Husband Wife treated single unit for capital gains deduction u/s 54 54F. Compensation paid to husband to vacate house owned by wife not allowable – ITAT

Husband Wife treated single unit for capital gains deduction u/s 54 54F. Compensation paid to husband to vacate house owned by wife not allowable – ITAT

ABCAUS Case Law Citation:
996 (2016) (08) ITAT
Assessment Year: 2011-12
Date/Month of Judgment/Order: August 2016

Brief Facts of the Case:
The  assessee was a non-resident and was owner of a land which was received by her by way of settlement from her mother. The assessee’s husband had built a house on the said land from his own borrowed funds. The assessee sold the land and the building was demolished.

In pursuance an agreement with her husband,  the assessee paid Rs 30 lakhs as compensation to her husband to handover the vacant possession of the house to the developer so that the building can be demolished. The assessee claimed in the assessment proceeding a deduction of Rs. 30,00,000/- being the compensation paid to acquire the house from her husband on the ground that unless the house was demolished, the assessee could not sell the landed property. Therefore, the compensation paid to her husband had to be allowed while computing the total income.

However, the Assessing Officer observed that the agreement entered between the assessee and her husband was an afterthought and he did not allow such deduction.

CIT(A) also confirmed the disallowance.

Contentions of the Assessee:
The assessee contended that the compensation was paid to her husband to handover the vacant possession of the house which was built with his owned fund and thus was an allowable deduction.

Alternatively the assessee claimed exemption under Section 54 of the Income-tax Act, 1961. It was submitted that the Assessing Officer had denied exemption under Section 54 on the ground that the assessee sold only the vacant land. However both the building and land appurtenant thereto had to be treated as residential house. Since the subject matter related to both land and building, the Assessing Officer could not have denied exemption under Section 54.

Contentions of the Revenue:

1. There was no agreement between the assessee and her husband at the time of construction of building, about the payment of compensation.

2. The assessee admittedly had not received any compensation/rent from her husband for allowing her husband to construct the building and hence there was no justification for paying compensation when the land was sold along with the building.

3. The assessee also resided in the very same house along with her husband, therefore, in the eye of law, both the assessee and her husband had to be treated one and the same. If the assessee treated herself as independent unit/ entity, then the assessee had to necessarily receive compensation/ rent for letting out landed property in which the building was constructed by her husband.

4. When the assessee allowed her husband to construct the building without any payment for using the land since the assessee decided to sell the property, it had to be treated that the building also owned by the assessee

5. The building was demolished and what was transferred to the developer was only a vacant land, therefore, the assessee was not entitled for exemption under Section 54 but only u/s 54F.

Observations made by the Tribunal:

The Tribunal observed that there was no agreement between the assessee and her husband at the time of construction of the building in the said land. It was also undisputed that the assessee had not received any compensation / rent for allowing her husband to construct the building in the land owned by her.

Even though the assessee and her husband are considered to be one and the same in the eye of law, the Income-tax Act treats them separately as independent assessable unit. Therefore, the assessee ought not to have allowed her husband to construct the building without receiving any compensation.

The assessee being the legal owner of the land and the assessee’s husband constructed the building and the assessee and her husband lived together in the building as wife and husband, therefore, the payment of compensation to the assessee’s husband could not go to reduce the cost of the land for the purpose of computing capital gains. 

Held:

(a) Deduction u/s 54F for compensation paid
The Tribunal opined that in the facts and circumstances of the case, the claim of payment of compensation u/s 54F for demolition of building to her husband was not justified. 

(b) Deduction u/s 54
The ITAT opined that since the assessee and her husband were treated as single unit, the assessee had to be treated as owner of the building along with her husband for all practical purposes. Hence what was transferred was land and building and therefore, the assessee was entitled for deduction under Section 54.