2008 (11) TMI 274 - AT - Income Tax

Summary

Issues Involved:
1. Chargeability of capital gain tax of Rs. 83,37,500.
2. Allowability of deduction under sections 54 and 54F of the IT Act.

Detailed Analysis:

1. Chargeability of Capital Gain Tax of Rs. 83,37,500:
The assessee filed a return for the assessment year 1998-99, declaring a total income of Rs. 95,290 apart from a long-term capital gain of Rs. 33,37,500. The dispute arose from the sale of a residential flat where the assessee's share of the sale proceeds was Rs. 85,50,000. The assessee claimed various deductions, including brokerage, legal fees, and an investment in a new residential house, resulting in a net long-term capital gain of Rs. 33,37,500. The AO, however, disallowed the deduction of Rs. 50 lakhs claimed under section 54, concluding that the assessee did not purchase or construct a new residential house but instead took a property on lease for 11 months. Consequently, the AO computed the long-term capital gain at Rs. 83,37,500.

The assessee argued that the capital gain arose from the transfer of a long-term capital asset whose cost of acquisition was nil or not ascertainable, invoking the judgment in CIT vs. B.C. Srinivasa Setty (1981) to claim that no capital gains tax was exigible. The CIT(A) rejected this argument, noting that the assessee's right to occupy the flat emanated from an agreement and that the assessee himself had shown the long-term capital gain in his return of income.

Upon appeal, the tribunal examined the facts and concluded that the assessee had acquired the right to occupy the property as a tenant through an agreement and remained in lawful possession until an eviction notice was issued. The tribunal found that the occupancy right was derived from the tenancy right and thus, the cost of acquisition should be computed as per section 55(2) of the IT Act. The tribunal upheld the CIT(A)'s order, confirming the chargeability of the capital gain tax.

2. Allowability of Deduction Under Sections 54 and 54F of the IT Act:
The assessee claimed a deduction under section 54 for an interest-free deposit of Rs. 50 lakhs given as security for taking a property on lease. The AO disallowed this deduction, noting that the assessee had not purchased or constructed a new residential house but had only taken a property on lease for a temporary period. The CIT(A) upheld this disallowance, stating that the refundable security deposit could not be treated as an investment in the acquisition of a new residential house.

In the tribunal, the assessee did not press much on this argument. The tribunal agreed with the CIT(A) and AO, stating that the law clearly requires the purchase or construction of a new residential house for deduction under section 54, which was not the case here. Consequently, the tribunal rejected the claim for deduction under section 54.

Conclusion:
The tribunal dismissed the appeal, confirming the chargeability of the capital gain tax of Rs. 83,37,500 and disallowing the deduction under section 54 of the IT Act. The tribunal found that the assessee's occupancy right was derived from the tenancy right, and the cost of acquisition should be computed as per section 55(2) of the IT Act. The refundable security deposit for the lease could not be treated as an investment in a new residential house for the purposes of section 54.