Sri Vidyasagar Dontineni, Hyderabad vs Department Of Income Tax

These two appeals preferred by the Revenue against two separate orders of the Ld. CIT(A)-IV, Hyderabad dated 07.02.2013 and 07.06.2013 for A.Ys. 2009-2010 and 2010-2011 involve a common issue and the same therefore, have been heard together and are being disposed of by a single consolidated order for the sake of convenience.

2. The solitary common issue involved in these two appeals is raised by the Revenue by way of identical ground which reads as under :

"The learned CIT(A) ought to have upheld the disallowance made u/s. 54 by A.O. as the assessee has not invested in purchase/construction of the new asset as stipulated u/s.54 and the construction of the new house started way back in the year 2002-03."

2 ITA.No.632 & 1238/Hyd/2013 Sri Vidyasagar Dontineni, Hyderabad.

3. The assessee in the present case is an individual who is the Managing Director of M/s. SEC Industries P. Ltd., The returns of income for both the years under consideration were filed by him on 28.08.2009 and 31.07.2010 declaring total income of Rs.2,65,81,270 and Rs.1,27,37,210 for A.Ys. 2009-2010 and 2010-2011 respectively. As declared in the said returns, long term capital gain of Rs.79,35,642 and Rs.99,13,046 had arisen to the assessee from the sale of flats in A.Ys. 2009-2010 and 2010-2011 respectively and deduction of Rs.79,35,642 and Rs.85,43,720 was claimed by the assessee in respect of such long term capital gain for A.Ys. 2009-2010 and 2010-2011 respectively on account of investment made in the construction of residential house at Plot No.995, Survey No.102/1 in Jubilee Hills Co-operative Housing Society. During the course of assessment proceedings for A.Y. 2009- 2010, the claim of the assessee for deduction under section 54 came to be examined by the A.O. for the first time. On such examination, he found that the following expenditure aggregating to Rs.78,11,375 was incurred by the assessee for providing amenities such as lift, stair case, air conditioner, furniture etc., in the existing house which was really not essential to make the house habitable.

Sl.No. Description Amount 1. Stair Case Railing Rs. 2,05,273 2. Stair Case Rs. 83,250 3. Security System Rs. 10,000 4. Electrical & Fittings (including Rs.36,26,613 stabilizer, decorative & imported items) and others 5. Wood & Ply Wood Rs. 5,07,591 6. Sanitary fittings Rs. 8,22,965 7. Pumps and Motors Connected to Rs. 49,200 sump 8. Air Conditions Rs. 2,00,000 3 ITA.No.632 & 1238/Hyd/2013 Sri Vidyasagar Dontineni, Hyderabad.

9. Stone carving Rs .1,00,000 10. Modular kitchen Rs. 42,826 11. Solar water system Rs. 1,03,960 12. Lift Rs. 96,416 13. Hardware Fittings Rs. 2,10,700 14. Miscellaneous expenses Rs. 9,610 15. Glasses & Glass fittings Rs. 59,173 16. Furniture and fittings Rs. 6,67,423 17. Marble Statue Rs. 3,00,000 18. Labour for Sanitary fittings Rs. 60,675 19. Labour for Electrical works Rs. 3,80,000 20. Labour for Carpenter Works Rs. 2,75,700 Total Rs.78,11,375

4. The assessing officer also found that the

construction of house at Jubilee Hills had commenced way back in April, 2002 and the said house was in habitable condition much before the transfer of new assets by the assessee during the years under consideration. He further held that the investment made by the assessee was not in the construction of a new house and the assessee, therefore, was not entitled to claim deduction under section 54 for such investment. Accordingly, the claim of the assessee for deduction under section 54F was disallowed by the A.O. in the assessment made for A.Y. 2009-2010 under section 143(3) vide its order dated 20.12.2011 and the same was followed by him even in A.Y. 2010-2011 to disallow the claim of the assessee for deduction under section 54.

5. Against the Orders passed by the A.O. under section 143(3) for both the years under consideration, appeals were preferred by the assessee before the Ld. CIT(A) challenging the disallowance made by the A.O. on account of his claim for deduction under section 54. During the appeal proceedings before the Ld. CIT(A), the following additional evidence was filed by the assessee.

4 ITA.No.632 & 1238/Hyd/2013 Sri Vidyasagar Dontineni, Hyderabad.

i. Purchase deed of plot No.995 dated 25.7.1987. ii. Construction plan for house at plot No.995 approved by MCH.

iii. Valuation report dated 1.7.2003 iv. Ledger account for cost of construction from 10.3.2001 to 31.3.2010.

v. Letter of municipality on completion of house dated 28.6.2010.

vi. Revised municipal assessment order dated 29.12.2011.

