AO Must Investigate Land Use Before Restricting Section 54F Exemption.

ORDER

Narinder Kumar, Judicial Member.- Assessee was in appeal before Learned CIT(A), while challenging assessment order dated 16.11.2019, passed by the Assessing Officer, relating to the assessment year 2017-18, as his income for the said assessment year was calculated by the Assessing Officer at Rs. 1,56,73,360/-, by making addition of a sum of Rs. 1,50,81,046/-, by way of long term capital gain earned on a sale of a residential plot, having come to the conclusion that investment came to be made in land i.e. actually an agricultural land measuring at 0.8619 hectare, wherein the construction raised was comparatively of a very small house i.e. on 1490 Sq. Ft., and the Legislature never intended to grant exemption in suchlike case.

2. By impugned order, Learned CIT(A), has dismissed the appeal filed by the assessee affirming the assessment order and the reasons recorded therein.

3. Arguments heard. File perused.

Brief Facts

4. Case of the assessee was selected under CASS for limited scrutiny. It led to issuance of notice u/s 143(2), on 13.08.2018 followed by a notice u/s 142(1) of the Act, on 03.05.2019 accompanied by a questionnaire.

According to the Assessing Officer, the assessee submitted details and documents before him.

5. Admittedly, during the year under consideration, the assessee had sold residential plot – 1 Kha-18, Jawahar Nagar, Jaipur for Rs. 2,40,00,000/-, on 16.07.2016. Said residential plot was purchased by the assessee on 17.10.2012. The assessee claimed indexed cost of acquisition of Rs. 84,01,569/-. As observed by the Assessing Officer said transaction led to long term capital gain of Rs. 1,55,98,431/-. Said observation is not in dispute.

The assessee and his brother are stated to have jointly purchased subject land having construction of house on a part thereof, on 09.05.2016, for a sum of Rs. 4,80,00,000/-. In the said sale consideration, the assessee had his share of Rs. 2,40,00,000/-, which he invested for purchase of the said land with construction of house on it.

6. Assessee is said to have claimed deduction of the abovesaid amount of LTCG of Rs. 1,55,98,431/-, under section 54 of the Act, on the ground that he invested said entire amount in purchase of new property.

Show Cause Notice

7. On 06.11.2016, the Assessing Officer issued show cause notice to the assessee. Same is reproduced for ready reference:-

“Sub: Show cause notice for completion of assessment proceedings u/s143(3) for AY 2017-18 of the I.T. Act, 1961-reg.-

Please refer to the pending assessment proceedings in your case.

During the financial year 2016-17 relevant to AY 2017-18 you have sold a Residential house at 1-kha-18, Jawahar Nagar, Jaipur for a consideration of Rs.2,40,00,000/- on 16.07.2016. Earlier, this house was purchased by you on 17.10.2012 at a price of Rs.63,62,788/-After taking cost inflation the indexed cost of the house works out to Rs.84,01,569. After adjusting the same balance of Rs. 1,55,98,431/-has been claimed by you as exempt income u/s54F on account of purchase of new residential house at Bhankrota, Ajmer Road, Jaipur in joint name with Sh. Jitendra Mutha for a consideration of Rs. 4,80,00,000/- excluding Registration Charges of Rs. 33,60,400/- by taking 50% share in the property you calculated it at Rs.2,40,00,000/-

From the perusal of the deed of the property it emerges that you have purchased an agriculture land admeasuring 0.8619 hectare which comes to 92,774.1439 sq ft. On this sprawling land of 92,774.1439 sqft there is a construction in 1490 sqft of area which works out to only 1.6% of the entire land which costs at

Rs.4,80,00,000/-. In money terms the cost of this piece of land i.e. of 1490 Sq. ft comes to Rs. 7,70,904/-only. This shows that the land appurtenant to the dwelling unit is very large in comparison to the size of the dwelling unit. Therefore claim of deduction u/s54F for investment in residential unit should be restricted upto the investment in the residential unit along with appurtenant land which should be reasonable in size in comparison to the residential unit. In this case since the residential unit stands on a vast area of land, it would not be proper to consider the entire area of land as appurtenant to the building for the purpose of section 54F.

