INCOME TAX APPELLATE TRIBUNAL - MUMBAI BENCH 'D'

IT Appeal Nos. 531 & 1186 (Mum.) of 2013
[ASSESSMENT YEAR 2009-10]

VIJAY PAL RAO, JUDICIAL MEMBER
AND D. KARUNAKARA RAO, ACCOUNTANT MEMBER

Firoze B. Andhyarujina for the Appellant.
Shekhar L. Gajbhiye for the Respondent.

The order of the Bench was delivered by

Vijay Pal Rao, Judicial Member - These cross-appeals are directed against the order dated November 2, 2012 of the Commissioner of Income-tax (Appeals) for the assessment year 2009-10.

2. In appeal I.T.A. No. 351 of 2013 the assessee has raised the following grounds :

"1.		On the facts and in the circumstances of the case and in law the Commissioner of Income-tax (Appeals) has erred in confirming the order of the Assessing Officer and denying the benefit of section 54 of the Income-tax Act, 1961.
2.		On the facts and in the circumstances of the case and in law the Commissioner of Income-tax (Appeals) has failed to appreciate the plea of the appellant that the provision of section 55(3) to be read with the section 49(1)(ii) were clearly attracted in the case and not the provision of section 55(2) of the Income-tax Act, 1961.
3.		On the facts and in the circumstances of the case and in law, the Assessing Officer having himself accepted that the tenancy rights had been acquired by the ancestors of the appellant prior to April 1, 1981 the Commissioner of Income-tax (Appeals) was wrong in not holding that the cost of acquisition was to be adopted as on April 1, 1981 and the benefit of indexation also be given to the appellant. That the Commissioner of Income-tax (Appeals) was wrong to ignore section 55(3) which is applicable in this case.
4.		On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) has erred in overlooking the provision of section 27(iiib), 49(1)(iii)(e) and section 55(2)(3) of the Income-tax Act, 1961 on the basis of which the appellant is entitled to the benefit of cost of acquisition as on April 1, 1981, benefit of indexation and the benefit of investment under section 54.
5.		On the facts and in the circumstances of the case and in law and without prejudice to the other grounds of appeal, since the Revenue insists that the cost of acquisition of the tenancy rights cannot be determined in this case no capital gain is assessable to tax as per the decision of the Supreme Court in the case of Union of India v. Cadell Weaving Mill Co. P. Ltd. [2005] 273 ITR 1 (SC).
6.		On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) has erred in denying the benefit the amount incurred on the heavy repairs to make the house inhabitable under section 48 of the Income-tax Act, 1961 although the details were on the record of the assessment proceedings.
7.		The appellant craves leave to add and/or to amend or alter any of the grounds of appeal any time before the final disposal of the appeal."

3. Before dealing with the issues raised in the grounds, we would like to mention the brief history of the events, in respect of the property in question :

(i)		The property namely a Bungalow CS No. 590 of Malabar situated at Nepean Sea Road, Mumbai 400 036 was purchased by Mr. Bomanjee Eduljee Cassinath the great-great grandfather of the assessee in and around 1898. Shri B.E. Cassinath died around 1912 and left a will dated August 8, 1895 and the codicil thereto dated August 27, 1900, whereby created a trust and life interest clauses in favour of the heirs of the testator. Shri Wookerjee Bomanjee Cassinath (son of Bomanjee Eduljee Cassinath) was appointed as a trustee of the will who has further appointed trustees to execute the codicil of his father's "will" vide deed of settlement of trust registered with sub-registrar of Bombay under registration No. 35 book No. 1 dated January 19, 1932. In the mean time Mr. Cursetjee Wookerjee Cassinath another son of B. E. Cassinath mortgaged his share to several mortgagees in or around late 1930s and thereafter in the year 1942, 1943 and 1944. The property was also sold in the year 1942 by the trustees of the will to Sir Ezra Knight, however, the entire family of the sons of B. E. Cassinath continued to reside in the same property even after its sale. Initially the 1st floor of the property was used for residence of the family but later on the grandfather of the assessee Nusserwanji Wookerji Cassinath took the ground floor of the property on rent from the landlord/purchaser in or around 1944-45. The landlord used to issue rent receipts in the name of Nusserwanji Wookerjee Cassinath, the grandfather of the assessee. Thereafter the property changed hands several times from 1945 to 2002 but the families of the heirs of Wookerjee Cassinath having beneficial interest under the trust and sale document continued to reside in the said property. The brief details of the transfer of the property from one hand to another hand are as under :
		1942 Sir Ezra Knight
		1943 J David Sasoon and Company
		1945 Ramnath Mahdavdas
		1947 S.C. Banerjee
		1947 Gaurajadevi Balmukund
		2002 Kapi Builders Pvt. Ltd. and Kupati Builders Pvt. Ltd.
(ii)		Nusserwanji Wookerji Cassinath, the assessee's grandfather died in 1970 living behind his wife Mary, daughters Amy and Tehmin. The assessee is the only daughter of Amy and was living in the same property since birth, i.e., 1972 till the property in question was sold by surrendering the tenancy/occupancy right in the year 2008. The mother of the assessee died in the year 1996 and the assessee being only heir succeeded her mother. The grandmother of the assessee namely Mary died in the year 1998 and after the death of the grandmother the assessee and her aunt Tahmin were in the occupation, in respect of the ground floor of the property.

