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2016 (5) TMI 632 - ITAT MUMBAI

2016 (5) TMI 632 - ITAT MUMBAI - TMI - Renovation expenses disallowed by way of benefit u/s. 54 - Exemption from LTCG - Held that:- The expenditure incurred by the assessee are towards the extensive civil, plumbing , electrical and painting works including new flooring, tiles, fittings in the new residential house property purchased by the assessee in Pune in July 2008 and are not towards purchase or installation of items of comfort such as air-conditioners, consumer electronics and entertainmen .....

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e for acquiring the new residential house property at Pune in July 2008. Thus based on the peculiar facts and circumstances of this case and on the basis of our discussion and reasoning above , we hold that the assessee is entitled for claim of benefit u/s 54 of the Act of expenditure incurred by the assessee to make the said new residential house purchased by the assessee at Pune in July 2008 ‘habitable’ fit for living for residential purposes by the assessee. - Decided in favour of assessee. - .....

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T(A) arose from the assessment order dated 21-11-2011 passed by the learned assessing officer (Hereinafter called the AO ) u/s. 143(3) of the Income Tax Act,1961(Hereinafter called the Act ), for the assessment year 2009-10. 2. The grounds raised by the assessee in the memo of appeal filed with the Tribunal read as under:- 1. The Order u/s 250 dated 19th March 2014, of the Commissioner of Income Tax(Appeals)-23 ,Mumbai , is bad in law, contrary to the facts of the case and evidence of record. 2. .....

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or. 4. During the course of assessment proceedings u/s. 143(3) read with Section 143(2) of the Act, it was observed by the AO that the assessee has sold his tenancy right in a residential property for a total amount of ₹ 2,00,00,000/- . Against this capital receipt ,the assessee invested in another residential property in Pune and claimed deduction of ₹ 1,31,78,257/- u/s. 54 of the Act and offered the difference of ₹ 68,21,743/- as long term capital gains . The break-up of the .....

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78,257/- Taxable long term capital gains Rs.68,21,743/- Thus, it was observed by the AO that the assessee has claimed ₹ 14,26,705/- towards improvement of purchased property as a deduction u/s 54(1)(i) of the Act. The assessee was asked to explain why the improvement made to the purchased house and claimed as deduction should not be disallowed and added to income of the assessee. The assessee submitted that soon after purchasing , to make the new house property , habitable by incurring fur .....

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aiming cost of improvement of ₹ 14,26,705/- not at the time of selling his property but with respect of the property bought by the assessee against the receipt of selling the tenancy rights. Thus, the claim of the assessee towards cost of making a new house property habitable amounting to ₹ 14,26,705/- was disallowed and added to the long term capital gains of the assessee, vide assessment orders dated 21-11-2011 passed by the AO u/s.143(3) of the Act. 5. Aggrieved by the assessment .....

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sset was created. Therefore, these expenses of ₹ 14,26,705/- should be allowed in determining the cost of purchase of new residential house. The assessee furnished copies of plan of the house and garage, sanctioned layout plan and proposed layout plan and description of the property certificates were furnished before the CIT(A). The assessee also submitted that on west side of the house purchased, there is a nala near to the garden which required protection by fencing. The assessee relied .....

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exact amount of expenditure required to improve it to a state of habitability is a subjective matter, as it depends on the quality of material preferred and other such matters. The AO further reported in remand report that upon perusal of list of works done by the contractors, it was seen that some items involve dismantling and demolition of the existing structures, flooring, tiles etc. and laying new better quality items in place of them. Similarly , some items involve painting of furniture s, .....

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the Act is ₹ 14,26,705/- . Thus, the AO stated in remand report that the excess expenses appears to be beyond mere repairs and restoration to a habitable condition, and rather make the house comfortable. Thus, the AO stated in remand report that out of the total expenditure of ₹ 14,26,705/- claimed by the assessee , ₹ 7,00,000/- (as per purchase agreement ) be treated as towards making the new house habitable , and the remaining ₹ 7,26,705/- be treated as making the new .....

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d as abnormal or expenditure and did not required to be incurred in making the house habitable. It was submitted that comfort in the house can come by comfortable bedding, air conditioning, furniture etc. and not by painted walls in a house will a proper flooring, bathroom and kitchen. The assessee submitted that house was bought in a dilapidated condition and to make it habitable , the assessee spent ₹ 14,26,705/- which is actually spent by the assessee and the expenditure is supported by .....

