2022 (4) TMI 437 - AT - Income Tax

Tribunal Clarifies Deduction Rules for Residential Property Investments

Jay Narendrakumar Thakkar Versus I.T.O., Ward-1 (2) (2), Ahmedabad.

The Tribunal upheld the disallowance of the excess construction cost claim but allowed the deduction under section 54 for the investment made in another ... Working of LTCG on sale of property - Claim of excess construction cost denied - HELD THAT:- we note that the assessee himself before the AO has agreed that he has claimed excessive construction cost by ₹ 2,50,000.00 only. - we do not find any reason to interfere in the finding of the AO. Thus, the ground of appeal of the assessee for claiming the deduction on account of the expenditure is dismissed. Deduction under the provisions of section 54 - Profit on sale of property used for residence - deduction was denied by the AO on the reasoning that the assessee was already in the possession of the residential house at the time of purchase of the new house - HELD THAT:- As we note the word used in section 54(1) of the Act reads as investment in ‘a residential’ property which ought to be interpreted as property in which investment should be of residential in nature in nature. As the word ‘a residential property’ should not understood in singular number or one residential property. In holding so, we find support and guidance from the judgment of Hon’ble Karnatka High Court in case of CIT vs. D. Ananda Basappa [2008 (10) TMI 99 - KARNATAKA HIGH COURT] The assessee cannot be denied the benefit of the deduction provided under section 54 of the Act if he has a house at the time of transfer of the property and makes the investment in another residential property. Accordingly, the finding of the authorities below is devoid of any merit. Likewise, the amount of capital gain is less than the amount of the investment made by the assessee in another residential house. Therefore, we are of the view that the assessee is eligible for deduction under the provisions of section 54 of the Act. Accordingly, we set aside the finding of the learned CIT-A and direct the AO to allow the benefit of deduction for making the investment in another residential unit of ₹ 12,50,000.00 only. Accordingly, there cannot be any addition to the total income of the assessee on account of capital gain as discussed above. Hence, the ground of appeal of the assessee is allowed. Issues:1. Disallowance of excess construction cost claimed by the assessee.2. Denial of deduction under section 54 of the Income Tax Act for the investment made in another residential unit.Issue 1: Disallowance of Excess Construction Cost:The appeal was filed by the Assessee against the order of the Commissioner of Income Tax (Appeals) regarding the assessment order passed under section 143(3) read with section 263 of the Income Tax Act for the Assessment Year 2011-12. The Assessee had initially declared an income of &8377;1,37,680, which was later revised under section 263 of the Act. The Assessing Officer (AO) made adjustments to the cost of construction, which the Assessee accepted. The Assessee had claimed a deduction under section 54 of the Act, which was reduced by the AO. The Assessee challenged the denial of the excess construction cost claim of &8377;2,50,000. However, the Assessee admitted the error in claiming &8377;2,77,600 instead of the correct amount of &8377;27,600. The Tribunal upheld the AO's decision to dismiss the claim for the excess construction cost.Issue 2: Denial of Deduction under Section 54:The Assessee claimed a deduction of &8377;12,50,000 under section 54 of the Act, which was denied by the AO on the grounds that the Assessee already owned a residential house at the time of purchasing a new one. However, the AO allowed a proportionate deduction under section 54 in the assessment order. The Tribunal noted the contradictory stance taken by the AO in denying and allowing the deduction simultaneously. The Tribunal referred to section 54(1) of the Act, emphasizing that the term 'a residential property' should not be interpreted as singular but as residential in nature. Citing a judgment, the Tribunal held that the Assessee should not be denied the deduction under section 54 if the investment was made in another residential property. As the capital gain was less than the investment, the Tribunal directed the AO to allow the deduction of &8377;12,50,000 under section 54. Consequently, the Assessee's appeal was partly allowed.In conclusion, the Tribunal upheld the disallowance of the excess construction cost claim but allowed the deduction under section 54 for the investment made in another residential unit. The Tribunal's decision provided clarity on the interpretation of the term 'a residential property' under section 54(1) of the Act, ensuring the Assessee's eligibility for the deduction.