2022 (8) TMI 1018 - AT - Income Tax

Proportionate deduction u/s 54 / 54F - Computation of capital gain - direct construction cost as stated to be paid by the assessee was held to be not admissible for want of documentary evidence and the pre-construction housing loan was held to be not admissible - HELD THAT - The assessee has paid construction cost under a construction agreement. The perusal of ledger account of the said party as placed on record would reveal that majority of these payments are through banking channels which are evidenced by assessee s bank statements. Shri J. Bhaskaran responded to the notice issue by AO u/s 133(6) and file the requisite details. AO found that the said party was not maintaining books of accounts and no tax return was filed since the income was stated to be below taxable limit. However, the aforesaid fact, in our opinion, could not jeopardize assessee s claim since the assessee had paid the amount through banking channels under a construction agreement, a fact which stood confirmed by the contractor. In such a case, restricting the construction cost to the extent of Rs.49.95 Lacs could not be held to be justified. Accordingly, we direct Ld. AO to allow full construction cost of Rs.74.09 Lacs as paid to the contractor. So far as cost of Rs.40.88 Lacs stated to be incurred by the assessee is concerned, upon perusal of ledger as placed on record, it could be seen that the assessee has paid the construction cost of Rs.5.18 Lacs through banking channel whereas the remaining amount of Rs.35.67 Lacs has been paid in small trenches for various construction work which is evident from the narrations appended with each of the entry. In such a case, the denial of deduction of the same is not justified. The Ld. AO is directed to allow this cost. It could be seen that the assessee has not claimed any deduction on sale of property which is situated at Kolathur and in fact, the computations have resulted into capital loss for assessee on sale of this property. Therefore, the sale consideration of this property was not to be considered while computing proportionate deduction u/s 54 / 54F. We order so. The Ld. AO is directed to re-compute assessee s income. Assessee appeal partly allowed.

Summary

Issues Involved:
1. Consideration of evidence towards the cost of construction of new house property.
2. Jurisdiction of Assessing Officer (AO) in limited scrutiny cases.
3. Computation of capital gains and denial of deduction under Section 54/54F.

Detailed Analysis:

1. Consideration of Evidence Towards the Cost of Construction of New House Property:
The primary grievance of the assessee was the non-consideration of evidence regarding the cost of construction of a new house property. The CIT(A) had disallowed a significant portion of the construction cost, primarily due to the contractor not maintaining books of accounts or filing income tax returns. The assessee argued that the contractor was not required to maintain books under Section 44AD and had provided bank statements as evidence.

Findings:
- The assessee paid Rs.74.09 Lacs to the contractor, with most payments made through banking channels.
- The contractor confirmed the payments and provided details in response to a notice under Section 133(6).
- The Tribunal found that the lack of the contractor's tax return filings should not affect the assessee's claim, as the payments were made under a construction agreement and confirmed by the contractor.
- The Tribunal directed the AO to allow the full construction cost of Rs.74.09 Lacs.

2. Jurisdiction of Assessing Officer (AO) in Limited Scrutiny Cases:
The assessee contended that the AO exceeded his jurisdiction by disallowing House Rent Allowance (HRA) exemption when the scrutiny was limited to cash deposits and deductions under the head Capital Gains, as specified in Board Instruction No. 5/2016.

Findings:
- The Tribunal did not provide a separate detailed analysis on this issue in the judgment, focusing more on the computation of capital gains and the construction cost evidence.
- The implication is that the Tribunal's primary concern was the proper computation of capital gains and related deductions.

3. Computation of Capital Gains and Denial of Deduction Under Section 54/54F:
The assessee sold two properties and claimed deductions under Section 54/54F for investments made in a new property. The AO had brought the entire sale consideration to tax due to insufficient documentary evidence, while the CIT(A) restricted the construction cost and disallowed brokerage charges.

Findings:
- The Tribunal reviewed the revised computation of capital gains submitted during remand proceedings.
- The Tribunal found that the brokerage charges should not be considered as the assessee could not provide sufficient evidence.
- The Tribunal directed the AO to allow the construction cost of Rs.74.09 Lacs paid to the contractor and Rs.40.88 Lacs incurred directly by the assessee, as evidenced by bank statements and ledger entries.
- The Tribunal noted that the sale of the Kolathur property resulted in a capital loss, and therefore, its sale consideration should not be included in the proportionate deduction calculation under Section 54/54F.
- The AO was directed to re-compute the assessee's income accordingly.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO to:
- Allow the full construction cost of Rs.74.09 Lacs paid to the contractor.
- Allow the direct construction cost of Rs.40.88 Lacs incurred by the assessee.
- Exclude the sale consideration of the Kolathur property from the proportionate deduction calculation under Section 54/54F.
- Re-compute the assessee's income based on these directives.

Order pronounced on 17th August, 2022.