2016 (4) TMI 1098 - AT - Income Tax

ITAT allows deduction for two flats under section 54

The ITAT allowed the assessee's appeal, reversing the CIT(A)'s decision on both issues. The deduction claimed under section 54 of the Income Tax Act, 1961 ... Capital gains exemption under Section 54/54F - Residential house as a building with multiple independent residential units - Allowability of cost of improvement by indexing and evidentiary verificationCapital gains exemption under Section 54/54F - Residential house as a building with multiple independent residential units - Whether the assessee can claim exemption under Section 54/54F in respect of investment in two flats in the same apartment building - HELD THAT: - The Tribunal examined whether the statutory requirement of acquisition of 'a residential house' precludes claiming exemption where the assessee acquires two flats in the same building and on different storeys. Relying on the reasoning of the Delhi High Court in CIT v. Gita Duggal (order dated 21/2/2013) that a residential house may consist of several units which can be independently used as residences and that the physical structuring (lateral or vertical) does not prevent treating the building as a residential house, the Tribunal held that Section 54/54F is satisfied if the assessee acquires a building for residential use even if it comprises separate units. Applying that principle to the facts, the assessee purchased two flats in Balaji Tower-III (different storeys) and invested sums exceeding the capital gain; the Tribunal therefore reversed the CIT(A)'s disallowance and allowed the deduction claimed under Section 54/54F in respect of both flats. [Paras 6]Deduction under Section 54/54F is allowable in respect of both flats purchased in the same building; ground No. 1 allowed.Allowability of cost of improvement by indexing and evidentiary verification - Burden of proof and verification of improvement expenses - Whether the indexed cost of improvement claimed in respect of the sold plot (boundary wall) can be allowed despite the Assessing Officer and CIT(A) rejecting the documents as unreliable - HELD THAT: - The assessee produced receipts and a document purportedly signed by a civil engineer and a labourer evidencing expenditure on construction of a boundary wall. The Tribunal found that the lower authorities rejected these documents without seeking verification or issuing enquiries to test their genuineness after the assessee shifted the onus by claiming the exemption. The Tribunal held that merely discarding the evidence without verification was not permitted and, given that the assessee's overall investment in the new flats exceeded the capital gain, the claimed indexed cost of improvement ought to have been accepted. Accordingly the Tribunal allowed the indexed cost of improvement. [Paras 7]Indexed cost of improvement is allowable; the assessee's second ground is allowed.Final Conclusion: The Tribunal allowed the appeal: exemption under Section 54/54F was permitted in respect of both flats purchased in the same building, and the indexed cost of improvement in respect of the sold plot was held allowable after finding that the lower authorities had rejected evidences without appropriate verification. Issues:1. Disallowance of deduction claimed under section 54 of the Income Tax Act, 1961.2. Disallowance of indexed cost of improvement incurred by the assessee during the financial year 2004-05.Issue 1: Disallowance of deduction claimed under section 54:The appeal was against the CIT(A)'s order sustaining the addition of Rs. 19,33,831 made on account of disallowance of the deduction claimed under section 54 of the Income Tax Act, 1961 for A.Y. 2008-09. The CIT(A) observed that the investment in another property was not declared by the assessee, and the binding decision of the Hon’ble Karnataka High Court was ignored. The Assessing Officer allowed deduction under section 54 only for one residential house, considering the rental income from another property owned by the assessee. The ITAT reversed the CIT(A)'s order, allowing the deduction claimed by the assessee on two flats in the same building, relying on various legal precedents and the decision of the Hon’ble Delhi High Court.Issue 2: Disallowance of indexed cost of improvement:The second ground of appeal related to the disallowance of the indexed cost of improvement amounting to Rs. 1,07,907. The assessee had claimed expenses against the property sold by indexing, but the evidence provided was considered unreliable by the Assessing Officer and the CIT(A). The ITAT noted that the lower authorities did not verify the evidence provided by the assessee, shifting the burden to the revenue to confirm the genuineness of the expenses. As the assessee had invested more than the capital gain calculated, the addition of indexed cost of improvement was deemed unnecessary, and the assessee's appeal was allowed on this ground as well.In conclusion, the ITAT allowed the assessee's appeal, reversing the CIT(A)'s decision on both issues and granting the deductions claimed under section 54 and the indexed cost of improvement.