S/s. 45, 54(1) & 54 (2), 55(1)(b) – Cost of purchase includes any capital expenditure incurred by the assessee on the property purchased to make it livable though the expenditure may be incurred after having purchased the property. The use of words `purchased or constructed’ does not mean that the property can either be purchased or constructed and not a combination of both the actions.
Facts: During the relevant previous year the assessee earned long term capital gain of Rs. 98,76,855 on sale of his residential house in August 2006. In May 2006, he purchased a house property for Rs. 71,94,570 and claimed to have spent Rs. 15,48,773 on its improvement. The expenditure on improvement was claimed to have been incurred till 31st March, 2007. The assessee claimed exemption u/s. 54 with reference to both the cost of purchase as well as expenditure incurred on improvement. It was submitted that “cost of improvement, as per section 55(1)(b), in any other case, means all the expenditure of capital nature incurred in making any addition or alteration to the capital asset by the assessee, after it becomes his property.”
The Assessing Officer (AO) was of the view that cost of improvement can be allowed as a deduction only to the transferor and not to the transferee. He denied claim of exemption u/s. 54 with reference to cost of improvement incurred by the assessee.
Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO.
Aggrieved, the assessee preferred an appeal to the Tribunal.
Held:
The Tribunal took note of the fact that the authorities below had laid a lot of emphasis on the fact that as the original house property was sold by the assessee in August 2006, it cannot be believed that the new house property was not habitable till September 2007. These observations were on the assumption that on sale of the old house, the assessee had to shift to new house. However, this overlooked the uncontroverted fact that the assessee had, during the period from August 2006 to June 2007 lived in a residential unit taken on lease. Lease rent was paid by cheque, copies of lease agreement and broker’s note were also filed and no errors were found in these evidences. Thus, the contention of the Department that the new house was habitable at the time of purchase was held to be unsustainable.
The Tribunal held that the cost of purchases does include any capital expenditure incurred by the assessee on such property to make it livable. As long as the costs are of such a nature as would be included in the cost of construction in the normal course, even if the assessee has bought a readymade unit and incurred those costs after so purchasing the readymade unit – as per his taste and requirements, the costs so incurred will form an integral part of the qualifying amount of investment in the house property. The use of words `purchased or constructed’ does not mean that the property can either be purchased or constructed and not a combination of both the actions. A property may have been purchased as a readymade unit but that does not restrict the buyer from incurring any bonafide construction expenditure on improvisation or supplementary work.
The Tribunal held that as long as the assessee has incurred bonafide construction expenditure, even after purchasing the unit, the additional expenses so incurred would be eligible for qualifying investment u/s. 54. The Tribunal restored the matter to the file of the AO for carrying out factual verifications, which was not done, in the light of its observations and to pass a speaking order after giving an opportunity of hearing to the assessee.
The appeal filed by the assessee was allowed for statistical purposes.
