The cost of a new residential house includes not just the cost incurred in its construction but also the purchase price of furniture items provided they form an integral part of the property deal. This view has been taken by the Income-Tax Appellate Tribunal (ITAT) in a recent order, reducing the IT liability of the petitioner.
In this case, Rajat Mehta, an NRI based in New Zealand, sold his large house in Vadodara and bought a smaller house in its place, so that he could remain connected with his roots. He entered into two separate contracts though—one for the purchase of the new house for Rs 60 lakh and the other for furniture for Rs 18 lakh. As tax benefits are available for investment in a new house, ITAT had to decide whether the cost of furniture should also be included while determining the cost of the new house.
As per tax rules, a profit made on the sale of a residential house that has been held for at least two years is to be treated as a long-term capital gain (LTCG) liable to taxation at 20% with adjustment for inflation.
Section 54 of I-T Act provides for investment-linked benefits. If the LTCG component is invested in another house in India, within a stipulated period of time, then the cost of the new house, or, in other words, investment made in a property, is deducted. Only the balance component of LTCGs is taxable, which results in a lower tax outgo.
Mehta had sold his original house and earned LTCGs of Rs 1.9 cr. Within the required time period, he invested in a new house and under Section 54 claimed a deduction of Rs 78 lakh.
At the tax assessment stage, the I-T officer held, “A separate agreement for furniture and fixtures was entered into to save on stamp duty (which is imposed only on property value) and now the tax payer was trying to evade income tax.”
According to the I-T officer, expenses incurred on buying furniture could not be treated as those for making the house habitable. Thus, he permitted only Rs 60 lakh as deduction.
The NRI’s appeal reached the ITAT level. The ITAT’s Ahmedabad bench comprising judicial member S S Godara and accountant member Pramod Kumar observed that the NRI did not have the option of not buying the furniture for Rs 18 lakh. In fact, irrespective of the purchase of furniture, he was under an obligation to pay Rs 78 lakh to the seller. Thus, the two contracts cannot be considered in isolation.
The ITAT bench pointed out that the NRI buyer was an unwilling party to artificially splitting up the sale transaction. The actual beneficiary would be the seller of the new house, as gains on sale of furniture were not taxable capital gains. Based on these facts, the ITAT allowed a deduction of the entire claim of Rs 78 lakh made by the NRI. The order waxes eloquently on the patriotic fervour shown by the NRI who invested part of the sale proceeds of his original large house in a smaller residential unit to keep his India connection alive. Denying him the legitimate deduction under Section 54 was not fair treatment, it ruled.