2025 (8) TMI 1188 - AT - Income Tax

Assessment set aside; AO to recompute long-term capital gains, verify cost deductions and allow section 54F and 139(4) relief

Shri Alpesh Navinbhai Barot Versus Income Tax Officer, Ward – 3 (3) (1), Ahmedabad

Shri Alpesh Navinbhai Barot Versus Income Tax Officer, Ward – 3 (3) (1), Ahmedabad - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether deduction under Section 54F of the Income Tax Act is allowable where the assessee has utilised the capital gain for construction of a residential house before the extended due date for filing return under Section 139(4), without depositing unutilised capital gains into a capital gains account scheme. 2. Whether the Assessing Officer was obliged to ascertain and allow deduction for cost of acquisition and cost of improvement (including indexed cost) in computation of long-term capital gains where the assessee's return treated the entire sale consideration as capital gain and did not claim such deductions. 3. Whether the condition under Section 54F-that the assessee should not own more than one house property on the date of transfer-was satisfied and is a matter for verification by the Assessing Officer. 4. Whether the assessment should be remitted to the Assessing Officer for fresh computation/verification because material aspects (cost, improvement, completion of new property, ownership condition) were not examined during original assessment. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Allowability of Section 54F deduction where construction is completed before extended filing date without deposit into capital gains account scheme Legal framework: Section 54F permits exemption from long-term capital gains if specified conditions are met, including investment of proceeds in acquisition/construction of a new residential house within prescribed time limits; where unutilised capital gains remain, deposit into a specified capital gains account scheme before the due date for filing return is an alternative compliance mechanism. The extended due date under Section 139(4) allows additional time for filing and may be relevant for timing of utilisation. Precedent treatment: A coordinate bench of the Tribunal has held that utilisation of capital gains for purchase/construction of residential property before the extended date under Section 139(4) suffices for claiming Section 54F relief even if no deposit into the capital gains account was made. Interpretation and reasoning: The Tribunal treats actual utilisation of capital gains in constructing the new house before the extended return filing date as meeting the time-linked condition for Section 54F relief. The absence of a deposit into the capital gains account is not fatal where expenditure towards construction has been incurred within the permitted time. The Tribunal reasons that expenditure actually incurred for construction up to the due date should be allowed as deduction for the purpose of Section 54F, subject to satisfaction of other statutory conditions (for example, ownership limits). Ratio vs. Obiter: The direction to allow deduction under Section 54F for construction expenditures incurred up to the extended filing date, despite absence of deposit into the capital gains account, is treated as ratio by the Tribunal in the facts of the case; reliance on the coordinate-bench decision is applied to the present facts. Conclusions: The Tribunal directs the Assessing Officer to allow deduction under Section 54F in respect of expenses actually incurred towards construction of the house up to the due date for filing return under Section 139(4), subject to verification of compliance with the other statutory conditions for Section 54F (including the requirement regarding ownership of house property). Issue 2 - Obligation of Assessing Officer to enquire into and allow cost of acquisition and cost of improvement (indexed) where assessee treated entire sale consideration as capital gain Legal framework: Computation of long-term capital gain requires deduction of cost of acquisition and cost of improvement (with indexation where applicable) from full consideration; Assessing Officer is duty-bound to determine correct taxable income in assessment proceedings. Precedent treatment: It is a settled administrative/legal principle that the Department should not derive advantage from an assessee's ignorance of his rights; where the assessee does not claim a deduction but relevant facts exist, the Assessing Officer should make enquiries to ascertain correct computation. Interpretation and reasoning: The Tribunal finds that the assessee treated the entire sale consideration as LTCG and did not claim acquisition/improvement deductions; the Assessing Officer also failed to examine or seek particulars in assessment proceedings. Given that the asset was not shown to be self-acquired without cost, it was incumbent on the Assessing Officer to call for and verify details of cost/acquisition/improvement and to allow appropriate deductions. Failure to do so deprived the assessee of a potentially lower tax liability and constituted an error in assessment procedure. Ratio vs. Obiter: The Tribunal's conclusion that the assessment must be set aside for recomputation of LTCG and that the AO should allow cost of acquisition/improvement, if substantiated, is ratio and dispositive of the related ground of appeal. Conclusions: The Tribunal sets aside the matter to the file of the Assessing Officer with direction to call for necessary details, verify them, and work out the correct long-term capital gains allowing deductions for cost of acquisition and cost of improvement (with indexation) where justified; the ground is allowed for statistical purposes and the AO is to recompute taxable gains accordingly. Issue 3 - Verification of the condition that the assessee did not own more than one house property on date of transfer (relevance to Section 54F) Legal framework: One of the conditions for Section 54F relief is that at the date of transfer the assessee should not own more than one residential house property (subject to statutory exceptions); this is a factual condition to be examined and established on the record. Precedent treatment: The requirement is a condition precedent to relief and must be examined by the Assessing Officer on available evidence; absence of such examination precludes allowance of the exemption without verification. Interpretation and reasoning: The Tribunal notes that the Assessing Officer did not verify on record whether the assessee was the owner of more than one house property on the date of transfer. While the assessee asserted compliance and provided an email claiming completion and ownership position, the Tribunal directs the AO to examine this matter in the remand proceedings to ensure the statutory condition is satisfied before allowing Section 54F relief. Ratio vs. Obiter: The requirement that the AO must verify ownership status before granting Section 54F relief is ratio; the Tribunal's direction to conduct the verification forms part of the operative disposal. Conclusions: The Assessing Officer is directed, in the set-aside proceedings, to examine and verify whether the assessee owned more than one house property on the date of transfer and to allow or deny Section 54F relief accordingly. Issue 4 - Necessity and scope of remand to Assessing Officer for fresh computation/verification Legal framework: Where material factual or legal issues have not been examined by the Assessing Officer-such as proper computation of capital gains, allowance of acquisition/improvement costs, verification of completion of new property and ownership conditions-the tribunal may remit the matter for fresh adjudication with specific directions. Precedent treatment: Remand is appropriate where the record is incomplete or where the AO failed to discharge the duty to elicit necessary information, and where fresh evidence or verification is necessary for correct determination of tax liability. Interpretation and reasoning: The Tribunal finds multiple deficiencies in the assessment record: (a) lack of enquiry into cost of acquisition/improvement; (b) absence of verification of completion of construction within statutory time; (c) absence of enquiry into ownership of house property; (d) the assessee's email/evidence on completion was sent after assessment completion and requires consideration. In view of these lacunae, the Tribunal remits the matter to the Assessing Officer with detailed directions to call for particulars, verify documents, compute correct LTCG and to determine entitlement to Section 54F relief in accordance with law and the directions given herein. Ratio vs. Obiter: The remand and directions to the Assessing Officer are operative and constitute the Tribunal's binding decision in the present appeal (ratio). Conclusions: The appeal is allowed for statistical purposes; the assessment is set aside and remitted to the Assessing Officer to (i) re-compute long-term capital gains allowing cost/indexation where proved, (ii) examine and verify completion of construction and utilisation of capital gains up to the extended filing date for purposes of Section 54F, and (iii) verify the ownership condition under Section 54F before granting exemption.