ITAT allows cost of improvement and section 54 deduction for LTCG despite Revenue's objections

The ITAT Pune upheld CIT(A)/NFAC's decision allowing cost of improvement and section 54 deduction for LTCG computation. The AO had denied cost of improvement claiming no prudent person would wait three years without sale deed reference and payments were made only after show cause notice. The AO also denied section 54 deduction for incomplete construction within statutory timeframe. The tribunal found Revenue had accepted identical cost of improvement claims for the assessee's spouse (co-owner) without appeal, establishing precedent. CIT(A)/NFAC correctly determined the assessee satisfied all section 54 conditions by selling old asset and acquiring new residential property. Revenue's appeal was dismissed on both grounds.

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Issues Involved:
1. Disallowance of cost of improvement.
2. Denial of deduction under Section 54 of the Income Tax Act, 1961.

Detailed Analysis of Judgment:

1. Disallowance of Cost of Improvement:

Facts and Assessment:
The Assessing Officer (AO) disallowed the cost of improvement claimed by the assessee to the extent of Rs. 11,42,700/- out of a total of Rs. 30,42,700/-. The AO noted that the assessee paid Rs. 19 lakhs to M/s Vision Buildcon, while Rs. 20 lakhs was paid by the purchaser, Shri Ramesh Kondhare. The AO argued that the payment made after the issuance of a show cause notice was an afterthought and not justified.

CIT(A) / NFAC's Findings:
The CIT(A) / NFAC deleted the disallowance, observing that the assessee and his wife paid Rs. 15 lakhs each to Shri Ramesh Kondhare as reimbursement for the improvement cost. The CIT(A) referenced a similar disallowance in the case of the assessee's wife, which was deleted by the CIT(A), NFAC, Delhi. The CIT(A) concluded that the AO failed to consider the appellant's claim properly and did not conduct any inquiry with Shri Ramesh Kondhare.

Tribunal's Decision:
The Tribunal upheld the CIT(A) / NFAC's deletion of the disallowance. It noted that a similar addition was made in the hands of the assessee's spouse, which was deleted by the CIT(A) / NFAC and not contested by the Revenue. The Tribunal found no reason for the Revenue's grievance against the CIT(A) / NFAC's order and noted that the AO's reasons for disallowance were not justified. The Tribunal confirmed the deletion of the disallowance of Rs. 11,42,700/-.

2. Denial of Deduction under Section 54:

Facts and Assessment:
The AO disallowed the deduction under Section 54 amounting to Rs. 2,26,33,135/-, stating that the assessee failed to complete the construction within three years from the date of transfer of the original asset. The AO relied on information from the local municipal corporation indicating that no completion certificate was issued for the construction.

CIT(A) / NFAC's Findings:
The CIT(A) / NFAC allowed the deduction, observing that the assessee sold an old asset and applied the consideration for acquiring a new residential house. The CIT(A) noted that the new property was not merely a plot but a residential house, as evidenced by the purchase deed. The CIT(A) referenced a similar case involving the assessee's spouse, where the deduction was allowed. The CIT(A) concluded that the assessee satisfied all conditions under Section 54 and cited various judicial precedents supporting a liberal interpretation of the provision.

Tribunal's Decision:
The Tribunal upheld the CIT(A) / NFAC's decision, noting that the AO's observation that the property was a plot was factually incorrect. The Tribunal referenced its earlier decision in the case of the assessee's spouse, where the claim under Section 54 was allowed. The Tribunal found that the assessee satisfied all conditions for the deduction under Section 54 and confirmed the CIT(A) / NFAC's order allowing the deduction of Rs. 2,26,33,135/-.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A) / NFAC's order that allowed the cost of improvement and the deduction under Section 54. The Tribunal found no infirmity in the CIT(A) / NFAC's detailed reasoning and conclusions, which were supported by judicial precedents and factual findings. The appeal by the Revenue was dismissed in its entirety.

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