I-T - Conversion of two or more residential units into one, would suffice for purposes of benefit u/s 54 / 54F
By TIOL News Service
MUMBAI, MAR 07, 2017: THE ISSUE IS - Whether conversion of two or more residential units into one residential house property, is sufficient for purpose of claiming benefit of deduction u/s 54 / 54F. YES is the answer.
Facts of the case:
The assessee had sold its erstwhile flat as well as shares and claimed deduction u/s 54 & 54F respectively by making investment in the impugned flat. The assessee claimed that it was 'one' residential flat, but the AO was of the view that assessee had made investment in two flats by registering two separate sale agreements. The deduction is allowable against one flat only. During the course of assessment proceedings, the AO carried out detailed enquiries u/s 131 from the builder, viz. Sheth Developers Pvt Ltd and the evidences collected from the said builder in the form of approved plan, booking receipts as well as completion certificates issued by the competent authorities. It was concluded by the AO that the builder had constructed two separate flats and assessee modified them by joining them together illegally, as the permission for the same was not obtained by the developer or the assessee. CIT(A) held that the assessee owns 'one' residential unit irrespective of the fact whether these were built as 'one' residential unit by the builder or these were joined subsequently by the assessee. It was held that assessee had made investments in "a residential house property" and hence the exemption claimed U/S 54 & 54F of the Act was to be allowed.
On appeal, the ITAT held that,
++ it is to be noted that the benefit of deduction is available to an assessee in respect of only 'one' residential house. But no limit has been prescribed under the law upon the size, shape and nature of the residential house property. Thus, it may also happen sometimes that a smaller unit may not be sufficient for use of an assessee's family and therefore, he may choose to combine more than one unit so as to make it useful for him and his family. No such embargo has been laid down by the law as would be clear from the plain reading of section 54 / 54F. Under these circumstances, the AO is also not permitted to read any such restrictions under the law while examining the claim of the assessee. The AO had himself noted in the assessment order that two residential house properties were converted into one residential house property and it has also been noted by him that as per law, two or more residential units can constitute one residential house property. According to the AO also, principally speaking, the benefit of deduction u/s 54 / 54F is allowable to the assessee. But, the AO was adversely influenced by the fact assessee converted two residential house into one subsequent to its acquisition and that too without following due procedure as prescribed under the applicable local law;
++ whether the house property is built upon an approved plan or not and whether the two flats have been converted into one after obtaining requisite approvals from the local authorities or not, shall not fall in the domain of Income-tax proceedings, so long as other conditions as prescribed under the law are duly fulfilled. Legal position has been threadbare clarified by Bombay High Court in the case of CIT vs Devdas Naik as well as CIT vs Raman Kumar Suri wherein in the similar facts it was held that even if two flats were acquired under two distinct agreements, but if the flats were constructed in such a view that adjacent units of the flats can be combined into one, then the assessee would be eligible to claim the benefit on the entire amount invested in two flats combined into one by the assessee. Thus, on legal principle, the AO's action was not proper, therefore, it has rightly been reversed by CIT(A);
++ the AO made an error by not going to the bottom of the truth and also erred by relying upon irrelevant or half-cooked pieces of information and also erred in disregarding evidences submitted by the assessee that too without making proper verification. The assessee had, time and again, requested the AO to carry out physical examination of the property to know the truth, but the AO disregarded or ignored the same for the reasons best known to him. When assessee acquired the flat, the intention was to use it as one residential unit. It will not make any distinction whether the flats were constructed as such by the builder or the same was altered or combined into one at the instance of the buyer (assessee). Thus, assessee is very much eligible to claim the benefit of deduction u/s 54 / 54F on the entire amount of investment made in residential flat. Thus, CIT(A) has rightly granted relief to the assessee and, therefore, his order is upheld.
(See 2017-TIOL-250-ITAT-MUM)
