2015 (3) TMI 714 - HC - Income Tax

Reopening of assessment - Whether, the order of the Appellate Tribunal in arriving at the finding that there was sufficient reasons and material to re-open the assessment? - Held that - Insofar as the extracts made in the order of the Tribunal is concerned, it discloses that the assessing authority, before issuing notice under Section 148 of the Act was satisfied that the assessee, while computing indexed cost of acquisition has taken the value as on 01.04.1981 as ₹ 280/- per sq.ft., but as per the Government notification, the value is at ₹ 45 per sq. ft. Therefore, he came to the conclusion that the assessee has taken higher value while working out indexation and therefore, he recorded an opinion that the income chargeable to tax has escaped assessment under Section 147 of the Act. Merely because, he addressed a letter to the Sub-Registrar asking him to furnish the particulars would not lead to the conclusion that on the day he issued notice, he had no material to show that the assessee has over valued the asset. Rightly, the authorities have rejected the said contention and the proceedings initiated is valid and legal and do not suffer from any legal infirmity. Therefore, the first substantial question of law is answered in favour of the revenue and against the assessee. Computation of benefit u/s 54F - Tribunal holding that only the expenses incurred to make the residential house habitable is entitled to benefit under Section 54F but not any additions made to the newly acquired building - Held that - It is not in dispute that the property purchased by the assessee was habitable but had lacked certain amenities. The assessee has spent nearly about ₹ 18 lakhs towards removal of mosaic flooring and laying of marble flooring, alteration of the kitchen, putting up compound wall, protecting the property with grill work and attending to other repairs. Section 54F of the Act provides that if the cost of the new asset, which is to be taken into consideration while determining the capital gain, the words used is cost of new asset and not the consideration for acquisition of the new asset . In law, it is permissible for an assessee to acquire a vacant site and put up a construction thereon and the cost of the new asset would be cost of land plus ( ) cost of construction. On the same analogy, even though he purchased a new asset, which is habitable but which requires additions, alterations, modifications and improvements and if money is spent on those aspects, it becomes the cost of the new asset and therefore, he would be entitled to the benefit of deduction in determining the capital gains. The approach of the authorities that once a habitable asset is acquired, any additions or improvements made on that habitable asset is not eligible for deduction, is contrary to the statutory provisions. The said reasoning is unsustainable. To that extent, the impugned order passed by the Tribunal as well as the Lower authorities require to be set-aside and it is to be held that in arriving at cost of the new asset, ₹ 18 lakhs spent by the assessee for modification, alterations and improvements of the asset acquired is to be taken note of. - Decided in favour of the assessee

Summary

Issues:
1. Interpretation of Section 54F of the Income-tax Act, 1961 regarding expenses eligible for exemption.
2. Validity of re-opening assessment under Section 148 of the Act.

Analysis:

Issue 1: Interpretation of Section 54F regarding expenses eligible for exemption

The appellant appealed against the Tribunal's decision that only expenses incurred to make a residential house habitable are eligible for benefits under Section 54F. The appellant, an individual, had sold a property and invested the proceeds in another property, claiming exemption under Section 54F. The Tribunal rejected the claim for expenses on additions made to the newly acquired building, stating that improvements on a habitable property do not qualify for the exemption. The appellant argued that the expenses for improvements should be considered in calculating the investment cost. The Revenue contended that the property was habitable and any additional expenses did not qualify for deduction under Section 54F. The Court found that the authorities erred in denying the deduction for expenses on modifications and improvements to a habitable asset. The Court ruled in favor of the appellant, holding that such expenses should be included in determining the cost of the new asset for the purpose of calculating capital gains.

Issue 2: Validity of re-opening assessment under Section 148 of the Act

The appellant challenged the validity of re-opening the assessment under Section 148, arguing that the initiation of proceedings lacked jurisdiction. The assessing authority had issued a notice under Section 148 based on discrepancies in the declared income and the market value of the property. The appellant contended that the initiation of proceedings without proper material was unjustified. The Revenue maintained that the notice was valid as the assessing authority had relevant information before issuing it. The Court upheld the validity of the re-opening of assessment, stating that the assessing authority had sufficient grounds to initiate proceedings based on discrepancies in the declared value of the property. The Court ruled in favor of the Revenue on this issue.

In conclusion, the Court allowed the appeal in part, holding that expenses for modifications and improvements to a habitable property are eligible for deduction under Section 54F, while upholding the validity of the assessment re-opening under Section 148 of the Act.