2016 (5) TMI 632 - AT - Income Tax

Tribunal grants appeal, allows deduction under Section 54 of Income Tax Act.

The Tribunal allowed the appeal, overturning the CIT(A)'s order and permitting the deduction of Rs. 14,26,705/- under Section 54 of the Income Tax Act, ... Renovation expenses disallowed by way of benefit u/s. 54 - Exemption from LTCG - Held that:- The expenditure incurred by the assessee are towards the extensive civil, plumbing , electrical and painting works including new flooring, tiles, fittings in the new residential house property purchased by the assessee in Pune in July 2008 and are not towards purchase or installation of items of comfort such as air-conditioners, consumer electronics and entertainment equipments, electrical and other equipments, furniture etc. We have also seen the photographs of the new residential house at Pune when it was purchased by the assessee in July 2008 which is also placed in paper book which clearly reflects that the said house was not in the habitable conditions and was in dilapidated condition when it was purchased by the assessee in July 2008, which is also corroborated by the clause 8(ix) in the purchase agreement dated 23-07-2008 entered into by the assessee for acquiring the new residential house property at Pune in July 2008. Thus based on the peculiar facts and circumstances of this case and on the basis of our discussion and reasoning above , we hold that the assessee is entitled for claim of benefit u/s 54 of the Act of expenditure incurred by the assessee to make the said new residential house purchased by the assessee at Pune in July 2008 ‘habitable’ fit for living for residential purposes by the assessee. - Decided in favour of assessee. Issues Involved:1. Legality of the CIT(A)'s order dated 19th March 2014.2. Disallowance of Rs. 14,26,705/- from the cost of acquisition of the new house property under Section 54/54F of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Legality of the CIT(A)'s Order:The assessee contested the CIT(A)'s order, claiming it was 'bad in law, contrary to the facts of the case and evidence of record.' The Tribunal examined the procedural and substantive aspects of the CIT(A)'s decision, ultimately focusing on the specific disallowance issue.2. Disallowance of Rs. 14,26,705/- under Section 54/54F:- Facts and Contentions: The assessee sold tenancy rights for Rs. 2,00,00,000/- and invested in a new residential property in Pune, claiming a deduction of Rs. 1,31,78,257/- under Section 54 of the Act. This included Rs. 14,26,705/- spent on making the new property habitable. The AO disallowed this amount, arguing it should be considered 'cost of improvement' under Section 48, not deductible under Section 54.- Assessee's Argument: The assessee argued that the expenses were necessary to make the new property habitable, citing bills for interior decoration, plumbing, and electrical work. The assessee relied on various judicial precedents to support the claim that such expenses should be included in the cost of the new asset under Section 54.- AO's and CIT(A)'s Findings: The AO and CIT(A) held that the expenses were for improvements and not for making the house habitable. The CIT(A) noted the property already had basic amenities and the expenses were for renovations to suit the assessee's preferences, thus disallowing the deduction.- Tribunal's Analysis: The Tribunal examined the provisions of Section 54, emphasizing its beneficial nature aimed at promoting investment in residential housing. The Tribunal noted that the property was in a dilapidated condition requiring extensive work to make it habitable. The Tribunal referenced the purchase agreement, which acknowledged the need for significant repairs estimated at Rs. 7,00,000/-. The Tribunal found that the actual expenses incurred were necessary for making the property habitable, not merely for comfort.- Legal Precedents: The Tribunal cited several cases, including Rahana Siraj v. CIT and B.B. Sarkar v. CIT, supporting the view that expenses incurred to make a property habitable should be included in the cost of the new asset under Section 54.- Conclusion: The Tribunal concluded that the expenses of Rs. 14,26,705/- were indeed for making the new property habitable and, therefore, should be allowed as a deduction under Section 54. The Tribunal allowed the appeal, overturning the CIT(A)'s order.Final Judgment:The appeal filed by the assessee was allowed, and the disallowance of Rs. 14,26,705/- was reversed, permitting the deduction under Section 54 of the Income Tax Act, 1961. The order was pronounced in the open court on 30th March 2016.