Peter Savio Pereira, Mumbai vs Assessee

/Assessee by : Shri K.Gopal & Jitendra Singh /Revenue by : Shri Pawan Kumar Beerla

Date of Hearing : 12/01/2015 Date of Pronouncement : 27/02/2015 ORDER

PER R.C.SHARMA (A.M.) :

These two appeals have been filed by two assessees against the

order of CIT(A), for the assessment year 2007-08, in the matter of order

passed u/s.143(3) of the I.T.Act.

2 ITA Nos.8797&8798/2010

2. Common grievance in both the appeals relate to disallowance of

claim of deduction u/s.54(1) in respect of residential flats acquired by the

assessees in consideration of old house sold to the builder.

3. Rival contentions have been heard and record perused. Facts in

brief are that the assessee Vilma Mary Pereira has sold immovable

property situated at "Violet Valley" (with garage) at Junction of 26th and

30th Road at Bandra (W), Mumbai for a total consideration of

Rs.3,05,00,000/- vide agreement dated 28.4.2006 to M/s. Aqua Marine

Enterprises. The share of the assessee is 23% in the said property and

the other assessee Mr. Peter Pereira was having share of 77% in the

said house. From the agreement, the A.O. observed that the assessee

was to receive three more flats i.e. two flats having a carpet area of 1200

sq.ft. each and one flat having carpet area of 750 sq.ft. and three parking

spaces (two stilt and one open) as part of additional consideration.

However, the additional consideration was not shown as part of the total

consideration received by the assessee in her computation of LTCG on

transfer of the said property during the year. Further, the assessee had

taken the FMV of the said property as on 1.4.1981 at Rs.35,00,000/- on

the basis of valuation report dated 3.8.2006. In view of this, vide letter

dated 21.8.2009, the A.O. asked the assessee to state as under :-

"1. Please provide the market value of tile additional flats and other amenities to be received by you from the builder as per the sale agreement dated 28.4.2006. Furnish copies of agreements entered by you in this respect. Please also explain why the market value of the said flats and amenities should not be added to your total consideration for sale of property during the year while computing the LTCG for the year on sale of property.

2. Please furnish purchase proof at" NHA bonds against which deduction uls.54EC has been claimed. Please furnish copies of 3 ITA Nos.8797&8798/2010

relevant bank extracts with narration of each entry to support your claim.

3. .. Proof of payment of professional fees and allowability of the same as deduction from the LTCG shown.

4. Basis of division of share of the property sold during the year. Please furnish evidences to support your claim.

5. Please explain why the valuation made by you of the property sold as on 1.4.1981 should not be rejected?

4. In response, the A.R. of the appellant vide letter dated 23.10.2009 submitted as under :-

"The new flat and car parking is receivable in lieu of old residential place and old car parking place. Hence there is no additional amenities received from seller hence there should not be addition on account of market value of the said flat and amenities added to total consideration for sale of property during the year.

Valuation done by Odilio Fernandes on 31.7.2006 as on 1.4.1981 at Rs.35 lacs. Your honour may refer to departmental valuer for further verification. In case your honour is not satisfied without valuation report."

4. The aforesaid submission of the assessee was considered by the

A.O. According to the A.O. the new flat and car parking are nothing but

additional consideration. If the said new flat is receivable for old flat and

old car parking place, how the assessee has claimed indexation on the

value of the said properties as on 1.4.1981 against the consideration. If

the new flat was to be given in lieu of the old area occupied by the

assessee in the old structure, then the value of the said old structure

should have been reduced from the value of the entire property as on

1.4.1981 while computing the LTCG on such sale. However, the assessee

has taken the FMV of the entire property as on 1.4.1981 into

consideration while computing the LTCG on the sale of such property. 4

ITA Nos.8797&8798/2010

5. The A.R. of the assessee vide his submission dated 12.11.2009

stated that if market value of the new flat is added to income of the

assessee, then the investment in new residential property should be

allowed u/s.54 at market value. The AO. analysed the contention of the

assessee. According to the A.O., exemption u/s.54 is available only when

the assessee has purchased a new flat one year before or two years after

the date of transfer or has constructed a new residential' house within a

period of three years from the date of transfer of the house property

(original). The flats (alongwith car 'parking spaces) received by the

assessee in the proposed building as 'additional consideration' agreed

upon in the agreement dated 28.4.2006 was over and above her share in

the monetary consideration. These flats (alongwith car parking spaces)

form part of consideration received by the assessee towards transfer of

the property. This flat is neither purchased by the assessee nor

constructed by her. The A.O. held that since the assessee has not fulfilled

the conditions laid down in section 54, she is not eligible for exemption

u/s.54 of the LT. Act. The A.O. has further elaborated this issue in para 10

of the assessment order wherein he has held that exemption u/s.54 of the

I.T.Act is allowable only when the assessee makes an investment towards

purchase or construction of a new house property within the stipulated

period. Thus for availing exemption u/s.54, the assessee has to either

purchase or construct a new house property.

