Top Stories Capital Gain Account Scheme towards Cost of Improvement of Residential Property Acquired is Eligible for Deduction u/s 54F of Income Tax Act: ITAT [Read Order] Capital Gain Account Scheme towards cost of improvement of residential property acquired was eligible for deduction under Section 54F of Income Tax Act, 1961, rules, ITAT By Aiswarya Krishnadas – On February 17, 2024 4:06 pm – 4 mins read In a significant ruling the Delhi bench of the Income Tax Appellate Tribunal ( ITAT ) observed that the capital gain account scheme towards cost of improvement of residential property acquired was eligible for deduction under Section 54F of the Income Tax Act, 1961

The assesse contested the show cause notice before the Principal Commissioner of Income Tax ( Pr.CIT ). However, the Pr.CIT did not agree with the arguments put forth by the taxpayer to dismiss the proceedings initiated under Section 263 of the Income Tax Act, 1961.The Pr.CIT broadly stated that the Assessing Officer had erroneously approved the method of calculating capital gains and subsequent deduction under Section 54F of the Income Tax Act, 1961 The Principal Commissioner of Income Tax ( Pr.CIT ) noted that the assessee had deposited a sum of Rs. 25 lakhs into the Capital Gain Account Scheme on 31.07.2017 and had claimed a deduction on this additional amount.

The Pr.CIT remarked that the extra amount deposited in the Capital Gain Account Scheme was purportedly for the improvement of a newly purchased property at Kirti Nagar. However, the Pr.CIT pointed out that the cost of improvement for an already built-up property purchased cannot be considered for deduction under Section 54F of the Income Tax Act, 1961 Furthermore, it was highlighted that during the assessment proceedings, the assessee herself acknowledged that the additional amount of Rs. 25 lakhs deposited in the Capital Gain Account Scheme was not allowable as a deduction under Section 54F of the Income Tax Act, 1961. Therefore, pr.CIT recommended that the same should be disallowed. The counsels for the assessee Nitin Kanwar, Rajeev Kumar and Rohit Kumar Gupta, argued that the property sold in Kirti Nagar was utilized solely for the acquisition of a single combined property at plot no. H-53A, Kirti Nagar, measuring 193.33 sq. yards. The acquisition involved two separate registries for the purchase of respective shares in a common property jointly held by two different individuals.

In addition presented a copy of the map/layout plan illustrating the division of shares between the two groups of relatives, emphasizing that this division resulted in the kitchen being situated in one part, thereby rendering the other part, without a kitchen, unable to be considered as an independent residential property. It was argued that although the property was artificially divided for demarcation purposes, both parts constituted one undivided property that functioned as a single residential unit. Moreover, it was asserted that the property, being 45 years old, necessitated immediate expenses for improvement to render it habitable, including the remodeling and reconstruction of the entire unit.  Furthermore contended that despite two agreements being made to acquire the property as a whole, the assessee effectively purchased only one residential property through two separate agreements executed on the same day, with the stamp paper also procured simultaneously. Therefore, it was argued that there was no violation of the provisions of Section 54F of the Income Tax Act, 1961.

Regarding the claimed cost of improvement of Rs. 25 lakhs, it was asserted that this expense was essential due to the age of the acquired property and was integral to its purchase cost, as it was necessary to make the property habitable. The counsel for the revenue Zafarul Haque Tanweer contended that when a point in issue arises in the revisional proceedings, it was incumbent upon the Pr.CIT to make some minimal inquiry himself to ascertain the veracity of concern arising in the revisional proceedings, before embarking upon giving any directions to the AO for such verification. The Pr.CIT has not done anything of this sort and passed the revisional order without making any such inquiry.

The revisional action of the Pr.CIT is this bad in law on this count also The counsel further reiterated the findings outlined in the revisional order, emphasizing that while the cost of improvement for a newly acquired property can indeed be considered as part of the improvement costs at the time of the property’s sale, it cannot be amalgamated with the sale consideration. It was pointed out that deductions under Section 54F of the Income Tax Act, 1961, are not applicable to the so-called cost of improvement, especially when such costs lack corroborative evidence and are ineligible for integration with the purchase consideration.

Furthermore argued that the primary issue under consideration in the revisional proceedings was the accuracy of the deduction claim under Section 54F of the Income Tax Act, 1961, as asserted by the assessee. The two member bench of the tribunal comprising Challaya Nagendra Prasad ( Judicial member ) and Pradip Kumar Kediya ( Accountant member ) observed that the  assessee that the sum of Rs. 25 lakhs allocated and retained in the Capital Gain Account Scheme for the improvement of the acquired residential property qualifies for deduction under Section 54F of the Income Tax Act, 1961. This cost of improvement can, at most, be considered as deductible at the time of the eventual sale of the property. Therefore, the directive issued by the Principal Commissioner of Income Tax ( Pr.CIT ) regarding this matter remains unchallengeable. In the result, the appeal of the assessee was partly allowed.