ASSISTANT COMMISSIONER OF INCOME TAX v. DR. P.S. PASRICHA
[Citation -2008-LL-0111-5]

Citation 2008-LL-0111-5
Appellant Name ASSISTANT COMMISSIONER OF INCOME TAX
Respondent Name DR. P.S. PASRICHA
Court ITAT
Relevant Act Income-tax
Date of Order 11/01/2008
Assessment Year 2001-02
Judgment View Judgment
Keyword Tags transfer of long-term capital asset • income from house property • taxable capital gain • commercial property • immovable property • sale of property • profit on sale • rental income • special bench • sale of flat • new asset
Bot Summary: After the sale of the above property, the assessee purchased a commercial property at Kolhapur for a total consideration of Rs. 125.28 lakhs and gave the said property on rent to M/s Huges Telecom Ltd. Thereafter, within the period specified under s. 54(1) of the Act, the assessee purchased two adjoining residential flats at Mumbai for a total consideration of Rs. 1,04,78,750 on which deduction was claimed under s. 54(1) of the Act. With regard to another objection that assessee has invested the sale proceeds in purchase of two residential houses, the learned Departmental Representative has invited our attention that the assessee has purchased two independent residential units and just after purchase, it were let out to different parties and rental income was earned by the assessee. The learned counsel for the assessee on the other hand has submitted that n o doubt the sale proceeds received on sale of residential flat in the building known as Dilwara was utilized to purchase a commercial property at Kolhapur for a total consideration of Rs. 125.28 lakhs the assessee has purchased another residential house within the period specified under s. 54(2) of the Act. The learned counsel for the assessee further contended that the proposition propounded by the learned Departmental Representative that the identity of the head should not be changed, is without any basis as it cannot be applied where the assessee acquires/purchases the residential house before the transfer took place. With regard to deduction with respect to two residential flats, the learned counsel for the assessee has submitted that the assessee has purchased the two residential flats with an intention to join them by removing the intermediate wall with a common kitchen, as such, the assessee is entitled for deduction with respect to both the flats. Now the question comes whether the assessee can claim deduction with respect to both the flats purchased by the assessee were not used by himself for its residential purpose Undisputedly, the assessee has purchased two adjoining flats in one building and these flats were rented out to two different tenants after few days from the purchase and later on these flats were finally sold in 2005 as stated by the learned counsel for the assessee. From the facts available, we are of the view that assessee had never intended to use these flats as a residential house by removing the intermediate walls with a common kitchen, as such, assessee is not entitled for deduction with respect to both the flats.


This appeal by Revenue is preferred against order of CIT(A) mainly on two grounds which are as under: "1. On facts and in circumstances of case and in law, learned CIT(A) erred in holding that assessee is entitled for relief of Rs. 1,04,78,750 under s. 54(1) of IT Act. On facts and in circumstances of case and in law, learned CIT(A) erred in holding that assessee is eligible for relief in respect of both flats." We have heard rival submissions and carefully perused orders of authorities below and documents placed on record. facts borne out from record are that assessee has acquired residential flat in building known as Dilwara at Cooperage, Mumbai at cost of Rs. 3,22,464. said property was sold during year for total consideration of Rs. 1,40,00,000. After claiming deductions for expenses incurred for sale and cost of long-term capital gains was worked out by assessee at Rs. 1,24,02,738. assessee claimed exemption under s. 54(1) of Act to extent of Rs. 1,04,78,750 and returned taxable capital gain at Rs. 19,23,988. After sale of above property, assessee purchased commercial property at Kolhapur for total consideration of Rs. 125.28 lakhs and gave said property on rent to M/s Huges Telecom Ltd. Thereafter, within period specified under s. 54(1) of Act, assessee purchased two adjoining residential flats at Mumbai for total consideration of Rs. 1,04,78,750 on which deduction was claimed under s. 54(1) of Act. AO disallowed claim of deduction under s. 54 on two grounds namely: (1) that sale proceeds from original asset were not deployed fully in new asset, (2) assessee has not purchased one single property, but, two units. assessee preferred appeal before CIT(A) with submissions that he has purchased residential property within specified period, as such, he is entitled for deduction under s. 54(1) of Act and with regard to two residential flats, it was contended that these flats are adjoining flats and they can be used as single unit. CIT(A), re-examined issue in light of legal provisions of Act