2022 (1) TMI 236 - AT - Income Tax

Disallowance of exemption claimed u/s 54F - nature of the property as residential in nature - assessee claims to have converted Shastri Nagar residential property into commercial property under MCD rules, no certificate from MCD is produced establishing property as commercial - HELD THAT - No dispute on fact that the property E-575A, GK-II, New Delhi owned by the assessee was being used as his office during the relevant period but only dispute between the assessee and Revenue remained about the entitlement of deduction of sec. 54F of the Act on the basis of actual user of the property i.e. office use and not merely on the basis of the municipal showing the property meant for residential use or in the sale deed shown as residential type It does not make difference whether the property has been shown as residential house on the record of the government authority but actual user thereof by the assessee will be considered while adjudicating upon the eligibility of deduction under sec. 54F Claimed by the assessee. In the present case, for denial of the claimed deduction under sec. 54F AO should not have considered the property E-575A, G.K.II, New Delhi as residential on the basis of municipal record ignoring the actual user thereof, as held in the above cited decisions. The authorities below were thus not justified in denying and upholding the denial of the claimed benefit to the assessee by way of deduction under sec. 54F of the Act on the basis that the assessee was owning more than one residential house (i.e. inclusion of E-575A, GK-II, New Delhi) on the date of transfer of the original assets. We thus setting aside the orders of the authorities below in this regard direct the Assessing Officer to allow the claimed deduction under sec. 54F of the Act. See case ofSHRI. NAVIN JOLLY C/O NAVIN ARCHITECT PRIVATE LIMITED VERSUS THE INCOME-TAX OFFICER, WARD 11 (1) 2020 (6) TMI 514 - KARNATAKA HIGH COURT The ground No.1 is accordingly allowed

Summary

Issues Involved:
1. Nature of the property at Shastri Nagar (residential vs. commercial).
2. Eligibility for exemption under Section 54F of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Nature of the Property at Shastri Nagar:
The primary issue was whether the property at Shastri Nagar was residential or commercial. The assessee claimed it was commercial, having converted it from residential status in 2008 per Municipal Corporation of Delhi (MCD) rules and Master Plan 2021, and paid conversion charges accordingly. The Assessing Officer (AO) disagreed, citing the lack of a certificate from MCD proving the property's commercial status and the absence of evidence showing commercial activity. The AO noted that even with mixed-use charges, the property's nature remained residential. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's view, emphasizing that only 25% of the ground floor could be used commercially, while the rest remained residential. The CIT(A) also pointed out that the property was not capitalized as a business asset, no depreciation was claimed, and the income was declared under "house property."

2. Eligibility for Exemption under Section 54F:
The assessee claimed exemption under Section 54F by investing in a new residential property. The AO disallowed this, asserting the Shastri Nagar property was residential. The CIT(A) concurred, stating that the property was residential based on its usage and the income declared. The assessee argued that the property's usage as a commercial entity should determine its nature, supported by a Karnataka High Court ruling in Navin Jolly v. ITO, which emphasized actual usage over municipal records. The Tribunal examined the facts, including an inspector's report confirming the property's commercial use for the assessee's hosiery business. The Tribunal cited several precedents, including Sanjeev Puri v. DCIT and Rajeev Malhotra v. ACIT, which supported considering actual usage for determining property nature under Section 54F.

Judgment:
The Tribunal concluded that the property was indeed used for commercial purposes, supported by the inspector's report and payment of mixed-use charges. It held that the nature of the property should be determined by its usage, not merely its classification in municipal records. Consequently, the assessee was entitled to the exemption under Section 54F. The Tribunal set aside the orders of the lower authorities and allowed the appeal, affirming that the property's commercial use qualified the assessee for the claimed exemption.

Conclusion:
The Tribunal allowed the appeal, recognizing the Shastri Nagar property as commercial based on its usage and granting the exemption under Section 54F. The judgment emphasized the importance of actual property usage in determining eligibility for tax exemptions.