Facts of the Case

The assessee, Sandeep Hooda, filed his return of income for Assessment Year 2015-16 declaring total income of ₹1,27,54,600. He sold a residential property at 1/7, Shanti Niketan, New Delhi on 25.09.2014 for ₹6,88,00,000, resulting in long-term capital gains of ₹5,63,74,550. The assessee claimed exemption under Section 54 on the ground that he had constructed a residential house within three years on agricultural land situated at Village Bandhwari, Sohna, District Gurgaon.

During assessment proceedings, the Assessing Officer examined the claim and conducted physical inspections of the subject property through departmental inspectors. The inspection reports revealed that only makeshift plywood structures were present on the land, comprising a small guard room and another plywood room with an attached toilet. There was no electricity connection, no water connection, and the rest of the land measuring approximately 1.75 acres was vacant.

Based on the inspection reports and statements of the assessee’s authorised representative, the Assessing Officer concluded that no residential house had been constructed within the stipulated period and disallowed the exemption under Section 54.

The Commissioner of Income Tax (Appeals) allowed the assessee’s claim, relying inter alia on an architect’s certificate and observing that rural areas did not require compliance with urban construction norms. The Revenue appealed to the Income Tax Appellate Tribunal, which reversed the CIT(A)’s order and restored the disallowance.

Issues Involved

Whether the assessee had constructed a residential house within three years from the date of transfer of the original asset so as to qualify for exemption under Section 54, and whether makeshift structures on agricultural land could be regarded as a residential house for the purposes of the said provision.

Petitioner’s Arguments

The assessee argued that the ITAT erred in holding that the subject property lacked basic amenities and ignored evidence such as the architect’s certificate and the existence of rooms, toilet and boundary arrangements. It was contended that Section 54 does not mandate specific construction standards or amenities and that minimal facilities in a rural setting should suffice to constitute a residential house.

Respondent’s Arguments

The Revenue contended that the finding of the ITAT was based on detailed factual examination including inspection reports, photographs and statements, which clearly established that no residential house fit for habitation had been constructed. It was argued that plywood structures without electricity or water cannot be equated with construction of a residential house within the meaning of Section 54.

Court Order / Findings

The Delhi High Court held that the core issue was whether the assessee had constructed a residential house within the stipulated period, which is a pure question of fact. The Court noted that the ITAT had relied on two inspection reports showing that only temporary plywood structures existed on the land, there was no electricity or water connection, and the vast majority of the land was vacant.

The Court observed that merely assembling plywood sheets to create makeshift rooms cannot be regarded as construction of a residential house meant for habitation. The findings of the ITAT were supported by evidence and could not be termed perverse or manifestly erroneous.

The Court further held that the ITAT was justified in rejecting the certificates relied upon by the assessee in light of the physical inspection conducted by the Department.

Important Clarification

The High Court clarified that while Section 54 does not prescribe any particular construction norms, the assessee must demonstrate construction of a residential dwelling capable of habitation. Temporary or makeshift structures raised on agricultural land do not satisfy the statutory requirement of construction of a residential house.

Final Outcome

The appeal filed by the assessee was dismissed. The Delhi High Court upheld the order of the Income Tax Appellate Tribunal disallowing exemption under Section 54 and held that no substantial question of law arose for consideration.

Link to download order - https://www.mytaxexpert.co.in/uploads/1769857176_SANDEEPHOODAVsDEPUTYCOMMISISIONEROFINCOMETAXCIRCLE222DELHIANR..pdf

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