2017 (11) TMI 667 - AT - Income Tax

Deduction u/s 54F entitlement - assessee is seeking exemption on the ground that it has constructed a residential house - objection of Assessing Officer are three-fold, firstly the assessee has 1/8th rights over the property on which the new asset is constructed; secondly, the construction started prior to transfer of original asset and thirdly the new asset can not be treated as residential house as same has been constructed on the commercial land - As per assessee by way of settlement amongst the co-owners, the assessee was given absolute rights over the new asset thus the assessee is entitled for exemption as claimed Held that - We find that the Revenue has not brought any material on record suggesting that on commercial land no residential house can be constructed. Even there is no material suggesting that any unauthorized construction by the assessee would debar it from claiming exemption u/s 54F. In the absence of such material, in our considered view benefit of section 54F cannot be denied. PP Another objection of the AO is with regard to the fact that construction of residential house was started prior to transfer of original asset. This objection is also misplaced when the assessee is entitled to exemption u/s 54F if the residential house is purchased one year before the transfer of the original asset. Therefore, in our considered view merely because the construction was started prior to transfer of original asset, if same is completed within three years of transfer of original asset, would not come into way of entitlement of exemption. Another objection of the AO is that the assessee is having 1/8th share in the commercial land on which the new asset has been constructed. The explanation of the assessee is that by way of settlement the assessee was given absolute rights on the new asset. We are of the view that this claim of the assessee requires verification at the end of the AO. Therefore, we modify the finding of ld. CIT (A) to the extent that AO would verify from other co-owners about the factum of relinquishment of their rights into new asset. If the AO finds correctness into the claim of the assessee, he would allow the entire claim lest he would restrict the same to the extent of 1/8th of the cost of construction of new asset. Ground No. 1 of the revenue s appeal is partly allowed for statistical purpose

Summary

Issues Involved:
1. Allowing deduction under Section 54F of ?54,12,140/-.
2. Admitting additional evidence in violation of Rule 46A of IT Rules, 1962.
3. Issuing notice under Section 148/147 and reopening of the assessment.

Detailed Analysis:

1. Allowing Deduction under Section 54F of ?54,12,140/-:
The primary issue was whether the assessee was entitled to a deduction under Section 54F of the Income Tax Act, 1961, for the construction of a residential house on a commercial plot. The Assessing Officer (AO) disallowed the deduction on the grounds that the land was commercial, the assessee only had 1/8th ownership, and the construction began before the sale of the original asset. The CIT (A) allowed the deduction, citing various judicial pronouncements and the fact that the essential requirement under Section 54F is the construction of a residential house, irrespective of the land's commercial status. The Tribunal upheld the CIT (A)'s decision, emphasizing that the law does not prohibit constructing a residential house on commercial land and that starting construction before the sale of the original asset does not invalidate the deduction if completed within three years. However, the Tribunal directed the AO to verify the claim of absolute ownership by the assessee through a settlement with co-owners.

2. Admitting Additional Evidence in Violation of Rule 46A of IT Rules, 1962:
The Revenue argued that the CIT (A) erred in admitting additional evidence in violation of Rule 46A. However, the Tribunal found no merit in this ground as the Departmental Representative could not point out any specific violation of Rule 46A by the CIT (A). Consequently, this ground of the Revenue's appeal was dismissed.

3. Issuing Notice under Section 148/147 and Reopening of the Assessment:
The assessee challenged the reopening of the assessment under Section 147, arguing that the AO did not have valid reasons for doing so. The CIT (A) upheld the AO's decision, stating that the AO had dealt with all objections raised by the assessee in a speaking order dated 01.10.2014. The Tribunal affirmed the CIT (A)'s order, agreeing that the AO had rightly initiated reassessment proceedings under Section 147.

Conclusion:
The Tribunal partly allowed the Revenue's appeal for statistical purposes, directing the AO to verify the assessee's claim of absolute ownership of the new asset. The Tribunal dismissed the Revenue's ground regarding the violation of Rule 46A and the assessee's cross-objection challenging the reopening of the assessment. The order was pronounced in the open court on 05.10.2017.