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lf after purchase of the house. This cost towards extensive repairs cannot be considered to be cost of house purchase by the assessee. The flooring, plumbing work and electrical work etc. was already there in the house. These were merely repaired and renovated to suit the requirements of the assessee. Thus, action of the AO was confirmed with respect of not considering the amount of expenditure incurred of ₹ 14,26,705/- for making improvements in the house for granting deduction u/s.54 of .....

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ble for deduction u/s.54 of the Act , vide orders dated 19-03-2014. 7. Aggrieved by the orders dated 19-03-2014 passed by the CIT(A), the assessee filed an appeal with the Tribunal. 8. Ld. Counsel for the assessee reiterated its submissions before the Tribunal as were made before the authorities below which are not repeated for sake of brevity. The ld counsel for the assessee submitted that the assessee sold tenancy rights for ₹ 2.00 crores and purchased a residential house property in Pun .....

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enue is contending that the said expenditure has not been incurred to make the house habitable but renovation was carried out by the assessee which is to make house comfortable rather than habitable. The assessee s counsel submitted that expenditure of ₹ 14.26 lacs was incurred to make the house habitable. Section 54 of the Act is a beneficial provision and should be construed liberally. The expenditure was incurred to make the house habitable from July 2008 to January 2009 , immediately a .....

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232 (Mum)(Mag.)(Trib.) 5. Mrs. Gulshanbanoo R Mukhi v. JCIT (2002) 83 ITD 649 (Mum. Trib.) 6. Sh. Ashok Kumar Ralhan v. CIT 360 ITR 575 Del. HC 7. G Shiv Ram Krishna v. DCIT in ITA no. 755/Hyd/2013 dated 20-12- 2013 9 Ld. DR relied upon the orders of CIT(A) and drew our attention to the details of expenditure of ₹ 14.26 lacs incurred by the assessee to contend that these expenses are merely renovation expenses which cannot be allowed by way of benefit u/s. 54 of the Act. 10. We have consi .....

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e , immediately after purchase of the said residential house at Pune in July 2008 which continued till January 2009, as it is stated by the assessee that the residential house so purchased in Pune in July 2008 was in dilapidated condition and was uninhabitable . The said amount was purportedly required to be spent for making the new residential house in habitable condition. The assessee, interalia, claimed benefit u/s. 54 of the Act also with respect to this expenditure of ₹ 14,26,705/- to .....

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y the assessee which is post the purchase of the new residential house as according to the Revenue , only the cost paid for acquiring new residential house is to be taken for the purposes of granting benefit u/s. 54 of the Act. Secondly as per Revenue, these expenditure of ₹ 14,26,705/- was incurred to make the residential house comfortable and was not incurred to make the house in habitable state as when the house was purchased/acquired by the assessee , it was already in habitable state .....

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. The dispute between the assessee and the revenue is, thus, within this narrow compass. It will be profitable at this stage to reproduce Section 54 of the Act , as under: 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 re .....

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h the transfer took place, it shall be dealt 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 resp .....

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may be, the cost shall be reduced by the amount of the capital gain [(2) The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit .....

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lready utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset : Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,- (i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three ye .....

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Act which is a piece of beneficial legislation being incentive provision is to be liberally construed to grant the benefit to the tax-payer to fulfill the mandate of legislation which is to promote investment in residential housing construction rather than in the manner which may frustrate the object . Reference can be drawn to the following observations of Hon ble Supreme Court in the case of Bajaj Tempo Limited v. CIT (1992) 196 ITR 188(SC) : The provision in a taxing statute granting incentiv .....

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taxpayer purchases or construct a new residential house property within the stipulated period as prescribed u/s. 54 of the Act . The word house has been defined in Blacks Law dictionary 7th edition, page 743 as a home, dwelling or residence . The residential accommodation is defined in Wharton s Concise Law dictionary 15th edition(concise),page 909 as residential accommodation, simply means that the accommodation should be capable of being used as residence or should have been built as a reside .....

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dential house property at Pune stipulate s that the said house required extensive civil, plumbing , electrical and painting works which is to be borne by the purchaser i.e. the assessee which was estimated to be ₹ 7,00,000/-, as under: (8)(ix) The Purchaser is aware that the flat requires extensive civil, plumbing , & electrical , painting works & that as regards the same, it is being sold on an as is where is basis. The Purchaser is aware that expenses of repairs and restoration i .....

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contractors and incurred expenditure of ₹ 14,26,705/- for making it habitable , for which necessary invoices were also produced by the assessee before the authorities below and also before us which are placed in paper book filed with the Tribunal. Thus, there is no dispute between assessee and Revenue as to incurring of this expenditure of ₹ 14,26,705/- towards work done in the new residential house purchased by the assessee at Pune, which work is done post purchase of the said resid .....

