ITAT Grants Deduction under Section 54F to NRI: Residential Houses Outside and Inside India Considered [Read Order]

The Income Tax Appellate Tribunal (ITAT), Hyderabad Bench, granted deductions under Section 54F of the Income Tax Act (the Act) holding that the assessment by the Assessing Officer (AO) was correct and the Commissioner of Income Tax (Appeals) [CIT(A)] had erred.

The assessee, Sumanth Badiga, is a non-resident Indian (NRI) who declared total income after claiming deduction under Section 54. The case was selected to complete scrutiny under CASS. The AO passed scrutiny assessment under Section 143(3) read with Section 144B vide order dated 02.09.2022 accepting the returned income of the assessee.

The Principal CIT noted that the deduction of INR 1,00,92,000/- against the long term capital gains is not allowable as the assessee owns more than one residential house, one in Dubai and another in USA, thereby making him ineligible for deduction under said Section.

Pr. CIT issued show cause notice under Section 263 of the Act on 16.01.2025 and assessee filed reply to the show cause contending that the assessee does not own more than one residential house in India other than the new asset on the date of transfer of the original asset. The counsel argued that the two houses are owned outside India and therefore the assessee is eligible for deduction.

Pr. CIT did not agree with this and held that one house in India and two abroad cannot be eligible for deduction and set aside the order of the AO with a direction to recompute the long-term capital gains.

The counsel for the assessee relied on the order of the ITAT, Cochin Bench in the case of Smt. Maries Joseph, Thrissur v. DCIT-(International Taxation), Kochi dated 02.01.2023 where the bench had to deal with an identical case and held that the proviso to Section 54F(1) must be construed harmoniously with the main statute inclusive of the proviso. Other decisions relied upon were Rampyari Devi Saraogi (1968), Rajalakshmi Mills Ltd. (2009) and Deloitte Haskins & Sells (2013).

On the other hand, the Departmental Representative was of the view that a strict interpretation is required as had been held in DCIT (International Taxation) v. Babu Rajendra Prasad [2023] where an identical issue was dealt with and the benefit under Section 54F(1) was denied.

The tribunal considered the inquiry report of the AO and the submissions made by the assessee at the scrutiny stage. Confirming that the AO had improperly prepared their assessment as there was lack of application of mind in exercising and questioning the assessee on the proviso to Section 54F, the bench held that the Pr. CIT had correctly considered the merits of their case and denied the deduction. However, adjudication remains to have taken place regarding this erroneous assessment and so the file was sent back to the Pr. CIT.

Conclusively, the bench comprising Vijay Pal Rao (Vice President) and Madhusudan Sawdia (Accountant Member), the appeal of the assessee has been allowed for statistical purpose.

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