2019 (11) TMI 332 - AT - Income Tax

LTCG - Claiming exemption u/s. 54F - deduction allowed against the income from sale proceeds of the flat - income accrued to assessee on sale of flats - HELD THAT - In the present case, the assessee has constructed 12 flats out of which 4 flats were sold in the assessment year 2013-14 and partial capital gain was accrued to the assessee during this period. From the table submitted by the assessee and not disputed by the department, it is clearly discernible that the assessee has incurred huge expenditure of ₹ 1,91,22,401/- and ₹ 1,92,80,023/- during financial year 2012-13 relevant to assessment year 2013-14 and obviously, this cost has been incurred by the assessee towards construction of flats, which were kept by him for his residential purposes and for claiming exemption u/s.54F. Therefore, no hesitation that the assessee is very much entitled for claiming exemption u/s.54F of income accrued to him on sale of flats during present assessment year 2012-13. Consequently, direct the AO to allow exemption u/s.54F of the Act to the assessee and recalculate the capital gain while giving appeal effect in pursuance to this order. Charging of interest u/s. 234A 234B - HELD THAT - As find that Hon'ble Jharkhand High Court in the case of Ajay Prakash Verma Vs. ITO 2013 (1) TMI 140 - JHARKHAND HIGH COURT has held that the revenue can levy the interest only on the total income declared in the return of income and not on the income. Therefore, the AO is directed to delete the interest levied u/s. 234A and 234B of the Act as the same has been charged on the assessed income.

Summary

Issues Involved:
1. Validity of the assessment order post search and seizure operation.
2. Nature of income from the sale of flats: business income vs. capital gains.
3. Calculation of profit from the sale of flats.
4. Classification of capital gains: long-term vs. short-term.
5. Applicability of stamp duty value for capital gains calculation.
6. Entitlement to deduction under Section 54 of the Income Tax Act.
7. Charging of interest under Sections 234A, 234B, and 234C.

Issue-wise Detailed Analysis:

1. Validity of the Assessment Order Post Search and Seizure Operation:
The assessee argued that the assessment order for the year 2013-14 should be considered void as it was abated by the search and seizure operation initiated on 19.01.2017. The Tribunal did not provide a specific ruling on this issue, focusing instead on the substantive issues of income classification and deductions.

2. Nature of Income from the Sale of Flats: Business Income vs. Capital Gains:
The CIT(A) treated the sale of flats as an "adventure in the nature of trade," thus classifying the income as business income. The assessee contended that it was a one-time venture and should be treated as a long-term capital gain. The Tribunal referenced various judgments, including those from the Supreme Court and High Courts, to conclude that the development and sale of flats were not in the nature of trade. The Tribunal directed the AO to treat the income from the sale of flats as capital gains.

3. Calculation of Profit from the Sale of Flats:
The CIT(A) enhanced the income by valuing unsold flats at market rates instead of cost price. The Tribunal did not specifically address this enhancement but focused on the correct classification of income and the period of holding for capital gains purposes.

4. Classification of Capital Gains: Long-term vs. Short-term:
The Tribunal examined whether the income from the sale of flats should be classified as long-term or short-term capital gains. The construction started in the financial year 2009-10 and was completed in 2013-14. The Tribunal held that since the substantial construction costs were incurred in the financial years 2012-13 and 2013-14, the holding period did not exceed three years. Therefore, the income from the sale of flats was correctly treated as short-term capital gains by the AO.

5. Applicability of Stamp Duty Value for Capital Gains Calculation:
The assessee argued that the AO erred in applying the stamp duty value without referring to the DVO, claiming that the stamp duty value was higher than the market value. The Tribunal did not specifically address this issue in detail, focusing instead on the broader classification and deduction issues.

6. Entitlement to Deduction under Section 54 of the Income Tax Act:
The AO denied the deduction under Section 54F, arguing that the residential flat was not constructed after the date of transfer but along with saleable flats. The Tribunal, referencing CBDT Circular No.791 and the Special Bench decision in Octavius Steel & Co. Ltd, held that the assessee was entitled to the deduction under Section 54F. The Tribunal directed the AO to allow the deduction and recalculate the capital gains accordingly.

7. Charging of Interest under Sections 234A, 234B, and 234C:
The Tribunal referenced the Jharkhand High Court's decision in Ajay Prakash Verma vs. ITO, holding that interest under Sections 234A and 234B should be levied only on the total income declared in the return, not on the assessed income. The Tribunal directed the AO to delete the interest charged under these sections.

Conclusion:
The Tribunal partly allowed the appeals, directing the AO to reclassify the income from the sale of flats as capital gains, allow the deduction under Section 54F, and delete the interest charged under Sections 234A and 234B. The conclusions drawn in the lead case applied mutatis mutandis to the related appeal, resulting in both appeals being partly allowed.