2024 (11) TMI 1382 - HC - Income Tax

Delhi HC upholds ITAT decision: plywood structures don't qualify as residential house construction under Section 54 LTCG deduction

Delhi HC upheld ITAT's decision disallowing deduction under Section 54 for LTCG. Assessee claimed construction of residential house on agricultural land ... LTCG - Disallowance of deduction u/s 54 - whether the Assessee had constructed a residential house on the agricultural land within the stipulated period of three years from the date of transfer of the aforesaid property in question, that is, on or before 25.09.2017? - HELD THAT:- A plain reading of Section 54 of the Act that the allowance is available if the capital gains arising from a sale of residential property is utilised by the Assessee for purchasing a residential property or constructing a residential house. It is obvious that the construction of a residential house would entail raising a construction for inhabitation as a residential dwelling unit. The Inspector’s report, which the learned ITAT had accepted is a makeshift guardroom made of plywood of 7 feet x 6 feet was found on the site and a similar room of plywood of 16 feet x 12 feet with a toilet attached was found at the said site. Putting together a structure of plywood sheets cannot be construed as constructing a residential house. The Inspector had also reported that there was no electricity or water connection on the land and electricity was used by genset. The first inspection report indicated that the exact location itself of the land was difficult to find as the area was vast and inhabited and comprised of hilly terrain. It is material to note that the structures made of plywood sheets were found to exist on the subject property during the second visit of the Inspector conducted on 7.12.2017. In our view, no question of law arises for consideration of this court given the description of the subject property in question, as noted by the learned ITAT in its order. The findings of the learned ITAT cannot be assailed as perverse or manifestly erroneous. Issues Involved:1. Eligibility for exemption under Section 54 of the Income Tax Act.2. Definition and requirements of a 'residential house' for the purpose of claiming exemption.3. Evaluation of evidence and findings by the CIT(A) and ITAT.4. The evidentiary value of certificates and reports submitted.5. Interpretation of Section 54 of the Income Tax Act concerning the construction of a residential house.Issue-wise Detailed Analysis:1. Eligibility for Exemption under Section 54 of the Income Tax Act:The primary issue was whether the appellant (Assessee) was eligible for an exemption under Section 54 of the Income Tax Act, 1961, for the capital gains earned from the sale of a residential property. The Assessee claimed that the capital gains were invested in constructing a residential house within the stipulated period, thus qualifying for the exemption. However, the Assessing Officer (AO) denied the exemption, concluding that the Assessee had not constructed a residential house but had merely purchased vacant agricultural land with makeshift structures, which did not qualify as a residential house.2. Definition and Requirements of a 'Residential House':The crux of the matter was the interpretation of what constitutes a 'residential house' under Section 54. The AO and ITAT emphasized that a residential house should have basic amenities such as a boundary wall, kitchen, washroom, bedroom, electricity, and water connection. The ITAT held that the makeshift structures found on the agricultural land did not meet these requirements, thereby disqualifying the Assessee from claiming the exemption.3. Evaluation of Evidence and Findings by the CIT(A) and ITAT:The CIT(A) had initially ruled in favor of the Assessee, accepting the claim that the structures on the land met the description of a residential house, particularly in a rural context where specific construction norms might not apply. The CIT(A) relied on the Inspector's report and other evidence, including a certificate from an architect. However, the ITAT reversed this decision, finding that the Assessee had not constructed a residential house within the required timeframe. The ITAT noted the lack of essential utilities and the temporary nature of the structures, which did not satisfy the criteria for a residential house.4. The Evidentiary Value of Certificates and Reports Submitted:The ITAT questioned the evidentiary value of the certificates issued by the Sarpanch and the architect, suggesting that they did not hold significant weight against the physical inspection reports conducted by the Inspector. The ITAT emphasized that the absence of basic amenities and the temporary nature of the structures were crucial in determining the non-eligibility for exemption.5. Interpretation of Section 54 of the Income Tax Act Concerning the Construction of a Residential House:Section 54 of the Income Tax Act allows exemption if the capital gains from the sale of a residential property are reinvested in purchasing or constructing another residential house within a specified period. The court highlighted that the construction must be suitable for habitation as a dwelling unit. The ITAT's findings, based on the Inspector's report, indicated that the Assessee's structures did not meet the legal requirements for a residential house, as they lacked permanence and essential services.In conclusion, the court upheld the ITAT's decision, affirming that the Assessee was not entitled to the exemption under Section 54 due to the failure to construct a qualifying residential house within the stipulated period. The appeal was dismissed, with the court finding no substantial question of law arising from the ITAT's findings.