2014 (1) TMI 1364 - AT - Income Tax

Denial of deduction u/s 54F of the Act - Compensation received treated as income from undisclosed source Held that - Once the assessee has entered into an agreement for the purchase of space which is specified and the place is also specified then it becomes the right of the assessee and such right is an asset which has a value -The gains arising on the transfer of such asset is liable to be treated only as LTCG - As long as the source of the receipt is not disputed, the same cannot be treated as undisclosed income of the assessee the fact that assessee has received the amount on the transfer of the right vested in him does not bring the receipt under the purview of the head income from other sources , especially when the said receipt falls under the specific head being income from capital gains - Income from other sources is a residuary head - gains derived by the assessee on the transfer of the right to purchase the flat being liable to tax under the capital gains, the assessee would be entitled to benefit of deduction u/s 54F of the Act the order of the CIT(A) set aside and the AO is directed to treat the receipt on the transfer of the right to purchase the flat as LTCG and grant the assessee s benefit of deduction u/s. 54F of the Act Decided in favour of Assessee.

Summary

Issues:
Appeal against order treating compensation as capital gains and denying deduction u/s 54F of the Income Tax Act, 1961.

Analysis:
The appeal was filed against the Commissioner of Income-tax (Appeals) order for the assessment year 2006-07. The issue revolved around the Assessing Officer treating the compensation received as capital gains under "income from undisclosed source" and denying the deduction u/s 54F of the Act. The appellant argued that the compensation was for surrendering the right to purchase a flat, which constituted a capital asset. The appellant had paid an advance for a flat but later canceled the agreement, receiving compensation. The appellant claimed this amount as Long Term Capital Gains (LTCG) and sought deduction u/s 54F for another property. The AO contended that since the flat was not acquired, the amount was not LTCG. The CIT(A) upheld the AO's decision, treating the amount as "income from other sources." The appellant argued that the surrender of the right constituted a transfer as per the Act, making it LTCG eligible for deduction u/s 54F.

The Senior-DR supported the AO and CIT(A) orders, emphasizing that the appellant did not transfer any tangible asset. The Tribunal noted that the appellant had a right to purchase a specific space, which was surrendered for compensation. The right held for over 36 months qualified as an asset, and its transfer constituted LTCG. As the source of the receipt was not disputed, it couldn't be treated as undisclosed income. The Tribunal disagreed with the CIT(A)'s reasoning and ruled in favor of the appellant. The receipt from surrendering the right was to be treated as LTCG, entitling the appellant to deduction u/s 54F. The Tribunal directed the AO to make the necessary adjustments and grant the benefit claimed by the appellant.

In conclusion, the Tribunal allowed the appellant's appeal, reversing the decisions of the AO and CIT(A). The receipt from surrendering the right was deemed as LTCG, and the appellant was granted the deduction u/s 54F as claimed.