2018 (2) TMI 670 - AT - Income Tax

Restricting the deduction under section 54 - actual consideration for the new house property determination - purchase within specified time limit under section 54 - what is the cost of the new residential house so purchased by the assessee at C 6 Anandvan Complex - Held that - The arrangements for separate purchase of furniture and fixtures were indeed artificial, but the remedy did not lie in declining deduction under section 54 to the buyer to that extent. The remedy was in bringing the right amount of capital gains to tax by ignoring the nomenclature of sale of personal effects, specifically excluded under section 2(14)(ii) from the definition of capital assets, as sale of residential property. That, however, was not done. It could not have been open to the authorities below to treat the payment of ₹ 18,00,000 on account of furniture and fixtures on standalone basis, and thus exclude it as a separate item rather than as a cost of the residential house so purchased . In our considered view, therefore, the assessee is entitled to deduction under section 54F by treating entire amount of ₹ 78,00,000 as the cost of the residential house purchased within specified time limit under section 54. Here is an NRI who decided to sell a fairly spacious house in his hometown, and yet, to keep his India connection alive, invested a part of these sale proceeds in a smaller residential unit, but he has been declined the legitimate deduction under section 54 in respect of the same, only for the reason, as the circumstances suggest, that he is made an unwilling party to artificially splitting of sale consideration to minimise the capital gains burden of the seller. Leaving even this aspect of the matter aside, quite clearly the sale of furniture and fixtures was an integral part of the deal of buying the house property. Whichever we way look at it thus, the assessee was wronged in partial denial of deduction. Now that the facts on record demonstrate that the actual consideration for the new house property was ₹ 78,00,000, he is being sought to be declined resultant relief on the ground that this particular plea was not taken earlier. That is certainly not a fair treatment to an assessee. What matters really is that whether the assessee deserves the relief on merits or not, and when the assessee deserves the relief on merits, such technicalities should not be allowed to come in the way of justice to the assessees. We are, therefore, not inclined to uphold the technical objection raised by the learned Departmental Representative. We uphold the grievance of the assessee, and, accordingly, direct the Assessing Officer to delete the disallowance of deduction under section 54 to the extent of ₹ 18,00,000. The assessee will get the relief accordingly. - Decided in favour of assessee

Summary

Issues Involved:
1. Correctness of the order passed by the CIT(A) regarding the assessment under section 143(3) of the Income Tax Act, 1961.
2. Restriction of deduction under section 54 of the Act to ?60,00,000 instead of ?78,00,000 as claimed by the assessee.

Issue-wise Detailed Analysis:

1. Correctness of the CIT(A) Order:
The appeal questions the correctness of the order dated 31st October 2015 passed by the CIT(A) concerning the assessment under section 143(3) of the Income Tax Act, 1961 for the assessment year 2011-12. The main grievance is against the CIT(A) upholding the action of the Assessing Officer (AO) in restricting the deduction under section 54 of the Act to ?60,00,000, as opposed to the ?78,00,000 claimed by the assessee.

2. Restriction of Deduction Under Section 54:
The assessee, a non-resident domiciled in New Zealand, sold a property in Vadodara for ?2,46,00,000, resulting in a long-term capital gain of ?1,89,77,426. He invested ?78,00,000 in another residential unit, claiming this amount as a deduction under section 54. The AO noted that the assessee had entered into two separate contracts on the same date: one for the house property (?60,00,000) and another for the furniture and fixtures (?18,00,000). The AO assumed these contracts were independent and viewed the payment for furniture as not qualifying for deduction under section 54F, leading to the restriction of the deduction to ?60,00,000.

Upon appeal, the CIT(A) upheld the AO's decision, prompting the assessee to further appeal.

Detailed Analysis:
- The Tribunal examined the sequence of events and agreements related to the purchase of the new residential unit. The initial agreement (banakhat) dated 19th January 2011 indicated a total consideration of ?78,00,000 for the property.
- However, on 4th February 2011, the payment was split into ?60,00,000 for the property and ?18,00,000 for the furniture and fixtures. The Tribunal noted that this splitting was artificial and the actual consideration for the house was ?78,00,000.
- The Tribunal emphasized that the cost of a residential house could include integral items like furniture and fixtures if they are part of the sale package. The agreements should be viewed as a composite contract, not in isolation.
- The Tribunal concluded that the cost of the new residential house should be treated as ?78,00,000, as the assessee was obligated to pay this amount regardless of the furniture's inclusion.
- The Tribunal rejected the technical objections raised by the Departmental Representative, stating that the assessee deserved relief on merits, and technicalities should not hinder justice.

Conclusion:
The Tribunal directed the AO to delete the disallowance of deduction under section 54 to the extent of ?18,00,000, allowing the assessee's appeal. The decision was pronounced in the open court on 9th February 2018.