Tribunal affirms deduction under Section 54F for residential house construction.

The Tribunal upheld the CIT(Appeals) decision, allowing the assessee's claim for deduction under Section 54F of the Income Tax Act, 1961. The Tribunal confirmed that the assessee's investment in constructing a residential house within the specified period qualifies for the deduction under Section 54F. Additionally, the Tribunal directed the CIT(Appeals) to address the issue of interest on borrowed funds as part of the cost of acquisition for computing Long Term Capital Gain, emphasizing that other matters were conclusively settled.

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Issues Involved:
1. Deduction under Section 54F of the Income Tax Act, 1961.
2. Interest on borrowed funds as part of the cost of acquisition for computing Long Term Capital Gain.

Issue-wise Detailed Analysis:

1. Deduction under Section 54F of the Income Tax Act, 1961:

The Revenue challenged the CIT(Appeals) decision allowing the assessee's claim for deduction under Section 54F of the Income Tax Act, 1961. The assessee had claimed a deduction of Rs. 49,27,996 on account of investment in a residential property. The Assessing Officer (AO) disallowed this claim on several grounds, including the timing of the construction agreement, the registration and possession of the property, and the non-deposit of sums under the capital gain account scheme.

The CIT(Appeals) directed the AO to allow the deduction, observing that the requirement for deduction under Section 54F for construction does not include the stipulation that the construction agreement must be within one year of the transfer of the capital asset. The CIT(Appeals) relied on judicial precedents, including the Karnataka High Court's decision in CIT vs. J. R Subramanya Bhat (1987) 165 ITR 571, which supported the assessee's claim.

The Tribunal upheld the CIT(Appeals) decision, stating that Section 54F allows for exemption if the capital gain is invested in constructing a residential house within three years of the transfer. The Tribunal noted that the payments made by the assessee to the builder were for the construction of a residential house and that there is no requirement for registration or valid title as a condition for availing exemption under Section 54F. The Tribunal dismissed the Revenue's appeal, confirming that the assessee's investment in the construction of the property within the stipulated period qualifies for the deduction under Section 54F.

2. Interest on Borrowed Funds as Part of the Cost of Acquisition for Computing Long Term Capital Gain:

The assessee's cross objection concerned the AO's disallowance of Rs. 7,82,394, which was interest paid on borrowed funds used to acquire the property. The AO contended that this interest could not be considered as part of the cost of acquisition or improvement, nor as an expenditure incurred in connection with the transfer. The CIT(Appeals) did not adjudicate this issue.

The Tribunal noted that the CIT(Appeals) failed to address the issue of whether the interest paid on loans borrowed for acquiring the property should be allowed as a deduction while computing the long-term capital gain. The Tribunal directed the CIT(Appeals) to adjudicate this issue after providing the assessee an opportunity to be heard. The Tribunal emphasized that other issues concluded in the previous order or by the Tribunal's order dated 20.03.2015 in ITA No.573/Bang/2012 would remain concluded and not open for scrutiny in the set-aside proceedings before the CIT(Appeals).

Conclusion:

The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross objection for statistical purposes, directing the CIT(Appeals) to adjudicate the issue of interest on borrowed funds as part of the cost of acquisition. The Tribunal confirmed that the assessee's investment in the construction of the property within the stipulated period qualifies for the deduction under Section 54F.

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