Mahavir Prasad Gupta Vs Joint Commissioner of Income Tax (ITAT Delhi)

Income Tax Appellate Tribunal (ITAT) Delhi addressed key issues in the case of Mahavir Prasad Gupta vs. Joint Commissioner of Income Tax, focusing on eligibility for exemption under Section 54F of the Income Tax Act, 1961. The appellant claimed exemption on long-term capital gains from the sale of shares, stating the gains were reinvested in constructing a residential property. The assessing officer (AO) partially allowed the exemption but questioned the absence of documentation for the purchase of shares and reinvestment details. On appeal, the CIT(A) disallowed the exemption entirely, asserting that the property was non-residential and challenging the nature of the capital gains.

The ITAT admitted additional evidence submitted by the appellant, which included documentation from Castrol India Ltd., verifying the shares were held for over 12 months, qualifying them as long-term assets. The Tribunal emphasized that the powers under Rule 29 of the ITAT Rules are discretionary and can admit evidence for clarity in factual disputes. The AO had earlier recognized the gains as long-term, partially granting exemption, while the CIT(A) denied the exemption without providing adequate notice of enhancement, a procedural lapse.

The Tribunal clarified that a property used for non-residential purposes does not automatically lose eligibility for Section 54F benefits, provided the primary intent remains residential use. It acknowledged the appellant’s investment history, including amounts declared under the Voluntary Disclosure of Income Scheme (VDIS), 1997, and supported the contention that the reinvested funds were correctly attributed to the construction of the residential property.

The Tribunal noted procedural lapses by the CIT(A), including introducing a new source of income without proper notice, which is impermissible under the statute.

The Tribunal’s decision reinstated the exemption under Section 54F, underscoring the principle that the mere non-residential use of a property does not negate its eligibility.

FULL TEXT OF THE ORDER OF ITAT DELHI

1. This is an appeal preferred by the assessee against the order of the CIT(A), dt. 20th Feb., 2001 pertaining to the asst. yr. 1997-98. The assessee has raised three main issues, which we shall deal in seriatim.

2. The first issue is with regard to the claim of exemption under Section 54Fof the IT Act, 1961 (hereinafter referred to as ‘the Act’) with regard to the long-term capital gain on sale of 500 equity shares of M/s Castrol India Ltd. The gain so declared represented the entire sale price of the shares. The assessee claimed to have reinvested the entire sum in the construction of a residential house and, therefore, in terms of Section 54Fconsidered the long-term capital gain as exempt, thereby computing ‘nil’ income under the head ‘Capital gain’. The AO noted that the assessee had not deducted any cost of acquisition of such shares against the sale. The AO further notes in the assessment order that the assessee vide letter dt. 20th Nov., 1999 admitted that there was no evidence with him regarding the purchase of shares. The AO also notes in the assessment order that the assessee was called upon to furnish evidence of having invested the gain in the construction of a residential house to the extent of Rs. 2,47,740, i.e., the amount of exemption claimed under Section 54F. The assessee submitted that the reinvestment, as per Section 54F was made by the assessee towards the construction of a residential house at 70-71-72, Ashoka Park, New Delhi and referred to the capital account appearing in the books of account of his proprietary concern for the instant year as also the earlier years to substantiate the said appropriation of money towards construction of the new house. A copy of the same has also been filed before us in the paper book and is placed at p. 8. The AO, however, noted that only an amount of Rs. 81,300 was shown to have been spent towards the construction of building during the year in the said capital account. He, therefore, restricted the exemption under Section 54F to the said amount, thereby bringing to tax the balance capital gain of Rs. 1,66,440 as a long-term capital gain. In appeal before the CIT(A), the assessee reiterated its submissions with regard to the reinvestments made in the construction of residential house amounting to Rs. 2,47,000 by referring to the capital account of the assessee maintained with the proprietary concern. It was submitted that from his capital account, it should be observed that the assessee had shown building expenses at Rs. 4,52,000 in the previous years. That the said building was under construction since January, 1994 and was since completed in 1996. Apart from the aforesaid, the assessee also submitted that he had disclosed an investment of Rs. 1,50,000 towards the construction of the said property under Voluntary Disclosure of Income Scheme, 1997 (hereinafter referred to as ‘VDIS’) which has been accepted by the Department. It was therefore stated that the exemption under Section 54F was correctly claimed. The CIT(A) examined the issue from a different angle and has since held that no deduction under Section 54F was allowable to the assessee on the ground that the new asset was not a residential house. The CIT(A) has, therefore, enhanced the income by Rs. 81,300 by denying the deduction under Section 54F allowed by the AO. The CIT(A) further noted the failure on the part of the assessee to furnish any evidence regarding the purchase of the shares, which resulted in the capital gains. Having noticed that the assessee had not furnished such evidence either before the AO or before him, the CIT(A) further concludes that no capital gain could be computed. The CIT(A) accordingly directed the AO to charge tax on the resultant income by not treating the same as capital gain. Aggrieved with the aforesaid, the assessee is presently in appeal before us.

