2020 (5) TMI 236 - AT - Income Tax

Exemption u/s 54F - Taxing capital gain under the head business income and not giving benefit of exemption u/s 54F - grievance of the assessee relate to explaining the scope of limited scrutiny and treating the property on sale of capital asset as business income in place of capital gain - HELD THAT - Respectfully following the order of the Tribunal in the case of brother of the assessee Shri Ramesh Raj Bohra 2020 (5) TMI 205 - ITAT JODHPUR we do not find any justification for the addition so made treating the capital gain as business income and not allowing deduction of expenditure so incurred.

Summary

Issues Involved:
1. Scope of limited scrutiny.
2. Classification of income from sale of property (capital gain vs. business income).
3. Eligibility for exemption under Section 54F of the Income-tax Act.
4. Deduction of expenditure incurred on property development.

Issue-wise Detailed Analysis:

1. Scope of Limited Scrutiny:
The assessee argued that the Assessing Officer (AO) exceeded the jurisdiction by expanding the scope of limited scrutiny without approval from the Principal Commissioner of Income Tax (Pr. CIT). The case was selected for limited scrutiny to verify large deductions claimed under various sections, but the AO also examined whether the gains from property sales were capital gains or business income. This expansion was contrary to CBDT instructions which mandate that any enhancement of scrutiny scope requires written approval from the Pr. CIT.

2. Classification of Income from Sale of Property:
The AO classified the income from the sale of properties as business income, asserting that the transactions were in the nature of business rather than capital investments. The assessee contended that the properties were held as capital assets for over 20 years and were used for agricultural purposes, thus qualifying for capital gains treatment. The Tribunal found that the properties were indeed held as capital assets and used for agricultural purposes, and the intention at the time of purchase was not for business. Therefore, the gains should be treated as capital gains, not business income.

3. Eligibility for Exemption under Section 54F:
The assessee claimed exemption under Section 54F for the purchase of a residential house using the capital gains from the sale of properties. The AO denied this exemption, treating the gains as business income. However, the Tribunal concluded that since the properties were capital assets, the assessee was eligible for the exemption under Section 54F. The AO was directed to allow the exemption claimed by the assessee.

4. Deduction of Expenditure Incurred on Property Development:
The AO allowed only 50% of the expenditure claimed by the assessee for property development, citing a lack of supporting bills. The CIT(A) reduced the disallowance to 40%. The Tribunal observed that the assessee had provided sufficient documentary evidence to support the expenditure and found the AO's findings erroneous. Consequently, the Tribunal directed the AO to allow the full expenditure amounting to ?43,90,029/-.

Conclusion:
The Tribunal ruled in favor of the assessee, allowing the appeal. The gains from the sale of properties were to be treated as capital gains, the exemption under Section 54F was to be granted, and the full expenditure on property development was to be allowed. The Tribunal emphasized adherence to the scope of limited scrutiny and proper documentation in support of claims.