Land appurtenant, in relation to any dwelling unit or units comprising building may be an open space for the enjoyment of such building, to the extent of land not exceeding one-third of the plinth area of the building comprising the dwelling unit or units at the ground level contiguous to the land occupied by such building. In view of the above the land appurtenant to the house one third of 1490 sq ft. which works out to roughly 500 sq ft. giving total area roughly of 2000 sqft eligible for claiming deduction u/s 54F. Since the land has been purchased jointly in partnership by two persons share of one person comes at 1000 sqft only and cost of investment in 1000 sqft comes at Rs.5,17,385/- You are therefore requested to show cause why the claim u/s54F of Rs.5,17,385/- is not allowed in place as claimed by you.

You are therefore requested to show cause why the assessment as proposed above is not made in your case not later than 14.11.2019 along with documentary evidence.”

Assessee responds referring to the previous reply

8. The assessee submitted letter dated 11.11.2019 to the above said show cause notice pleading therein that his detailed reply already submitted vide dated 03.07.2019 may be treated as a response to theshow cause notice.

As is available from page 3 of the assessment order in said reply dated 03.07.20419, the assessee claimed to have purchased a new residential house, and at the same time, pleaded that even if the said house is constructed on an agricultural land, deduction u/s 54 of the Act, cannot be denied, especially when expression “residential house” has not been defined under the Act.

Assessment Order is passed

9. At page 4 of the assessment order, the Assessing Officer observed that the objection from the side of the revenue was regarding “reasonable size of land” appurtenant to the dwelling unit, to be considered for the purposes of exemption, u/s 54F of the Act.

The Assessing Officer went on to observe as under, while framing the assessment :-

“In the instant case it is an agriculture land admeasuring 0.8619 hectare which comes to 92,774.1439 sq ft. On this vast area of land of 92,774.1439 sqft there is a construction in a small area of 1490 sqft which is only 1.6% of the entire land which costs at Rs.4,80,00,000/. In money terms the cost of this piece of land i.e. of 1490 Sq. ft comes to Rs.7,70,904/-only. The deduction u/s54F was introduced in the statute to promote housing so that the citizens of India have at least a respectable dwelling unit for their family. If investment in such a large sized open land is allowed in the name of deduction in residential house it would sabotage the very purpose of deduction.

In view of the above the land appurtenant to the house is one third of 1490 sq ft. which works out to roughly 500 sq ft. giving total area roughly of 2000 sqft eligible for claiming deduction u/s 54F. Since the land has been purchased jointly in partnership by two persons share of one person comes at 1000 sqft only and cost of investment in 1000 sqft comes at Rs.5,17,385/-. Thus the assessee is allowed deduction u/s54F of Rs.5,17,385/-, Since the assessee has under reported his income penalty u/s270A is also initiated in his case Income from Long Term Capital Gain

Sale Price: 2,40,00,000

Cost of plot: 63,62,788

Indexed Cost: 63,62,788* 1125/852 84,01,569

Net income from sell of plot 1,55,98,431

Deduction u/s 54F as discussed above: 5,17,385

Net Taxable income from LTCG :1,50,81,046

Thus after taking deduction u/s54F of Rs.5,17,385/- the net long term capital gain comes at Rs. 1,50,81,046/- which is added to its total income for the year under consideration.

Subject to the above the income of the assessee is assessed as under

Income as per ITR: 5,92,314

Add: LTCG as discussed above: 1,50,81,046

Total income : 1,56,73,360″

Matter reached CIT(A)

10. When the issue was raised in appeal before Learned CIT(A), challenging denial of deduction for the reasons recorded by the Assessing Officer, on behalf the appellant, there it was reiterated that there is no limit to restrict land appurtenant to residential house, as per the provisions of IT Act.

Learned CIT(A) recorded following observations/ findings, while dealing with the said contention raised before him:-

