Land adjacent to a building – there is no rider under section 54 regarding the size of the land
Facts and issues of the case
The Revenue has taken the following grounds of appeal:
“1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is legally justified in deleting the disallowance of Rs. 1,00,91,252/- made on account of indexed cost of House Property pertaining to interest expenses.
2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in allowing deduction u/s 54 of the I.T. Act of Rs. 1,70,00,000/- on account of acquisition of new residential unit.”
The assessee is an individual. He has income from salary from M/s. Banox Exim Pvt. Ltd. where he is Director, income from house property, profit from partnership firm M/s. Prime Banox, long term capital gain and income from other sources. He filed his return for AY 2015-16 on 29.09.2015 declaring income of Rs. 1,57,00,290/-. The case was selected for scrutiny under CASS. The Ld. Assessing Officer (“AO”) found that the assessee sold his residential house for Rs. 5,80,00,000/- and Computed Long Term Capital Gain (‘LTCG’) of Rs. 1,94,89,939/- out of which he claimed deduction of Rs. 1,70,00,000/- under section 54 of the Income Tax Act, 1961 (the “Act”) and declared taxable capital gain of Rs. 24,89,939/-. While computing capital gain of Rs. 1,94,89,939/- the assesee has claimed deduction of interest cost of Rs. 1,00,91,252/- as indexed cost of acquisition. On query, the assessee submitted that interest incurred for acquisition of capital asset forms part of cost of asset and relied on the following decisions:
CIT vs. Sri Hari Ram Hotels Pvt. Ltd. 188 Taxman 178 (Kar)
CIT vs. Shri Raja Gopala Rao 252 ITR 459 (Mad)
CIT vs. Mithilesh Kumari (1973) 92 ITR 9 (Delhi)
The submission of the assessee was not acceptable to the Ld. AO who observed that the decisions (supra) are not applicable to the case of the assessee. These decisions (supra) say that actual cost would include all expenditure necessary to bring the assets into existence and put them in working condition. Nowhere it has been held therein that expenditure incurred after the acquisition of the asset would be included in the cost of assets. He therefore held that interest paid by the assessee for the period commencing from the date of acquisition of asset till the date of sale would not form part of the cost of acquisition.
Observation by the court
According to Ld. AO such interest expenditure does not fall within the ambit of section 48 and cited the decision of Mumbai Bench of the ITAT in Macintosh Finance Estate Ltd. vs. Addl. CIT (2007) 12 SOT 324. He also observed that in determining the cost of acquisition, the interest component after bringing the asset into existence is not taken into consideration as per Explanation 8 to section 43 of the Act.Moreover, in earlier years the assessee has claimed deduction of interest in respect of self occupied property sold during the year under section 24(b) of the Act under the head “House Property”. Hence it cannot be treated as cost of acquisition of property for capital gain. Accordingly, the Ld. AO did not allow the impugned interest as indexed cost of acquisition.
Further, the Ld. AO negatived the claim of the assessee for deduction of Rs. 1,70,00,000/- under section 54 of the Act. He found that the assesee purchased agricultural land measuring 87120 sq. ft. From M/s. Banox Exim Pvt. Ltd. in which he is director and gets salary. The Ld. AO issued commission under section 131(1)(d) of the Act to ITO, Ward Bhiwadi. He deputed his inspector who reported that the land in question is being used as Farm House and that the residential house is constructed in 1350 sq ft., guest house in 900 sq ft., staff quarters and toilets 500 sq. ft., swimming pool 400 sq. ft. and shed for parking & pets 1800 sq. ft. Based on the above report and that the land is still agricultural in revenue records, the Ld. AO disallowed the impugned deduction under section 54 of the Act. Both the issues aforementioned were challenged by the assessee in appeal filed before the Ld. CIT(A). Aggrieved, the Revenue is in appeal before the Tribunal.
Ground No. 1 relates to disallowance of Rs. 1,00,91,252/- made by the Ld. AO on account of indexed cost of house property pertaining to interest expenses which has been deleted by the Ld. CIT(A). The Ld. DR supported the order of the Ld. AO and attempted to justify his view. The Ld. AR reiterated the same arguments which were advanced before the Ld. CIT(A). He relied on the decision of Chennai Tribunal in ACIT v. Ramabrahamam (2012) 27 taxmann.com 104 (Chennai-Trib) in which it was held that interest on housing loan which was claimed as a deduction under section 24(b) while computing income from house property was also deductible under section 48 as cost of acquisition. Several judgments were cited in support of the proposition that where property is purchased from borrowed funds, the interest paid therein constitute ‘cost’ to the assesee. It was also submitted by the Ld. AR that Mumbai Tribunal in its later decision in DCIT vs. Shri Fritz D. Silva in ITA No. 236/Mum/2010 dated 8.5.2015 overruled its earlier decision in Macintosh Finance Estates Ltd. (supra) relied upon by the Ld. AO, following the judgment of Hon’ble Madras High Court in CIT vs. Trishul Investments Ltd. (2008) 305 ITR 434 (Mad.). The Ld. AR further submitted that Explanation 8 to section 43 of the Act is not at all applicable to the facts of the assessee’s case.
Ground No. 2 relates to denial of exemption under section 54 by the Ld. AO which has been allowed by the Ld. CIT(A). The Ld. DR supported the order of the Ld. AO whereas the Ld. AR submitted that the solitary ground on which the Ld. AO disallowed the claim of the assessee is that the residential house is constructed on agricultural land. The impugned disallowance is not valid on this ground alone as ITAT Jaipur Bench has held in Shyam Sunder Makhija vs. ITO 38 ITD 125 that the Farm House is also a residential house. The Ld. AR submitted that section 54 does not put any rider that deduction in respect of investment in acquisition of land appurtenant to the building will not quality for exemption.
Court had given our careful thought to the submissions of the parties and perused the orders of the Ld. AO/CIT(A) as also the material on records. It is not in dispute that the assessee has purchased agricultural land and constructed in the said land residential house, guest house, staff quarters, swimming pool & shed for parking etc. The Ld. CIT(A) has observed and rightly so that the assessee has made investment in the residential house and land appurtenant thereto and that the Act does not limit the size of appurtenant land.
Court therefore, of the opinion that the impugned disallowances of exemption under section 54 is not based on any solid foundation and the Ld. CIT(A) was perfectly justified in deleting the disallowance. There being no substance in this ground of the Revenue, Court reject it.
In the result, the appeal of the Revenue is dismissed.DCIT-Vs-Sh.-Kanwal-Mohan-Singh-Sehgal-ITAT-Delhi.
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