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said new residential house property at Pune in dilapidated condition by the assessee in July 2008 and concluded with the extensive construction work carried out immediately post purchase of said new residential house in July 2008 and which concluded in January 2009 , comprising of civil, plumbing , electrical and painting works in the said new residential house property at Pune costing ₹ 14,26,705/- , to make the house in a habitable condition with amenities fit for living for residential .....

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letely inhabitable. However as per AO , it does seem to be in need of repairs, refurbishing and improvement. The exact amount of expenditure required to improve it to a state of habitability is a subjective matter, as it depends on the quality of material preferred and other such matters. The AO further reported in the remand report that upon perusal of list of works done by the contractors, it was seen that some items involve dismantling and demolition of the existing structures , flooring, til .....

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unt to construction within the meaning of Section 54 of the Act , hence , the assessee cannot be denied the benefit u/s. 54 of the Act merely on the ground that the assessee has purchased the new residential house and there-fore benefit as available to construction of the new residential house cannot be extended to the assessee simultaneously . Perusal of Section 54 of the Act will reveal that no such restrictions are placed in the provisions of Section 54 of the Act that purchase of new residen .....

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ry 2009 which tantamount to construction of the said residential house by spending ₹ 14.26 lacs , to make the said new residential house habitable with amenities fit for living of the assessee for residential purposes . Section 54 of the Act does not stipulate any condition that if the new residential house is purchased by the tax-payer, then benefit associated with construction of the said new residential house cannot be extended simultaneously rather both purchase and construction of the .....

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are ,therefore, denied . Our above view is fortified by the judgment of Hon ble Calcutta High Court in the case of B.B.Sarkar v. CIT (1981) 132 ITR 150(Cal.HC) . Similarly, Section 54 of the Act does not impose any conditions or restrictions as to what constitute habitable to get the benefit of deduction u/s 54 of the Act. The word habitable is highly subjective and has to be understood and interpreted in the context of the socio-economic status and standing of the tax-payer in the society. Sec .....

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d and amenities required by both the tax-payer s to make the house habitable fit for living for their residential purposes, but both the tax-payer s will be entitled for deduction u/s 54 of the Act provided other conditions as stipulated u/s 54 of the Act are fulfilled as section 54 of the Act does not stipulate any such restrictive conditions as to the ceiling on amount per-se of investment in purchase and /or construction of new residential house property which is rather linked to long term ca .....

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e tax-payer for his residential purposes. Revenue cannot deny the benefit u/s 54 of the Act on the ground that expensive marble floorings or tiles are used in place of ordinary flooring or tiles etc. or a high quality expensive construction material is used by the tax-payer or more amenities are required by the tax-payer to make the house habitable and more so when Section 54 of the Act itself does not stipulate any such restrictive conditions, thus, benefit u/s 54 of the Act cannot be denied to .....

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u/s. 54 of the Act as these are items of comfort and are not part of the purchase or construction cost of new residential house property within the meaning of Section 54 of the Act and hence, benefits u/s 54 of the Act cannot be allowed for these items of comfort so purchased/installed by the tax-payer in the new residential house so purchased or constructed. If the tax-payer is allowed to purchase or construct the residential house without any ceilings as to the amount of investment u/s 54 of t .....

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in the case of Rahan Siraj v. CIT (2015) 58 taxmann.com 333(Kar. HC) whereby Hon ble Karnatka High Court held as under: 6. In the light of the aforesaid rival contentions, the substantial questions of law that arise for our consideration in this appeal are as under: "(i) ***** (ii) Whether the Tribunal is right in holding that the appellant is not entitled to make a deduction in respect of additions/alterations made to the property after purchase in order to have a normal living in computin .....

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property with grill work and attending to other repairs. Section 54F of the Act provides that if the cost of the new asset, which is to be taken into consideration while determining the capital gain, the words used is "cost of new asset" and not "the consideration for acquisition of the new asset". In law, it is permissible for an assessee to acquire a vacant site and put up a construction thereon and the cost of the new asset would be cost of land plus (+) cost of construct .....

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trary to the statutory provisions. The said reasoning is unsustainable. To that extent, the impugned order passed by the Tribunal as well as the Lower authorities require to be set-aside and it is to be held that in arriving at cost of the new asset, ₹ 18 lakhs spent by the assessee for modification, alterations and improvements of the asset acquired is to be taken note of. Thus, the second substantial question of law is answered in favour of the assessee and against the Revenue. Hence, we .....

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