The Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) while partly allowing the appeal held that a Hindu Undivided Family (HUF) is entitled to capital gain exemption under Section 54F of the Income Tax Act, 1961, on investment in new residential property.
The Assessee, Kothari Sanjay Manilal, Karta of the Hindu Undivided Family , had filed its return of income for A.Y. 2018-19, but due to a mistake in accessing emails, there was a delay of 94 days in filing the appeal against the order of the Commissioner of Income Tax(Appeals).
The assessee filed their income tax return for the Assessment Year (A.Y.) 2018-19, declaring a total income of Rs. 1,92,89,740. The case was selected for limited scrutiny by the Assessing Officer (AO), focusing on deductions claimed under income from other sources and capital gains. The assessment was completed under Section 143(3), on March 17, 2021, where the following additions were made:Addition on account of long-term capital gain (LTCG): Rs. 12,26,32,248. And Disallowance of interest expenses claimed under Section 57: Rs. 58,40,796.
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The assessee had relinquished rights in certain lands, and the AO had calculated the sale consideration by applying the sale rate of land, resulting in a long-term capital gain (LTCG) of Rs. 12,31,77,000. The assessee argued that it only received Rs. 6,16,49,843 after adjusting loans owed to the societies, and thus the amount of Rs. 12,31,77,000 was an incorrect computation.
The assessee had claimed a deduction of Rs. 4,15,14,798under Section 54F of the Income Tax Act for the investment made in purchasing two flats. The AO disallowed the deduction, stating that the purchase or construction was not completed within the stipulated time.
The assessee further claimed interest expenses of Rs. 58,40,796 under Section 57 against interest income of Rs. 94,57,637. The AO disallowed a portion of the interest expense, arguing that the loan taken by the assessee was not fully utilized for earning the interest income.
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The two member Bench composed of T R Senthil Kumar(Judicial Member) and Narendra Prasad Sinha(Accountant Member) held that the AO’s approach was incorrect because the assessee did not sell the land directly but relinquished rights, and therefore the sale consideration should be based on what the assessee actually received from the societies (Rs. 6,16,49,843). The AO had wrongly applied the sale rate at which the societies sold the land.
Tribunal allowed the deduction under Section 54F by relying on previous court decisions which held that a delay in construction would not bar the claim if the entire net consideration was invested within the prescribed period. However, some of the payments made by the assessee were not eligible for deduction (like legal charges and other non-eligible expenses). The AO was directed to verify the correctness of the claimed deduction.
The ITAT noted that Section 57 allows for the deduction of expenses incurred wholly and exclusively for the purpose of earning income. It emphasized that only the interest related to the portion of the loan used for generating taxable interest income should be allowed. The ITAT directed the AO to verify the actual loan utilization and assess the disallowance correctly.
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Thus, the ITAT partially allowed the appeal, with directions to the AO for further verification.
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