2014 (4) TMI 774 - AT - Income Tax

Property's Initial Purpose Key in Tax Exemption Decision

Smt. K. Pratibha, Hyderabad Versus Income Tax Officer Ward 7(3), Hyderabad

Smt. K. Pratibha, Hyderabad Versus Income Tax Officer Ward 7(3), Hyderabad - TMI Issues:Claim of exemption under Section 54 of the Income Tax Act for capital gains from sale of property.Analysis:The appellant contested the Commissioner's decision to disallow the exemption claimed under Section 54 for Rs. 22,73,732. The appellant inherited a property and reinvested the sale proceeds in a commercial property, claiming it was for residential use. The Assessing Officer denied the exemption, citing the property's commercial usage and deviation from the approved plan. The CIT(A) upheld the denial, emphasizing the property's commercial nature and the developer's intention. The appellant argued that the property acquired was residential initially, supporting their claim with legal precedents. The Departmental Representative supported the Revenue's decision, highlighting the property's commercial status. The Tribunal considered the original intent of the property's development and municipal permissions, concluding that subsequent commercial use does not negate its residential nature. Citing a similar case, the Tribunal overturned the CIT(A)'s decision, directing the Assessing Officer to reevaluate and grant relief under Section 54, subject to conditions.This judgment clarifies that the nature of the property acquired, as intended during development and municipal approvals, determines eligibility for exemption under Section 54. Despite subsequent commercial use, if the property was originally residential, relief under Section 54 should be granted. The Tribunal emphasized the importance of the property's initial purpose and legal documentation in determining eligibility for tax exemptions.