4. Ground No. 1 regarding the denial of exemption under section 54 and granting exemption under section 54F. During the year under consideration the assessee had surrendered the tenancy rights in the property in question which resulted in capital gains liable to tax in her hands. While computing the taxable long-term capital gains on surrender of tenancy rights the assessee had claimed deduction towards the cost of acquisition and also claimed deduction for expenses incurred in connection with transfer such as architect/valuer's fees, legal fees, etc. The assessee further claimed deduction under section 54 of the Act on account of investment in residential house, along with the expenses incurred on improvement of new residential house.

5. Before the Assessing Officer, the assessee submitted that she had transferred her ½ undivided interest and right in the ground floor of the property known as "Laxmi Niwas" vide agreement dated August 4, 2008. The assessee claimed that she is deemed owner of the property in terms of section 27(iiib) read with section 269UA(b) of the Income-tax Act. The Assessing Officer concluded that the assessee had only tenancy rights and she was not the owner of the property. Accordingly, the Assessing Officer rejected the claim of the assessee under section 54 of the Act. However, the Assessing Officer allowed deduction under section 54F of the Act. The Assessing Officer also denied the benefit of indexed cost of acquisition. On appeal, the Commissioner of Income-tax (Appeals) confirmed the action of the Assessing Officer in denying benefit under section 54 and granting the deduction under section 54F.

6. Before us the learned authorised representative of the assessee has submitted that the tenancy/occupancy rights, other interest are in respect of residential house and therefore, cannot be treated separately from the residential house. The question of ownership of house is not relevant when the assessee transferred the tenancy/occupancy rights and interest in the residential property and the ownership of these rights are not disputed. The capital gains earned by the assessee is from sale of rights in the residential house and therefore, the provisions of section 54 are applicable. He has further submitted that the Assessing Officer though accepted the transfer of capital asset being tenancy rights, however it was treated as not sale of building or land appurtenant thereto and accordingly, denied the exemption under section 54. The Assessing Officer was of the view that the assessee is not owner of the property being residential house and therefore, for the purpose of section 54 of the Act, the transfer of tenancy rights does not tantamount to transfer of residential house.

7. The learned authorised representative has further contended that the children/heirs of the testators were given the life benefit in the property and further the grandfather of the assessee took the ground floor on rent in the year 1944-45, which continued till the assessee sold the same in the year under consideration. Therefore, the assessee inherited the rights in the property along with the tenancy right. He has referred the provisions of section 27(iiib) read with section 269UA of the Income-tax Act and submitted that when the tenancy/lease of the property in question has been continued since 1945 then the assessee as well as her ancestors became deemed owner of the property. He has referred the decision of the hon'ble High Court in the case of Mrs. Amy F. Cama v. CIT [1999] 237 ITR 82 (Bom) and submitted that the hon'ble High Court had held that the beneficial owner is also considered as owner of the property for the purpose of section 54 of the Income-tax Act.

