2004 (6) TMI 247 - AT - Income Tax

Tribunal: Payments to tenants not exempt under section 54F

The Tribunal held that payments made by the assessee to tenants for acquiring tenancy rights cannot be considered as the cost of acquisition or ... Capital Gains Issues Involved:1. Whether the payments made by the assessee to tenants for acquiring tenancy rights should be treated as the cost of acquisition or improvement for the purpose of exemption under section 54F of the Income Tax Act.2. Whether the entire payment made by the assessee to tenants should be fully allowed as the cost of the asset or should be restricted proportionately to the assessee's share.Issue-Wise Detailed Analysis:1. Treatment of Payments to Tenants as Cost of Acquisition or Improvement:The primary issue in this case is whether the payments made by the assessee to the tenants for acquiring tenancy rights should be considered as the cost of acquisition or improvement of the residential house for the purpose of exemption under section 54F of the Income Tax Act.The assessee claimed exemption under section 54F for the purchase consideration of Rs. 6,00,000 and additional amounts paid to the tenants for vacating the property. The Assessing Officer restricted the claim to Rs. 6,00,000, arguing that the payments made to tenants could not be considered as the cost of acquisition or improvement for the purpose of section 54F. The CIT(A), however, held that the payments made to tenants should be treated as the cost of acquisition or improvement, relying on various judicial precedents.The Tribunal, after considering the rival submissions and relevant case laws, concluded that the question of whether the payments made to tenants constitute the 'cost of acquisition' of the residential house is irrelevant for deciding the controversy in the present appeal. The term 'cost of acquisition' is relevant for computing capital gains under section 48, but the issue at hand is whether the payments made to tenants fall within the ambit of the word 'purchase' as used in section 54F.The Tribunal referred to the Supreme Court's observation in CIT v. T.N. Aravinda Reddy, which stated that the word 'purchase' should be construed in its ordinary meaning. The Tribunal held that the payments made to tenants do not qualify as the purchase price of a residential house under section 54F, as the term 'cost of acquisition' and 'cost of improvement' are not mentioned in section 54F. Therefore, the benefit sought by the assessee cannot be conferred by interpreting the word 'purchase' to include these payments.2. Proportionate Allowance of Payments to Tenants:The alternative plea raised by the Assessing Officer was that if the payments made to tenants are treated as the cost of acquisition or improvement, the entire payment should not be fully allowed as the cost of the asset. Instead, it should be restricted proportionately to the assessee's share in the property.The CIT(A) did not accept this plea, stating that the assessee's share in the property was not restricted to 1/2 of the built-up area and included additional benefits attached to the property. However, the Tribunal found this reasoning unconvincing. The Tribunal noted that the assessee had purchased a 1/2 undivided share from his brother on an 'as is where is' basis and that the payments made to tenants pertained to the ground and first floors, which exceeded the assessee's 1/2 share of the built-up area.The Tribunal concluded that the entire payment to the tenants could not be considered as the cost of acquisition for the assessee's 1/2 share. The Tribunal emphasized that in the absence of any material suggesting that the assessee received extra benefits in the property, the excess payment should not be considered as the cost of acquisition. Therefore, the assessee would only be entitled to proportionate relief if it is held in further appeal that the payments made to tenants are eligible for deduction under section 54F.Conclusion:The Tribunal set aside the order of the CIT(A) and restored the order of the Assessing Officer, allowing exemption under section 54F only to the extent of Rs. 6,00,000. The appeal was allowed in favor of the revenue, and the Tribunal held that the payments made to tenants do not qualify for exemption under section 54F as the cost of acquisition or improvement. If the payments are considered eligible for deduction under section 54F in further appeal, the relief should be restricted proportionately to the assessee's share in the property.