3. Before us, at the outset, the learned Counsel submitted that the order of the CIT(A) has the effect of enhancing of income and that the CIT(A) having failed to give any notice of enhancement, was, therefore, bereft of his powers to conclude as above. The second issue raised by the assessee is that notwithstanding the aforesaid, the impugned addition made by the CIT(A) was beyond his powers of enhancement inasmuch as the CIT(A) has brought to tax income from a new source which was neither returned by the assessee and nor was assessed by the AO. In this regard, the learned Counsel submitted that the assessee had returned the gain from the sale of shares as a long-term capital gain, which was admitted by the AO, while the CIT(A) had merely considered it to be short-term capital gain. A long-term capital gain and the short-term capital gain are treated differently under the statute. The CIT(A), therefore, by changing the character of the income has sought to bring to tax a new source of income, which was impermissible.

4. Before arguing on the merits, the learned Counsel referred to the application of the assessee made under Rule 29 of the ITAT Rules, 1963 with respect to the admission of additional evidence. The additional evidence is in the shape of a letter dt. 30th June, 1994 addressed by Castrol India Ltd., the investee company to the assessee to demonstrate that the shares sold by the assessee were held by him for a period of more than 12 months. According to the learned Counsel, this would demonstrate that the gain resulting on account of the sale of such shares was a long-term capital gain and, therefore, the view of the CIT(A) in not accepting the character of income as a long-term capital gain was contrary to the factual position. With regard to the justification for admission of the said additional fresh evidence, the learned Counsel submitted that the assessee had in his possession the broker note for the sale of shares, which was produced before the AO. The factum of the capital gain being a long-term capital gain, was accepted by the AO on the basis of evidence and material available before him. Therefore, there was no occasion for the assessee to have produced any further material to substantiate its period of holding of such shares in this regard. Before the CIT(A), the assessee could not produce it as the matter was very old and the records were not easily accessible. However, the assessee has now brought on record a document, which was kept by him in his old records, which clearly demonstrates that the shares have been held by the assessee for more than 12 months. It was submitted that the documents are crucial to arrive at the correct appreciation of facts, and, therefore, deserve to be admitted for the sake of advancing substantial justice.

5. In our view, insofar as the fresh evidence in the shape of a letter dt. 30th June, 1994 issued by M/s Castrol India Ltd. depicting the shareholding of the assessee is concerned, the same deserves to be admitted. The argument of the learned Departmental Representative that the assessee had sufficient opportunity to produce the same before the lower authorities is not justified having regard to the peculiar circumstances of the instant case. In this case, we find that the AO, after having noticed the absence of evidence with the assessee regarding the acquisition of the shares, still treated the gain on sale of shares as a long-term capital gain. This is evident from the fact that the AO has partially allowed exemption under Section 54Fto the extent of Rs. 81,300. The exemption in terms of Section 54Fis allowable in relation to the capital gain arising from the transfer of any long-term capital asset alone. Before the CIT(A) as well as before the AO, the assessee had filed a copy of dividend warrants dt. 25th April, 1992 evidencing his shareholding to the extent of 1,266 shares to demonstrate that 500 shares sold by it during the year were indeed held by it for more than 12 months. The said evidence has not been accepted by the CIT(A) on the ground that there are no distinctive numbers mentioned in the dividend warrants and, accordingly, it was not possible to correlate the shares sold during the year with the shares mentioned in the said dividend warrant. Ostensibly, the power of the Tribunal in terms of Rule 29 to admit fresh evidence entails an element of discretion which is required to be exercised in a judicious manner. The powers of the Tribunal to admit additional evidence are not only in situations where the evidence could not be produced before lower authorities owing to lack of adequate opportunity but also situations where the fresh evidence would enable the Tribunal to pass order or for any other substantial cause. Of course, the power of the Tribunal is to be exercised judiciously and for reasons to be recorded. In the instant case, we find that the present evidence seeks to demonstrate that the shares sold by the assessee were indeed held by it for more than 12 months, thereby qualifying to be a long-term capital asset. Although the said assertion has been consistently made by the assessee before the lower authorities on the basis of a dividend warrant. The dividend warrant, according to the CIT(A), was not clear inasmuch as the distinctive number of shares mentioned therein could not be co-related with the shares sold, leading, therefore, to an obscurity in a fact position. The fresh evidence now being produced seeks to clear this obscurity thereby leading to correct appreciation of facts and, in our view, the admission of the same is very much within the realm of the expression ‘for any other substantial cause found in Rule 29 of the ITAT Rules. Therefore, the said evidence deserves to be admitted in the interest of justice so as to remove the obscurity in the order of the lower authorities on this issue.