“However, considering the overall facts of case involving huge agricultural land as large as 92,774 sq.ft. involving appellant constructed house of only 1490 sq.ft., AO has re-computed such attributable land to the residential house as at 500 sq.ft. being 1/3rd of the total constructed area on reasonable basis and arrived at 2000 sq.ft as attributable to new house as eligible for exemption u/s.54F of I.T Act. On this analogy as reasoned by AO in the assessment order, eligible exemption of appellant is restricted to Rs.5,17,385/- as against the appellant claim of same at Rs. 1.55 crores. Considering all these facts of case as reasoned and explained by AO in the assessment order and keeping in view the appellant claims without substantiating genuineness / justifiability of such huge track of agricultural land as appurtenant to residential house etc., the working as restricted by AO to hold the residential house as having a constructed area of 1490 sq.ft. plus 500 sq. ft. of land appurtenant to this house is apparently reconcilable and justifiable as per the facts available on record, keeping in view the letter and spirit behind the legislative intent of provisions u/s.54F of I.T Act. It would be unfair on the part of the appellant to seek for claim of entire agricultural land as large as 92,774 sq. ft as attributable to the small house built on it for an sq.ft of 1490, that too involving agricultural land to contend that the same as part of house and thereby the same has neither any basis nor any justification contrary to the findings of AO involving practical conditions and realities of a residential house as predominantly understood in Indian context as reconcilable / understood with legislative intent as envisaged in I.T Act. Further, appellant has adduced various citations to hold the order of AO as not maintainable and on perusal of same, the facts of case of appellant and ratios of adjudication involved in the citations is neither comparable nor reconcilable to the facts of case of the appellant as brought out by AO in the assessment order and thereby the same are not considered as applicable. Accordingly, AO computation to consider the residential house as involving fully constructed house area of 1490 sq. ft. with further reasonable benefit of 500 sq. ft. as reasoned in the assessment order seems justifiable and accordingly there exists no infirmity in the observations and consequent findings of AO resulting in restriction of appellant claim of exemption uls.54F of LT Act to Rs.5.17.385/-, thereby the order of AO is justifiable. In the result, appellant various contentions / GOA as advanced involving inter-related /multiple over-lapping GOA are to be treated as not maintainable and thereby appellant appeal is to be dismissed as not maintainable as per the facts available on record on merits

6. Accordingly, appellant appeal against the assessment order u/s. 143(3) of LT Act dated 16.11.2019 for AY 2017-18, is dismissed on merits as not maintainable as per law as above

7. In the result, appellant appeal for AY 2017-18, is dismissed.”

Assessee comes to the Appellate Tribunal-contentions

11. Before us, Ld. AR for the appellant has submitted that the Assessing Officer and Learned CIT(A) fell in error by recording observation and finding that in this case, only 1/3 area of the land is to be taken as the land appurtenant to the residential house and when so worked out, same came to about 500 Sq. Ft.

Ld. AR for the appellant has contended that the area in which a residential house is constructed, is of no significance, when under the Act expression residential house has not been defined. He has tried to buttress his argument by submitting that it depends upon the area in which newly purchases property is situate and the amenities provided therein.

12. On the other hand, Ld. DR for the department has submitted that the size of the land appurtenant to the dwelling unit must be reasonable, for the purpose of allowing of deduction u/s 54 of the Act.

13. It may be mentioned here that while framing assessment, the Assessing Officer resorted to the provisions of Section 54F of the Act, and not section 54 of the Act.

There is no dispute that in his reply submitted to the Assessing Officer, the assessee is stated to have claimed exemption u/s 54 of the Act.

Certain admitted facts

14. As rightly submitted by both sides the factum of sale of original property by the assessee, on 16.07.2016, and purchase of new assest, even prior thereto on 09.05.2016, are not in dispute.

15. Sale consideration of each of the above said property is also not in dispute. It is also not disputed that the share of the assessee, in the total sale consideration, as regards purchase of new property, came to Rs. 2,40,00,000/-, being his half share, the other half share being of his brother.

16. It is also not in dispute that the assessee had claimed exemption u/s 54 of the Act of a sum of Rs. 1,55,98,431/-, i.e. long term capital gain to the assessee on sale of the original asset. Amount of said Long Term Capital Gain is not in dispute.

17. Ld. DR for the department is well aware that the authority below relied on the provisions of section 54F, even when the assessee was claiming exemption section 54 of the Act.

Discussion

18. Vide assessment order, the amount of exemption allowed to the assessee was restricted to Rs. 5,17,385/-, as against the total exemption of Rs. 1,55,98,431/- claimed by him.

19. As noticed above, there is no dispute as regards the total sum of LTCG of Rs. 1,55,98,431/-, from the sale of the original asset. Restriction to exemption came to be made by the Assessing Officer, having regard to the reasonable size of land appurtenant to the dwelling unit.

20. As is available from the assessment order, the Assessing Officer clearly observed that the new asset is an agricultural land measuring 0.8619 hectares equal to 92774.1439 Sq. Ft., and further that on the said vast area of land, the construction was only in a small area measuring 1490 Sq. Ft., which formed only 1.6% of the entire land. Then the Assessing Officer valued the said small area of construction at Rs. 7,70,904/-.

