2021 (10) TMI 731 - AT - Income Tax

Cost of improvement claimed by the assessee u/s. 54 - AO came to the conclusion that the assessee has not carried out any improvement at the house purchased by the assessee and accordingly, he disallowed the entire amount - assessee has submitted before us that the repairs carried by the assessee long back, five years ago and therefore, he is not able to produce evidence before the AO - entire repair works/improvements carried out by his relatives and he is not able to collect the bills and vouchers since he is residing at Mumbai - HELD THAT - We find that the Inspector has enquired with the neighbours and the neighbours has stated before him that they are not aware of the improvements carried out by the assessee. Mainly, based on the enquires made with the neighbours, he came to the conclusion that the assessee has not carried out any improvement work and disallowed the entire expenditure claimed by the assessee. On appeal CIT(A) is of the opinion that if the A.O wanted to know exactly about the improvement works carried out by the assessee, he should have been enquired through a builder who constructed the building inspite of neighbours - CIT(A) keeping in view the above and also by considering all other factors and also take into consideration that the assessee is not residing at Chennai he is only residing at Mumbai, he disallowed an amount of ₹ 5,00,000/- for lack of evidence and directed the A.O to allow the benefit u/s. 54 of the Act to the extent of ₹ 18,00,000/-. We have gone through the entire order of the Ld. CIT(A), we find that the disallowance made by the Ld. CIT(A) to the extent of ₹ 5,00,000/- is fair and reasonable and we find that no interference is called for. In view of the above, the appeal filed by the Revenue is dismissed.

Summary

Issues Involved:
1. Cost of improvement claimed by the assessee under Section 54 of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Cost of Improvement Claimed by the Assessee under Section 54 of the Income Tax Act, 1961:

The primary issue in this appeal revolves around the cost of improvement claimed by the assessee under Section 54 of the Income Tax Act, 1961. The assessee purchased a flat and incurred expenses for renovation, amounting to ?23,00,000. The breakdown of the expenses includes construction of a septic tank and compound wall, replastering labor work, tile removal and relaying, plumbing and electrical work, painting work, and main door change and carpentry work.

The Assessing Officer (A.O.) requested bills and vouchers for these expenditures. The assessee, residing in Mumbai, could not provide the bills and vouchers, asserting that the renovation was carried out by relatives and thus, the documents were not available. The A.O. deputed an Inspector to verify the claims. The Inspector's enquiry with the neighbors revealed they were unaware of any improvements. Based on this, the A.O. concluded that no renovation was carried out and disallowed the entire claimed amount.

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] partially disagreed with the A.O. The CIT(A) noted that it is common for buyers of old houses to renovate them and criticized the A.O. for not consulting a departmental valuer for a scientific valuation. The CIT(A) found the A.O.'s reliance on the Inspector's report, which compared the assessee's house with a neighbor's house, to be arbitrary and based on assumptions. The CIT(A) also highlighted that the A.O. should have conducted basic enquiries with the builder rather than relying on neighbors' statements.

The CIT(A) acknowledged that the assessee could not provide satisfactory evidence for tile removal and relaying, and painting works amounting to approximately ?4.95 lakhs. Consequently, the CIT(A) disallowed ?5,00,000 and allowed the remaining ?18,00,000 as the cost of improvement.

The Revenue, aggrieved by the CIT(A)'s decision, appealed to the Tribunal. The Departmental Representative supported the A.O.'s order, arguing that the assessee failed to provide evidence. Conversely, the assessee's representative supported the CIT(A)'s order.

The Tribunal reviewed the materials and found that the CIT(A)'s decision to disallow ?5,00,000 was fair and reasonable, considering the circumstances. The Tribunal noted that the A.O.'s enquiry was primarily based on neighbors' statements and did not involve expert valuation or consultation with the builder. The Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal.

Conclusion:

The Tribunal concluded that the CIT(A)'s partial disallowance of ?5,00,000 was justified and reasonable, given the lack of evidence for certain renovation expenses. The Tribunal found no reason to interfere with the CIT(A)'s decision, thereby dismissing the Revenue's appeal and allowing the cost of improvement to the extent of ?18,00,000 under Section 54 of the Income Tax Act, 1961.