Shri Irshad Mirza ,, Kanpur vs Department Of Income Tax

This appeal is preferred by the Revenue against the order of the ld. CIT(A) on a solitary ground that the ld. CIT(A) has erred in law and on facts in directing the Assessing Officer to allow the claim of deduction under section 54F of the Income-tax Act, 1961 (hereinafter called in short "the Act") without appreciating the facts brought on record by the Assessing Officer during the course of assessment proceedings. :-2-:

2. Through cross objection, the assessee has assailed the order of the ld. CIT(A) that he has erred in not allowing the claim of deduction of Rs.30 lakhs and computation of long term capital gain as per provisions of section 48(1) of the Act.

3. The appeal and cross objection were heard together and are being disposed of through this consolidated order for the sake of convenience.

4. The facts in brief borne out from the record are that the assessee has raised a claim of deduction under section 54F of the Act with regard to the capital gain earned on sale of property No.101-B, 1st Floor, Elegant Business Park, Andheri (East), Mumbai. Deduction under section 54F of the Act was claimed in respect of investment in purchase of residential house No.10/495, Khalasi Lines, Kanpur for Rs.4,28,46,400/- on 26.6.2008;

deduction of Rs. 5lakhs for transfer charges; Rs.17,07,480/- for excess tax paid after sale and Rs.30 lakhs penal charges for late possession from the sale consideration of Rs.12 crores on sale of property at Mumbai. The Assessing Officer, however, disallowed the deduction under section 54F of the Act as well as claim of expenditure of Rs.17,07,470/- and Rs.30 lakhs as aforesaid. He allowed deduction of Rs.5 lakhs only relating to transfer charges in respect of property sold at Mumbai. While disallowing the claim of deduction under section 54F of the Act, the Assessing Officer was of the view that the assessee is already having a self occupied property at Parwati Bagla Road, Kanpur and has also disclosed to have received rental income from the property No.83/140, Parampurwa, Kanpur. The Assessing Officer has also noticed that in addition to this, the assessee also owns one more residential property at plot No.14/6B, Gwalitoli, Civil Lines, Kanpur and rental income from which has also been disclosed under the head "income from house property". The Assessing Officer formed a view that there is a clear violation of clause (1) (a) read (1) (b) of the provisions of section 54F of the Act. He accordingly denied exemption with regard to the claim of :-3-:

deduction of Rs.30 lakhs relating to sale of Mumbai property. The Assessing Officer was of the view that it was penal charges for late possession, therefore, the same cannot be allowed for the purpose of deduction from the cost of transfer.

5. The assessee preferred an appeal before the ld. CIT(A) and filed written submissions explaining the nature of properties held by him at the time of purchase of residential house No.10/495, Khalasi Lines, Kanpur along with certain evidence relating to other properties. The ld. CIT(A) called comments from the Assessing Officer with regard to the evidence furnished by the assessee relating to different properties held by him and after obtaining comments from the Assessing Officer, the assessee's comments were also sought on the submissions of the Assessing Officer and thereafter has admitted the additional evidence. The ld. CIT(A) has adjudicated the issue in the light of the submissions made by both the parties with respect to different properties and was of the view that the assessee owns only one residential house and the other properties are commercial properties and are not being used for residential purpose.

Therefore, the assessee is entitled for deduction under section 54F of the Act.

6. With regard to the claim of deduction of Rs.30 lakhs on sale of property at Mumbai, the ld. CIT(A) has not appreciated the contentions on behalf of the assessee and he treated this payment as penal in nature and not as compensation for late possession of property. He accordingly confirmed the order of the Assessing Officer in this regard.

7. Aggrieved, the Revenue is in appeal and the assessee has filed cross objection before the Tribunal.

8. The ld. D.R. has placed reliance upon the order of the Assessing Officer with regard to deduction claimed under section 54F of the Act whereas the ld. CIT(A) has placed reliance upon the order of the ld. CIT(A). :-4-:

Besides, he has also invited our attention that the assessee has filed various documents before the ld. CIT(A) in order to establish that the properties held by the assessee at the relevant point of time are commercial properties.

9. With regard to the property at plot No.14/6B, Gwalitoli, Civil Lines, Kanpur, the assessee has filed certificate of registration with Trade Tax Department, registration with Directorate of Industries, Unnao, Wealth Tax return for assessment year 2009-10 and valuation report of the DVO dated 15.7.2009 to prove that this property was used for commercial purposes.

