2021 (9) TMI 1221 - AT - Income Tax

Exemption u/s 54 - denial of claim on purchase of property abroad - Scope of amendment to Act - investment made in purchasing the residential house outside India prior to the amendment to section 54 vide Finance Act, 2014 - CIT(A) allowing the benefit of exemption, placed reliance on the judgment of Leena Jugalkishor Shah v. ACIT 2016 (12) TMI 351 - GUJARAT HIGH COURT - HELD THAT - Amendment introduced in Section 54 of the Act vide Finance Act, 2014, which mandates purchase or construction of residential house in India, is prospective in nature operational only with effect from 1st April, 2015 i.e., Assessment Year 2015-16 and it will not affect the eligibility of claim in respect of investment made outside India prior to such amendment. In the present appeal, the investment in purchase of residential house in UK was made in July, 2013 and as such the claim of exemption u/s 54 of the Act in respect of such investment is allowable. Accordingly, we find no reason to take a view different from the view taken by the Ld. CIT(A) on the issue and we uphold the same. The grounds raised by the Department are dismissed. Disallowance of expenses claimed by the assessee towards cost of improvement - HELD THAT - Costs incurred towards stamp duty and registration of the gift in the name of the assessee was an essential pre-condition for the purpose of obtaining the legal title of the property and its further sale - charges incurred for conversion of leasehold to freehold also had to be incurred for the purpose of enhancing the sales consideration value of the property sold and, therefore, it can be safely concluded that the impugned expenditure was a legitimate cost of improvement. We are of the considered opinion that cost of improvement is of wide amplitude and it would take into its fold all kinds of expenses incurred for the improvement of the impugned property. Therefore, we set aside the order of the Ld. CIT(A) on the issue and direct the Assessing Officer to allow the claim of assessee

Summary

Issues Involved:
1. Validity of the claim of exemption under Section 54 of the Income Tax Act for the purchase of property abroad.
2. Disallowance of expenses claimed towards the cost of improvement of the property.

Issue-wise Detailed Analysis:

1. Validity of the claim of exemption under Section 54 of the Income Tax Act for the purchase of property abroad:

The Department challenged the CIT(A)'s decision allowing the assessee's claim of exemption under Section 54 of the Income Tax Act for the purchase of a residential house in the UK. The Department argued that the benefit of exemption under Section 54 is available only for investments made in India, as clarified by the Finance Act, 2014, which added the words "in India" to the section. The Department contended that the intention of the legislature was to encourage investment in India.

The assessee, on the other hand, relied on various judgments, including those of the Hon'ble Delhi High Court and the Hon'ble Gujarat High Court, which held that prior to the amendment by the Finance Act, 2014, Section 54 did not specify that the residential house must be in India. The Tribunal noted that the CIT(A) had relied on the judgment of the Hon'ble Gujarat High Court in Leena Jugalkishor Shah v. ACIT, which allowed the benefit of exemption for investment in a residential house outside India before the amendment.

The Tribunal also referred to the judgment of the Hon'ble Delhi High Court in Dipankar Mohan Ghosh, which upheld the exemption under Section 54 for investment in a residential house outside India prior to the amendment. The Tribunal concluded that the amendment introduced by the Finance Act, 2014, was prospective and applicable from Assessment Year 2015-16 onwards. Therefore, the claim of exemption for the investment made in the UK in July 2013 was allowable. The Tribunal upheld the CIT(A)'s decision and dismissed the Department's appeal.

2. Disallowance of expenses claimed towards the cost of improvement of the property:

The assessee challenged the CIT(A)'s decision upholding the disallowance of expenses claimed towards the cost of improvement of the property. The expenses included stamp duty charges, professional fees for conversion of the property from leasehold to freehold, and registration expenses. The assessee argued that these expenses were essential for obtaining legal title and enhancing the sale value of the property, and thus should be considered as part of the cost of improvement.

The Tribunal noted that the Assessing Officer did not dispute the genuineness and nature of the expenses. The Tribunal observed that expenses such as registration expenses, conversion charges, stamp duty, and professional fees were inextricably linked with the property and incurred for the purpose of the sale transaction. The Tribunal concluded that these expenses were legitimate costs of improvement and should be allowed.

The Tribunal set aside the CIT(A)'s order on this issue and directed the Assessing Officer to allow the assessee's claim for these expenses. Consequently, the grounds raised in the Cross Objection by the assessee were allowed.

Final Result:

The appeal of the Department was dismissed, and the Cross Objection of the assessee was allowed. The order was pronounced on 27th September 2021.