Exemption u/s 54 where part of new residential property used for commercial purposes

Allowability of Exemption u/s 54 where new residential property used partly for commercial purposes . ITAT remanded case for verification of the proposition

ABCAUS Case Law Citation:
ABCAUS 3100 (2019) (08) ITAT

Important case law relied upon by the parties:
Seema Sabharwala vs. Income Tax Officer
M. Subramanian vs. DCIT i

The instant appeal had been filed by the assessee against the order of CIT(A) in upholding the disallowance on account of long term capital gains, invested in purchase of residential house claimed exempt u/s 54F of the Income Tax Act, 1961 (the Act).

The assessee had sold a commercial property and had invested the proceeds in Mutual Fund and after withdrawing from Mutual Fund, the assessee had purchased a residential property within the prescribed period of time.

However, the Assessing Officer (AO) did not allow deduction u/s 54F of the Act on the basis that

(i) assessee had not invested the proceeds in the capital gain scheme account

(ii) at the time of sale, the assessee was holding three properties; and

(iiii) the property so purchased by the assessee was partly residential and partly commercial.

Before the Tribunal the assessee submitted that regarding first objection of the Assessing Officer the law laid down by various Benches of the Tribunal, is that if the assessee, during the course of assessment proceedings, demonstrates before the Assessing Officer that he has invested the amount in the purchase of a new property then the requirement of keeping the funds in capital gain scheme is not necessary.

As regards the objection of Assessing Officer that the assessee was holding three properties, it was submitted that out of three properties, two properties were commercial in nature. The assessee also filed a petition for admission of additional evidence in the form of confirmation from the tenants regarding use of properties for commercial purposes and requested that these evidences went to the root of the matter and be admitted.

Regarding the third objection related to the fact that a part of new property was being used for residential purposes and a part was being used for commercial purposes, the assessee relied upon the decision of the Coordinate Bench wherein Tribunal had held that only criteria for allowing benefit u/s 54F is that the assessee should have purchased a residential house within the stipulated period and therefore, it was prayed that the necessary relief may be allowed to the assessee.

The Tribunal admitted the additional evidences and remitted the matter back to Assessing Officer to readjdicate the issue afresh after keeping in view the additional evidences. The Assessing Officer was also directed to examine the case laws relied on by the assessee for the following propositions:

(a) That if the assessee had demonstrated before the Assessing Officer that assessee had already invested the amount in the purchase of new property then the need to place the funds into capital gain account is not necessary.

(b) That for exemption u/s 54 new property should be residential property, even though a part of it is used for commercial purposes.

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