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Cost incurred on Alteration / Renovation on the purchased unit is Eligible for Capital Gain Exemption

In Income-tax Officer vs Shri. Ramakrishna M. J, Assessee, sold his property and purchased a new house within the prescribed time. The capital gain was also used for alteration / renovation on the purchased unit and to the construction of the third floor. Since he utilised the entire amount for construction of new house within the provisions of Section 54F of the Income Tax Act, assessee claimed the benefit of the provision.

However, the claim was disallowed on the ground that the same would amount to construction of new unit in addition to the unit that the assessee has purchased. The AO was of the opinion that the exemption is only available for purchase of units within two years out of the sale proceeds from the date of transfer of the capital asset. On appeal, the first appellate authority allowed the contentions of the assessee. the department challenged the order before the Appellate Tribunal.

The ITAT noted the fact that the assessee had spent an amount of Rs.32,50,000/- towards alteration made to the house and that payment was made to the contractor. The observed that the word ‘constructed’ is used in the later part of Section 54F. Upholding the first appellate order, the bench ruled that “If the interpretation as has been given by the AO is accepted, that the word used ‘purchased’ is required to be restricted only to actual purchase and if any addition, alteration or demolition of the property is carried out by the assessee for the purposes of reconstruction after the demolition and for making it convenient for his use, then the cost incurred by the assessee for that purpose would not be eligible for deduction u/s.54F, is against the very purpose of providing this deduction in the statute book. Our reading of the provision makes it abundantly clear that the purchase do not include a purchase which is not a purchase of an asset which is not incapable of being used by the assessee. The assets for the purpose of Section of 54F should be an asset purchased by the assesse and if an assessee incurs a cost for making it useful and convenient after taking approval from the competent authority, as in the present case, then the assessee is entitled to deduction u/s.54F of the Act.”

Article referred: http://www.taxscan.in/cost-incurred-alteration-renovation-purchased-unit-eligible-capital-gain-exemption-us-54f-itat-bengaluru/11319/

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