Section 54 deduction denied for LTCG as constructed property lacked basic amenities like electricity and water connection

ITAT Delhi denied section 54 deduction for LTCG on residential house construction. AO found the property lacked basic amenities including electricity and water connection, with no approved construction map submitted. Physical inspection on 07.12.2017 by IT Inspector confirmed absence of basic amenities. Tribunal held that assessee failed to construct habitable residential house within prescribed three-year period from transfer date (25.09.2014 to 25.09.2017). The property remained agricultural land without residential amenities. Revenue's appeal was allowed, upholding denial of section 54 deduction.

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Issues Involved:
1. Eligibility for deduction u/s 54 of the Income Tax Act, 1961.
2. Basic amenities in the claimed residential house.
3. Nature of the property purchased.
4. Interpretation of "residential house" under section 54.
5. Relevance of the Punjab & Haryana High Court judgment.

Summary:

Issue 1: Eligibility for deduction u/s 54 of the Income Tax Act, 1961

The primary issue to be decided is whether the assessee is eligible for claiming deduction u/s 54 of the Income-tax Act, 1961. The assessee sold a residential property on 25.09.2014 and claimed deduction u/s 54 for the capital gain earned. The AO observed that the assessee did not construct a new residential property within the stipulated time frame.

Issue 2: Basic amenities in the claimed residential house

The AO noted that the property purchased by the assessee lacked basic amenities such as proper water and electricity connection, and the constructed area was a makeshift arrangement. The Inspector's report confirmed the absence of these amenities, and the AO concluded that the property did not qualify as a residential house.

Issue 3: Nature of the property purchased

The AO observed that the assessee purchased agricultural land with the intention to construct a residential house, but the construction was not completed within the required period. The property was reported to have only makeshift structures and lacked essential amenities.

Issue 4: Interpretation of "residential house" under section 54

The learned AO emphasized that a residential house should have basic amenities such as a boundary wall, kitchen, washroom, bedroom, electricity, and water connection. The AO concluded that the assessee's property did not meet these criteria and thus did not qualify as a residential house for the purpose of section 54.

Issue 5: Relevance of the Punjab & Haryana High Court judgment

The AO relied on the judgment of the Hon'ble Punjab & Haryana High Court in the case of Ashok Syal v. CIT, which stated that a house must have basic living amenities to qualify as a residential house. The AO denied the deduction u/s 54 based on this judgment.

Conclusion:

The Tribunal upheld the AO's decision, stating that the assessee did not construct a residential house with the required basic amenities within the prescribed time frame. The certificates from the Sarpanch and Architect were deemed insufficient to prove the existence of a habitable residential house. Therefore, the appeal of the Revenue was allowed, and the deduction u/s 54 was denied.

Order pronounced in open court on 29.04.2024.

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