2014 (1) TMI 601 - AT - Income Tax

Eligibility for exemption u/s 54EC - taxability of advance - Held that - Under section 2(47)(v), if the possession was handed over as part performance of the agreement, then, there is a transfer within the meaning of section 2(47) of the Income-tax Act, even though there may not be a transfer under the common law - The assessee, by her letter dated 26-12-2008 admits that as on 31-03-2006 she was the owner of the property - It is clear that the possession was not handed over on 01-02-2006 and it was handed over only on 16-06-2006 - The transfer of property took place only in the assessment year 2007-08 and not in 2006-07 Since it was an advance relatable to the capital asset it was not taken as income - This advance shall be adjusted when the property would be transferred and the capital gain computed - The advance could be adjusted against the purchase price when the transfer of the property is taken place, i.e. in the year under consideration. Section 54EC provides for exemption in respect of capital gain arising from transfer of a long term capital asset if the same was invested at any time within a period of six months after the date of transfer of the capital asset - The investment of Rs.20 lakhs was made in the financial year 2006-07, i.e. before the date of transfer - The lower authorities have rightly found that the assessee is not entitled for exemption u/s 54EC of the Act - Decided against assessee. Improvement cost - Held that - The power of the CIT(A) is co-terminus with that of the assessing officer, therefore, the powers exercisable by the assessing officer can also be exercised by the CIT(A) - The CIT(A) restricted the cost of improvement to Rs.5 lakhs instead of Rs.10 lakhs allowed by the assessing officer - When the income of the assessee is increased, he has to give a notice of enhancement and seek the comments / response from the assessee as required u/s 251(2) of the Income-tax Act - The Tribunal is of the considered opinion that the CIT(A) is not justified in increasing the income by restricting the cost of improvement without issuing a notice of enhancement. However, this is a rectifiable defect - The issue is set aside for fresh adjudication.

Summary

Issues:
1. Assessment of capital gain.
2. Disallowance of improvement made by the assessee.

Analysis:

Assessment of Capital Gain:
The appeal pertains to the assessment of capital gain for the assessment year 2007-08. The primary contention of the assessee was related to the timing of the property transfer and the associated capital gain exemption claimed under section 54EC of the Income-tax Act. The assessee claimed that possession of the property was handed over on 01-02-2006, making the transfer applicable for the assessment year 2006-07. However, the assessing officer disallowed the exemption for Rs.20 lakhs, stating that possession was taken by the purchaser only on 16-06-2006, during the year under consideration. The tribunal analyzed the agreement between the parties and found that possession was indeed handed over after the agreement date, contradicting the assessee's claim. The tribunal upheld the assessing officer's decision, confirming that the transfer of property occurred in the assessment year 2007-08. Additionally, the tribunal examined the advance received by the assessee on 24-02-2006, clarifying that it was not treated as income but would be adjusted against the purchase price upon property transfer.

Disallowance of Improvement:
The second issue raised in the appeal concerned the disallowance of improvement costs claimed by the assessee. The assessing officer had allowed a portion of the improvement costs but disallowed the rest. On appeal, the CIT(A) further restricted the allowable cost without issuing a notice for enhancement, as required under section 251(2) of the Act. The tribunal noted that while the CIT(A) has the authority to restrict costs, any increase in income should be accompanied by a notice of enhancement to the assessee. As the CIT(A) did not follow this procedure, the tribunal set aside the order and remanded the issue back to the CIT(A) for proper consideration. The CIT(A) was directed to issue a notice of enhancement to the assessee and decide the matter in accordance with the law.

In conclusion, the tribunal partly allowed the appeal for statistical purposes, addressing both the assessment of capital gain and the disallowance of improvement costs. The judgment emphasized adherence to procedural requirements and proper application of relevant provisions under the Income-tax Act.