2014 (10) TMI 977 - AT - Income Tax

Capital gain computation - Value of tenancy right determination - deduction of cost of improvement of the residential premises inherited by the assessee against the long term capital gain - FMV determination - Claim towards the cost of new residential property purchased against long term capital gain arising on sale of an old house property - deduction u/s 54 denied - as per assessee he inherited tenancy rights from his father and hence the provisions of section 55(2)(b)(ii) shall apply - as per DR cost of tenancy right should be taken as NIL - Held that - Since the assessee has transferred only his tenancy right, in our view, the assessee cannot consider the cost incurred on construction of the structures as the cost of acquisition of tenancy rights. In our view, the value of tenancy right has to be determined in accordance with the practice adopted in real estate market. The assessee is entitled to adopt fair market value of the tenancy rights as on 1-4-1981 as the cost of acquisition of tenancy rights. However, from the records we notice that neither the assessee nor the A.O. has attempted to ascertain the fair market value of the tenancy rights as on 1-4-1981. Accordingly, we are of the view that the issue relating to the determination of fair market value of the tenancy rights as on 1-4-1981 should be decided afresh at the end of the A.O. Accordingly, we set aside the order of the ld. CIT(A) on this issue and restore the matter to the file of A.O. with a direction to determine the fair market value as on 1-4-1981 Deduction towards the expenditure incurred on construction of any authorized or any unauthorized structure - Held that - From the computation of capital gain made by the assessee, we notice that the assessee has claimed to have spent ₹ 31 lacs for construction of certain structures on 15-12-1988 and claimed indexed cost thereof as deduction against capital gain. In this regard, we inclined to agree with the view taken by the ld. CIT(A) that the assessee has received compensation for surrendering the tenancy rights and not towards surrender or sale of any unauthorized or authorized structure - assessee is not entitled to claim any deduction towards the expenditure incurred on construction of any authorized or any unauthorized structure Disallowance of part of expenditure incurred in connection with the acquisition of new asset - Held that - The assessee is entitled to include the expenditure incurred on the new flat in the cost of the new flat, provided they were incurred within in the prescribed time. However, in the instant case, the details of expenditure relating to ₹ 2,23,830/- are not available on record. Hence, in our view, the claim made by the assessee with respect to the sum of ₹ 2,23,830/- needs to be examined afresh in the light of the decision rendered by the co-ordinate Bench of this Tribunal in the case of Saleem Fazelbhoy 2006 (6) TMI 139 - ITAT BOMBAY-G Disallowance of development charges, proportionate share of tax and other charges - Held that - all these expenses have been incurred by the assessee for peaceful enjoyment of the property and not for acquisition of the property -Accordingly, we find merit in the decision taken by the ld. CIT(A) in confirming the decision taken by the A.O. Accordingly we hold that the assessee is not entitled to include this amount in the cost of acquisition of new flat.

Summary

Issues:
1. Rejection of claim for deduction of cost of improvement of inherited residential premises against long term capital gain.
2. Disallowance of deduction u/s 54 for expenses on improvement of new residential house and society formation charges.

Analysis:
1. The appellant contested the rejection of the claim for deduction of the cost of improvement of the residential premises inherited against long term capital gain. The Assessing Officer (A.O.) disallowed the claim as per section 55(2)(a)(ii) of the Income Tax Act, stating that the cost of acquisition of tenancy right should be considered as NIL. The appellant argued for the application of section 55(2)(b)(ii) based on inheriting tenancy rights. The Tribunal referred to a similar case and held that fair market value as of 1-4-1981 should be considered as the cost of acquisition, but directed the A.O. to determine the fair market value as it was not previously ascertained.

2. Regarding the deduction claimed u/s 54 for expenses on the new house, the A.O. disallowed expenses on society formation charges and improvement charges. The appellant argued that expenses on construction should be allowed as deduction u/s 54. The Tribunal agreed that fair market value as of 1-4-1981 should be considered as the cost of acquisition of tenancy rights. However, the Tribunal found no evidence of the fair market value being determined and directed the A.O. to re-examine the issue. Furthermore, the Tribunal directed the A.O. to re-examine the claim for expenses incurred on the new flat in light of a previous Tribunal decision.

3. The A.O. disallowed the inclusion of builder charges in the cost of acquisition of the new flat. The Tribunal upheld this decision, stating that these charges were for peaceful enjoyment of the property and not for acquisition. Therefore, the Tribunal confirmed the disallowance of these charges in the cost of acquisition.

In conclusion, the appeal was partly allowed for statistical purposes, with the Tribunal directing the A.O. to re-examine the determination of fair market value for tenancy rights and the claim for expenses incurred on the new flat.