2014 (1) TMI 883 - AT - Income Tax

Recall of appeal Rectification of error apparent on record - Denial of exemption u/s 54 of the Act - Cost of improvement incurred in the new house property Held that - The cost of purchases does include any capital expenditure incurred on the assesse on such property to make it liveable - As long as the costs are of such a nature as would be includible in the cost of construction in the normal course, even if the assessee has bought a readymade unit and incurred those costs after so purchasing the readymade unit as per his taste and requirements, the costs so incurred will form integral part of the qualifying amount of investment in the house property - The use of words purchased or construed does not mean that the property can either be purchased or constructed and not a combination of both the actions - A property may have been purchased as a readymade unit but that does not restricts the buyer from incurring any bonafide construction expenditure on improvisation or supplementary work - As long as the assessee has incurred the bonafide construction expenditure, even after purchasing the unit, the additional expenses so incurred would be eligible for qualifying investment under Section 54 - as the relevant factual verifications have not been carried out by any of the authorities below it would be fit and proper to restore the matter to the Assessing Officer for fresh adjudication Decided in favour of Assessee.

Summary

Issues:
1. Justification of denial of exemption under section 54 for the cost of improvement in a new house property.

Analysis:
The judgment pertains to a recalled matter where the quantum appeal was directed against an order passed by the CIT(A) regarding the assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2007-08. The main issue was whether the denial of exemption under section 54 for the cost of improvement in the new house property amounting to Rs 15,48,773 was justified. The assessee had sold a property and purchased another one, claiming to have spent on its improvement. The Assessing Officer disallowed the deduction for the cost of improvement, stating it should be allowed in the hands of the transferor. The CIT(A) upheld this decision, leading to the appeal before the ITAT.

The authorities below emphasized that since the original house was sold in August 2006, it was assumed that the new house was habitable by September 2007, thereby rejecting the claim for the cost of improvement. However, it was revealed that the assessee had lived in a leased residential unit during this period, indicating that the new house might not have been habitable immediately after purchase. The ITAT highlighted that moving into a new property does not necessarily mean all construction work is complete. Referring to Section 54(1) of the Act, the ITAT concluded that any capital expenditure incurred by the assessee to make the property habitable should be included in the cost of the new asset for the exemption. The ITAT emphasized that even if a property was purchased as a ready-made unit, additional bonafide construction expenditure would qualify as a part of the investment under Section 54.

The ITAT, therefore, set aside the previous decisions and restored the matter to the Assessing Officer for fresh adjudication. The Assessing Officer was directed to conduct factual verifications and provide a speaking order after giving the assessee another opportunity for a hearing. The quantum appeal was allowed for statistical purposes, modifying the previous order. The judgment was pronounced in an open court on June 28, 2013.