8. The learned authorised representative has pointed out that though ownership of the property has changed many hands but the family of the assessee continue to reside in the property in question because of the right inherited as per will/trust and tenancy rights in respect of the ground floor. This shows that the assessee acquired deemed ownership, in respect of the property in question. The learned authorised representative has referred section 54 of the Income-tax Act and submitted that reference has been made to the capital asset being residential house income of which is chargeable to tax under the head income from house property. The capital asset in question is tenancy rights/occupancy rights/other interest and rights in the residential house property should be treated as capital asset equivalent to the capital asset being residential house. Even, otherwise when the property in question is under lease for more than 12 years and rather more than 6 decades then as per the provisions of section 27(iiib) read with section 269UA, the assessee is deemed owner of the property being the capital asset transferred by the assessee and therefore, is entitled for exemption under section 54 of the Act. The learned authorised representative has submitted that all the conditions required to take the benefit under section 54 of the Act are satisfied in the case of the assessee.

9. On the other hand, learned Departmental representative has submitted that the benefit of section 54 is available in the case, when the capital gain arises from transfer of building or land appurtenant thereto. Therefore, the capital asset being residential house is required to be transferred for a availing the benefit under section 54. What has been transferred by the assessee is the tenancy right in the property and not the residential house itself. He has referred to the transfer document and submitted that the assessee has transferred only the tenancy rights being surrender of tenancy rights and not sale of the residential property. He has relied upon the order of the authorities below and submitted that the Assessing Officer is justified in granting deduction under section 54F instead of section 54 because the assessee is not owner or deemed owner or beneficial owner of residential property but the assessee is only occupant/tenant and consideration received by the assessee is for surrender of tenancy right.

10. We have considered the rival submissions as well as relevant material on record. As noted above the property in question was purchased by one Shri. B. E. Cassinath, the great-great-grandfather of the assessee around the year 1898. Mr. B. E. Cassinath died in the year 1912 and left behind him a will. By the said will and codicil, he created a settlement regarding the residential property in question and appointed his wife and sons as executrix and trusties of will. The testator gave a life interest to his children/grand children in the property in question. The trusties of the will sold the property in question and thereafter the property changed hands various times however, the families of the heirs of the testator continued to reside in the property in question. The assessee is a descendant of B.E. Cassinath the testator. For better understanding of the fact we reproduced the family tree of B. E. Cassinath as under :

11. It is clear from the above chart of the descendants of the testator that the assessee is a great-great-grand daughter of the testator. Initially the entire family was residing at the 1st floor and due to the requirement of more space the ground floor was also taken on lease by the grandfather of the assessee. The family of the grandfather of the assessee then shifted to the ground floor in respect of which the tenancy rights have been surrendered by the assessee. Though the assessee claimed by filing an affidavit that a sum of Rs. 20,000 was paid by the grandfather of the assessee to the land lord as a pagri at the time of taking the ground floor on rent, however, except the statement of the assessee no other record/evidence in support of the claim has been produced. Even otherwise for deciding the issue of exemption under section 54 or 54F this aspect of payment is not so relevant.

12. As it is clear from the facts of the case that the ground floor was taken on rent/lease and therefore the rights vested with the assessee were only the tenancy rights. The property changed hands various times and finally M/s. Kapi Builders Pvt. Ltd. purchase the property in the year 2002. The assessee surrendered her rights/tenancy in respect of the ground floor of the property against the consideration. The Assessing Officer though accepted the consideration received by the assessee for transfer of capital asset being tenancy right however denied the exemption under section 54 and allowed the exemption under section 54F.

