2015 (9) TMI 1010 - AT - Income Tax

Revision u/s 263 - CIT-II, Pune directing disallowance of deduction u/s.54F alleging that deduction needs to be allowed on purchase of only one flat and not a house property containing 2 combined flats - Held that - There is no dispute to the fact that the assessee in the instant case has invested her long term capital gain in acquisition of 2 adjacent flats bearing Flat Nos. 13 and 14 in the project Magnolia vide purchase deed dated 17-07- 2008 for a total consideration of ₹ 77,82,600/-. We find the AO, in the body of the assessment order, allowed deduction u/s.54F at ₹ 69,12,528/- being the proportionate deduction u/s.54. While allowing deduction u/s.54F at ₹ 69,12,528/- the AO had also rejected the claim of deduction u/s.54(2) made by the assessee at ₹ 77,82,600/-. A copy of the purchase deed was also before the AO. Therefore, it cannot be said that the AO has not applied his mind on the issue of applicability of deduction u/s.54F on account of 2 adjacent flats. Since at the prevailing time various decisions were available to the proposition that where more than one units are purchased which are adjacent to each other and are converted into one house for the purpose of residence by having common passage, common kitchen etc. then it would be a case of investment in one residential house and consequently the assessee would be entitled to deduction u/s.54F. It is the settled proposition of law that for invoking the jurisdiction u/s.263 the twin conditions namely, the order is erroneous and the order must be prejudicial to the interest of the revenue must be satisfied. In the instant case the order of the AO may be prejudicial to the interest of the revenue but it cannot be said to be erroneous since various judicial decisions support the case of the assessee that the assessee is entitled to deduction u/s.54F in respect of 2 adjacent units - Decided in favour of assessee.

Issues Involved:

1. Eligibility of deduction under Section 54F of the Income Tax Act for investment in two combined flats.
2. Jurisdiction of the Commissioner of Income Tax (CIT) under Section 263 of the Income Tax Act.

Detailed Analysis:

1. Eligibility of Deduction under Section 54F for Investment in Two Combined Flats:

The assessee filed a return of income declaring taxable income of Rs. 72,64,890 for the assessment year 2008-09. During the assessment, the Assessing Officer (AO) noted that the assessee transferred development rights of land and claimed a deduction of Rs. 77,82,600 under Section 54(2) of the Income Tax Act. The AO determined that the deduction should be under Section 54F, not Section 54, as the assessee transferred agricultural land, not a residential house. The AO computed the net capital gain and allowed a proportionate deduction under Section 54F.

The CIT examined the records and observed that the AO allowed the deduction without verifying whether the two flats purchased by the assessee were combined into one residential unit. The CIT issued a notice under Section 263, questioning the deduction for two flats.

The assessee explained that the two flats were combined into one by the previous owners and purchased as a single unit. The CIT, however, was not satisfied, noting that the flats were originally separate and maintained distinct identities in the purchase deed, including two kitchens and entrances. The CIT concluded that the AO's order was erroneous and prejudicial to the revenue's interest, directing the AO to reassess the deduction claim.

2. Jurisdiction of CIT under Section 263:

The assessee appealed against the CIT's order, arguing that the AO had applied his mind and allowed the deduction appropriately. The assessee cited various judicial decisions supporting the claim that combined flats could be considered a single residential unit for deduction purposes.

The Tribunal considered the arguments and found that the AO had indeed applied his mind, as evidenced by the detailed assessment order and the rejection of the initial claim under Section 54. The Tribunal noted that the prevailing judicial decisions at the time supported the view that combined adjacent flats could be treated as one residential house for Section 54F deduction.

The Tribunal referenced the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Devdas Naik, which held that acquisition of two flats, eventually used as a single residential unit, qualified for deduction under Section 54. Additionally, the Tribunal acknowledged the amendment by the Finance (No.2) Act, 2014, which clarified that "one residential house in India" indicated no restriction on combined units before the amendment.

The Tribunal concluded that the AO's view was a possible and reasonable interpretation of the law, and thus, the order was not erroneous. Since the twin conditions for invoking Section 263-error and prejudice to revenue-were not both satisfied, the Tribunal set aside the CIT's order.

Conclusion:

The Tribunal allowed the appeal, ruling that the AO's decision to grant deduction under Section 54F for the combined flats was a possible view supported by judicial precedents. The CIT's invocation of Section 263 was deemed unjustified, as the AO's order was not erroneous despite being potentially prejudicial to the revenue. The assessee's grounds were upheld, and the appeal was allowed.

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