Expense to Make House Habitable eligible for deduction u/s Section 54

What is section 54 of the Income tax act?

Section 54 states that where assessee being individual or HUF has sold a long term capital asset consisting of residential house property then he shall be eligible for exemption of capital gain under this provision.

The assessee is required to purchase one residential house property in India in order to avail exemption under section 54. Where the Long term capital gain arising out of transfer is up to Rs. 2 crore then assessee can acquire two residential house properties prescribed time limit. This benefit of two house property is available to the assessee only once in lifetime.

The assessee has to purchase the new property within 1 year before or 2 years after the date of transfer of the old asset. In case the assessee conducts construction of the property then such construction must be completed within 3 years from the date of transfer of asset.

If the assessee is not able to purchase the property before the due date of filing of return than he can deposit the amount of capital gain in Capital gain account scheme in order to avail the exemption.

The assessee will get a maximum exemption of the amount of long term capital gain or the cost of new asset whichever is lower.

The assessee has to hold the asset for 3 years. In case the assessee transfer the new asset within 3 years from the date of purchase or construction, then cost of acquisition of new asset reduced by exempted capital gain.

Where the amount deposited in Capital gain account scheme is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains.

Fact of the case

The assessee individual, filed his return of income for the A.Y 2016-17 on 27.03.2018 admitting income of Rs.7,14,270/-. The case was selected for scrutiny under CASS and during the assessment proceedings u/s 143(3) of the Act, the Assessing Officer observed that the assessee, alongwith his mother, sold their house property admeasuring 875 sq. yards during the financial year 2015-16 at Banjara Hills Hyderabad, for a sale consideration of Rs.2,85,00,000 and that the assessee is a 50% shareholder. The Assessing Officer observed that the assessee has claimed deduction u/s 54F of the Act for a sum of Rs.3,87,85,200/- in respect of the house purchased jointly with his mother Mrs. Radhay Rani on 1.6.2016 having entered into an agreement for construction of house with Jayabhen Properties (P) Ltd. The Assessing Officer observed that the assessee has claimed Rs.55.00 lakhs towards furnitures and fixtures including other fittings such as Air Conditioner, Sofa Set, Double Bed, Dining Table set and other interior fitting kitchen equipment etc., and also Rs.14,85,000/- as expenditure towards additional works in the house. The Assessing Officer disallowed the same holding it to be not for making the house habitable. He, therefore, only allowed the cost of acquisition and indexed cost of acquisition and cost of the improvement to the extent of Rs.1,59,00,100 being the assessee’s share. Aggrieved, the assessee preferred an appeal before the CIT (A) who confirmed the order of the Assessing Officer and the assessee is in second appeal before the Tribunal.

Issue of the case

The assessee is in second appeal before the Tribunal by raising the following grounds of appeal:

“1. On the facts and in the circumstances of the case, the order of the learned Commissioner of Income Tax (Appeals)-6, Hyderabad, is perverse and unsustainable in law and on facts.

2. The CIT(A) erred in sustaining the disallowance of Rs.55,00,000 (appellant’s share of Rs.27,50,000) which was paid to the vendor for acquiring the movables in the house property purchased by the Appellant along with his mother. The authorities below ought to have mentioned that the house property which included the interior fittings was purchased as complete unit and therefore the said cost could not have been disallowed.

3. The CIT(A) erred in sustaining the disallowance of Rs.14,85,000 made by the AO.

4. The authorities below failed to appreciate that Rs.5,00,000 of the above amount was paid to broker for purchase of new residential house and the balance amount of Rs.9,85,000 was incurred towards repair charges to make the residential house fit for occupation.

For these and other grounds that may be urged at the time of hearing, it is prayed that the Hon’ble Tribunal may be pleased to allow the appeal.”

Observation of the Tribunal

The learned Counsel for the assessee submitted that the assessee and his mother had purchased the house along with furnitures and fixtures and therefore, the entire expenditure incurred by the assessee was towards the composite purchase of the house and furniture and should be allowed in toto. He also submitted that there were certain expenditure towards electrical work, plumbing work etc., which are necessary for making the house habitable and therefore, at least such expenditure should have been allowed.

The learned DR, however, placed reliance upon the orders of the authorities below:

Having regard to the rival contentions and the material on record, I am of the opinion that the cost of acquisition is the price paid by the assessee for the purchase of the house and also the expenditure towards the repairs made by him to make the house habitable and no other expenditure is to be allowed u/s 54 of the Act. As regards the details of the expenditure furnished in page 31 of the paper book of the assessee which are being sought as exempt by the assessee, I find that except for the expenditure incurred by the assessee towards electrical, water leakage problem and plumbing work, no other expenditure is required to be incurred for making the house habitable. Assessing Officer is directed to allow the same as cost of improvement and allow the same, if found to be in order.