and has held that assessee is entitled for deduction under s. 54(1) of Act even when capital gain are invested in more than one flat. With regard to investment of sale proceeds, he has further held that entire sale proceeds was utilized for purchase of both flats in question, as such, deduction to be allowed at Rs. 1,04,78,750 as claimed by assessee. Now Revenue has preferred appeal before Tribunal. learned Departmental Representative has raised his two fold arguments. first objection is that sale proceeds received on account of sale of flat in building known as Dilwara was utilized in purchase of commercial properties at Kolhapur. In support of his contention, learned Departmental Representative has invited our attention to chart prepared by AO at page No. 2 in assessment order. Later on, assessee has purchased two residential flats in Lady Ratan Tower, Worli, Mumbai for sum of Rs. 1,04,78,750 out of funds received from different sources and claimed exemption under s. 54(1) of Act. learned Departmental Representative has submitted to avail benefit of s. 54(1), assessee is required to invest sale proceeds on transfer of long- term capital asset in purchase of another residential house, but, in instant case, said sale proceeds from earlier capital asset, was utilized to purchase commercial property. residential house was purchased out of funds obtained from different sources. learned Departmental Representative further contended that at least identity of head should not be changed and particular receipt credited to head of capital gain/sale proceeds of immovable property, should remain there, till another residential house is purchased. But, in instant case, identity of head is diminished once sale proceeds is exhausted in purchase of commercial property, as such, assessee is not entitled for deduction under s. 54(1) of Act. With regard to another objection that assessee has invested sale proceeds in purchase of two residential houses, learned Departmental Representative has invited our attention that assessee has purchased two independent residential units and just after purchase, it were let out to different parties and rental income was earned by assessee. He has also placed parties and rental income was earned by assessee. He has also placed reliance upon order of Special Bench in case of ITO vs. Ms. Sushila M. Jhaveri (2007) 109 TTJ (Mumbai)(SB) 299: (2007) 107 ITD 321 (Mumbai)(SB). He has further submitted that since assessee has purchased two independent residential houses and there is no possibility of joining them together, said residential flats cannot be called to be one residential house and deduction under s. 54 cannot be allowed with regard to both residential flats. learned counsel for assessee on other hand has submitted that n o doubt sale proceeds received on sale of residential flat in building known as Dilwara was utilized to purchase commercial property at Kolhapur for total consideration of Rs. 125.28 lakhs, but, assessee has purchased another residential house within period specified under s. 54(2) of Act. He has also invited our attention that provisions of s. 54 of Act with submissions that nowhere it has been mentioned that same sale proceeds, received on transfer of long-term capital asset, must be utilized for purchase of another residential house. assessee is simply required to acquire residential house within period of one year before or two years after date on which transfer took place. In instant case, assessee has purchased residential flat before due date of filing of return and as such, its claim is not hit by sub-s. (2) of s. 54 of Act. learned counsel for assessee further contended that proposition propounded by learned Departmental Representative that identity of head should not be changed, is without any basis as it cannot be applied where assessee acquires/purchases residential house before transfer took place. With regard to deduction with respect to two residential flats, learned counsel for assessee has submitted that assessee has purchased two residential flats with intention to join them by removing intermediate wall with common kitchen, as such, assessee is entitled for deduction with respect to both flats. Having heard rival submissions and from careful perusal of orders of lower authorities and provisions of s. 54 of Act, we find that assessee has initially utilized sale proceeds on sale of its residential flat in commercial properties and later on he purchased two residential flats within period specified in sub-s. (2) of s. 54 of Act, and these facts are not disputed by Revenue. Revenue s main dispute is that sale proceeds were utilized for purchase of commercial property and residential house was purchased out of funds obtained from different sources, as such, identity of heads has been changed. We do not find much force in this argument as requirement of s. 54 is that assessee should acquire residential house within period of one year before or two years after date on which transfer took place. Nowhere, it has been mentioned that same funds must be utilized for purchase of another