2006 (6) TMI 139 - AT - Income Tax

Capital Gains - denial of assessee's claim under section 54F of the Income-tax Act, 1961 - amount spent by the assessee, after the purchase of inhabitable house, to make the house habitable. The contention of revenue is that, the moment the house is purchased, the requirement of section 54F stands complied with and, therefore, any amount spent thereafter in respect of such house would not qualify for exemption under section 54F. HELD THAT - The investment in residential house would not only include the cost of purchase of the house but also the cost incurred in making the house habitable. An inhabitable premises, in our opinion, cannot be equated with a residential house. If one person cannot live in a premises, then such premises cannot be considered a residential house. In the modern age, the builder may provide semi-finished house or complete house depending upon the price agreed to between the parties. In case of semi-finished house, the purchaser will have to invest on flooring, wooden work, sanitary work, etc., to make it habitable. Therefore, the investment in house would be complete only when such house becomes habitable - it is held in principle that expenditure incurred on making the house habitable should be considered as investment in purchase of the house subject to the condition that payment was made during the period specified in section 54F. There is distinction between expenditure incurred on making the house habitable and the expenditure on renovation. A situation can be visualised where assessee may buy a habitable house but the assessee may like to incur expenditure by way of renovation to make it more comfortable. He may not be happy with the quality of material used by the builder and, therefore, he may incur the expenditure on improvement of the house. Such expenditure cannot be equated with the expenditure on making the house habitable. Whether the house purchased by the assessee was in a habitable condition or not would depend on the state of condition of the house at the time of purchase. Hence, this aspect would have to be kept in mind while adjudicating such issue. In the present case, the Assessing Officer as well as the learned CIT(A) had rejected the claim of the assessee on the ground that no expenditure could be considered for exemption under section 54F which was incurred after the date of purchase. The Assessing Officer had no occasion to examine the state of the condition of the house purchased by the assessee. Though, the list of expenditure has been provided by the assessee, yet it is to be examined whether such expenditure was incurred to make the house habitable or just to make the house more comfortable. This aspect of the matter requires examination by the Assessing Officer. The assessee is entitled to exemption under section 54F with reference to the expenditure incurred for making the house habitable. However, the factual matrix requires examination. Accordingly, the order of the learned CIT(A) is set aside and the Assessing Officer is directed to re-adjudicate the issue in accordance with the guidelines given and after considering the entire material produced by assessee before him. The assessee's appeal stands allowed protanto.

Summary

Issues:
Denial of assessee's claim under section 54F of the Income-tax Act, 1961 with reference to a specific sum.

Analysis:
The main issue in this appeal pertains to the denial of the assessee's claim under section 54F of the Income-tax Act, 1961, concerning a sum of Rs. 28,66,675. The assessee sold shares and purchased a flat, incurring additional expenses to make it habitable. The Assessing Officer rejected the claim, emphasizing that the cost of a new asset must be interpreted as the cost of purchase only, excluding subsequent improvements or renovations. The CIT(A) upheld this decision. The crux of the matter lies in interpreting section 54F, which incentivizes investment in residential properties.

The Tribunal highlighted the need to construe incentive provisions liberally to achieve the statute's objective. Referring to relevant case law and a circular, it emphasized that investment in a residential house should encompass not just the purchase cost but also expenses to make the house habitable. The Tribunal differentiated between expenditure to make a house habitable and renovation costs, stressing that an inhabitable house cannot be equated with a residential house. It directed the Assessing Officer to re-examine the issue, considering whether the expenses were for habitability or comfort enhancement, emphasizing the importance of assessing the house's condition at the time of purchase.

In conclusion, the Tribunal allowed the assessee's appeal partially, holding that expenditure to make the house habitable should be considered an investment for section 54F exemption. However, it mandated a reassessment by the Assessing Officer to determine the nature of expenses incurred and their relation to habitability. The decision underscores the importance of interpreting tax provisions in a manner that promotes the statutory objective of incentivizing investment in residential properties.