13. The Commissioner of Income-tax (Appeals) has discussed the issue elaborately and concluded the finding in paragraph 2.17 as under :

"2.17 In the present case, there is no ambiguity. The appellant's own undertaking clearly states that she is tenant and consideration received by her was for surrender of tenancy right. The question of transfer of building or land does not arise at all. Similarly, argument such as appellant is deemed/beneficial owner is also not acceptable as the property is transferred to the builder by the landlords as admitted by the appellant in her own undertaking cum indemnity. Considering all these facts, I have no hesitation in coming to the conclusion that appellant in the instant case is not the owner of the property and holds mere tenancy right with respect to the impugned property. In view of this and in view of the specific provisions of section 54, I hold that the appellant is not entitled to claim deduction under section 54 of the Act. The Assessing Officer is, therefore, justified in rejecting the claim of the appellant and in denying the deduction under section 54 of the Act. As the tenancy right is a capital asset other than residential house, the Assessing Officer has rightly granted the deduction under section 54F of the Act."

14. We do agree with the finding of the fact given by the Commissioner of Income-tax (Appeals) that the assessee is not the owner of the property but holds mere tenancy rights in respect of the ground floor of the property. The argument of deemed ownership is relevant only in connection with computation of income from house property and not in relation to exemption under section 54. Accordingly we do not find any error or illegality in the impugned order of the Commissioner of Income-tax (Appeals) qua this issue.

15. Ground Nos. 2 to 5 regarding cost of acquisition under section 55 of the Income-tax Act. The assessee claimed that the property was acquired by great-great-grandfather in the year 1898 and thereafter by the grandfather of the assessee in year 1945 by taking the ground floor on rent. Therefore, as per the provisions of section 49, when the assessee has inherited the property, the cost of acquisition would be considered as the cost to the previous owner and accordingly the fair market value as on April 1, 1981, with index cost has to be taken into consideration for the purpose of computation of capital gains. The assessee filed a valuation report shown the value of the property as on April 1, 1981 at Rs. 87,68,000 and indexed cost of acquisition claimed by the assessee at Rs. 5,10,29,760 for the entire ground floor of the property. The Assessing Officer held that there is no cost incurred for purchase/acquisition of the tenancy rights and accordingly took the cost of acquisition at nil. Hence, the Assessing Officer rejected the claim of the assessee for cost of acquisition being fair market value as on April 1, 1981 and index cost based on the value as on April 1, 1981. On appeal, the Commissioner of Income-tax (Appeals) has confirmed the action of the Assessing Officer.

16. Before us the learned authorised representative of the assessee has submitted that though the property in question was sold by the trustees in the year 1942, however, the sale consideration was depressed due to right to reside vested in the legal heirs of the testator. Therefore, there was a cost of right to reside/occupy the property. Further even after the sale in 1942 the property was mortgaged by the brother of grandfather of the assessee which shows that the element of cost was involved in the absence of which the property could not be mortgaged. The learned authorised representative has submitted that the grandfather of the assessee paid Rs. 20,000 in cash, in respect of the ground floor taken on lease/rent though there was receipt/acknowledgment regarding Rs. 20,000 paid as pagadi/slami however, the assessee has made a categorical solemn affirmation on affidavit in this respect. The learned authorised representative has further submitted that if the Revenue takes a stand that there is no cost of acquisition for tenancy right, then the consideration received because of surrender of such tenancy right could not be subjected to capital gains in view of the decision of the hon'ble Supreme Court in the case of CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294/5 Taxman 1.

17. He has relied upon the decision of the hon'ble Supreme Court in the case of CIT v. D. P. Sandu Bros. Chembur (P.) Ltd. [2005] 273 ITR 1/142 Taxman 713 and A. R. Krishnamurthy v. CIT [1989] 176 ITR 417/43 Taxman 30 and submitted that the hon'ble Supreme Court has held that it cannot be said conceptually that there is no cost of acquisition of leasehold rights. The cost of acquisition of leasehold rights can be determined. The authorised representative has referred the decision of the hon'ble jurisdictional High Court in the case of CIT v. Ms. Janhavi S. Desai [2012] 74 DTR 2 (Bom) wherein it was held that when the property was acquired by the previous owner became the property of the assessee as per section 49(1), then the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired. The authorised representative has referred the provision of section 55 and submitted that when the capital asset became the property of the assessee through the modes as specified under sub-section (1) of section 49 and capital asset became the property of previous owner before April 1, 1981 then the cost of acquisition shall be the cost of capital asset to the previous owner or the fair market value of the asset on April 1, 1981 at the option of the assessee. Thus, learned counsel has contended that once the assessee has claimed the fair market value as on April 1, 1981 as cost of acquisition, then the Assessing Officer cannot take the cost of acquisition at nil. Even otherwise as per the provisions of section 55(2), the cost of acquisition of the capital asset can be taken to be nil only in the cases which do not fall under clauses (i) to (iv) of sub-section (1) of section 49.

