2017 (3) TMI 1175 - AT - Income Tax

Claim of deduction under Section 54F denied - property was registered in the name of the Karta of HUF - Held that - As regards the investment made in the individual capacity, even though HUF is an independent assessable unit under Income Tax Act, under the common law, HUF cannot be considered to be a legal entity. The HUF has to be represented through any one of the coparceners. Therefore, when the assessee HUF invested the funds in the name of any one of the coparcener, it has to be construed that the investment was made in the name of HUF. When the nucleus of the HUF fund was used for purchase of a property in the name of any one of the coparcener, the property belongs to the HUF, even though the property was registered in the individual name of one of the coparcener. The property belongs to all the coparceners in equal shares as members of HUF. Therefore, the Assessing Officer is not justified in rejecting the claim of the assessee especially, when the investment was made in the name of Karta of HUF. Only the borrowed funds are used for purchase of new asset - Held that - Provisions of Section 54F of the Act, requires the assessee to purchase a property one year before the date of the sale or two years after the date of the sale of asset. If the assessee could not invest within the time frame provided in the Act, the same has to be deposited in any one of the capital gain account within the due date provided for filing the return of income under Section 139(1) of the Act. No one could expect the assessee to utilize the sale proceeds of the capital asset or the capital gain arising from such sale before the date of the sale of the capital asset. The assessee cannot have any sale proceeds before the date of the sale. Therefore, when the assessee borrowed the funds and utilized in purchasing the capital asset and thereafter uses the sale proceeds or capital gain for repaying the loan borrowed, that would amount to sufficient compliance of the requirement of Section 54F of the Act. Therefore, merely because the borrowed funds were used when the property was purchased before the date of the sale of asset, this Tribunal is of the considered opinion, this cannot be a reason for disallowing the claim of the assessee. No construction was made, admittedly, the assessee has purchased a land and building - Held that - when the assessee has purchased a building and made some investment for making it fit for human habitation, the same has to be treated as part of the investment from out of the capital gain and the Assessing Officer is not justified in rejecting the claim of the assessee on the ground that the assessee has not filed any proof / plan from the Corporation of Chennai. For the purpose of renovation and maintenance, the Corporation may not give any approval or planning permission. The assessee has to necessarily obtain the planning permission and building approval in case there was new construction or an additional construction over and above the existing building. In the case before us, it is not the case of the assessee that there was additional construction or new construction. The admitted case of the assessee that the existing building was made it fit for human habitation. Therefore Assessing Officer is not justified in disallowing the claim of the assessee. - Assessee appeal allowed.

Summary

Issues:
1. Disallowance of exemption under Section 54F for purchase of property in the individual name of the Karta.
2. Disallowance of exemption under Section 54F for utilizing borrowed funds for purchasing the new asset.
3. Disallowance of renovation expenditure for lack of approval from the Corporation of Chennai.

Analysis:
1. The first issue revolves around the disallowance of exemption under Section 54F due to the purchase of property in the individual name of the Karta. The representative for the assessee argued that the investment in the name of the Karta should be considered an investment by the HUF, citing relevant case law. The tribunal agreed, stating that the property belongs to all coparceners of the HUF, even if registered in the name of an individual coparcener.

2. The second issue concerns the disallowance of exemption under Section 54F for using borrowed funds instead of the sale proceeds of the diamond. The tribunal noted that the Act allows investment in immovable property within a year before the sale of the capital asset. Therefore, utilizing borrowed funds before the sale of the asset does not disqualify the assessee from claiming the exemption under Section 54F.

3. The third issue involves disallowance of renovation expenditure due to lack of approval from the Corporation of Chennai. The tribunal clarified that renovation to make a building habitable should be considered part of the investment from the capital gain. They emphasized that obtaining planning permission is necessary for new construction, not renovation. Consequently, the tribunal held that the Assessing Officer was unjustified in disallowing the renovation expenditure.

In conclusion, the tribunal set aside the orders of the lower authorities and allowed the appeal of the assessee, directing the Assessing Officer to grant the exemption under Section 54F for the amount invested before the filing of the income tax return.