10. Similar is the position with regard to the property No.105 & 106, Parampurwa, Kanpur and with regard to this property, the assessee has filed the copies DVO's report, High Court order, Income-tax return and computation of income, Certificate issued by the U.P. Pollution Control Board, Electricity bill, Registration Certificate and other evidences to establish that this property is a factory building and was used for commercial purposes. The ld. CIT(A) examined these evidences in detail and came to the conclusion that these properties were used for commercial purposes.

11. Having carefully examined the orders of the lower authorities in the light of the rival submissions, we find that the Assessing Officer has made disallowance of claim of deduction under section 54F of the Act without making necessary verification. Before the ld. CIT(A), the assessee has filed enormous evidence in order to establish that the alleged properties held by the assessee were not of residential nature, as they were used for commercial purposes. The ld. CIT(A), while adjudicating the issue, has taken into account various evidences placed before him. The additional evidence was also confronted to the Assessing Officer and reply of the Assessing Officer was also taken into account by the ld. CIT(A) while :-5-:

adjudicating the issue. The relevant observation of the ld. CIT(A) in this regard are extracted hereunder for the sake of reference:-

"I have carefully considered the rival submissions furnished by the Assessing Officer and the ld. AR, the legal position and case laws on the issues involved in the present appeal. After examining the various evidences relied upon by both the parties relating to the issue of claim of deduction under section 54F of the Act, I find that Assessing Officer has based his decision vide remand report dated 6.11.2012 simply on the narration given I the sale deed of the properties at Parampurwa & Civil Lines which mention the nature of the property as residential. The Assessing Officer has also not disbelieved the documentary evidences furnished by the appellant which also pertains to the period when the property at Mumbai was sold. In this regard it is very pertinent and relevant to go through the proviso to sub-section (1) of section 54F which reads as under:-

Provided that nothing contained in this sub-section shall apply where-

(a) the assessee,-

(i) owns more than one residential house, other than the new asset, on the date of transfer of the original asset ; or

(ii) purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset ; or

(iii) constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and

(b) the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head ''Income from house property''.

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As per above provisions the condition relating to the ownership of more than one residential house other than the new assets is to be judged on the date of transfer of the original assets. In the present case the position of the two properties considered as residential house by the Assessing Officer at the relevant time has been as under:-

(i) Property No.105-106 Parampurwa, Kanpur.

The Assessing Officer has considered this property as residential on the basis of sale deed which was executed in financial year 2006-07 whereas the transfer of Mumbai property took place in financial year 2008-09. About the nature & use of the property the learned AR has furnished voluminous documents and most of them are the certificates issued by various Govt. agencies like Excise Department, Sales Tax, Labour Deptt., Pollution Deptt., etc. Apart from this the premises was also inspected by Department Valuer of Valuation Cell who had found the property as factory building in the year 1996. The appellant had disclosed the rental income from the tenant who was running the factory before and after the relevant period. In Wealth Tax returns the appellant had disclosed the property as commercial property for the last several years. The ld. AR has thus stated that these documents prove beyond any doubt that the property in question was a commercial property. It was submitted that the Assessing Officer in his report has not disbelieved these evidences and merely on the basis of narration in the sale deed reached to the conclusion that the property was a residential house. The Assessing Officer also did not make any effort to inspect the property during assessment as well as in remand proceedings.

Decision: (With reference to Prampurwa Property) :-7-:

I have carefully considered the rival submission and evidences placed on record. The documentary evidences furnished by the appellant have not been disbelieved by the Assessing Officer. The Assessing Officer only on the basis of same narration in the sale deed has come to the conclusion vide remand report dated 6.11.2012 that property under reference was a residential property. In my opinion the Assessing Officer has failed to place any cogent material and evidences to disprove the contention of the appellant. Even personal inspection of the property was also not made. On consideration of-

1. Valuation report dated 27.7.2007

2. Intimation dated 22.1.2006 to Trade Tax Department

3. Income statement for assessment year 2009-10 with return of income

4. TDS certificate on rent for assessment year 2009- 10

5. Letter dated 26.5.2007 & 15.11.2007 of U.P. Pollution Board

6. Electricity Bill

7. License under Factory Act

8. Registration certificate dated 13.3.2006

9. Acknowledgement dated 3.5.2007 of Govt. of U.P.

10. Income statement filed for assessment year 2007- 08 & 2008-09.

It is obvious that the property is commercial property. Considering the overwhelming documentary evidences filed by the appellant and decision of SC (Supra), I hold that the property under reference was not a residential :-8-:

house and proviso to section 54(1) was not applicable to the facts of the present case.

