2023 (7) TMI 673 - AT - Income Tax

Disallowance of cost of improvement in incurred by the appellant on the property which was sold by him - HELD THAT - We have no hesitation that the AO examined and verified a note book mentioning the date and amount of labour bills and vouchers submitted by the assessee and thereafter drawn a sustainable conclusion that the bills/ vouchers submitted by the assessee are not acceptable documentary evidence to substantiate the fact of incurring as cost of improvement of the land during FY 1996-97. Therefore, we decline to accept the contention of assessee and thus, ground No. 1 of the assessee is dismissed. Deduction claimed u/s. 54F - Investment in new residential house - Proof of construction of the residential house - HELD THAT - In the present case, the valuation report and other documentary evidence including change of land use (CLU) certificate issued by the Haryana Govt authorities and the certificate issued by Sarpanch of Village Biranwas, Tehsil Kotkasim Distt. Alwar, Rajasthan clearly reveals that the assessee has constructed residential buildings comprising of two rooms, kitchen, toilet having electricity and water connection and a borewell with a septic tank which was being used as residential unit. Therefore, we are unable to agree with the basis taken by the ld CIT(A) that in proportion to the size of plot/ land the constructed portion is very small and thus, the exemption benefit u/s 54F of the Act cannot be extended to the cost of land appurtenant to the house. Therefore, on the basis of foregoing discussion we reach to a legal conclusion that the assessee, for claiming deduction u/s 54F submitted sufficient and all possible documentary evidence under his command, before authorities below to show that the assessee purchased land, constructed a residential unit consisting of two rooms, kitchen and bathroom with electricity and water facility supported by connection of borewell and septic tank built therein. The change of land use certificate reveals that the assessee before construction of said unit obtained permission from the competent authority before using agricultural land for the purpose of construction of residential house pertaining entire 1.26 hectre of land. Therefore, authorities below have erred in dismissing the claim of the assessee for deduction u/s 54F and hence, the AO is directed to allow the same to the assessee. Ground of the assessee are allowed.

Summary

Issues Involved:
1. Disallowance of cost of improvement.
2. Disallowance of deduction claimed under Section 54F.
3. Whether the constructed residential house qualifies for the deduction under Section 54F.

Summary:

Issue 1: Disallowance of Cost of Improvement
The assessee contested the disallowance of Rs. 4 lakh as the cost of improvement on the property sold during FY 1996-97. The AO and CIT(A) disallowed the claim, citing unreliable documentary evidence. The CIT(A) noted that the bills and vouchers submitted lacked authenticity, including issues like sequential bill numbers despite different dates, absence of sales tax registration or PAN, and non-existent contact numbers at the time. The Tribunal upheld the disallowance, agreeing with the AO and CIT(A) that the evidence provided was insufficient to substantiate the claim.

Issue 2 and 3: Disallowance of Deduction under Section 54F
The assessee claimed a deduction under Section 54F for investing in a new residential house. The AO disallowed the claim, stating that the assessee only possessed a piece of land without any construction. The CIT(A) partially allowed the claim but restricted it to the constructed portion, not the entire land, and questioned the residential intent and the small size of the constructed portion relative to the land size.

The Tribunal reviewed the evidence, including site plans, valuation reports, and change of land use (CLU) certificates, which indicated the construction of a residential unit. The Tribunal referred to various ITAT decisions, concluding that the non-residential use of a residential house does not disqualify it from Section 54F benefits. It also stated that the size of the constructed portion should not limit the exemption to the land appurtenant. The Tribunal ruled that the assessee met all conditions for the deduction under Section 54F and directed the AO to allow the deduction for the entire land and constructed portion.

Conclusion:
The Tribunal dismissed the ground on the cost of improvement but allowed the grounds related to the Section 54F deduction, directing the AO to grant the deduction for the entire land and constructed residential unit. The appeal was partly allowed.