18. The learned authorised representative has submitted the case of the assessee falls in the category of mode of acquisition under clauses (i) to (iv) of section 49(1) therefore, the provisions of section 55(2)(a)(ii) would not apply in the case of the assessee rather the provisions of clause (b)(ii) of sub-section (2) are applicable. Further sub-section (3) of section 55 provides that in case the cost of acquisition of the previous owner cannot be ascertained the cost of acquisition means the fair market value on the date on which the capital asset became the property of the previous owner. Since the capital asset became the property of the previous owner before April 1, 1981, therefore, the cost of the capital asset to the previous owner or market value of the asset as on April 1, 1981 at the option of the assessee would be the cost of acquisition. The learned authorised representative has further contended that the Explanation to section 49(1) has made it clear that the expression "previous owner" in relation to the capital asset means the last previous owner of the capital asset. The learned authorised representative has also relied on the following decisions :

(i)		Mrs. Amy F. Cama's case (supra) ; and
(ii)		CIT v. Manjula J. Shah [2013] 355 ITR 474/[2012] 204 Taxman 691/[2011] 16 taxmann.com 42 (Bom).

19. On the other hand, the learned Departmental representative has submitted that there is nothing on record to show that amount of Rs. 20,000 was paid for acquisition of tenancy rights as claimed by the assessee. He has relied upon the orders of the authorities below and submitted that in the absence of any evidence the cost of acquisition of tenancy rights has been rightly taken as nil as per the provisions of section 55(2). The learned Departmental representative has further contended that when the cost of acquisition is taken as nil, then no benefit of index of cost can be given.

20. We have considered the rival submissions, as well as the relevant material on record. There is no dispute that the tenancy was acquired by the grandfather of the assessee in the year 1945 and capital asset in the shape of tenancy right became a property of the assessee by inheritance which clearly falls within the modes provided under section 49(1) as under :

"49. Cost with reference to certain modes of acquisition—(1) Where the capital asset became the property of the assessee—

(i)		on any distribution of assets on the total or partial partition of a Hindu undivided family ;
(ii)		under a gift or will ;
(iii)		(a) by succession, inheritance or devolution, or
		(b) on any distribution of assets on the dissolution of a firm, body of individuals, or other association of persons, where such dissolution had taken place at any time before the 1st day of April, 1987 ; or
		(c) on any distribution of assets on the liquidation of a company, or
		(d) under a transfer to a revocable or an irrevocable trust, or
		(e) under any such transfer as is referred to in clause (iv) or clause (v) or clause (vi) or clause (via) or clause (viaa) or clause (vica) or clause (vicb) or clause (xiii) or clause (xiiib) or clause (xiv) of section 47 ;
(iv)		such assessee being a Hindu undivided family by the mode referred to in sub-section (2) of section 64 at any time after the 31st day of December 1969,

the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.

Explanation.—In this sub-section the expression 'previous owner of the property' in relation to any capital asset owned by an assessee means the lase previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to in clause (i) or clause (ii) or clause (iii) or clause (iv) of the sub-section."

21. The case of the assessee clearly falls under sub-clause (iii) of clause (a) of sub-section (1) of section 49. Once the capital asset in question became the property of the assessee as per section 49(1)(iii)(a) and the previous owner acquired the property prior to April 1, 1981, then the cost of acquisition of the capital asset for the purpose of sections 48 and 49 shall be the cost of acquisition of the asset to the previous owner or the fair market value (FMV) of the asset as on April 1, 1981 at the option of the assessee provided under the provisions of section 55(2)(ii)(b) of the Income-tax Act. For ready reference, we reproduce section 55(2)(a)(b) as under :
"(2) For the purposes of sections 48 and 49, 'cost of acquisition',—

(a)

in relation to a capital asset, being goodwill of a business, or a trade mark or brand name associated with a business or a right to manufacture, produce or process any article or thing or right to carry on any business, tenancy rights, stage carriage permits or loom hours,—

(i)		in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price ; and
(ii)		in any other case not being a case falling under sub-clauses (i) to (iv) of sub-section (1) of section 49, shall be taken to be nil; . . .

