2017 (11) TMI 173 - AT - Income Tax

Deduction u/s 54F - disallowing 50% of labour expense which resulted in reducing the construction value of the residential property - Held that - As gone through the material as per record and observed that the existence of residential house was evident from the construction of room, bathroom, water tank, boundary wall etc. There was electricity connection in the house with meter near the entry of constructed house. We have also observed that existence of these facts were not disproved by the assessing officer as he has not referred the matter to the valuation officer. After taking into consideration the specific facts of this case we are of the view that for lack of some facilities it is not appropriate to categorized the aforesaid house as non-residential house. Inter alia we are inclined with the decision of the CIT(A) that the assessee has failed to fully substantiate the claim of labour expenses by not furnishing the relevant evidences as elaborated in the findings of the Ld.CIT(A). Therefore, we do not find any error in the findings of the Ld.CIT(A) of disallowing 50% of labour expense (Rs 11,50,000/- ) which resulted in reducing the construction value of the residential property to ₹ 54,50,000/- and restricting the deduction u/s 54F of the Act to ₹ 52,63,756/- on the basis of 1/6th share of the assessee. Therefore, the appeal of the revenue is dismissed. Invoking provision of section 94(7) on account of disallowance of loss relating to short term loss on sale of Mutual Funds we find that the assessee failed to controvert the applicability the provision of section 94(7) to the fact of the case of the assessee, therefore, the cross objection filed by the assessee on this issue is rejected Also dismissed in view of the applicability of provision of section 2(22)(e) for accepting loan from the company in which he was a director and beneficial owner of holding 20% shares

Issues Involved:
1. Deletion of disallowance made by the AO under section 54F of the Income Tax Act, 1961.
2. Partial disallowance of expenses incurred towards construction of residential property.
3. Disallowance of loss under section 94(7) of the Income Tax Act.
4. Addition under section 2(22)(e) of the Income Tax Act as deemed dividend.
5. Levy of interest under sections 234B and 234C of the Income Tax Act.
6. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Deletion of Disallowance under Section 54F:
The assessing officer (AO) disallowed the exemption claimed by the assessee under section 54F, arguing that the constructed property did not qualify as a "residential house." The AO pointed out several deficiencies such as the absence of a kitchen, incomplete construction, and lack of basic amenities. However, the CIT(A) observed that the term "residential house" is not defined in the Act and interpreted it in common parlance. The CIT(A) concluded that the construction, which included a room, bathroom, water tank, and boundary wall, qualified as a residential house. The CIT(A) also noted that the AO's focus on the assessee's lifestyle and the property's lack of certain facilities was irrelevant. Consequently, the CIT(A) allowed the exemption under section 54F but restricted it to ?54,50,000/- after disallowing ?11,50,000/- of the claimed expenses as unsubstantiated.

2. Partial Disallowance of Construction Expenses:
The CIT(A) partly disallowed the expenses claimed by the assessee for the construction of the residential property. The AO had questioned the genuineness of the expenses due to the lack of substantiating evidence such as the inability to produce laborers who carried out the work. The CIT(A) agreed with the AO to an extent, disallowing 50% of the labor expenses amounting to ?11,50,000/-. The Tribunal upheld this decision, noting that the existence of construction was evident but the assessee failed to fully substantiate the labor expenses.

3. Disallowance of Loss under Section 94(7):
The assessee's claim of short-term loss on the sale of mutual funds was disallowed by the AO under section 94(7) of the Act. The CIT(A) upheld this disallowance, and the Tribunal found that the assessee failed to controvert the applicability of section 94(7). Therefore, the cross objection filed by the assessee on this issue was rejected.

4. Addition under Section 2(22)(e) as Deemed Dividend:
The AO made an addition of ?1,25,000/- under section 2(22)(e), treating the amount received as deemed dividend. The CIT(A) upheld this addition, and the Tribunal dismissed the cross objection filed by the assessee, affirming the applicability of section 2(22)(e) since the assessee was a director and beneficial owner holding 20% shares in the company.

5. Levy of Interest under Sections 234B and 234C:
The CIT(A) held that the levy of interest under sections 234B and 234C was consequential. The Tribunal did not find any merit in the cross objection filed by the assessee on this issue.

6. Initiation of Penalty Proceedings under Section 271(1)(c):
The CIT(A) considered the initiation of penalty proceedings under section 271(1)(c) as premature. The Tribunal did not address this issue further, as it was deemed premature.

Conclusion:
The Tribunal dismissed both the appeal of the revenue and the cross objection of the assessee. The Tribunal upheld the CIT(A)'s decision to allow partial exemption under section 54F, disallow partial construction expenses, and confirm the disallowance of loss under section 94(7) and addition under section 2(22)(e). The levy of interest under sections 234B and 234C was deemed consequential, and the initiation of penalty proceedings under section 271(1)(c) was considered premature.

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