2020 (1) TMI 862 - AT - Income Tax

Exemption claimed u/s. 54F - non completion of the house within the time specified - HELD THAT - It is a fact on record the assessee has made the investment in the land and construction of the house as discussed above which evidences that the assessee has substantially complied the provisions of section 54F of the Act. Thus, any delay in the completion of the construction of the house will not debar the assessee from claiming the exemption provided under section 54F Assessee has substantially complied the provision of section 54F of the Act by acquiring the piece of land and commencing construction thereon. It is also pertinent to note that the amount invested by the assessee in the acquisition of land and construction of house was exceeding the amount of the sale consideration received by the assessee on the sale of plot as discussed above. Thus, it is not the case of Revenue that the investment made by the assessee is less than the amount required to be invested under the provisions of section 54F of the Act. Accordingly, we set aside the finding of the learned CIT (A) and direct the AO to delete the disallowance made by the AO. As such the exemption claimed by the assessee under section 54F of the Act is accepted. Hence the ground of appeal of the assessee is allowed. Addition u/s 57 - Assessee has earned interest income from the FDRs and deposits with the firms during the year and the assessee has claimed interest expenses against such interest income - addition u/s 14A - AO rejected the contention of the assessee by observing that the assessee did not furnish any documentary evidence to justify that interest bearing funds were used in interest bearing deposit and advance - HELD THAT - Assessee failed to justify whether the interest expenses were incurred against the interest income. Accordingly, the AO made the disallowance of such interest expenses in the absence of sufficient documentary evidence and further observed that the assessee has earned dividend income which is exempted from tax but no disallowance was made by the assessee under the provisions of section 14A read with rule 8D of Income Tax Rules. As such the AO was of the view that the borrowed fund has been utilized in making the investments which are giving rise to the exempted income. The view taken by the AO was subsequently confirmed by CIT (A). Admittedly, there was no disallowance made by the authorities below under section 14A read with rule 8D of income tax rule against the dividend income which is exempted under section 10(34) of the Act. Thus, in our considered view no disallowance of such interest can be made for the interest expenses under the provisions of section 14A read with rule 8D. Whether the impugned interest expense has been incurred by the assessee against the impugned interest income - onus lies on the assessee to furnish the sufficient documentary evidence in support of his contention. But he failed to do so before the authorities below. Though in our considered view, the assessee has failed to furnish the necessary documentary evidence, but in the interest of justice and fair play we are inclined to give one more opportunity before the AO to raise his points of contentions. Accordingly, we remit the ground of appeal of the assessee to the file of the AO for fresh adjudication as per the provisions of law. Hence, the ground of appeal of the assessee is allowed for the statistical purposes.

Summary

Issues Involved:
1. Denial of exemption under Section 54F of the Income Tax Act.
2. Disallowance of expenses claimed under Section 57 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Denial of Exemption under Section 54F:

The appellant, an individual engaged in the business of manufacturing and trading pharmaceuticals, sold a plot of land for ?50,00,000 on 18-01-2010 and purchased four plots for ?37,05,000 each on 02-03-2010 with the intention to construct a residential house. The appellant claimed an exemption under Section 54F of ?28,93,333, declaring NIL long-term capital gain. The Assessing Officer (AO) disallowed the exemption, noting that the appellant failed to provide an approved construction plan and admitted that the construction was incomplete within the stipulated period.

Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] acknowledged the appellant's intention to construct a residential house but noted the construction was completed after the three-year period specified in Section 54F. Consequently, the CIT(A) directed the AO to make the addition in the year when the three-year period expired, i.e., AY 2013-14, after verifying the returns. The appellant further appealed, arguing that the delay was beyond their control and should not result in the withdrawal of the exemption.

The Tribunal observed that the appellant had substantially complied with Section 54F by investing in land and commencing construction, despite the delay in completion. Citing precedents, the Tribunal held that mere delay in construction does not disqualify the exemption under Section 54F. The Tribunal directed the AO to delete the disallowance and accept the exemption claim, allowing the appellant's appeal on this ground.

2. Disallowance of Expenses Claimed under Section 57:

The appellant claimed interest expenses of ?2,59,394 against interest income of ?5,79,663 from Fixed Deposit Receipts (FDRs) and deposits with firms. The AO disallowed the expenses, stating that the appellant failed to provide evidence of a direct nexus between the borrowing and the interest income. Additionally, the AO noted that the appellant had exempt dividend income, suggesting that borrowed funds might have been used for investments generating exempt income, thus invoking Section 14A.

The CIT(A) upheld the AO's decision, emphasizing the appellant's failure to establish the nexus between interest expenses and interest income. The appellant appealed, providing additional details and requesting a remand to the AO for verification.

The Tribunal noted the lack of documentary evidence to support the appellant's claim but, in the interest of justice, decided to provide another opportunity for the appellant to substantiate the claim. The Tribunal remitted the issue back to the AO for fresh adjudication, allowing the appellant's appeal for statistical purposes.

Conclusion:

The Tribunal allowed the appellant's appeal concerning the exemption under Section 54F, directing the AO to delete the disallowance. The issue regarding the disallowance of expenses under Section 57 was remitted back to the AO for fresh adjudication, providing the appellant an opportunity to furnish necessary evidence. The appeal was partly allowed for statistical purposes.