(b)

in relation to any other capital asset,-

(i)		where the capital asset became the property of the assessee before the 1st day of April, 1981, means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of April, 1981, at the option of the assessee ;
(ii)		where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49, and the capital asset became the property of the previous owner before the 1st day of April, 1981, means the cost of the capital asset to the previous owner or the fair market value of the asset on the 1st day of April, 1981, at the option of the assessee ; . . ."

22. As, it is clear from sub-clause (ii) of clause (b) of sub-section (2) of section 55 that in case the assessee opts the cost of acquisition of capital asset being fair market value on April 1981, then the actual cost of capital asset to the previous owner is not relevant. Even otherwise as per sub-section (3) of section 55 in a case where the cost of acquisition of the property to the previous owner cannot be ascertained then the cost of acquisition to the previous owner would be taken as fair market value on the date on which the capital asset becoming the property of the previous owner. We quote sub-section (3) of section 55 as under ;

"(3) Where the cost for which the previous owner acquired the property cannot be ascertained, the cost of acquisition to the previous owner means the fair market value on the date on which the capital asset became the property of the previous owner."

23. Since, the previous owner acquired the property before April 1, 1981, therefore the fair market value of the property as on April 1, 1981 has to be taken into account for the purpose of sections 48 and 49 of Act. The case of the Revenue is based on sub-clause (ii) of clause (a) of sub-section (2) of section 55. It is discernible from the plain reading of section 55(2)(ii)(a), that the cost of acquisition is taken to be nil only in the cases of commercial intangible assets which are not falling under sub-clauses (i) to (iv) of section 49(1). As we have already discussed in the forgoing paragraphs that the case of the assessee falls under sub-clauses (i) to (iv) of section 49(1) therefore, the provisions of sub-clause (a) of clause (ii) of sub-section (2) of section 55 do not apply in the case of the assessee.

24. It is pertinent to note that the tenancy rights includes the enjoyment and occupation of the property, therefore it carries cost in the form of rent paid by the assessee. Though, the assessee could not prove the payment of consideration in a lump-sum for acquisition of tenancy rights however, the rent itself is cost of the tenancy rights. Further as we have already discussed, when the assessee has the option to adopt the fair market value as on April 1, 1981 then the cost of acquisition at the time of acquisition prior to April 1, 1981 becomes irrelevant.

25. Therefore, we are of the considered view that that fair market value of the tenancy rights as on April 1, 1981, shall be the cost of acquisition as per the provisions of section 55(2)(ii)(b). The assessee filed the valuation report for valuing the fair market value of the asset in question as on April 1, 1981 and the authorities below have not questioned the correctness of the value as on April 1, 1981. We further take note that the Bombay Stamp Act recognises the value of surrender of tenancy rights exceeding 29 years as almost equivalent to the market value of the property therefore, it supports the claim of fair market value as on April 1, 1981.

26. Ground No. 6 regarding the expenditure incurred on improvement/ renovation of the new residential house for the purpose of deduction under section 54. The Assessing Officer noted that the assessee claimed cost of renovation amounting to Rs. 58,26,773 as part of the cost of acquisition of new residential house for the purpose of deduction under section 54. The Assessing Officer disallowed the claim of the assessee on the ground that the renovation was not in connection with any structural damage to the house and it was only in respect of plastering and renovating of wires which cannot be treated as making the house habitable. Accordingly, the Assessing Officer held that the claim of the assessee is untenable and disallowed cost of renovation. On appeal, the learned Commissioner of Income-tax (Appeals) has confirmed the disallowance made by the Assessing Officer.

