2018 (8) TMI 260 - AT - Income Tax

Deduction u/s. 54 denied - no residential house in the old property - long term capital gain on transfer of the old property under the JDA - assessee submitted that there is clear evidence to show a building viz., a residential house existed over the old property and therefore the provisions of section 54 of the Act ought to have been applied - Held that - As far as the question whether section 54 of the Act would apply, it is clear from the Settlement Deed dated 24.07.2002 under which the assessee got the property that there was a residential house in the property which was subject matter of JDA. The CIT(Appeals), however, proceeded on the basis that the JDA does not make any reference to any building. It cannot come to the conclusion that the subject matter of the JDA is only a land, because the reference is to property bearing Bangalore Mahanagara Palike Old No.66 & 67, New No.17 situated at Ittamadu Village, Uttarahalli Hobli, Bangalore South Taluk, Bangalore 560 085. As far as the deduction u/s. 54F of the Act on the question whether if under a JDA multiple flats are given to the owner whether deduction u/s.54F of the Act can be given, the decision of the Hon ble High Court of Karnataka and the other decision cited before us supports the plea of the assessee that deduction u/s. 54F of the Act cannot be denied on the ground that multiple flats are obtained by the assessee. See COMMISSIONER OF INCOME-TAX VERSUS SMT. KG. RUKMINIAMMA 2010 (8) TMI 482 - KARNATAKA HIGH COURT as held it has to be construed as a residential house and the assessee is entitled to the benefit accordingly. In that view of the matter, the Court held that the Tribunal as well as the appellate authority were justified in holding that there is no liability to pay Capital Gains tax as the case squarely falls under sec. 54 of the Income Tax Act, 1961. Also the conclusion of CIT(Appeals) that since the assessee did not file return of income making claim for deduction u/s. 54 of 54F of the Act, the same cannot be allowed, we are of the view that the CIT(Appeals) as an appellate authority cannot deny the benefit of deduction which the assessee is entitled to in law. As decided in DR. ASHWIN BALCHAND MEHTA VERSUS JOINT COMMISSIONER OF INCOME TAX, RANGE 11 (2) , MUMBAI 2015 (11) TMI 1057 - ITAT MUMBAI even if a claim is not made before the AO, it can be made before the appellate authorities. We are of the view that a lawful claim of deduction cannot be denied by the revenue authorities purely on technicalities. Tax is to be levied and collected in accordance with the law. If the assessee is entitled to deduction while computing the long term capital gain, that cannot be denied on the ground that such a claim was not before the AO - Decided in favour of assessee

Issues Involved:

1. Validity of the assessment under section 147 of the Income Tax Act.
2. Entitlement to deduction under section 54 of the Income Tax Act.
3. Entitlement to deduction under section 54F of the Income Tax Act.
4. Determination of the cost of construction for computing capital gains.
5. Enhancement of long-term capital gains by the CIT(A).

Issue-wise Detailed Analysis:

1. Validity of the assessment under section 147 of the Income Tax Act:

The assessment was initiated under section 147 based on the Joint Development Agreement (JDA) entered by the assessee, which was considered a transfer of property, leading to capital gains tax liability for AY 2006-07. The notice under section 148 was served by affixture after being returned by postal authorities. The AO completed the assessment under section 144 due to non-appearance of the assessee.

2. Entitlement to deduction under section 54 of the Income Tax Act:

The CIT(A) denied the deduction under section 54, concluding that the property transferred was merely land without a residential house. The Tribunal, however, found evidence from the Settlement Deed indicating the existence of a residential house on the property. The Tribunal referred to the Karnataka High Court decision in Dr. R. Balaji, which recognized even a small house with basic amenities as a residential house for section 54 purposes. Thus, the Tribunal concluded that the assessee was entitled to deduction under section 54.

3. Entitlement to deduction under section 54F of the Income Tax Act:

The CIT(A) also denied deduction under section 54F, stating the assessee owned another house at Banashankari 3rd Stage. The Tribunal found no basis for this conclusion, noting the property referred to by the CIT(A) was the same as the one under JDA. The Tribunal cited the Karnataka High Court decision in K.G. Rukminiamma, which allowed deduction under section 54F even for multiple flats received under a JDA, considering them as one residential house. Therefore, the Tribunal ruled that the assessee was entitled to deduction under section 54F.

4. Determination of the cost of construction for computing capital gains:

The AO adopted a cost of construction rate of ?1,800 per sq.ft., while the CIT(A) enhanced it to ?2,000 per sq.ft. based on a clause in the JDA for adjusting built-up area. The Tribunal found this clause applicable only for marginal changes in constructed area and not for determining the cost of construction. Therefore, the Tribunal did not support the CIT(A)'s enhancement.

5. Enhancement of long-term capital gains by the CIT(A):

The CIT(A) enhanced the long-term capital gains based on an incorrect interpretation of the JDA clause regarding the cost of construction. The Tribunal directed that the lawful claim of deduction should not be denied on technicalities, referencing ITAT Mumbai Bench's decision in Dr. Ashwin Balchand Mehta and the Bombay High Court's decision in Pruthvi Brokers & Shareholders Pvt. Ltd., which allowed claims before appellate authorities even if not made before the AO.

Conclusion:

The Tribunal concluded that the assessee was entitled to deductions under sections 54 and 54F of the Income Tax Act. The Tribunal also held that the CIT(A)'s enhancement of long-term capital gains was not justified. The appeal of the assessee was allowed, directing the revenue authorities to allow the lawful deductions and compute the capital gains accordingly.

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