6. In this regard, the A.O. further held that exemption u/s.54 in respect

of capital gains arising on-sale of property used for residence is only

available towards investment [by way of purchase or construction in a 5 ITA Nos.8797&8798/2010

new house property within the time limit prescribed under the Act. In the

case under consideration, the assessee is treating the flats and parking

lots received by her as additional consideration as investment made

u/s.54. These flats (alongwith car parking spaces) received by the

assessee as part of 'consideration' cannot simultaneously be treated as

investment. In order to avail the exemption u/s.54, the assessee should

have made the investment in a new residence either by way of purchase

or construction of the same. In the instant case, as per AO, the assessee

has not fulfilled this condition which is the requirement of the Act. In view

of the above, the A.O. held that the assessee is not eligible for exemption

u/s.54 of the l.T.Act and accordingly denied the same to the assessee.

7. By the impugned order, the CIT(A) confirmed the disallowance

against which the assessees are in further appeals before us.

8. We have considered rival contentions, carefully gone through the

orders of the authorities below and found from the record that during the

course of appellate proceedings the assessee has submitted as under :-

"1. During the year the assessee with her co owner i.e. her brother Mr.Peter Savio Pereira sold the ancestral residential property for consideration of Rs.3,05,00,00/- and 3 flats admeesurinq 3150 sq. ft. with one open and two stilt parking in kind.

2. In the assessment order. the A.O. has valued the consideration received in kind for Rs.3,32,70,540/- and additions were made in the assessment order under the head long term capital gains without considering the said amount as reinvestment is neither purchased nor constructed by the assessee.

3. As regards benefit of section 54, this section makes it clear that capital gain arising from the transfer of a house property is exempt from tax provided the following conditions are satisfied :-

(a) The house property is a residential house whose income is taxable under the head 'Income from house property' as transferred by an individual or an HUF.

6 ITA Nos.8797&8798/2010

(b) The house property (may be self occupied or let out) is a long term capital asset.

(c) The assessee has purchased a residential house within a period of one year before the transfer or within two years after the date of transfer or has constructed a residential house property within a period of three years after the date of transfer.

The appellant has fulfilled the precondition mentioned at point Nos.(a) & (b) above was not in doubt. This was also not in dispute that the assessee had purchased new residential property by way of construction. This was because it was clear from the agreement with developer that the developer would construct the residential building on the property alienated by the assessee to the developer and handover the residential house to the assessee in consideration of the sale of original residential property. This fact is clear and unambiguous. Therefore to say that the appellant has also complied the last condition of section 54 for acquisition of new residential property.

The A.O. has considered sale consideration received in cash and kindbut failed to allow the exemption u/s.54 for reinvestment of the said consideration received in kind for acquiring of new residential house properly.

5. The A.O. has misinterpreted the definition of 'purchase' held by the Apex Court in the assessee of CIT vs. T.N. Aravinda Reddy. In this case, the definition of the term 'purchase' has been given as under:

"....... We find no reason to divorce the ordinary meaning of the word purchase as buying for a price or equivalent of price by payment in kind or adjustment towards an old debt or for other monetary consideration from the legal meaning of that word in section 54(1). If you sell your house and make a profit pay Caesar what is due to him. But if you buy or build another subject to the conditions of section 54(1), you are exempt. The purpose is plain the symmetry is simple, the language is plain. "

Thus the Hon. Supreme Court has defined the term 'purchase' as buying for a price / equivalent of price by payment in kind or adjustment towards an old debt or for other monetary consideration.

The word 'purchase' in section 54 has to be given its common and wider meaning. It should include buying or adjustment towards old debt or for other monetary consideration.

6. In the present' case before your honour, the assessee has purchased/constructed the new residential property and paid the consideration equivalent of price by payment in kind. Therefore the assessee has purchased the residential property and is entitled for exemption u/s.54 of the I T.Act 1961."

