2021 (10) TMI 786 - AT - Income Tax

Disallowance of exemption u/s 54F - villa was registered on 21.02.2015 i.e. prior to transfer of original asset i.e. 13.11.2015 - Also assessee has not paid for purchase of new residential house but it is for registration charges stamp duty charges and interior works - HELD THAT - There is no strict requirement regarding completion of construction u/s 54F(1) to be entitled for availing exemption. The passport to derive benefit under sec. 54F(1) is investment in construction of property within the period required u/s. 54F(1) or to invest in residential property within the stipulated time for enabling deduction u/s 54F of the Act. Hon'ble Karnataka High Court in decision of CIT vs. Sambandam Udaykumar 2012 (3) TMI 80 - KARNATAKA HIGH COURT took the view that, under provisions of section 54F of the Act, the condition preceded is that, capital gains realised from sale of capital asset should have been parted by assessee and invested or constructed a residential house, as the case may be. Hon'ble court also observed that, the essence of the purpose of section 54F, is whether, the assessee who received the capital gain has invested in a house. Once it is demonstrated that the consideration received on transfer of capital asset has been invested in or construction of residential house, even though the construction is not complete in all respect as required under law, assessee cannot be denied benefit u/s 54F. Respectfully applying ration of Hon'ble Karnataka High Court in case of CIT Vs. Sambandam 2012 (3) TMI 80 - KARNATAKA HIGH COURT we hold that assessee is eligible during the year under consideration. However, the amount said to have been spent on interior decoration can't be granted since it is not for the purpose of making the house into habitats condition. see ALEEM FAZELBHOY. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-6 (1), MUMBAI. 2006 (6) TMI 139 - ITAT BOMBAY-G - AO is directed to compute the proportionate deduction - Decided in favour of assessee partly.

Issues Involved:
1. Justification of the order by the Learned Commissioner (Appeals).
2. Denial of exemption of capital gains under section 54F of the IT Act.
3. Eligibility of expenses incurred prior to and after the transfer of the original asset.
4. Reliance on judicial precedents.
5. Inclusion of registration charges, stamp duty, statutory charges, and interior works in the cost of the new residential house.
6. Denial of exemption on interior works.
7. Conditions under section 54F and their satisfaction by the appellant.
8. Interpretation of section 54F as a beneficial provision.

Detailed Analysis:

1. Justification of the Order by the Learned Commissioner (Appeals):
The appellant argued that the order of the Learned Commissioner (Appeals) was not justified in law and on facts. The Commissioner upheld the action of the Assessing Officer in denying the exemption of capital gains claimed under section 54F, which the appellant contested as erroneous.

2. Denial of Exemption of Capital Gains under Section 54F:
The appellant claimed an exemption of ?59,73,467/- under section 54F for the assessment year 2016-17, which was denied by the Assessing Officer and upheld by the Commissioner (Appeals). The denial was based on the grounds that the villa was registered before the transfer of the original asset and that certain expenses were not considered part of the purchase cost of the new residential house.

3. Eligibility of Expenses Incurred Prior to and After the Transfer of the Original Asset:
The appellant contended that the expenses incurred within one year prior to the transfer and after the transfer towards the furnishing of the villa should be eligible for exemption under section 54F. The Commissioner (Appeals) disagreed, noting that the villa's registration date and the nature of the expenses did not meet the criteria for exemption.

4. Reliance on Judicial Precedents:
The Commissioner (Appeals) relied on the decision in Parswanath Padmarajaiah Jam [2019] 102 taxmann.com 92 (Bengaluru) and ignored the jurisdictional High Court's decision in CIT vs. K Ramachandra Rao, [2015] 230 Taxman 334. The appellant argued that the latter decision supported their claim that investments made within one year prior to the sale of the original asset are eligible for exemption under section 54F.

5. Inclusion of Registration Charges, Stamp Duty, Statutory Charges, and Interior Works in the Cost of the New Residential House:
The appellant asserted that registration charges, stamp duty, statutory charges, and interior works should be included in the cost of the new residential house and thus eligible for exemption under section 54F. The Commissioner (Appeals) upheld the disallowance, stating that these expenses were not part of the purchase cost.

6. Denial of Exemption on Interior Works:
The Commissioner (Appeals) denied the exemption on investments made towards interior works, arguing that expenditure on interiors to make the house plush and luxurious is not included in the total cost of the house paid to the builder. The appellant contested this, stating that such investments were essential to make the home habitable.

7. Conditions under Section 54F and Their Satisfaction by the Appellant:
The appellant claimed to have satisfied all conditions stipulated under section 54F, including the investment in the new residential house within the specified period. The Commissioner (Appeals) disagreed, noting that the construction of the house was completed before the sale of the original asset, thus disqualifying the appellant from claiming the exemption.

8. Interpretation of Section 54F as a Beneficial Provision:
The appellant argued that section 54F is a beneficial provision and should be interpreted liberally to encourage investments in residential houses. The Commissioner (Appeals) took a strict interpretation, denying the exemption based on the timing and nature of the expenses.

Conclusion:
The Tribunal held that the appellant substantially fulfilled all necessary conditions to be entitled to a liberal interpretation of section 54F. It was noted that the primary condition for eligibility was the investment in the construction or purchase of a residential house within the stipulated period. The Tribunal directed the Assessing Officer to compute the proportionate deduction for registration and stamp duty expenses but upheld the denial of exemption for interior decoration expenses, as they were not necessary to make the house habitable. The appeal was thus partly allowed.

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