27. Before us learned counsel for the assessee has submitted that the expenditure has been incurred for making the new house habitable and therefore, the same is part of the cost of the acquisition of new house as per the provisions of section 48. He has referred to the details of the expenditure as well as the photographs of the renovation work carried out in the new asset. The learned authorised representative has also pointed out that there is an architect's report of estimated cost of the renovation and therefore, the expenditure was inevitable for the purpose of making the new house habitable. In support of his contention he has relied upon the decision of this Tribunal following cases :

Saleem Fazelbhoy v. Dy. CIT [2007] 106 ITD 167 (Mum) ;
Mrs. Sonia Gulati v. ITO [2001] 115 Taxman 232 (Mum.) (Mag.)

28. On the other hand, the learned Departmental representative has submitted that section 48 is applicable for the purpose of computation of capital gains and not for exemption under section 54. He has relied upon the order of the learned Commissioner of Income-tax (Appeals) as well as the decision of hon'ble Delhi High Court in the case of D. P. Mehta v. CIT [2001] 251 ITR 529/116 Taxman 611.

29. We have considered the rival submissions as well as relevant material on record. There is no dispute that the assessee has incurred an expenditure of Rs. 58,26,773 on the improvement of the flat purchase by the assessee to make it inhabitable condition. The Assessing Officer has not disputed the genuineness of the expenditure incurred by the assessee but disallowed the claim of the assessee under section 54/54F, in respect of this amount on the ground that there is no structural damage to the house. On appeal the Commissioner of Income-tax (Appeals) confirmed the disallowance made by the Assessing Officer by following the decision of the hon'ble Delhi High Court in the case of D. P. Mehta (supra).

30. It is to be noted that the objective and scheme of granting exemption under sections 54 and 54F is promoting investment in the residential house out of the capital gains/proceeds of sale of capital asset. A residential house means a proper habitable house and not merely a structure. Therefore, the investment in the purchase or construction of residential house may be in the form of lump-sum payment for a ready to occupy house or getting a house constructed. In the case in hands the assessee has purchased an old house and thereafter, incurred the expenditure for making it habitable. Thus it is prerogative of the assessee to decide as to how a residential house can be acquired on a reasonable cost. If the assessee decides that, instead of going to purchase a ready to shift residential house, purchase an old house and get the same renovated for making it habitable as it is economical then, the tax authorities cannot question such a decision taken by the assessee in the absence of any allegation of bogus claim. In the case of Saleem Fazelbhoy (supra) the co-ordinate Bench of this Tribunal has considered and decided a similar issue in para 7 as under :

"7. In view of the above discussion, we are of the view that investment in residential house would not only include the cost of purchase of the house but also the cost incurred in making the house habitable. An inhabitable premises, in our opinion, cannot be equated with a residential house. If one person cannot live in a premises, then such premises cannot be considered a residential house. In the modern age, the builder may provide semi-finished house or complete house depending upon the price agreed to between the parties. In case of semi-finished house, the purchaser will have to invest on flooring, wooden work, sanitary work, etc., to make it habitable. Therefore, in our view, the investment in house would be complete only when such house becomes habitable. Similar view has also been taken by 'SMC' Bench of the Tribunal in the case of Mrs. Sonia Gulati v. ITO [2001] 115 Taxman 232 (Mag) (Mum). Accordingly, we hold in principle that the expenditure incurred on making the house habitable should be considered as investment in purchase of the house subject to the condition that payment was made during the period specified in section 54F."

31. It is clear from the above decision that the residential house for the purpose of section(s) 54 and 54F means a habitable house and investment made up to the stage of making house as habitable should be considered as investment in purchase of house. A similar view was taken by the Tribunal in the case of Mrs. Samy G. v. Dy. CIT 115 Taxman 232 (sic) which has been considered by the co-ordinate bench in the case of Saleem Fazelbhoy (supra). Therefore, if the assessee chooses to purchase a house and incurred bona fide expenditure on improvement for making it habitable it would be eligible as investment in the new asset for the purpose of section 54 of the Income-tax Act. In the case of D. P. Mehta (supra) the hon'ble Delhi High Court has observed as under (page 531) :

