2013 (1) TMI 568 - AT - Income Tax

Exemption u/s. 54F - disallowance of claim as the advances were paid for the purpose of construction only after 31.07.2008 i.e., after the due date of filing the return - Any portion of the sale consideration was not deposited in the capital gain scheme account as mandated by sec. 54 within the stipulated time - Held that - Admittedly, in this case the assessee purchased a property measuring 17 acres 47 cents along with the building for a consideration of Rs. 2.25 crores and also incurred expenditure of Rs. 21,37,800 towards registration charges. The assessee also claimed expenditure of Rs. 27,03,100 towards settling the claims of two persons viz., Sri J. Subramanyam Naidu and B.C. Reddappa Reddy. The fact of purchasing the above property cannot be disputed. This property was purchased through the High Court order from Official Liquidator. As DR produced a letter that the vital documents filed by the assessee are not available in the assessment folder. To that extent there is a contradiction between the AO and the CIT(A) s order. These facts are to be examined. As the expression residential house used in section 54F has not been defined in the Income-tax Act. The popular meaning of the word house is a place or a building used for habitation of persons. Since a house is called residential house with reference to the purpose of its users, it may not be necessary that somebody should live in it continuously. It is enough if it was a house for residence. A farmhouse is also a residential house. Thus if the evidence brought on record by the assessee to show that there was a dwelling unit in the present property and the investment has been made by the assessee for construction or remodelling of the existing building as stipulated herein below the claim of the assessee has to be allowed - claim of the assessee cannot be rejected on any superficial ground that the assessee had not made investment within the time stipulated and the building constructed by the assessee is not a residential house - remit the issue back to the file of the AO who will examine the issue afresh in the light of the evidence brought on record by the assessee - Also the amount incurred by the assessee towards settling certain claims at Rs. 27,03,100 cannot be considered for deduction u/s. 54F as the new property acquired by the assessee is through the High Court order from Official Liquidator and thud unable to see any reason to incur such an amount - in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Disallowance of deduction for expenditure incurred on property improvements.
2. Disallowance of deduction for settlement expenses.
3. Rejection of deduction claim under Section 54F.
4. Non-utilization of sale consideration within the meaning of Section 54F.
5. Investment in land for residential purposes not in accordance with Section 54F.
6. Expenses incurred after the due date for construction of a residential house.
7. Unutilized portion of sale proceeds and its assessment as income.

Detailed Analysis:

1. Disallowance of Deduction for Expenditure Incurred on Property Improvements:
The assessee claimed an expenditure of Rs. 7,00,000 for property improvements in the financial year 2004-05. However, the Assessing Officer disallowed this claim due to the lack of proof or evidence. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance, and no ground was raised against it before the CIT(A). The Income Tax Appellate Tribunal (ITAT) noted that since no details of expenditure were provided and the issue was not raised before the CIT(A), this ground should not be allowed.

2. Disallowance of Deduction for Settlement Expenses:
The assessee claimed Rs. 27,03,100 as settlement expenses paid to two individuals due to disputes over the property title. The Assessing Officer and CIT(A) rejected this claim, noting that the sale deed from the Official Liquidator indicated clear title and possession, negating the need for such a settlement. The ITAT concurred, stating that the payment towards settling claims could not be considered for deduction under Section 54F, as the new property was acquired through a High Court order.

3. Rejection of Deduction Claim Under Section 54F:
The assessee claimed a capital gain exemption under Section 54F after selling a plot and purchasing another property. The Assessing Officer rejected this claim on several grounds:
- No construction was started on the new land.
- No permission for construction was obtained.
- Expenditure for construction was incurred after the due date.
- Lack of proof for expenditure on improvements and settlements.

The CIT(A) upheld the Assessing Officer's decision, emphasizing that the land purchased was initially a mill land, and no new residential construction was undertaken. The ITAT noted that the term "residential house" is not defined in the Income Tax Act and should be interpreted liberally. The ITAT remitted the issue back to the Assessing Officer for re-examination in light of the evidence provided by the assessee.

4. Non-Utilization of Sale Consideration Within the Meaning of Section 54F:
The CIT(A) and the Assessing Officer noted that the assessee did not utilize the sale consideration within the stipulated time for acquiring a residential property, as required under Section 54F. The ITAT observed that the entire amount of capital gain was invested within the due date for filing the return, and the claim should not be rejected on superficial grounds.

5. Investment in Land for Residential Purposes Not in Accordance with Section 54F:
The CIT(A) and the Assessing Officer found that the investment of Rs. 2,25,00,000 in purchasing land was not in accordance with Section 54F, as it was not for constructing a residential house. The ITAT instructed the Assessing Officer to re-examine the evidence and determine if the investment complied with Section 54F.

6. Expenses Incurred After the Due Date for Construction of a Residential House:
The CIT(A) upheld the disallowance of expenses incurred after the due date for filing the return, as they were not eligible for exemption under Section 54F. The ITAT directed the Assessing Officer to verify the timing and nature of the expenses incurred.

7. Unutilized Portion of Sale Proceeds and Its Assessment as Income:
The CIT(A) and the Assessing Officer noted that the unutilized portion of sale proceeds should be assessed as the assessee's income only after the expiry of the three-year period. The ITAT agreed that the assessment should be based on the utilization of sale proceeds within the stipulated time.

Conclusion:
The ITAT remitted the case back to the Assessing Officer for a fresh examination of the evidence regarding the construction or remodelling of the residential house. The ITAT emphasized a liberal interpretation of Section 54F and clarified that the settlement expenses of Rs. 27,03,100 could not be considered for deduction. The appeal was allowed for statistical purposes.