21. In the opinion of the Assessing Officer, deduction u/s 54F of the Act was introduced to remote housing so that citizen of India could have at least one dwelling unit for their families. He was also of the view that if the investment is allowed, in suchlike cases of large size open land, it was not going to serve the purpose of exemption allowed under the Act.

22. On perusal of section 54 of the Act, it is quite obvious that same pertains to profit on sale of property used for residence. Said property has been described within the section by stipulating that the same may be a building or land appurtenant thereto, but the same must be a residential house.

23. Nature of the original asset sold by the assessee was never an issue in the assessing proceedings. When it is so, the only other requirement to claim exemption u/s 54 of the Act was that the assessee purchased or constructed one residential house, within stipulated period with the amount of the Long Term Capital Gain got on sale of the original property.

24. The Assessing Officer and Learned CIT(A) did not allow the claim of the assessee-appellant, as in their view, the entire new asset is not a residential house, as construction in the total area of 92774.1439 Sq. Ft is too small i.e. 1490 Sq. Ft. i.e. only 1.6% of the entire land.

25. As noticed above, the contention raised by the Ld. AR for the appellant is that the assessee has life style of comfort and fulfillment, he having desires to stay connected to the nature and enjoy serene environment, and as such, he purchased said area, in which construction was already there. Ld. AR has submitted that the factors like location of the property, its use, and requirements of the assessee are relevant factors for consideration, while applying the provisions of section 54 of the Act, but the authorities below have taken into consideration only the fact that construction in the vast areas of the land is in a very small area. Therefore, he has contended that the assessment order and the impugned order deserve to be set aside, because all the relevant factors were not considered while framing the assessment.

26. On perusal of the assessment order, it transpires that before issuance of the show cause notice dated 06.11.2016, the Assessing Officer had gone through sale deed vide which he and his brother purchased new asset, and the said deed contained relevant details, including the area of the construction and the land appurtenant to the said dwelling unit.

27. Surprisingly, the Assessing Officer observed in the impugned order that the new asset, except the area in which there is construction, purchased by the assessee and his brother in equal shares, is an agricultural land. However, the Assessing Officer has nowhere mentioned as to whether there was any produce sown in the land appurtenant to the area of construction/ dwelling unit.

The assessment order also does not reveal as to whether the Assessing Officer ever called upon the assessee to produce the land record or jamabandi to find out the purpose for which the land appurtenant to the dwelling unit was being utilized during the relevant year or soon after the purchase thereof by the assessee.

It is also not borne out from the assessment proceedings, if the Assessing Officer called for any report from the Revenue authorities regarding use of the land appurtenant to the residential construction therein.

Assessment order does not reveal that the Assessing Officer visited the site and inspected the same to find out as to what was the actual status of the new asset during the period relevant for the purposes of section 54 of the Act. Inspection could reveal if the assessee had raised any construction in the land appurtenant or made any additions or alterations for the purposes of use of the entire area of said new property as a residential house, so as to attract or not, the provisions of section 54 of the Act as regards the vast area of the land appurtenant to the small area of construction already existing at the time of its purchase.

Therefore, it becomes difficult to decide the issue involved without further material.

It is beyond comprehension as to how, in view of any additional material, the Assessing Officer could conclude in the assessment order that the assessee had actually purchased agricultural land, and as such, decided to deny benefit of exemption in full under section 54 of the Act, by restricting it and to levy tax under section 54F of the Act.

28. In view of the above discussion and observations, we deem to be a fit case, where a detailed enquiry is required to determine as to whether the entire area of the new asset purchased by the assessee constitutes a residential house, even when the constructed of dwelling unit as per sale deed is in small area out of the vast area of the property purchased.

It may be mentioned here that even in the written submissions, Learned AR for the appellant also put forth that the matter required detailed enquiry.

29. In view of the above discussion and findings, the impugned order passed by Learned CIT(A) and the assessment order passed by the Assessing Officer deserve to be set aside, and the matter needs to be remitted to the Assessing Officer for decision afresh.

Result

30. As a result, the appeal is disposed of, for statistical purpose and the matter is remitted to the Assessing Officer for decision afresh, after taking into consideration all the relevant factors for adjudication of the issues involved in this matter, of course, after providing reasonable opportunity of being heard to the assessee.

31. File be consigned to the record room after the needful is done by the office.