residential house. requirement of law is that, assessee should purchase residential house within specified period and source of funds is quite irrelevant. For sake of reference, we extract provisions of s. 54 as under: "54. Profit on sale of property used for residence. (1) [Subject to provisions of sub-s. (2), where, in case of assessee being individual or HUF], capital gain arises from transfer of long-term capital asset, being buildings or lands appurtenant thereto, and being residential house, income of which is chargeable under head Income from house property (hereafter in this section referred to as original asset), and assessee has within period of (one year before or two years after date on which transfer took place purchased), or has within period of three years after that date constructed, residential house, then, instead of capital gain being charged to income-tax as income of previous year in which transfer took place, it shall be dealt with in accordance with following provisions of this section, that is to say, (i) if amount of capital gain [is greater than cost of residential house so purchased or constructed (hereafter in this section referred to as new asset)], difference between amount of capital gain and cost of new asset shall be charged under s. 45 as income of previous year; and for purpose of computing in respect of new asset any capital gain arising from its transfer within period of three years of its purchase or construction, as case may be, cost shall be nil; or (ii) if amount of capital gain is equal to or less than cost of new asset, capital gain shall not be charged under s. 45; and for purpose of computing in respect of new asset any capital gain arising from its transfer within period of three years of its purchase or construction, as case may be, cost shall be reduced by amount of capital gain. (2) amount of capital gain which is not appropriated by assessee towards purchase of new asset made within one year before date on which transfer of original asset took place, or which is not utilised by him for purchase or construction of new asset before date of furnishing return of income under s. 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than due date applicable in case of assessee for furnishing return of income under sub-s. (1) of s. 139] in account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which Central Government may, by notification in Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for purposes of sub-s. (1), amount, if any, already utilised by assessee for purchase or construction of new asset together with amount so deposited shall be deemed to be cost of new asset: Provided that if amount deposited under this sub-section is not utilised wholly or partly for purchase or construction of new asset within period specified in sub-s. (1), then, (i) amount not so utilised shall be charged under s. 45 as income of previous year in which period of three years from date of transfer of original asset expires; and (ii) assessee shall be entitled to withdraw such amount in accordance with scheme aforesaid." (Emphasis supplied) Since assessee has purchased residential house before due date of filing of return of income, its claim is not hit by sub-s. (2) of s. 54 of Act. We, therefore, of view that assessee is entitled for deduction under s. 54(1) of Act. Now question comes whether assessee can claim deduction with respect to both flats purchased by assessee, but, were not used by himself for its residential purpose? Undisputedly, assessee has purchased two adjoining flats in one building and these flats were rented out to two different tenants after few days from purchase and later on these flats were finally sold in 2005 as stated by learned counsel for assessee. Meaning thereby, assessee had never intended to use both flats as residential house by removing intermediate wall with common kitchen. We are conscious about decision of Special Bench in case of Ms. Sushila M. Jhaveri (supra), in which it has been held that if two adjoining flats are purchased by assessee which can be used as residential house by removing intermediate walls with common kitchen, same can be treated as residential house for allowing deduction under s. 54(1) of Act. But, in instant case, assessee has purchased two independent flats though, adjoining with each other, and they were let out to two different tenants and finally in 2005, they were sold out. From facts available, we are of view that assessee had never intended to use these flats as residential house by removing intermediate walls with common kitchen, as such, assessee is not entitled for deduction with respect to both flats. He can only claim deduction with respect to any one of flat. We, accordingly, restore matter to file of AO to allow deduction under s. 54(1) of Act with respect to any one of flat as claimed by assessee. Accordingly, this appeal is disposed of. In result, appeal of Revenue is partly allowed for statistical purposes. *** ASSISTANT COMMISSIONER OF INCOME TAX v. DR. P.S. PASRICHA
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