5.1. Relying on the above additional evidence, it was submitted on behalf of the assessee before the Ld. CIT(A) that after the purchase of Plot No.995 in 1987, a temporary structure was constructed on the said plot. It was submitted that the said structure, however, was demolished by the assessee before the commencement of construction of new house in the year 2002. It was submitted that the construction of new house was delayed and the same was completed in the year 2010 as per the completion certificate issued by the Municipality on 28.06.2010. It was pleaded that the expenditure in question incurred in both the years under consideration thus was for construction of a new house and since the same was incurred to make the new house habitable, the assessee was entitled to claim deduction under section 54. As regards the commencement of construction of new house in the year 2002, it was contended on behalf of the assessee that the date of commencement of construction of new house is not relevant for the purpose of deduction under section 54 and what is relevant is the date of completion of construction and the specified period in which the expenditure claimed to be eligible for deduction under section 54 is incurred. It was contended that the expenditure incurred by the assessee on the construction of new house during the specified period thus 5 ITA.No.632 & 1238/Hyd/2013 Sri Vidyasagar Dontineni, Hyderabad.

was eligible for deduction under section 54 and the A.O. was not justified in disallowing the said deduction claimed by the assessee. It was also brought to the notice of the Ld. CIT(A) by the assessee that the actual expenditure incurred on construction of new house during the specified period relevant to A.Y. 2009-2010 was Rs.95,03,268.

5.2. The additional evidence furnished by the assessee was forwarded by the Ld. CIT(A) to the A.O. for verification and comments. In his remand report dated 30.11.2012 submitted the Ld. CIT(A), it was stated by the A.O. that the fact that the municipal assessment of the assessee's Jubilee Hills house was revised in December, 2011 itself was sufficient to show that the said house was not a new house and there was an old house already in existence. The A.O. contended that the assessee, therefore, was not entitled to claim deduction under section 54 in respect of the expenditure incurred on renovation of old house.

6. After taking into consideration the material available on record including the additional evidence filed by the assessee as well as the remand report submitted by the A.O., the Ld. CIT(A) held that the assessee was eligible to claim deduction under section 54 in respect of expenditure incurred on construction of new house at Jubilee Hills for both the years under consideration. According to him, even though there was a old structure already in existence on the land of the assessee, the same was demolished as there was no reference to such old structure even in the valuation report. He also held that the other documentary evidence filed by the assessee further corroborated the claim of the assessee that the house constructed by the assessee at Jubilee Hills was 6 ITA.No.632 & 1238/Hyd/2013 Sri Vidyasagar Dontineni, Hyderabad.

entirely new house and it was not the case of a mere expansion or modification of an old house as alleged by the A.O. As regards the commencement of construction of new house in the year 2002, the Ld. CIT(A) held that section 54 merely specifies the date by which construction should be completed and therefore, the fact that the assessee had initiated construction much before the transfer of a capital asset did not disentitle him from claiming deduction under section 54. He also held that the expenditure incurred by the assessee for providing facilities like electrical and other fixtures, ward-robe and sanitary fittings etc., was necessary to make the new house habitable and therefore, such expenditure was eligible for deduction under section 54. He however, found that expenditure incurred by the assessee for certain items, which did not form an integral and inalienable part of the house such as marble statue, furnitures, fittings etc., was not required to be incurred to make the house habitable and since such expenditure was incurred mainly to decorate the new house of the assessee, he held that it was not eligible for deduction under section 54. Such expenditure as identified by the Ld. CIT(A) for both the years under consideration was under :

Assessment Year 2009-2010 a. Marble Statue Rs.3,00,000 b. Glass and glass fittings (including Rs.3,20,889 Glasses, permets, curtain cloth, sheer blinds, honey comb blinds.

c. Furniture & Fittings (Bed, table sofa and Rs.15,99,376 cushion curtains and decorative items) Total Rs.22,20,265

Assessment Year 2010-2011 a. Audio Visual system (Home theatre) Rs.16,00,000

b. Glass and Glass fittings (including Rs. 3,20,889 Glasses, permets, curtain cloth, sheer Blinds, Honey comb blinds 7 ITA.No.632 & 1238/Hyd/2013 Sri Vidyasagar Dontineni, Hyderabad.

c. Furniture & Fittigs (Bed, table sofa and Rs.15,99,376 cushion curtains and decorative items.

Total Rs.35,20,265

6.1. Accordingly, the claim of the assessee for

deduction under section 54 was held to be allowable by the Ld. CIT(A) to the extent of Rs.72,83,003 (Rs.95,03,268 - Rs.22,20,265) and Rs.50,23,455 (Rs.85,43,720 - Rs.35,20,265). The Ld. CIT(A) also directed the A.O. to verify the expenditure incurred by the assessee for construction of new house eligible for deduction under section 54 for both the years under consideration in order to ensure that deduction in respect of the same expenditure is not allowed for both the years under consideration. Aggrieved by the orders of the Ld. CIT(A), Revenue has preferred these appeals before the Tribunal.

