1. The main issue arising in this appeal relates to denial of assessee's claim Under Section 54F of the Income Tax Act, 1961 (Act) with reference to the sum of Rs. 28,66,675/-.
2. Briefly stated the facts are these: The assessee had sold 89,998 shares of Koyal Finvest Pvt. Ltd. for a consideration of Rs. 4,85,98,920/- in the year under consideration. He also purchased a flat in a building namely Samudra Mahal, situated at Dr. Annie Besant Road, Mumbai, for a consideration of Rs. 3,46,95,443/-. According to the assessee, this flat was in an inhabitable condition and, therefore, he had to incur an expenditure of Rs. 28,66,675/- in order to make the flat habitable. In the return filed, the assessee claimed exemption Under Section 54F in respect of both the amounts mentioned above. In the course of assessment proceedings, the Assessing Officer asked the assessee to explain as to how the exemption could be allowed in respect of the sum of Rs. 28,66,675/- in response to the same, the assessee, vide letter dated 15.1.2002, submitted - (i) The cost Under Section 54F would include all expenses necessary to put the asset required in good running condition; (ii) The expression "actual cost" must be understood in the sense in which a commercial man would understand; (iii) That as per normal rule of accountancy prevailing in commerce and industry, the cost of fixed asset has to include all expenses necessary to bring such asset into existence and put them in working condition; and (iv) The house purchased by the assessee was in inhabitable condition and, therefore, the assessee had incurred various expenditures such as electrification of house, civil work, design and planning, plumbing work, flooring, fitting of aluminum windows, etc.
In view of the above submissions, it was prayed that the sum of Rs. 28,66,675/- should be considered as part of the investment in the residential house for the purpose of claiming deduction Under Section 54F.3. However, the Assessing Officer rejected the claim of the assessee by observing as under: The submissions of the assessee company have been considered and not found acceptable for the following reasons: a. Section 54F(1) spells out conditions for availing deduction Under Section 54F and clauses 54F(a) and (b) in which the phrase "cost of new asset" appears, specifies the quantum of deduction under this section. The condition Under Section 54F(1) is that the assessee should "purchase" a residential house. The process of purchase involves execution of an agreement, payments pursuance of this agreement, payment of stamp duty, registration of the deed of transfer, payment of transfer fee to the society and getting the shares in the Cooperative Housing Society transferred to one's name.
When all these actions are over, the process of purchase is complete. Therefore, when Sub-sections 54F(1) and 54F(1) (a) & (b) are read together, it is amply clear that "cost of new asset" means "cost of purchase of new asset". It cannot include cost of improvements or cost of renovation as these activities are subsequent to the "purchase".
b. The assessee has relied upon the decisions in the cases of Challapalli Sugar Ltd. v. CIT 98 ITR 167 (SC) and Arvind Mills Ltd. v. CIT 112 ITR 64 (Guj.). In these cases the issue is of depreciation wherein the asset is to be purchased, installed and put to use. Unless all the three activities are completed by the assessee, depreciation cannot be claimed. Therefore, for the purpose of depreciation, cost of purchase as well as expenditure incurred in installation and putting the asset to use is capitalised and depreciation is allowed on the entire capital cost. The ratio of these decisions is not at all applicable since Under Section 54F the requirement is of "purchase" and therefore, "cost of new asset" means "cost of purchase of new asset".
c. Assessee's submission is that the flat was in inhabitable condition and hence cost of renovation should be included in "cost of new asset" are irrelevant as addition to the cost structure stops as soon as the purchase is complete." d. In view of the above, deduction Under Section 54F is allowed on the cost of purchase of new asset of Rs. 3,46,95,443/-.
On appeal, the Learned CIT (A) confirmed the order of the Assessing Officer. Aggrieved by the same, the assessee has preferred this appeal before the Tribunal.
4. Both the parties have been heard at length. The question to be considered is whether exemption Under Section 54F can be allowed in respect of the amount spent by the assessee, after the purchase of inhabitable house, to make the house habitable. The contention of Revenue is that, the moment the house is purchased, the requirement of Section 54F stands complied with and, therefore, any amount spent thereafter in respect of such house would not qualify for exemption Under Section 54F. The stand of the assessee is that, incentive provisions should be construed liberally. According to him, an incomplete house which is inhabitable cannot be considered as purchase of residential house and, therefore, any sum incurred to make such house habitable would form part of cost of purchase. So, the entire dispute centers round the interpretation of the provisions of Section 54F of the Act. Therefore, it would be appropriate to reproduce the relevant portion of the provisions of Section 54F as under: 54F. (1) Subject to the provisions of Sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say, - 5. A bare look to the above provisions shows that the above provisions are incentive provisions intended to augment the investment in residential houses. -It is the settled legal position that incentive provisions should be construed liberally in such a manner that object of the statute is fulfilled rather than the manner which may frustrate the object. Reference can be made to the following observations of the Hon'ble Supreme Court in the case of Bajaj Tempo Ltd., 196 ITR 188: The provision in a taxing statute granting incentives for promoting growth and development should be construed liberally; and since the provision for promoting economic growth has to be interpreted liberally, restrictions on it too has to be construed so as to advance the objective of the provisions and not to frustrate it.
