great Grand Father had utilized the entire permissible area available for construction, for constructing the residential house. In such circumstances, it is obvious that the nomenclature of the asset predominantly falls in the category of residential building though large extend of the premises consist of land. - Decided in favor of assessee. The earnest effort taken up by the co-owners and the probable joint developers to convert the property into a commercial property cannot be construed to hold that the property is converted as a commercial property.

Summary

Issues Involved:
1. Disallowance under section 54 of the Income Tax Act.
2. Applicability of section 54F of the Income Tax Act.
3. Ownership and nature of the property.
4. Classification of land as appurtenant to a residential building.
5. Treatment of the property as a commercial asset.

Detailed Analysis:

1. Disallowance under section 54 of the Income Tax Act:
The assessee claimed an exemption under section 54 for Rs.1,00,00,000/- on the transfer of a property. The Assessing Officer (AO) disallowed this claim on three grounds:
- The property belonged to the estate of Late Shri Prabhashankar Patani and not the assessee.
- The property was predominantly land and not a residential house.
- The property had been converted to a commercial asset.

2. Applicability of section 54F of the Income Tax Act:
The Commissioner of Income Tax (Appeals) [CIT(A)] did not address the applicability of section 54F in detail. The assessee argued that the property was a residential house and should qualify for exemption under section 54. The CIT(A) partially agreed with the assessee but upheld the AO's decision on certain grounds.

3. Ownership and nature of the property:
The AO argued that the property was part of the estate of Late Shri Prabhashankar Patani and not individually owned by the assessee. However, the Tribunal found that the property had been orally partitioned among the heirs, making the assessee a co-owner of the property in her individual capacity. The Tribunal noted that oral partitions are legally valid and recognized by the revenue.

4. Classification of land as appurtenant to a residential building:
The AO contended that the property was predominantly land and not a residential house with land appurtenant thereto. The Tribunal disagreed, stating that the property, located in the Lutyen's Bungalows Zone, had stringent construction restrictions, making the large land area integral to the residential building. The Tribunal cited the Andhra Pradesh High Court's decision in CIT Vs Zaibunnisa Begum, which emphasized that "land appurtenant" should be understood in a broad, non-technical sense.

5. Treatment of the property as a commercial asset:
The AO argued that the property had been converted to a commercial asset based on a letter from The Indian Hotels Co. Ltd., which indicated an interest in joint development for a hotel. The Tribunal found that the joint development plan did not materialize due to regulatory restrictions, and the property remained a residential house. The Tribunal concluded that the property had always been residential, and the efforts to convert it to commercial use did not succeed.

Conclusion:
The Tribunal held that the assessee was entitled to claim the exemption under section 54 of the Income Tax Act, as the conditions regarding ownership and the nature of the property as a residential house with land appurtenant thereto were fulfilled. The appeal of the assessee was allowed, and the appeal of the revenue was dismissed. The Tribunal emphasized that the property remained residential and was not converted to a commercial asset. The decision was pronounced in the open court on 08-06-2012.