ITAT Allows Section 54 Deduction on Two Adjoining Flats:

The assessee is an individual deriving income under the heads “Capital Gains” and “Income from Other Sources”, filed her return of income for Assessment Year 2012-13 on July 31, 2012, declaring a total income of Rs 3,42,54,515. Subsequently, the AO received information regarding the transfer of Plot No. 711, together with the structure standing thereon, situated in Sindh Co-operative Housing Society Ltd., after an agreement dated March 30, 2011.

Based on the information received concerning the valuation of the property as on April 1, 1981, the AO initiated reassessment proceedings by issuing a notice under Section 148 of the Act on March 22, 2019. The AO questioned the valuation adopted by the assessee’s valuer and relied upon another valuation report adopting a rate of Rs 40 per square foot. This resulted in an addition of Rs 48,24,225 on account of the difference in the indexed cost of acquisition.

During the reassessment proceedings, the AO also examined the assessee’s claim for deduction under Section 54. The assessee challenged the additions before the CIT(A). The CIT(A) upheld the restriction on the deduction.

The Tribunal noted that the assessee was approximately 80 years old and had explained that she was unable to effectively track electronic communications and appellate proceedings. She became aware of the order only when her authorised representative accessed the ITBA portal, following which steps were taken to file the appeal.

The Tribunal observed that the property transferred by the assessee comprised both land and a building standing thereon. The Tribunal held that where the existence of the building was undisputed and its cost had been accepted during the assessment proceedings, the allowable cost attributable to the structure could not be excluded from the computation without a valid basis. The computation of capital gains had to take into account the allowable cost of acquisition of the components comprising the transferred property, in accordance with the applicable provisions of the Act.

Accordingly, the AO was directed to recompute capital gains by considering the cost of the building as on April 1, 1981, to the extent accepted and allowable under the Act, and to grant indexation in accordance with law. 

The Tribunal noted that, for Assessment Year 2012-13, Section 54 did not contain the express restriction requiring investment in “one residential house in India”. That restriction was introduced by the Finance (No. 2) Act, 2014, with effect from April 1, 2015, and was therefore not applicable to the assessment year under consideration. The Tribunal further observed that the flats were adjoining and had been purchased on the same date. The Revenue had not disputed their adjoining nature. It held that the claim could not be rejected merely because the investment involved two flats, without examining the nature of the accommodation and the assessee’s intention to use them as one residential house.

Accordingly, the Tribunal directed the AO to allow deduction under Section 54 in respect of the entire investment of Rs 3,35,36,982 made in both flats, subject to verification of the actual investment, fulfilment of the other statutory conditions and computation of eligible capital gains in accordance with law.