7. We have heard the arguments of both the parties and also perused the relevant material available on record. It is observed that the claim of the assessee for deduction under section 54 for investment made in the construction of residential house from the long term capital gain arising from the sale of residential flats made in both the years under consideration was disallowed by the A.O. mainly on the grounds that such investment was not made by the assessee in the construction of new residential house, as the house on the plot of land at Jubilee Hills was already in existence and that the expenditure in question on construction of house was incurred by the assessee mainly for providing amenities such as lift, stair case, air conditioner, furniture etc., to the existing house which were not essential to make the said house habitable. In so far as the nature of expenditure in question is 8 ITA.No.632 & 1238/Hyd/2013 Sri Vidyasagar Dontineni, Hyderabad.

concerned, the Ld. CIT(A) has already examined the same and has found on such examination that the said expenditure was partly incurred by the assessee to make the house habitable whereas, the remaining expenditure incurred mainly to decorate the house was not incurred for making the house habitable. Accordingly, he has restricted the claim of the assessee for deduction under section 54 only to the extent it is on account of expenditure incurred by the assessee to make the house habitable and the department has not raised any ground specifically in the present appeals disputing this aspect of the matter.

8. The grievance of the Revenue as projected in the common ground raised in these appeals is that the construction of house having been started way back in the year 2002-2003, the investment made by the assessee in the construction of the said house cannot be regarded as investment in construction of the new house eligible for deduction as envisaged in section 54. The provisions of section 54 to the extent relevant in this context are reproduced below :

"Profit on sale of property used for residence.

54. [(1)] [Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family], the capital gain arises from the transfer of a long-term capital asset [***], being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head "Income from house property" (hereafter in this section referred to as the original asset), and the assessee has within a period of [one year before or two years after the date on which the transfer took place purchased], or has within a period of three years after that date [constructed, a residential house], then], instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt 9 ITA.No.632 & 1238/Hyd/2013 Sri Vidyasagar Dontineni, Hyderabad.

with in accordance with the following provisions of this section, that is to say,--

(i) if the amount of the capital gain [is greater than the cost of [the residential house] so purchased or constructed (hereafter in this section referred to as the new asset)], the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or

(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain."

8.1. A careful reading of the relevant provisions of section 54 makes it clear that the capital gain arising from the transfer of long term capital asset being the residential house is eligible for deduction under section 54 to the extent the same is invested or utilized during the specified period for purchase or construction of a residential house. There is however, nothing to show that such a residential house has to be only a new residential house and not a old residential house. Such a residential house is referred to as "the new asset" in clauses (i) and (ii) of sub-section(1) of section 54 in order to distinguish it from the similar expression "a residential house", the transfer of which has given the rise to the capital gain used in the same provisions. What therefore is envisaged in section 54 for claiming deduction is the investment made in purchase or construction of residential house and not new residential house as interpreted by the A.O. As rightly held by the Ld. CIT(A), in this context, although 10 ITA.No.632 & 1238/Hyd/2013 Sri Vidyasagar Dontineni, Hyderabad.

there was an old structure on the plot of the assessee at Jubilee Hills which was demolished and the construction of new house had commenced way back in the year 2002-2003, the date of commencement of construction is not relevant for the purpose of deduction under section 54 and what is relevant is the date of completion of the construction as well as the period of investment made by the assessee in such construction. In this regard, there is no dispute that the amount in question spent by the assessee on construction of the residential house was within the specified period and that the construction of house was completed on 28.06.2010. As such, considering all the facts of the case, we are of the view that the assessee is eligible for deduction under section 54 to the extent allowed by the Ld. CIT(A) in both the years under consideration and we find no justifiable reason to interfere with the impugned orders of the Ld. CIT(A) on this issue. The same are therefore upheld and these appeals filed by the Revenue are dismissed.

9. In the result, appeals of the Revenue are dismissed.

Order pronounced in the open Court on 28.01.2015.

Sd/- Sd/- (ASHA VIJAYARAGHAVAN) (P.M. JAGTAP) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated 28th January, 2015

VBP/- 11 ITA.No.632 & 1238/Hyd/2013 Sri Vidyasagar Dontineni, Hyderabad.

Copy to

1. The Deputy Commissioner of Income Tax, Circle 3(1), 7th Floor, 'B' Block, I.T. Towers, A.C. Guards, Hyderabad.

2. Sri Vidyasagar Dontineni, 6/25, Kukatpally, Opp. IDPL Project, Hyderabad - 500 037.

3. CIT(A)-IV, Hyderabad.

4. CIT-III, Hyderabad.

5. D.R. I.T.A.T. "A" Bench, Hyderabad.