2015 (5) TMI 712 - AT - Income Tax

Revision u/s 263 - deduction under section 54F wrongly allowed - Held that - The assessee had obtained the permission for construction of farm house on 21/12/006 for construction of 582 sq.meters. and subsequent to the approval, assessee incurred expenditure of ₹ 1.78 crore upto 31/03/2009. This shows that the said asset/residential house was pre-existing and not a new asset constructed/purchased within the period as laid down in Clause (a) & (b) of Sub-section 1 to Section 54 of the Act. It was further observed that the land on which the farm house was constructed for claim of deduction u/s.54F of the Act was purchased in 10/11/2004 and 26/08/2005 and also obtained construction approval in Decembner-2006, i.e. even before the purchase of land (original asset purchased in October-2006 & February2007) which was sold during the previous year to generate long term capital gain. It was observed by the ld.CIT that as per provisions of section 54F of the Act if the residential house is constructed after the date on which transfer took place only then the deduction u/s.54 is allowable for construction of new asset, i.e. residential house. Further, even if the provisions of section 54F are considered to be applicable to extension of existing house under construction, the allowable claim of exemption has to be restricted to the extent of investment/expenditure incurred in the said residential house subsequent to the transfer of original capital asset under consideration. So far this reasoning is concerned, we find that the AO has allowed deduction without examining this aspect. Contention of the assessee is that the AO had raised a specific query in this regard and after considering the facts, submissions and case-laws allowed the deduction. But no such material is placed on record of this Tribunal that the AO during the course of hearing raised query with regard to claim of deduction of u/s.54 of the Act. Therefore, in the absence of such material, we do not see any infirmity into the finding of ld.CIT that AO failed to examine the aspect of allowability of deduction u/s.54F of the Act. After considering the totality of facts, we deem it appropriate to modify the order of ld.CIT on this issue and restore the issue of allowability of deduction u/s.54F of the Act to the file of AO for decision afresh. - Decided in favour of assesse for statistical purposes.

Summary

Issues Involved:
1. Invocation of provisions of section 263 of the Income Tax Act by CIT.
2. Treatment of profit on the sale of land as business income vs. long-term capital gains.
3. Consideration of replies and case laws submitted in response to the show-cause notice.
4. Direction to treat land sold as stock-in-trade.
5. Disallowance of claim under section 54F of the Act.
6. Examination of the correctness of facts and application of law by the AO.
7. Jurisdiction of CIT(A) in appellate proceedings.
8. Charging of interest under section 234 of the Act.
9. Initiation of penalty proceedings.

Detailed Analysis:

1. Invocation of Provisions of Section 263 of the Income Tax Act by CIT:
The CIT invoked section 263, revising the assessment order, directing the AO to treat the profit from the sale of non-agricultural land as business income instead of long-term capital gains. The CIT argued that the AO's failure to examine the nature of the income rendered the assessment order erroneous and prejudicial to the interests of the revenue.

2. Treatment of Profit on Sale of Land as Business Income vs. Long-Term Capital Gains:
The assessee contended that the land was held as an investment and shown as a fixed asset in the balance sheet, arguing that the CIT's direction to treat it as business income was erroneous. The CIT maintained that since the assessee was engaged in the business of development and sale of land, the profit should be treated as business income. The tribunal found that the assessee had consistently treated the land as a fixed asset, supporting the claim of long-term capital gains.

3. Consideration of Replies and Case Laws Submitted in Response to the Show-Cause Notice:
The assessee argued that the CIT did not consider the replies and case laws submitted in response to the show-cause notice. The tribunal noted that the CIT's order did not address these submissions, which should have been considered before revising the assessment order.

4. Direction to Treat Land Sold as Stock-in-Trade:
The CIT directed the AO to treat the land sold as stock-in-trade and tax the transaction under business income. The assessee contended that the land was held as an investment and valued at cost in the balance sheet. The tribunal agreed with the assessee, stating that the intention to hold the land as an investment was evident from its treatment in the accounts.

5. Disallowance of Claim under Section 54F of the Act:
The CIT directed the AO to disallow the claim under section 54F, arguing that the profit from the sale of land should be treated as business income. The tribunal found that the AO had allowed the deduction without examining the details of the investment in the new residential house. The tribunal restored the issue to the AO for a fresh decision on the allowability of the deduction under section 54F.

6. Examination of the Correctness of Facts and Application of Law by the AO:
The CIT held that the AO's failure to ascertain the correctness of facts and apply the correct provisions of law made the assessment order erroneous and prejudicial to the interests of the revenue. The tribunal found that the AO had not raised specific queries regarding the claim under section 54F and had allowed the deduction without proper examination.

7. Jurisdiction of CIT(A) in Appellate Proceedings:
The CIT(A) dismissed the appeal, holding that the revisionary order was an appealable order before the ITAT and that neither the AO nor the appellate office could decide the issues on merits. The tribunal noted that since the order of the CIT was set aside, the order in the present appeal would also not survive, and the issue of allowability of deduction under section 54F was restored to the AO for a fresh decision.

8. Charging of Interest under Section 234 of the Act:
The assessee challenged the charging of interest under section 234. The tribunal did not specifically address this issue, as it was contingent on the outcome of the primary issues under consideration.

9. Initiation of Penalty Proceedings:
The assessee contended that the initiation of penalty proceedings was not justified. The tribunal did not specifically address this issue, as it was contingent on the outcome of the primary issues under consideration.

Conclusion:
The tribunal allowed the appeals for statistical purposes, modifying the CIT's order and restoring the issue of allowability of deduction under section 54F to the AO for a fresh decision. The tribunal emphasized the need for the AO to examine the details and facts thoroughly before allowing deductions and making assessments.