2024 (7) TMI 787 - AT - Income Tax

LTCG - Deduction u/s 54 - capital expenditure so made by the assessee to bring the new property in the habitable condition stating that it will not be includible in the cost of new property and hence consequently disallowed the amount - whether the renovation expenses claimed by the appellant which were incurred much after the purchase of the property do form part of purchase consideration of the property eligible to claim the benefits of section 54? - HELD THAT - The assessee has incurred the necessitate capital expenditures in the form of electrification of house and water facilities, wooden works, glass works, works to carry out cooking activities, bath room fittings and fixings and painting of wall, doors and windows, in support of which necessary evidences has been provided to the AO vide letter dated 05.02.2016 to make the new property in the habitable condition since the flat so purchased was in unfinished/in a state of general disrepair and was inhabitable. AO has denied assessee s claim u/s 54 of the Act without cogent reasons. Ld. CIT (A) also called the expenditure incurred to bring the house inhabitable condition as renovation expenses. As per the facts of the case, the house was purchased in inhabitable condition and expenditure was necessary for the proper electrification, water facilities, wood work, glass work, etc. as detailed above. It cannot be at all called renovation expenses. Assessee s claim is appropriate and assessee should get exemption u/s 54 of the Act on this expenditure also. Case of Rajat B Mehta 2018 (2) TMI 670 - ITAT AHMEDABAD is applicable on the facts of this fact and ld. CIT (A) has erred in distinguishing the said case law. Decide the issue in favour of the assessee.

Summary

Issues:
1. Deduction under Section 54 of the Income Tax Act.
2. Recognition of separate contracts for property purchase and improvement.
3. Consideration of assets for Section 54.
4. Reference to Valuation Officer for fair market value.
5. Rebuttal of inspection report.
6. Sharing of inspection report with assessee.
7. Physical verification without intimation to assessee.
8. Reliance on ITAT Ahmedabad D Bench judgment.

Issue 1: Deduction under Section 54 of the Income Tax Act:
The assessee claimed a deduction under Section 54 for the investment made in a house property. The Assessing Officer (AO) denied the claim, stating that the capital expenditure made by the assessee to bring the new property into a habitable condition would not be included in the cost of the new property. The AO disallowed the amount of Rs. 24,24,127/- on this basis. The CIT (A) upheld the AO's decision, emphasizing that renovation expenses incurred much after the property purchase date do not form part of the purchase consideration eligible for Section 54 benefits. The CIT (A) found the appellant's claim lacking clarity and upheld the AO's findings.

Issue 2: Recognition of separate contracts for property purchase and improvement:
The assessee entered into two separate contracts with the same builder: one for the purchase of the house property and the other for various improvement works. The total consideration for both contracts was made through banking channels before the property registration. The ITAT recognized the integral nature of both agreements in the deal of buying the house property. The ITAT emphasized that the renovation expenses were necessary to make the purchased property habitable and not merely renovation expenses. The ITAT referred to a judgment of ITAT Ahmedabad D Bench, supporting the assessee's position and directing the AO to delete the disallowance of deduction under Section 54.

Issue 3: Consideration of assets for Section 54:
The assessee argued that if an assessee incurs costs to make a property habitable, useful, and convenient, it should be considered an investment made for the property purchase and be eligible for deduction under Section 54. The ITAT agreed with this argument, emphasizing the necessity of the capital expenditures to bring the new property into a habitable condition.

Issue 4: Reference to Valuation Officer for fair market value:
The AO did not make a reference to the Valuation Officer to ascertain the fair market value of the property, which was contested by the assessee. The ITAT did not specifically address this issue in its judgment.

Issue 5: Rebuttal of inspection report:
The AO did not allow the assessee to rebut or refute the inspection report, which was considered an error compounded by the National Faceless Appeal Centre (NFAC). The ITAT found this action to be in error but did not provide detailed analysis in the judgment.

Issue 6: Sharing of inspection report with assessee:
The AO did not share the inspection report with the assessee before issuing the assessment order. The ITAT considered this action an error compounded by the NFAC but did not elaborate on the implications in the judgment.

Issue 7: Physical verification without intimation to assessee:
The AO conducted physical verification at the property without informing the assessee, close to the time-barring date of assessment. The inspection report was based on third-party statements and not shared with the assessee before the assessment completion. The ITAT found this action to be erroneous and highlighted the lack of reasonable notice period given to the builder for verification.

Issue 8: Reliance on ITAT Ahmedabad D Bench judgment:
The NFAC erred by not relying on a judgment of ITAT Ahmedabad D Bench in a similar case, where two separate agreements were recognized for property purchase and improvement works. The ITAT found the judgment applicable to the current case and directed in favor of the assessee based on this precedent.

In conclusion, the ITAT allowed the appeal of the assessee, recognizing the necessity of capital expenditures to make the purchased property habitable and eligible for deduction under Section 54. The judgment emphasized the integral nature of separate contracts for property purchase and improvements and highlighted errors in the AO's actions regarding inspection reports and physical verification.