2024 (10) TMI 362 - AT - Income Tax

Addition under the head capital gain - disallowing exemption u/s 54/54F - without giving the benefit of the cost of improvement - Assessee contended that the investment was made by the assessee in the residential property. Therefore, the same is eligible for deduction u/s 50/54Fand that the depreciable assets, if the period of holding exceeds 36 months, are also eligible for such deduction u/s 50/54F Whether the benefit of cost of improvement claimed by the assessee is eligible for deduction in calculating the amount of capital gain? - HELD THAT - We note that admittedly the assessee has taken loan for the construction of the building amounting to Rs. 7.36 lakhs which was also accepted by the AO. It is a prevailing practice in the market that the banks do not give hundred percent loan to the parties for any project. In the given case the loan given by the bank stood at Rs. 7.36 lakhs and therefore it is implied that it shall be within the range of 70 to 80% of the total cost of the project. Accordingly, an inference can be drawn that the assessee must have also incurred the expenses for the construction of the house in the year 2003 to the tune of Rs. 20 to 30% of the total project cost. Thus, in the present facts and circumstances, we are of the view that the assessee should have also incurred the expenses to the tune of Rs. 5.16 lakhs approximately as claimed by him and accordingly we hold that the expenses claimed by the assessee for Rs. 12.52 lakhs towards the cost of construction of the building is eligible for deduction while calculating the capital gain long term capital gain with indexation. Cost of construction whether 2/4th of such expenses have been claimed by the assessee relating to the depreciable assets and the balance relates to the residential properties - Assessee has attached the receipt of the property tax demonstrating that 2 units of the impugned property were used for residential purposes. The copies of the receipt of the property tax are placed on pages 27 and 28 of the paper books, which were not disputed by the revenue authorities. Accordingly, we hold that the 50% cost of the improvement is eligible for indexation cost while calculating the capital gain. Whether the gain arising on the sale of depreciable assessed is eligible for exemption under section 54/54F? - Depreciable assets are subject to short-term capital gain in pursuance to the provisions of section 50 of the Act irrespective of the period of holding. However, there is no such distinction made under the provisions of section 54/ 54F and in the definition of long-term capital asset provided under section 2(29AA)/ 2(42A) - The gain arising from the depreciable asset shall be eligible for the exemption under section 54/ 54F of the Act if the period of holding exceeds 36 months as provided under the provisions of law. Accordingly, we hold that the assessee cannot be denied the benefit of exemption under section 54/ 54F of the Act with respect to the short-term capital gain arising from the sale of depreciable assets. Whether the investment made by the assessee in the new property is partly commercially in nature and partly residential in nature? - we note that assessee admittedly has been using the property for the residential purposes. Apart of such property indeed has been notified as commercially in nature but what we find from the facts on record is that the property primarily as a whole was used for the purpose of residence alone. The property marked as commercially in nature was never used for any commercial activity. As decided in Shri Amit Gupta 2005 (12) TMI 461 - ITAT DELHI in the facts and circumstances of the present case the basement was capable of being used as residence. The fact that the assessee did not actually use the same for his residence will not disentitle him to the claim of exemption under section 54F of the Act. On the facts and the circumstances of the case, we are of the view that the exemption under section 54F deserves to be allowed. Accordingly, we direct that the same should be allowed. The appeal of the assessee is allowed. It is not out of the place to mention that the assessee in the written submission has accepted part of such property as commercial in nature and accordingly submitted that such part of the property can be excluded from the amount of deduction under section 50/ 54F of the Act. However, at the time of hearing before us the ld.AR requested not to exclude such investment as alleged commercial in nature by the revenue on the reasoning that such property was predominantly used for the residential purposes. Thus we are inclined to hold that the assessee has made investment in the residential property and therefore the same is eligible for deduction under section 50/ 54F of the Act. Hence the ground of appeal of the assessee is hereby allowed.

Summary

Issues:
Interconnected issue of confirming addition under capital gain without exemption under section 54/54F.

Analysis:
The appeal was against the order of the National Faceless Appeal Centre for Assessment Year 2017-18. The assessee sold property in 2016 and claimed indexed cost of acquisition, indexed cost of improvement, and deduction under section 54/54F, resulting in NIL long-term capital gain. However, the AO found discrepancies in the property details and treated some properties as short-term capital assets, leading to an addition of Rs. 1,45,22,651. The CIT(A) upheld the AO's decision.

The first issue was whether the cost of improvement claimed by the assessee was eligible for deduction in calculating capital gain. The Tribunal noted that the assessee had taken a loan for construction, implying additional expenses incurred. It held that the claimed cost of improvement was eligible for deduction.

The second issue was whether short-term capital gain was eligible for exemption under section 54/54F. The Tribunal clarified that gain from depreciable assets could be exempt if the holding period exceeded 36 months, as per section 54/54F.

The third issue was whether the investment in the new property qualified for exemption under section 54/54F. The Tribunal found that though part of the property was marked as commercial, it was predominantly used for residential purposes. Citing precedent, it allowed the exemption, considering the property as residential.

The Tribunal analyzed the facts, including property tax receipts and actual usage, to conclude that the investment was primarily in residential property. The appeal was allowed, and the assessee's position was upheld, directing the allowance of the exemption under section 54/54F.

In conclusion, the Tribunal allowed the appeal, emphasizing the eligibility of the cost of improvement for deduction, the exemption for short-term capital gain under section 54/54F, and the residential nature of the investment property. The decision was pronounced on 3rd October 2024.