By TIOL News Service

AHMEDABAD, NOV 06, 2013: THE issues before the Bench are - Whether when the assessee who was gifted a plot of land from her father, constructed eight flats by demolishing her bungalow and sold four of them, such income is to be treated as business or adventure in nature of trade and Whether assessee can avail Sec 54F benefits even if she constructed the flats before the date of transfer. And the verdict partly goes in favour of the assessee.

Facts of the case

The Assessee is an individual. The AO noticed that Assessee’s father owned a plot of land admeasuring 809 sq. Yds and the same was transferred in the name of Assessee vide gift deed. The Assessee constructed a bungalow on the said land. The bungalow was dismantled to construct 8 flats. Four flats were retained by Assessee for her own use and the remaining 4 flats were sold. On the 4 flats sold, Assessee worked out LTCG on sale of land and short term loss on sale of construction of flats and offered the same for tax. The AO considered the construction of flats to be as adventure in the nature of trade and therefore the income is to be treated as "business income" and not "capital gains”. He also noticed that the 4 flats retained by the assessee for her own use were on two different floors, independent units and therefore according to him the 4 flats cannot be considered to be a single unit for the purpose of claiming exemption u/s 54F and therefore held that Assessee was not eligible for deduction u/s 54F.

Since expenses on demolition was not accounted by the Assessee in her books and in the absence of details, he made an addition of Rs 2 lacs considering the same to be unexplained expenditure made out of income from undisclosed sources. He also noted that the demolition of bungalow would have resulted into generation of timber, steel, copper from electric wires, doors, windows etc. Since no income was reported by the Assessee on account of sale of the aforesaid items, he estimated its sale to be of Rs 1 lacs and added it to the income. The CIT(A) held that the income from sale was not be considered as business income on the ground that at the time of conversion the appellant was not engaged into any business activity. She was merely a lady owning a residential property, acquired by gift from her father, which was demolished to be converted into a multi-storeyed residential premise. Thus the basic condition enunciated in section 45(2) rws 2(47)(iv) were not fulfilled. With respect to claim of deduction u/s 54F, the claim of Assessee was negated by CIT(A) .The CIT(A) confirmed the addition on account of undisclosed demolition expenditure and undisclosed income from generation of scrap.

On Appeal before the Tribunal the AR submitted that since provisions of section 54F were beneficial provisions, the same hadto be construed liberally.

Having heard the parties, the Tribunal held that,

++ the CIT(A) by a well reasoned order has concluded that the AO has misinterpreted and misunderstood the provisions and accordingly held that the transaction of the Assessee cannot be treated as business or adventure in nature of trade. The Revenue could not controvert the findings of CIT(A) nor could it bring any contrary material on record in its support. In view of the aforesaid facts, we find no reason to interfere with the order of CIT(A) with respect to deleting the addition as “business income”;

++ with respect to holding the Assessee to be not eligible for deduction u/s 54F, since the construction took place prior to the date of transfer, we are of the view that CIT(A) has rightly held that Assessee is not eligible for deduction u/s 54F;

++ as far as the addition made on account of demolition expenses and income from sale proceeds of items extracted from old bungalow is concerned, no addition can be made only on the basis of estimation. We thus direct its deletion.

(See 2013-TIOL-947-ITAT-AHM)