"We have heard learned counsel for the parties. Learned counsel for the assessee submitted that, in view of the conclusions of the Tribunal, that servant quarters had been constructed, the further conclusion that keeping in view of the assessee's status, it cannot be said that the house was being used for the purpose of residence cannot be maintained. It was further submitted that what was necessary for claiming exemption related to user of the property for the purpose of residence and the status of the assessee and/or total built in area has no relevance so far as that aspect is concerned. Learned counsel for the Revenue, on the other hand, referred to the statement dated January 28, 1974, wherein the assessee himself admitted that the building was not worth occupying.
We find that the Tribunal has not really considered the essence of the dispute in the background of the factual aspects which were on record. It is to be noted that the assessee himself had stated that the property was not worth occupying. There is no dispute about the statement having been made by the assessee. Additionally, we find that the construction was of the garage and servant quarters. The Appellate Assistant Commissioner referred to some personal visits and found that there was actually no occupation by any servant or tenant and even there was no cooking. In view of the accepted statement of the assessee that the building was not worth occupying and was not inhabitable, the conclusion that the assessee was not entitled to the exemption is in order."

32. It is clear from the decision of the hon'ble High Court that in the said case the assessee himself admitted that only a servant quarter was in existence as total built up area without any provision of cooking and it was found that the said construction was not at all fit for habitation, therefore, it was held that the assessee was not entitle to the exemption under section 54. The decision of the hon'ble Delhi High Court (supra) supports the claim of the assessee because the assessee made the investment for making the house habitable and the claim has been made only after the new asset was made habitable. In view of the above discussion and facts and circumstances of the case, we hold that the assessee is entitled to the exemption under section 54, in respect of the expenditure incurred on the renovation work to make the house habitable apart from cost of purchase.

Appeal in I.T.A. No. 1186 of 2006
33. The Revenue has raised various grounds however the only issue arises is as under :

"Whether, in the facts and circumstances of the case, Commissioner of Income-tax (Appeals) is justified in allowing the exemption under section 54F, in respect of Rs. 1,25,00,000 deposited in capital gains account in the Central Bank of India on July 29, 2009 and the assessee has utilised the said amount for purchase of another flat."

34. The Assessing Officer disallowed the claim of the assessee without any discussion. On appeal, the Commissioner of Income-tax (Appeals) has allowed the claim of the assessee by considering the facts that the assessee invested this amount in accordance with the provision of section 54F and within the time limit prescribed by the law.

35. Before us the learned Departmental representative has submitted that when the assessee has already claimed deduction/exemption, in respect of one house then as per the provisions of sections 54 and 54F no exemption can be granted for purchase of more than one house.

36. On the other hand the learned authorised representative of the assessee has submitted that in view of the various decisions of the High Court, a deduction under section 54 is eligible even for purchase of more than one house. He has relied upon the following decisions :

(i)		In the matter of CIT v. Smt. Jyothi K. Mehta [2011] 12 taxmann.com 440/201 Taxman 79 (Mag.) (Kar) ;
(ii)		CIT v. Smt. K. G. Rukminiamma [2011] 331 ITR 211/196 Taxman 87/[2010] 8 taxmann.com 121 (Kar) ;
(iii)		CIT v. D. Ananda Basappa [2010] 320 ITR (St.) 19 (FRSC) ;
(iv)		CIT v. Jeo B. Fernandes [2010] 322 ITR (St.) 8 (FRSC) ;
(v)		CIT v. Smt. Rashmi Khanna [2010] 322 ITR (St.) 8 (FRSC) ; and
(vi)		CIT v. D. Ananda Basappa [2009] 309 ITR 329/180 Taxman 4 (Karn).

37. We have considered the rival submission as well as relevant material on record. Undisputedly the assessee has deposited Rs. 1.25 crore in the capital gain account within the prescribed period and further the said amount has been invested in another flat. The issue is now covered by the various decisions of the hon'ble High Courts as relied upon by the learned authorised representative of the assessee. Accordingly, there is no reason to interfere with the impugned order of the Commissioner of Income-tax (Appeals) qua this issue.

38. In the result, the appeal of the assessee is partly allowed and the appeal of the Revenue is dismissed.

The order pronounced in the open court on 4 September, 2013.