ITAT Delhi Clarifies Section 54/54F Relief for Mixed-Use Properties and Stamp Duty Valuation Disputes

Background and Appeal Overview

In Raj Krishan Gupta Vs ACIT (ITAT Delhi), the Delhi Bench of the Income Tax Appellate Tribunal dealt with multiple issues arising from the assessment for Assessment Year 2015-16, including:

  • Denial of deduction under Section 54 / Section 54F
  • Addition under Section 56(2)(vii) on account of stamp duty valuation
  • Disallowance of indexed cost of acquisition

The assessee, engaged in the business of trading in shares and mutual funds and also working as an insurance advisor on mercantile basis, had filed a return declaring total income of ₹91,58,530 for AY 2015-16. The case was picked up for limited scrutiny under CASS on account of:

  • Mismatch in capital gains arising from transfer of land or building
  • Variations in capital account figures

Subsequently, the Assessing Officer (AO) initiated assessment under Section 143(2) and completed the assessment making several additions and disallowances.

Assessment Proceedings and Additions Made

Capital Gains Computation and Section 50C Addition

The assessee held a 1/5th undivided share in the property at M-21, Greater Kailash Part II, New Delhi as well as a 1/5th share in another property at S-330, Greater Kailash Part I, New Delhi. In the return, long-term capital gains from these properties were computed after claiming indexed cost of acquisition and deduction under Section 54/54F.

On examining the sale transaction of the M-21 property, the AO noticed:

  • Total sale consideration as per sale agreement for the entire property: ₹12.31 crore
  • Stamp duty value mentioned: ₹12.95 crore

Since the assessee was one of five co-owners, the AO applied Section 50C and made a proportionate addition of ₹12,80,000 in the hands of the assessee on account of the difference between the declared sale consideration and the value adopted for stamp duty purposes.

Denial of Deduction under Section 54 / Section 54F

The assessee had claimed deduction of ₹88,41,618 under Section 54/54F in respect of capital gains on sale of the property at M-21, Greater Kailash Part II, New Delhi.

The AO issued a show-cause notice proposing to deny the benefit of exemption. After considering the assessee’s submissions, the AO rejected the claim for two main reasons:

  1. Nature of Property at M-21, GK-II

    • The sale deed described the property as “commercial”.
    • According to the approved layout/plan, the basement and ground floor were to be used for commercial purposes.
    • The AO concluded that the transferred asset was not a residential house, which is a prerequisite for deduction under Section 54.

  2. Ownership of More Than One Residential House for Section 54F

    • The assessee alternatively claimed deduction under Section 54F.
    • The AO noted that:
      • The assessee already owned E-492, Greater Kailash Part-II, New Delhi, shown as a self-occupied residential house in the computation.
      • The assessee had also purchased F-24, Basement, Kalkaji, New Delhi on 25.09.2014.
      • The original asset at M-21, GK-II was sold on 26.09.2014.
    • As per the AO, the assessee therefore owned more than one residential house (other than the new asset) on the date of transfer, thereby failing the condition stipulated in Section 54F.

On this basis, the AO disallowed the entire exemption of ₹88,41,618 claimed under Section 54/54F.

Addition under Section 56(2)(vii)

During the assessment, the AO further noted that the assessee had purchased Property E-383, Basement, Greater Kailash Part II, New Delhi for a declared consideration of ₹78,00,000. However, the stamp duty authority had valued this property at ₹1,02,00,000.

Treating the difference of ₹24,00,000 as income under Section 56(2)(vii), the AO held that the assessee had acquired an immovable property for a consideration less than the stamp valuation by more than the threshold, and thus the difference was taxable as income from other sources.

Disallowance of Indexed Cost of Acquisition

The AO also reduced the indexed cost of acquisition claimed by the assessee in relation to:

  • S-330, GK Part I, New Delhi – disallowance of ₹37,74,283
  • M-21, GK Part II, New Delhi – disallowance of ₹54,89,032

These disallowances were based on differences between departmental valuation and values adopted by the assessee.

Order of the Commissioner (Appeals)

The assessee challenged the assessment before the Commissioner of Income Tax (Appeals). The CIT(A) sustained:

  • The denial of deduction under Section 54/54F
  • The addition of ₹24,00,000 under Section 56(2)(vii)
  • The disallowance of indexed cost in respect of both properties