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ITA Nos.8797&8798/2010

9. It is clear from the above that residential house was given to the

assessee in consideration of the sale of old house. The sale consideration

was partly received in cash and partly in the form of new flats to be

constructed on the plot of old house sold by assessee. The new flats

agreed to be given to assessee amounts to investment by assessee in

residential house. Therefore, the AO was not justified in adding back the

additional consideration given in the form of allotment of three flats by

declining claim of deduction u/s.54 of the I.T.Act.

10. In the present case before us, the assessee has

purchased/constructed the new residential property and paid the

consideration equivalent of price by payment in kind. Therefore, the

assessee is entitled for exemption u/s.54 of I.T.Act, 1961 in respect of

these flats.

11. An issue was also raised by the AO with regard to sharing of 3 flats

between the co-owners of the property and the exemption u/s.54

allowable in case of investment in one residential flat only. In this regard,

we found that the details of allocation of area of new residential property

between co-owners are as follows :-

Name Ratio Area in Description Sq.Ft. Mr. Peter S. Pereira 77% 2400 Flat No.301 & 302 adjacent flats @ 1200 Sq.Ft. each on 3rd floor and two Stilt car parking space. Ms Vilma M. Pereira 23% 750 Flat No.402 on 4th floor and one car parking space.

The aforesaid ratio of allocation between co-owners is already on record

of the AO as well as in the valuation report. Furthermore, the co-owner

will get the area according to their ratio in the new residential property. 8

ITA Nos.8797&8798/2010

Since flat no.301 & 302 are situated in the same floor and adjacent to

each other and will be treated as one single residential unit for the

purpose of claiming exemption u/s.54. The same view has been taken by

the Special Bench of the Mumbai Tribunal in the case of ITO Vs. Ms.

Sushila M. Jhaveri, (2007) 292 ITR (AT) 1 (Mumbai).

12. The issue raised by the AO is also covered by the decision of

Hon'ble Delhi High Court in the case of Gita Duggal 257 CTR 208,

wherein the Hon'ble High Court held as under :-

"Sec. 54/54F uses the expression "a residential house". The expression used is not "a residential unit". This is a new concept introduced by the AO into the section. Sec. 54/54F requires the assessee to acquire a "residential house" and so long as the assessee acquires a building, which may be constructed, for the sake of convenience, in such a manner as to consist of several units which can, if the need arises, be conveniently and independently used as an independent residence, the requirement of the section should be taken to have been satisfied. There is nothing in these sections which require the residential house to be constructed in a particular manner. The only requirement is that it should be for the residential use and not for commercial use. If there is nothing in the section which requires that the residential house should be built in a particular manner, it seems that the IT authorities cannot insist upon that requirement. A person may construct a house according to his plans and requirements. Most of the houses are constructed according to the needs and requirements and even compulsions.

For instance, a person may construct a residential house in such a manner that he may use the ground floor for his own residence and let out the first floor having an independent entry so that his income is augmented. It is quite common to find such arrangements, particularly post-retirement. One may build a house consisting of four bedrooms (all in the same or different floors) in such a manner that an independent residential unit consisting of two or three bedrooms may be carved out with an independent entrance so that it can be let out. He may even arrange for his children and family to stay there, so that they are nearby, an arrangement which can be mutually supportive. He may construct his residence in such a manner that in case of a future need he may be able to dispose of a part thereof as an independent house. There may be several such considerations for a person while constructing a residential house. The physical structuring of the new residential house, whether it is lateral or vertical, should not come in the way of considering the building as a residential house. The fact that the 'residential house consists of several independent units cannot be permitted to act as an impediment to the allowance of the deduction under s.54/54F.

It is 9 ITA Nos.8797&8798/2010

neither expressly nor by necessary implication prohibited. Tribunal was therefore justified in allowing exemption under s.54 in respect of entire investment in construction of basement, ground floor, first floor, second floor and third floor."

13. In view of the above discussion, we do not find any merit in the

action of the AO for decline of claim of deduction u/s.54 in respect of

residential flats allotted by builder in consideration of sale of old house.

14. In the result, appeals of both the assessees are allowed.

Order pronounced in the open court on this 27th Feb.2015.

Sd/- Sd/- ( ) ( ) (VIVEK VARMA) (R.C.SHARMA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER Mumbai; Dated 27/02/2015 /pkm, PS Copy of the Order forwarded to : 1. / The Appellant 2. / The Respondent. 3. / The CIT(A), Mumbai. / BY ORDER, 4. / CIT 5. / DR, ITAT, Mumbai

6. Guard file.

//True Copy// (Asstt. Registrar) / ITAT, Mumbai