2018 (9) TMI 616 - AT - Income Tax

Revision u/s 263 - AO has failed to examine whether assessee s claim of deduction u/s 54 in respect of two flats purchased by him is in compliance to the conditions mentioned under the said provision - order to be erroneous and prejudicial to the interests of Revenue - Held that - If the Assessing Officer allows assessee s claim after considering the fact that the two flats have been converted to one residential unit having single entrance and one kitchen the view adopted by the Assessing Officer cannot be considered to be erroneous since it is a possible view. That being the case one of the conditions of section 263 of the Act is not fulfilled. Therefore the assessment order cannot be subjected to the proceedings under section 263 of the Act. As per the provision of section 54 of the Act applicable to the impugned assessment year a residential house does not mean one residential house. This interpretation has been given in various judicial precedents a few of which have been cited before us by the learned Authorised Representative. In these decisions it has been held that if the flats purchased by the assessee are adjacent or contiguous to each other and are used as a single residential unit having common entrance and common kitchen they have to be considered as a single residential unit satisfying the condition of section 54 of the Act. Directions of the Principal Commissioner of Income-tax to the Assessing Officer while setting aside the assessment order is conflicting and contradictory. While in Para 6 of the impugned order he has directed the Assessing Officer to examine the claim of the assessee to the effect that the two flats are single units and decide the issue after affording opportunity of being heard to the assessee whereas in Para 7 of the order he has directed the Assessing Officer to restrict the deduction under section 54 of the Act to one flat at 54, 12, 800. Once the learned Principal Commissioner of Income-tax directs the AO to restrict the deduction under section 54 of the Act to one flat the other direction for examining assessee s claim that the residential unit is a single unit becomes redundant. - Decided in favour of assessee

Issues:
1. Revision of assessment order under section 263 of the Income Tax Act, 1961.
2. Eligibility of the assessee to claim deduction under section 54 of the Act for two adjacent flats.
3. Examination of the assessee's claim of deduction under section 54 by the Assessing Officer.
4. Interpretation of the expression "a residential house" under section 54 of the Act.
5. Validity of the directions given by the Principal Commissioner of Income Tax in the impugned order.

Issue 1: Revision of assessment order under section 263 of the Income Tax Act, 1961:
The appeal was directed against an order passed under section 263 of the Act by the Principal Commissioner of Income Tax for the assessment year 2013-14. The Principal Commissioner found the assessment order erroneous and prejudicial to revenue as the deduction under section 54 was allowed for two flats instead of one. The assessee challenged the initiation of proceedings under section 263, arguing that the Assessing Officer had made a full enquiry before allowing the deduction.

Issue 2: Eligibility of the assessee to claim deduction under section 54 of the Act for two adjacent flats:
The Principal Commissioner held that the deduction under section 54 should be restricted to one flat since the assessee had invested in two flats. The assessee contended that the two flats were a single residential unit and relied on judicial precedents to support the claim that the two adjacent flats could be considered as one unit for the purpose of the deduction.

Issue 3: Examination of the assessee's claim of deduction under section 54 by the Assessing Officer:
The Assessing Officer had issued a notice and specifically raised the issue of deduction under section 54 in respect of two flats. The assessee provided explanations and justifications for claiming the deduction, and the Assessing Officer allowed the deduction after considering the submissions and documentary evidence.

Issue 4: Interpretation of the expression "a residential house" under section 54 of the Act:
The expression "a residential house" was interpreted to include more than one residential unit if they were joined together and functioned as a single residential unit with common facilities. The assessee demonstrated that the two flats purchased had been converted into a single unit with common entrance and kitchen, meeting the conditions of section 54.

Issue 5: Validity of the directions given by the Principal Commissioner of Income Tax in the impugned order:
The directions given by the Principal Commissioner were found to be conflicting and contradictory. While directing the Assessing Officer to examine the claim of the assessee regarding the two flats being a single unit, the Principal Commissioner also directed to restrict the deduction to one flat. This inconsistency led to the conclusion that the exercise of jurisdiction under section 263 in this case was invalid, and the assessment order passed by the Assessing Officer was restored.

In conclusion, the Tribunal allowed the assessee's appeal, quashed the order passed under section 263, and restored the assessment order, finding that the Assessing Officer had properly examined the claim of deduction under section 54 and that the two adjacent flats could be considered a single residential unit for the purpose of the deduction.

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