6. In view of the aforesaid discussion, insofar as the nature of the income arising from the sale of 500 shares of M/s Castrol India Ltd. is concerned, the same has to be treated as a long-term capital gain. Now, coming to the plea of the assessee for claiming exemption under Section 54F. On this issue, CIT(A) has denied the same on the ground that the appropriation made towards construction of the new property was not eligible for benefit of exemption under Section 54Ffor the reason that the same was not a residential house. This objection was not taken by the AO as he has allowed partial relief under Section 54F. The preliminary objection of the assessee is that there was no notice of enhancement given by the CIT(A). In our view, the objection is unacceptable, having regard to the circumstances of the case, which we shall discuss hereinafter. With regard to the withdrawal of exemption under Section 54F, the discussion in para 9 of the order of the CIT(A) is quite eloquent. It is clearly brought out by the CIT(A) that the assessee was show caused as to why benefit under Section 54Fshould not be withdrawn. Therefore, we do not find any fault in the approach of the CIT(A) to this extent. The CIT(A) found that the new property in question has been let out for commercial purposes and, therefore, the same could not be said to be a residential house. The stand of the assessee before the CIT(A) as also before us is that the plot of land was meant for residential purposes. That the super structure constructed by the assessee was unauthorized, as it did not have the MCD approval, yet the same was constructed only with the object of using as a residential house. The letting out by the assessee of the super structure for commercial purposes was not the intention and was merely incidental, done with a purpose of earning some rentals. It was argued that the conditions specified in Section 54F merely require an assessee to invest in a residential house and there was no stipulation that the same be also used as a residential house. It was submitted that the letting out for commercial purposes was only a temporary phenomenon and does not distract from the fact that the property remained a residential property. With regard to the stand of the CIT(A) that the plan of construction itself does not demonstrate that the property was to be used as residential property, the assessee submitted that there was no basis to arrive at such fact situation.

7. On the other hand, learned Departmental Representative has relied on the orders of the CIT(A) on this issue. Learned Departmental Representative submitted that what was constructed by the assessee was not a residential house. It was submitted that the CIT(A) noted that in the super structure constructed by the assessee, there was no provision for any kitchen facility and, therefore, it could not qualify to be a residential house. Learned Departmental Representative also submitted that the claim of the assessee was not in keeping with the intention of the legislature under Section 54Fof the Act.

8. We have considered the rival submissions carefully and in our view having regard to the circumstances of the instant case, the assessee is eligible for claim of exemption under Section 54F of the Act. To the extent it is necessary for our purpose, we note that Section 54F envisages exemption of long-term capital gain, if the net consideration thereof is appropriated towards the construction of a new residential house. The new property, in the instant case, has been let out for commercial use, and thus Revenue seeks to deny the exemption under Section 54F. In our view, the use of the property is not the relevant criterion to consider the eligibility of Section 54F benefit. A bare reading of the provisions of Section 54F reflect that what is required is investment in a new residential house. Therefore, the question that arises in the instant case is as to whether the new property constructed by the assessee is a residential house or not. Mere non-residential use would not render a property ineligible for Section 54F benefit, if it otherwise is a residential house. On this aspect, we do not find any positive finding by the lower authorities and neither is there any relevant material before us to arrive at a finding. Thus, for this limited purpose, the issue is restored to the file of the AO. If the assessee is found to have constructed a residential house, whatever may be the use it has been put to, the assessee can be said to have fulfilled the conditions envisaged under Section 54F.

