2014 (1) TMI 1036 - AT - Income Tax

Deduction u/s 54F - Held that - As per the revenue authorities, the assessee has only carried out renovation/ extension of the existing building - The tax authorities have taken the view that the deposit made in Capital gain account scheme for carrying out renovation/ extension of the existing building is not eligible for deduction u/s 54F, since the said section provides for deduction only for either purchase or construction of a new residential house - The submission of the assessee is that he has put up second floor also, besides carrying out finishing works in the existing building - In support of the said submissions, the assessee has filed copies of building permission granted by the competent authority and also copies of approved floor plans, as additional evidences - The materials furnished before us is in total contradiction to the view entertained by the tax authorities. The submissions made by the assessee are in contradiction to the facts as understood by the tax authorities - The assessee has furnished fresh materials before us in the form of additional evidences to support his contentions - These additional evidences are required to be examined by the AO - In view of the contradiction between the parties with regard to the facts relating to the issue, it also requires to be examined afresh - The issue has been restored for fresh adjudication.

Issues Involved:
1. Denial of deduction under Section 54F of the Income Tax Act.
2. Consideration of expenses towards brokerage.
3. Eligibility of cost of improvement.
4. Utilization of sale proceeds for construction or renovation.
5. Validity of deposit in Capital Gains Account Scheme.
6. Repayment of housing loan from sale proceeds.

Issue-wise Detailed Analysis:

1. Denial of Deduction under Section 54F:
The primary issue revolves around the assessee's claim for deduction under Section 54F of the Income Tax Act. The assessee sold a property and sought to claim a deduction on the capital gains by depositing the sale proceeds in a Capital Gains Account Scheme, intending to use it for renovation and extension of an existing residential house. The Assessing Officer (AO) denied this deduction, stating that Section 54F allows for deductions only for the purchase or construction of a new residential house, not for renovation or extension. The AO's decision was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)], who referenced case laws such as CIT Vs. Pradeep Kumar and Mrs. Meera Jacob Vs. ITO to support the interpretation that Section 54F does not cover alterations or extensions of existing buildings.

2. Consideration of Expenses towards Brokerage:
The assessee incurred Rs.4,81,250/- as brokerage expenses, which was deducted from the sale consideration to compute the net consideration. The AO did not dispute this deduction, and it was accepted as part of the computation of the long-term capital gains.

3. Eligibility of Cost of Improvement:
The AO did not allow the deduction for the cost of improvement claimed by the assessee. The assessee had claimed expenses for improvements made in the financial year 2003-04, but the AO observed that the construction had started in 2001 and was largely completed by 2003. The AO noted that the additional construction and finishing works carried out from December 2007 to April 2010 were not substantial enough to qualify as new construction under Section 54F.

4. Utilization of Sale Proceeds for Construction or Renovation:
The AO observed that the assessee used the sale proceeds for renovation and extension rather than new construction. The assessee's claim that additional construction included a separate residential unit was not substantiated by sufficient evidence. The AO pointed out discrepancies such as the lack of evidence for the commencement and completion dates of the construction, improper application of the deposit as per the Capital Gains Account Scheme, and the absence of tax receipts and original approval from the competent authority.

5. Validity of Deposit in Capital Gains Account Scheme:
The AO questioned the validity of the deposit made in the Capital Gains Account Scheme, noting that it was not conclusively proved that the amount was used for construction purposes. The AO also highlighted that the certificate issued by the bank appeared erroneous and that the deposit was partly used for brokerage payments, which is not permissible under the scheme.

6. Repayment of Housing Loan from Sale Proceeds:
The assessee argued that the repayment of an existing housing loan from the sale proceeds should be eligible for deduction under Section 54F. The AO rejected this claim, and the CIT(A) upheld the decision. The assessee cited the decision of the Mumbai Bench in the case of Ishar Singh Chawla Vs. DCIT to support the claim, but the tax authorities did not accept this argument.

Conclusion:
The Tribunal noted the contradictions between the assessee's submissions and the tax authorities' observations. The assessee provided additional evidence, including building permits and approved plans, which were not examined by the AO. The Tribunal decided to set aside the order of the CIT(A) and remand the case back to the AO for a fresh examination of all issues, including the additional evidence provided by the assessee. The AO was directed to consider all relevant facts and submissions and take an appropriate decision in accordance with the law. The appeal was allowed for statistical purposes, and the judgment was pronounced on 17-01-2014.

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