2015 (1) TMI 1421 - HC - Income Tax

Reopening of assessment u/s 147 - Benefit u/s 54F - Tribunal held that only the expenses incurred to make the residential house habitable is entitled to benefit u/s 54F but not any additions made to the newly acquired building - HELD THAT - Assessing authority before issuing notice u/s 148 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. Benefit u/s 54F - 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.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. Thus the second substantial question of law is answered in favour of the assessee

Summary

Issues:
1. Whether the expenses incurred for making a residential house habitable are entitled to benefit under Section 54F of the Income-tax Act, 1961?
2. Whether additions made to a newly acquired building can be considered for exemption under Section 54F of the Act?

Analysis:

Issue 1:
The appellant appealed against the Tribunal's decision that only expenses to make a house habitable are eligible for benefits under Section 54F. The appellant, an individual, sold a property and invested the proceeds in a new property to claim exemption under Section 54F. The Assessing Authority initiated proceedings to re-open the assessment under Section 148 of the Act. The Tribunal remanded the matter to consider the case based on a previous judgment. The Tribunal rejected the appellant's claim for improvements made to the new property, stating that if the property was habitable, additional investments were not eligible for benefits under Section 54F. The appellant argued that the initiation of re-opening proceedings was without jurisdiction and that expenses for property improvements should be considered in calculating the investment cost. The Court found that the Assessing Authority had sufficient material to re-open the assessment and that expenses for improvements to a habitable property should be included in determining the cost of the new asset. The Court ruled in favor of the appellant on this issue.

Issue 2:
The second substantial question of law involved whether deductions for additions/alterations made to a property after purchase could be considered for exemption under Section 54F. The appellant had spent a significant amount on improvements to the habitable property, which lacked certain amenities. Section 54F refers to the "cost of new asset" to determine capital gains. The Court held that expenses for modifications, alterations, and improvements made to a habitable asset should be included in the cost of the new asset for calculating capital gains. The Court disagreed with the authorities' view that additions to a habitable asset were not eligible for deduction, as it contradicted statutory provisions. Therefore, the Court ruled in favor of the appellant on this issue as well. Consequently, the Court allowed the appeal in part, emphasizing the eligibility of expenses for property improvements under Section 54F for calculating capital gains.