(ii) Property No.14/68, civil Lines, Kanpur:

As stated earlier this property has also been considered by the Assessing Officer as residential house. The reasons given by the Assessing Officer are the same as discussed in respect of property at 104-105, Parampurwa, Kanpur. The ld. AR has vehemently argued that this property was also not a residential house. The nature of this property has been explained in written submission dated 24.9.2012 which is reproduced as under:-

Evidence relating to house property No.14/6-B, Civil Lines, Kanpur.

This was also not a residential property. It was a piece of land on which some old construction being garage and small verandah existed. It was being used for commercial purposes for installation of genset. It was not in a condition of living for residential purposes. There was no Toilet, Bathroom, Kitchen & electricity connection. The property had no basis amenities fit for human habitation and as such it could not be called and considered a residential house. This property was received by the appellant as per court's order dated 18.2.1990 in suit No.374/1989 in the case of Irshad Mirza vs. Smt. Qaiser Jahan, Mirza Shakil Ahmad & Mirza Anish Ahmad decided by District & Session Judge, Kanpur.

Following documents showing that the property was no a residential house and the old constructed portion was being used for business purposes by M/s Gemini Packagers are enclosed:-

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1. Registration certificate dated 27.8.2002 under Central sales Tax ( Additional Evidence).

2. Roop Patra form No.15 (Trade tax) (Additional evidence)

3. Certificate of Directorate of Industries (Additional evidence)

4. Copy of wealth tax returns of the appellant. In the wealth tax return no exemption for residential house property was claimed for this property. The copy of wealth tax returns for assessment year 2004-05 to 2009-10 are enclosed (Evidence available on record with Assessing Officer)

5. Copy of valuation report of Shri. A.S. Agarwal (Additional evidence) Reliance is placed on the decision of Punjab & Haryana High Court in the case of Asha Sayal vs. CIT in I.T.A. No. 566 of 2005 decided on 4.5.2012.

The Assessing Officer in the remand report has observed as under:-

The assessee also filed certain additional evidence in respect of property at 14/6-B, Civil Lines, Kanpur, in which assessee has submitted that the said property is a piece of land and not a residential property. Further, evidence i.e. Registration certificate under CST, Roop Patra Form No.15 (Trade Tax), Permanent registration certificate of Directorate of Industries and wealth tax returns for assessment year 2004-05 to 2009-10 have also been submitted by the assessee. On perusal and comparative analysis of wealth tax returns for the aforesaid assessment years, it is found that upto assessment year 2005-06 the value of said property was shown at Rs.15 lakhs and further in the :-10-:

assessment year 2006-07 the value of said property has been shown at Rs.28,77,000/- which clearly indicates that assessee had made further investment of Rs.13,77,000/- in the said property in the shape of construction of premises.

It is further seen from the additional documents submitted by the assessee that he has mentioned a copy of valuation report in respect of property 14/6-B, Civil Lines, Kanpur as additional evidence but on going through the same it is found that the same is on "Estimate of proposed construction to be done in the premises 14/6-B, Civil Lines, Kanpur". Since the said document is an estimate which has no legal existence and in any case cannot be treated as valuation report. Keeping in view of the above, I am of the view that the said evidence is irrelevant in this case which may not be considered by your honour.

Further, in respect of use of this property, my observation is same as in respect of property at Parampurwa, Kanpur that the specific characteristic of property cannot be changed to assessee's own mood without following law prevailed for the purpose. In conclusion, I am of the view that first application of the assessee under rule 46A(1)(c) is not deserves to be considered and secondly since assessee is having more than one residential property at that time, therefore claim under section 54F is not allowable in assessee's case."

