The Chandigarh Bench of the Income Tax Appellate Tribunal (ITAT) granted full deduction under Section 54F of the Income Tax Act, 1961, citing construction on land owned by the taxpayer’s mother was valid and accepted the cost of construction as per the approved valuer’s report.
Sher Singh, a resident of Yamunanagar, filed an appeal for the assessment year 2008-09 against the order of the Commissioner of Income Tax (CIT) which confirmed the Assessing Officer’s (AO) addition of Rs. 46,08,371 as capital gains on the sale of agricultural land.
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The AO estimated the cost of construction of a residential house built by the assessee using the sale proceeds at Rs. 25,00,000, lower than the Rs. 55,82,750 stated in the valuation report provided by the assessee. The AO restricted the deduction under Section 54F of the Income Tax Act, 1961 to Rs. 25,00,000 and computed taxable capital gains at Rs. 21,08,371.
Upon appeal, the CIT(A) rejected the assessee’s claim under Section 54F entirely, arguing that the residential house was constructed on land owned by the assessee’s mother, Jabra Devi. The CIT(A) further enhanced the taxable capital gain to Rs. 46,08,371.
On appeal before the ITAT, the assessee argued that the AO’s reliance on an unqualified Income Tax Inspector to estimate construction costs was inappropriate, and the CIT(A)’s rejection of the deduction based on ownership of the land by the mother was unfounded. The assessee maintained that the house was constructed and occupied by him and his mother using the proceeds from the sale of agricultural land.
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The single-member bench comprising Sanjay Garg (Judicial Member) observed that the construction of the house and its occupation by the assessee were undisputed facts. The tribunal held that the AO’s reliance on the inspector’s report was unjustified as the inspector lacked the technical expertise to assess construction costs. The valuation report from the approved valuer, a qualified professional, was accepted.
The tribunal also ruled that the land ownership by the mother was not a valid ground for rejecting the claim under Section 54F, as the house was constructed by the assessee and was being used as his residence.
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The ITAT directed the acceptance of the construction cost as Rs. 55,82,750 based on the approved valuer’s report and deleted the addition made by the AO. The tribunal ruled in favor of the assessee and allowed the appeal.
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