6. At this stage, it would also be useful to refer to the Board's Circular No. 471 dated 15.10.1986, which reads as under: 1. "Capital gains tax - Whether investment in a flat under the self-financing Scheme of the Delhi Development Authority would be construction for purpose of Sections 54 and 54F of the Income Tax Act, 1961. - Section 54 and 54F of the Income-tax Act, 1961, provide that capital gains arising on transfer of a long-term capital asset shall not be charged to tax to the extent specified therein, where the amount of capital gain is invested in a residential house. In the case of purchase of a house, the benefit is available if the investment is made within a period of one year before or after the date on which the transfer took place and in case of construction of house, the benefit is available if the investment is made within three years from the date of transfer.
2. The Board had occasion to examine as to whether the acquisition of a flat by an allottee under the Self-financing Scheme of the Delhi Development Authority amounts to purchase or is construction by the D.D.A. of behalf of the allottee. Under the Self-financing Scheme of the Delhi Development Authority, the allotment letter is issued on payment of the first installment of the cost of construction. The allotment is final unless it is cancelled or the allottee withdraws from the scheme. The allotment is cancelled only under exception circumstances. The allottee gets title to the property on the issuance of the allotment letter and the payment of installments is only a follow-up action and taking the delivery of possession is only a formality. If there is a failure on the part of D.D.A. to deliver the possession of the flat after completing the construction, the remedy for the allottee is to file a suit for recovery of possession.
3. The Board have been advised that under the above circumstances, the inference that can be drawn is that the D.D.A. takes up the construction work on behalf of the allottee and that the transaction involved is not a sale. Under the scheme, the tentative cost of construction is already determined and the D.D.A. facilitates the payment of the cost of construction in instalments subject to the condition that the allottee has to bear the increase, if any, in the cost of construction. Therefore, for the purpose of capital gains tax, the cost of the new asset is the tentative cost of construction and the fact that the amount was allowed to be paid in instalments does not affect the legal position stated above. In view of these facts, it has been decided that cases of allotment of flats under the Self-financing Scheme of the Delhi Development Authority shall be treated as cases of construction for the purpose of capital gains.
The above Circular clearly shows that object of Sections 54 and 54F was to augment the investment in residential accommodation. Considering the said object, the Board took the view that payment to Delhi Development Authority, under self financing scheme, amounted to investment in construction of residential house even though the assessee himself had not constructed the house. In view of the same, in our opinion, the Learned CIT (A) was not justified in applying strict rule of interpretation.
7. In view of the above discussion, we are of the view that investment in residential house would not only include the cost of purchase of the house but also the cost incurred in making the house habitable. An inhabitable premises, in our opinion, can not be equated with a residential house. If one person can not live in a premises, then such premises cannot be considered a residential house. In the modern age, the builder may provide semi-finished house or complete house depending upon the price agreed to between the parties. In case of semi-finished house, the purchaser will have to invest on flooring, wooden work, sanitary work, etc., to make it habitable. Therefore, in our view, the investment in house would be complete only when such house becomes habitable. Similar view has also been taken by "SMC" Bench of the Tribunal in the case of Sonia Gulati v. ITO 115 Taxman 232 (Mum.).
Accordingly, we hold in principle that expenditure incurred on making the house habitable should be considered as investment in purchase of the house subject to the condition that payment was made during the period specified in Section 54F.8. Before parting with this issue, we would like to mention that there is distinction between expenditure incurred on making the house habitable and the expenditure on renovation. We may visualize a situation where assessee may buy a habitable house but the assessee may like to incur expenditure by way of renovation to make it more comfortable. He may not be happy with the quality of material used by the builder and, therefore, he may incur the expenditure on improvement of the house. Such expenditure cannot be equated with the expenditure on making the house habitable. Whether the house purchased by the assessee was in a habitable condition or not would depend on the state of condition of the house at the time of purchase. Hence, this aspect would have to be kept in mind while adjudicating such issue.
In the present case, the Assessing Officer as well as the Learned CIT (A) had rejected the claim of the assessee on the ground that no .
expenditure could be considered for exemption Under Section 54F which was incurred after the date of purchase. The Assessing Officer had no occasion to examine the state of the condition of the house purchased by the assessee. Though, the list of expenditure has been provided by the assessee, yet it is to be examined whether such expenditure was incurred to make the house habitable or just to make the house more comfortable. This aspect of the matter requires examination by the Assessing Officer.
In view of the above discussion, we hold that the assessee is entitled to exemption Under Section 54F with reference to the expenditure incurred for making the house habitable. However, the factual matrix requires examination. Accordingly, the order of the Learned CIT (A) is set aside and the Assessing Officer is directed to re-adjudicate the issue in accordance with the guidelines given by us and after considering the entire material produced by assessee before him. The assessee shall be given proper opportunity to represent his case.