2019 (1) TMI 1353 - AT - Income Tax

Exemption claimed u/s 54F - LTCG - nature of property acquired - residential house contemplated u/s 54F or acquisition of land per se - construction cost of superstructure constructed on the land is very marginal - whether the co-owned superstructure on a combined adjoining plots of land can be regarded as residential house for the purposes of Section 54F? - Held that - In the instant case the dominant object of the deployment of consideration is to acquire land parcel and not to enjoy the residential house per se. We are at loss to understand as to how the factual aspects like lack of basic amenity and a non-descript temporary makeshift shelter/superstructure of insignificant worth can convert a land into a residential house. The vast open land with naturally grown grass, a grossly asymmetric consumption of land for construction of superstructure (cost less than 1% of total costs), the occupation of the superstructure by a watchman/caretaker clearly indicates that such superstructure cannot be mechanically reckoned as a residential house. The existence of vast parcel of open land is a reality. We thus find it utterly difficult to put blinkers on tell-tale facts. The superstructure claimed to be a residential house is clearly superficial and does not go hand in hand with ground realities. It is totally unconceivable that a token and symbolic superstructure of temporary nature involving insignificant construction costs or land occupying negligible space (created with an object to typically accommodate a watchman to safeguard the land) would convert huge parcel of land into a residential house. As we see in nutshell, cost of land exceeds 99% of the total cost of new investment in so called residential house. Likewise, land used for construction of superstructure is less than 1% of total area. The superstructure is jointly owned and devoid of basic amenities and actually used by the caretaker of lands. The unflappable facts narrated above when seen cumulatively seals the narrative against the assessee. The sale consideration is thus essentially appropriated towards purchase of land per se and not towards construction of residential house as enjoined by S. 54F. We thus find no plausible reason to interfere with the conclusion drawn by the Revenue authorities. In the result, the grievance of the assessee towards disallowance of deduction under s.54F dismissed - Decided against assessee.

Issues Involved:

1. Rejection of exemption under Section 54F of the Income Tax Act.
2. Determination of whether the constructed structure qualifies as a residential house.
3. Inclusion of the cost of land as part of the cost of the residential house.
4. Treatment of the entire land appurtenant to the house for exemption under Section 54F.
5. Allegation of the claim being a sham to defraud the government.
6. Withdrawal of exemption after three years from the date of transfer.
7. Rejection of the cost of improvement of the capital asset sold.
8. Levy of interest under Sections 234A, 234B, and 234C.
9. Initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Rejection of Exemption under Section 54F:
The assessee claimed exemption under Section 54F of the Income Tax Act for the capital gains arising from the sale of co-owned land, asserting that the sale consideration was used to purchase land and construct a residential house. The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] rejected the exemption, stating that the constructed structure did not qualify as a residential house due to the absence of basic amenities such as a toilet, water, electricity connection, and kitchen, and thus did not meet the conditions laid down under Section 54F.

2. Determination of Whether the Constructed Structure Qualifies as a Residential House:
The AO conducted a spot verification and found the constructed structure to be inhabitable, lacking basic amenities, and primarily used by a watchman. The CIT(A) upheld this view, emphasizing that the structure was not fit for habitation and did not meet the criteria of a residential house. The Tribunal concurred, noting that the construction cost was meager compared to the land cost, and the structure was temporary and devoid of essential facilities, thus failing to qualify as a residential house.

3. Inclusion of the Cost of Land as Part of the Cost of the Residential House:
The assessee argued that the cost of the land should be included in the cost of the residential house as per CBDT Circular No. 667 of 1993. While the Tribunal acknowledged this principle, it emphasized that the dominant objective of the investment was the acquisition of land, not the construction of a residential house. The Tribunal found that the substantial portion of the sale consideration was used for purchasing land, with only a negligible amount spent on construction, thereby disqualifying the claim for exemption under Section 54F.

4. Treatment of the Entire Land Appurtenant to the House for Exemption under Section 54F:
The assessee contended that the entire land, including two adjoining plots, should be considered for exemption. The CIT(A) and the Tribunal rejected this argument, stating that the vast open land with minimal construction could not be treated as land appurtenant to a residential house. The Tribunal noted that the land used for construction was less than 1% of the total area, and the structure was not intended for residential use, thus failing to meet the requirements for exemption.

5. Allegation of the Claim Being a Sham to Defraud the Government:
The CIT(A) and the Tribunal found the claim to be a sham, intended to defraud the government by avoiding tax on capital gains. The Tribunal highlighted the disproportionate investment in land versus construction and the lack of basic amenities in the structure, concluding that the claim was not genuine.

6. Withdrawal of Exemption After Three Years from the Date of Transfer:
The assessee argued that the exemption could only be withdrawn after three years from the date of transfer. However, this argument was rendered moot as the primary issue was the qualification of the constructed structure as a residential house, which was not met.

7. Rejection of the Cost of Improvement of the Capital Asset Sold:
The AO rejected the claimed cost of improvement of the capital asset sold, amounting to ?5,65,520/-, citing insufficient evidence. This rejection was upheld by the CIT(A) and the Tribunal, as the assessee failed to provide adequate proof of the claimed improvements.

8. Levy of Interest under Sections 234A, 234B, and 234C:
The Tribunal did not find any justification to interfere with the levy of interest under Sections 234A, 234B, and 234C, as these were consequential to the primary findings on the disallowance of exemption.

9. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal did not address the initiation of penalty proceedings under Section 271(1)(c) in detail, as the primary focus was on the disallowance of exemption under Section 54F.

Conclusion:
The Tribunal dismissed the appeal of the assessee, upholding the disallowance of exemption under Section 54F, rejecting the claim that the constructed structure qualified as a residential house, and confirming the findings of the AO and CIT(A) on all related issues.

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