2014 (4) TMI 774 - AT - Income Tax

Disallowing the exemption claimed u/s 54 of the Act - Rent from property and capital gains from sale of residential house - Held that - The decision in Shri M.V. Subramanyeswara Reddy (HUF), Hyderabad 2014 (4) TMI 71 - ITAT HYDERABAD followed The intention of the parties when the development agreement was entered into and the municipal permissions were obtained, which determine the nature of the property sought to be acquired, and subsequent change in the user of the property does not disentitle the assessee to relief under S.54 of the Act - Even though the property was subsequently leased out to M/s. APP Lab Technology P Ltd, and it has been used for non- residential purposes, the deduction u/s 54F cannot be denied - Mere nonresidential use subsequently would not render the property ineligible for benefit u/s 54F, if it is otherwise a residential property, as held in Mahavir Prasad Gupta Vs JCIT 2005 (10) TMI 231 - ITAT DELHI-G - The Revenue authorities are not justified in denying the assessee the benefit of relief u/s 54 of the Act thus, the order of the CIT(A) set aside and the AO is directed for fresh examination and grant relief u/s 54 of the Act Decided in favour of Assessee.

Summary

Issues:
Claim of exemption under Section 54 of the Income Tax Act for capital gains from sale of property.

Analysis:
The appellant contested the Commissioner's decision to disallow the exemption claimed under Section 54 for Rs. 22,73,732. The appellant inherited a property and reinvested the sale proceeds in a commercial property, claiming it was for residential use. The Assessing Officer denied the exemption, citing the property's commercial usage and deviation from the approved plan. The CIT(A) upheld the denial, emphasizing the property's commercial nature and the developer's intention. The appellant argued that the property acquired was residential initially, supporting their claim with legal precedents. The Departmental Representative supported the Revenue's decision, highlighting the property's commercial status. The Tribunal considered the original intent of the property's development and municipal permissions, concluding that subsequent commercial use does not negate its residential nature. Citing a similar case, the Tribunal overturned the CIT(A)'s decision, directing the Assessing Officer to reevaluate and grant relief under Section 54, subject to conditions.

This judgment clarifies that the nature of the property acquired, as intended during development and municipal approvals, determines eligibility for exemption under Section 54. Despite subsequent commercial use, if the property was originally residential, relief under Section 54 should be granted. The Tribunal emphasized the importance of the property's initial purpose and legal documentation in determining eligibility for tax exemptions.