9. In case the assessee is found to have constructed a residential house, next issue is with regard to the quantum of deduction under Section 54F. We find that the AO allowed the same at Rs. 81,300 on the ground that only such amount has been incurred during the year, and there is no evidence of balance spending. Apart from that, the only evidence which the assessee has been able to substantiate is the certificate under VDIS evidencing the investment of Rs. 1,50,000 towards construction of the new building. To that extent, in our view, the assessee can be construed to have discharged its onus of proving appropriation of money towards construction of the new building. Therefore, we consider it fit and proper to set aside the order of the CIT(A) and direct the AO to allow further benefit of Section 54Fto the extent of Rs. 1,50,000 if the assessee is otherwise found eligible for Section 54Fbenefit as the above stated verification exercise. However, if as a result of the verification to be carried out by the AO, the assessee is found not to have constructed a residential house, no deduction shall be allowable to the assessee and the AO shall be at liberty to pass such orders as is in accordance with law. Thus, the assessee partly succeeds on this ground, as above, for statistical purposes.

10. The second issue taken by the assessee is with regard to the action of the CIT(A) in disallowing commission payment of Rs. 80,000 paid to the broker. The facts are that the assessee rented out its property at a sum of Rs. 5,52,000 against which it claimed the deduction of Rs. 80,000 representing payment made to the broker. The assessee submitted that the said amount was paid to the broker towards services rendered by him for letting out of the property. The AO disallowed the claim on the ground that it was not in terms of any statutory provision. The CIT(A) has since sustained the addition on the following ground :

I have considered the facts of the case and have also gone into the decisions relied upon by the learned Authorized Representative. As regarding the Orissa High Court decision it does not help the case of the appellant because in this case the Hon’ble Court had held that the deductions for repair etc., are to be made from the actual rent received or receivable. According to the Court, the deductions are granted in addition to the annual value. What it means is that for calculating the l/6th for repairs, the other expenses do not have to be deducted from under Section 24 and then l/6th calculated, but l/6th has to be calculated without considering the other expenses allowed under Section 24, i.e., on the annual value determined under Section 23. As regards the Tribunal decision referred to by the appellant, the Hon’ble Tribunal had allowed the amount of security service charges as deductible from gross rent received while computing annual value under Section 23. However, the Hon’ble High Court, Delhi in the case of CIT v. H.G. Gupta & Sons held that the legislature had used the word ‘namely’ which shows that the heads of expenditure wherefrom deduction can be claimed are exhaustive and where not specifically provided, the expenditure was not deductible. In the referred case ‘supra’, the appellant had shared with the tenant the stamp duty expenses on the lease deed. The Court held that neither Section 23 nor Section 24 provides for deduction of the expenses incurred towards stamp duty or registration charges in respect of the lease and hence the said expenditure was not deductible. In the instant case, the appellant is claiming brokerage of Rs. 80,000 to be deductible from the annual value under Section 23. In view of Hon’ble Delhi High Court decision, since brokerage like stamp duty, etc., is not provided for in Section 23 or Section 24, it cannot be allowed. Addition is sustained.

11. After having heard the rival parties on this issue, we do not find any reasons to interfere with the conclusion drawn by the CIT(A). Having regard to the decision of the jurisdictional High Court of Delhi in the case of CIT v. H.G. Gupta & Sons(1984) 42 CTR (Del) 178 : (1984) 149 1TR 253 (Del), the issue is liable to be decided against the assessee. The assessee accordingly fails on this count.

12. The third ground is with regard to the chargeability of interest under Sections 234Band 234Cof the Act. The plea of the assessee is that the interest cannot be charged on assessed income but can only be charged on the returned income. In this regard, we do not find any merit in the pleas of the assessee. However, the AO shall give consequential effect and recompute the interest under the aforesaid section after considering the reliefs allowed in the earlier paragraphs. Further, in the course of the aforesaid exercise, the assessee shall be allowed an opportunity by the AO to challenge the very applicability of the imposition of interest in terms of the decision of the Special Bench of the Tribunal in the case of Motorola Inc. v. Dy. CIT (2005) 96 TTJ (Del)(SB) 1 : (2005) 95 ITD 269 (Del)(SB). The AO shall allow adequate opportunity to the assessee of being heard in the matter and thereafter pass appropriate orders in accordance with law.

13. In the result, the appeal of the assessee is treated as partly allowed.