2005 (7) TMI 583 - AT - Income Tax

Tribunal allows deduction under Income-tax Act for reinvestment in residential property

The Tribunal ruled in favor of the assessee, allowing the deduction under Section 54 of the Income-tax Act for Long-Term Capital Gain reinvested in a new ... Capital gains -Profit on sale of property used for residential house Issues Involved:1. Long-Term Capital Gain (LTCG) and claim of deduction under Section 54 of the Income-tax Act, 1961.2. Classification of property as residential or commercial for tax exemption purposes.3. Validity of treating two separate agreements for the purchase and sale of property as a single residential unit.Detailed Analysis:1. Long-Term Capital Gain (LTCG) and Claim of Deduction under Section 54 of the Income-tax Act, 1961:The primary issue in this case is whether the assessee is entitled to claim a deduction under Section 54 of the Income-tax Act, 1961, for the Long-Term Capital Gain reinvested in the purchase of a new residential property. The Assessing Officer (AO) initially denied the exemption for one of the two flats (B-I), arguing that it was used for commercial purposes as a beauty parlour. The AO allowed the exemption only for the other flat (B-II), which was used as a residential property. The CIT(A) and the Tribunal, however, found that both flats should be treated as a single residential unit and allowed the deduction.2. Classification of Property as Residential or Commercial for Tax Exemption Purposes:The AO contended that Flat B-I was used commercially as a beauty parlour and thus did not qualify for the residential property exemption under Section 54. The AO's assessment included evidence such as the assessee's admission of using B-I for a beauty parlour, municipal licenses, and separate sale agreements. However, the assessee argued that both flats were part of a single residential duplex house, with the beauty parlour occupying only a small part of the ground floor. The CIT(A) supported the assessee's claim, emphasizing that the property was primarily residential, no depreciation was claimed, and the beauty parlour was closed before the sale.3. Validity of Treating Two Separate Agreements for the Purchase and Sale of Property as a Single Residential Unit:The AO's position was based on the existence of two separate agreements for the purchase and sale of the flats, treating them as distinct units. The assessee and the CIT(A) argued that despite the separate agreements, the flats constituted a single residential unit, supported by factors such as a common entrance, interlinked staircase, and the structure of the property as a duplex house. The Tribunal upheld this view, noting that the property was used and sold as a single residential unit, thus qualifying for the exemption under Section 54.Conclusion:The Tribunal concluded that the property, despite being purchased and sold through separate agreements, should be treated as a single residential unit. The beauty parlour's temporary commercial use did not alter the property's residential character. The Tribunal upheld the CIT(A)'s decision to allow the indexation of the cost of the original asset and the deduction under Section 54 for the Long-Term Capital Gain reinvested in the new residential property. Consequently, the Revenue's appeal was dismissed.