The ld. AR in his counter reply has staed that the Assessing Officer has wrongly treated this property as residential house. The relevant portion of the reply is reproduced as under:- in his counter reply has staed that the Assessing Officer has wrongly treated this :-11-:

property as residential house. The relevant portion of the reply is reproduced as under:-

About House Property no. 14/6B Civil Lines Kanpur:-

Various documents showing the nature of property has also been filed. This property was also not a residential property. Here also the Assessing Officer has not refuted our contention & has not disbelieved the documents filed in support of our submission. The variation in valuation of the property in Asstt Year 2005-2006 & 2006-have also not been properly understood The valuation shown in Asstt Year 2006- 2007 was based on valuer's report who estimated the fair market value of the property as on 31.03.2006. There was no further investment in the property. The increase in value was as per estimate of the approved value which always vary from year to year. Details of evidences furnished with paper book are as under:-

S. Documents/Evidences Nature of such documents PB Page No No. . 1 Certificate of Certificate shows that the 63 Registration dt. property was a commercial 27/8/02 with Trade Tax property Department 2 Registration Certificate Certificate shows that the 64-65

dt. 27/08/03 with D.I.C. property was a commercial Unnao property

3 Wealth Tax Returns for Property was a commercial 66 to 87 Asstt Year 2004-2005 property to 2009-20 10 :-12-:

4 Valuation report dt. The report of the valuer 88 to 89 15/07/2009 for sates "There is one old estimate of the constructed store Room proposed construction & Verandah without to be done in premises electric connection, No. 14/63 Civil Lines Kitchen. WC. The Kanpur constructed portion is being used for keeping genset.

Here also our submissions are the same as

explained in respect of property at Parampurwa hereinbefore.

In view of this there was no justification in treating this property also as Residential House.

Decision: (with reference to Civil Lines property) I have carefully considered the rival submission made by the AR and Assessing Officer. From the details and evidences furnished I find that the constructed portion was very old having one constructed room and verandah without electric connection, kitchen and the same was being used for keeping genset.

I also find that Assessing Officer simply on the basis of sale deed vide remand report dated 6.11.2012 has reached to the conclusion that the property was a residential house. He has however given no comment on the various evidences furnished by the appellant demonstrating that the property was not fit for residential purposes and it was being used as garage of which rental income was shown. No inspection of this property was also done by Assessing Officer. The approved valuer in his report dated 15.7.2009 has also :-13-:

described the nature of property. Observations with regards to the valuation of the property are not relevant to the issue relating to the nature of property. On consideration of-

1. Certificate of Registration dated 27.8.2004 with Trade Tax Department.

2. Registration certificate dated 27.8.2003 with DIC, Unnao

3. Wealth Tax Return for assessment year 2004-05 to 2009-10

4. Copy of valuation report dated 15.7.2009 It is obvious that property is commercial property.

Looking to the totality of the facts documents, evidences & case law cited, I hold that this property was also not a residential property at the relevant time."

12. During the course of hearing, the Revenue has not brought anything on record to controvert the evidence produced by the assessee before the ld. CIT(A) and also before us. The evidence filed before the ld. CIT(A) is also available on record and from its careful perusal we find that these properties are of commercial in nature. Therefore, it cannot be held that the assessee owns more than one residential house at the time of purchase of new residential house out of sale proceeds received from his capital asset at Mumbai. We, therefore, find no merit in the order of the ld. CIT(A) in this regard. Accordingly we confirm the same.

13. So far as disallowance of deduction of Rs.30 lakhs is concerned, we find that the assessee has paid a sum of Rs.30 lakhs to the seller through cheque for delay in execution of sale deed and handing over of possession within a specified period as per memorandum of understanding. Undisputedly there was a clause in the agreement to sell that the assessee :-14-:

would pay Rs.30 lakhs to the seller if the possession is delayed. The explanation has furnished for the delay in handing over the possession to the seller for which assessee has paid Rs.30 lakhs, therefore, the payment is compensatory in nature and is a part of sale transaction. Had it not been paid, the deal would not have been materialized. Therefore, the payment of Rs.30 lakhs is an allowable deduction from sale consideration. The lower authorities have looked this payment from a different angle and treated it to be penal in nature; whereas the payment was made for the delay in handing over the possession. Since it was compensatory in nature, the same is allowable for deduction. We accordingly set aside the order of the ld. CIT(A) and direct the Assessing Officer to allow deduction of Rs.30 lakhs against sale consideration. Accordingly the Revenue's appeal on this issue is dismissed and the cross objection of the assessee is allowed.

14. In the result, appeal of the Revenue is dismissed and the cross objection of the assessee is allowed.

Order was pronounced in the open court on the date mentioned on the captioned page.

Sd/- Sd/- [A. K. GARODIA] [SUNIL KUMAR YADAV] ACCOUNTANT MEMBER JUDICIAL MEMBER

DATED: 5th June, 2015 JJ:0605 Copy forwarded to: 1. Appellant 2. Respondent 3. CIT(A) 4. CIT 5. DR Assistant Registrar