1 Section 54 – Two separate contracts for purchase of flat viz. one for house property and the other for furniture, etc. considered, in substance, as the one only and deduction allowed in full.

FACTS
The assessee is a non-resident who sold off a house for a consideration of Rs 2.46 crore and earned long term capital gain of Rs. 1.9 crore. He invested a portion of the sale proceeds, Rs. 78 lakhs, in another residential unit and claimed a deduction u/s. 54. The AO noted that the assessee had entered into two separate contracts viz., for purchase of house property and another for purchase of furniture and fixtures therein. The payment of Rs. 60 lakhs was for the purchase of house property and Rs. 18 lakhs was for the purchase of furniture and fixtures. The AO was of the opinion that the assessee had executed two separate deeds to save stamp duty on it, (and) now the assessee is trying to evade income tax. He was further of the view that most of the furniture items are removable, and, that it cannot be said that furniture was purchased to make the house habitable. Therefore, the AO declined deduction u/s. 54 F to the extent of Rs 18 lakhs paid under a separate agreement for furniture and fixtures in the residential property purchased by the assessee.

HELD
Analysing the provisions of section 54, the Tribunal noted that the expression used in the statute is “cost of the residential house so purchased” which according to it does not necessarily mean that the cost of the residential house must remain confined to the cost of civil construction alone. A residential house may have many other things, other than civil construction and including things like furniture and fixtures, as its integral part and may also be on sale as an integral deal. Further, it noted that there are, for example, situations in which the residential units for sale come, as a package deal, with things like air-conditioners, geysers, fans, electric fittings, furniture, modular kitchens and dishwashers. If these things are integral part of the house being purchased, the cost of house has to essentially include the cost of these things as well. In such circumstances, what is to be treated as cost of the residential house is the entire cost of house, and it cannot be open to the AO to treat only the cost of only civil construction as cost of house and segregate the cost of other things as not eligible for deduction u/s. 54.

However, from the arrangement in which the transaction was entered into, the Tribunal noted that in substance and in effect the house was sold for Rs 78 lakhs. Even if the assessee was to buy the house, without the furniture, it would have been for Rs 78 lakhs – as was clearly specified in the agreement to sell. The cause or trigger for the splitting of the consideration was not relevant and it had no bearing on de facto consideration for purchase of house property. The two agreements, according to it, cannot be considered in isolation with each other on standalone basis, and have to be considered essentially as a composite contract, particularly in the light of the undisputed contents of the agreement to sale. Given these facts, the Tribunal held that the cost of the new asset has to be treated as Rs 78 lakhs. Accordingly, the Tribunal directed the AO to delete the disallowance of deduction u/s. 54 to the extent of Rs 18 lakhs.