2015 (6) TMI 674 - AT - Income Tax

Deduction u/s. 54F - CIT(A) allowed the claim - Held that - An analysis of the provisions of section 54F of the Act in the light of the grounds raised by the Revenue in the appeal would show that there is no merit in the grounds raised by the Revenue in its appeal. Section 54F(1) lays down that any capital gain arising from transfer of long term capital asset, not being a residential house, will be allowed exemption, if the assessee has after the date on which the transfer took place, within a period of three years after that date, constructed residential house, the assessee will be entitled to claim deduction, even after the capital gain is invested in construction of a residential house. It cannot be disputed by the Revenue that the payment made by the assessee to the builder is for the purpose of construction of a residential house. It is pertinent to mention that there is no requirement regarding registration and valid title, as a condition for availing exemption u/s. 54F(1). The purport of the section is investment in construction of a property and the fact that provisions of section 54F(1) does not use that expression will not mean money spent for construction of residential property will not be eligible for deduction u/s. 54F of the Act. It is therefore clear that none of the grounds raised by the Revenue in the grounds of appeal has any merit and accordingly the appeal by the Revenue is dismissed. If the money is invested in constructing the residential house, merely because the construction was not complete in all respects and was not in a condition to be occupied within the stipulated period, that cannot be a ground for rejecting the benefit of deduction u/s. 54F to the assessee. The Hon ble Court in the case of Sambandam Udaykumar 2012 (3) TMI 80 - KARNATAKA HIGH COURT observed that the essence of the provisions of section 54F is whether the assessee who received the capital gain has invested in the house. Once if it is demonstrated that the consideration received on transfer has been invested in construction of the residential house, then though the construction is not complete in all respects and as required under law, the assessee should be given the benefit of section 54F. A reading of the aforesaid decision of the Hon ble Karnataka High Court would show that there is no particular stage of completion of construction that is contemplated. It is not in dispute that the later the construction was completed and has occupied the residential house. In such circumstances, we are of the view that no fault can be found with the order of the CIT(Appeals) allowing benefit of deduction u/s. 54F of the Act to the assessee. - Decided against revenue. Interest on borrowed funds utilized for acquisition of property - whether constituted cost of acquisition and same should have been allowed as such while computing the Long Term Capital Gain on sale of property? - Held that - The assessee did not raise the issue with regard to deduction of ₹ 7,82,394 which was interest paid on borrowing claimed as deduction while computing long term capital gain on sale of land. This sum of ₹ 7,82,394 was interest paid on funds that the assessee borrowed to acquire the land. The AO did not allow the said claim for the reason that it could neither be considered as expenditure incurred in connection with transfer nor cost of acquisition nor cost of any improvement thereon. The assessee challenged this part of the order of AO before the CIT(Appeals). The CIT(Appeals) did not adjudicate this issue at all. In the Cross Objection, the submission of the assessee is that the CIT(Appeals) failed to adjudicate this issue.Since the CIT(Appeals) has not adjudicated this issue, we are of the view that it would be just and appropriate to direct the CIT(Appeals) to adjudicate this issue after affording the assessee opportunity of being heard. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Deduction under Section 54F of the Income Tax Act, 1961.
2. Interest on borrowed funds as part of the cost of acquisition for computing Long Term Capital Gain.

Issue-wise Detailed Analysis:

1. Deduction under Section 54F of the Income Tax Act, 1961:

The Revenue challenged the CIT(Appeals) decision allowing the assessee's claim for deduction under Section 54F of the Income Tax Act, 1961. The assessee had claimed a deduction of Rs. 49,27,996 on account of investment in a residential property. The Assessing Officer (AO) disallowed this claim on several grounds, including the timing of the construction agreement, the registration and possession of the property, and the non-deposit of sums under the capital gain account scheme.

The CIT(Appeals) directed the AO to allow the deduction, observing that the requirement for deduction under Section 54F for construction does not include the stipulation that the construction agreement must be within one year of the transfer of the capital asset. The CIT(Appeals) relied on judicial precedents, including the Karnataka High Court's decision in CIT vs. J. R Subramanya Bhat (1987) 165 ITR 571, which supported the assessee's claim.

The Tribunal upheld the CIT(Appeals) decision, stating that Section 54F allows for exemption if the capital gain is invested in constructing a residential house within three years of the transfer. The Tribunal noted that the payments made by the assessee to the builder were for the construction of a residential house and that there is no requirement for registration or valid title as a condition for availing exemption under Section 54F. The Tribunal dismissed the Revenue's appeal, confirming that the assessee's investment in the construction of the property within the stipulated period qualifies for the deduction under Section 54F.

2. Interest on Borrowed Funds as Part of the Cost of Acquisition for Computing Long Term Capital Gain:

The assessee's cross objection concerned the AO's disallowance of Rs. 7,82,394, which was interest paid on borrowed funds used to acquire the property. The AO contended that this interest could not be considered as part of the cost of acquisition or improvement, nor as an expenditure incurred in connection with the transfer. The CIT(Appeals) did not adjudicate this issue.

The Tribunal noted that the CIT(Appeals) failed to address the issue of whether the interest paid on loans borrowed for acquiring the property should be allowed as a deduction while computing the long-term capital gain. The Tribunal directed the CIT(Appeals) to adjudicate this issue after providing the assessee an opportunity to be heard. The Tribunal emphasized that other issues concluded in the previous order or by the Tribunal's order dated 20.03.2015 in ITA No.573/Bang/2012 would remain concluded and not open for scrutiny in the set-aside proceedings before the CIT(Appeals).

Conclusion:

The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross objection for statistical purposes, directing the CIT(Appeals) to adjudicate the issue of interest on borrowed funds as part of the cost of acquisition. The Tribunal confirmed that the assessee's investment in the construction of the property within the stipulated period qualifies for the deduction under Section 54F.