MR. THIRUMANI,CHENNAI V. ACIT, NCC-6(1), CHENNAI

ITA 3351/CHNY/2024

AI Insights

The case involves an appeal by the assessee, Thirumani, against the order of the Commissioner of Income Tax (Appeals) which upheld the disallowance of a claim under section 54F and partly allowed an appeal regarding an addition under section 56(2)(vii)(b). The primary contention was whether the assessee had constructed a 'residential house' as required under section 54F after selling a property and claiming exemption by investing in another property. The Tribunal examined various evidences including tax receipts and photographs, and compared them with the Inspector's report which was found to be insufficient to negate the residential character of the property. The Tribunal also considered precedents and the statutory interpretation of section 54F, leading to the conclusion that the assessee's construction met the legal requirements for a residential house.

• Counselvise Citation: [2026] 140 COUNSELVISE.COM (IT) 827404 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-01-2026
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2016-2017
• Appeal Filed On: 30-12-2024
• Other Referred Cases: CIT vs. Smt. M. Kalpagam, CIT vs. Smt. Sunita Aggarwal, CIT vs. Kalyanaraman Nataraja, ACIT vs. Anandhi Karthikeyan, Girish Mohan vs. ACIT, DCIT vs. Kanwal Mohan Singh Sehgal, Addl CIT vs. Narendra Mohan Uniyal, ACIT vs. Somchand Kanji, Harshad M Thakkar v DCIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: GOUTHAMI MANIVASAGAM; J. C.I.T
• Assessee Lawyers: B. RAMAKRISHNAN; F
• Keywords: Set aside; Fair market value; Capital Gains; Principle of natural justice; Valuation report
• Section: 143(3); 54; 56(2)(vii)(b); 54F

Judgement Text

"आयकर अपीलीय अिधकरण, ‘बी’ ा यपीठ, चे\u0012ई IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH, CHENNAI \u0014ी एस एस िव\u0018ने\u001a रिव, ा ियक सद एवं \u0014ी एस. आर. रघुना था , लेखा सद क े सम# BEFORE SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER AND SHRI S. R. RAGHUNATHA, ACCOUNTANT MEMBER आयकर अपील सं./ITA No.:3351/Chny/2024 िनधा $रण वष$ / Assessment Year: 2016-17 Thirumani, 260/1, Mint Street, Park Town, Chennai – 600 003. vs. ACIT, Non-Corporate Circle 6(1), Chennai – 600 034. [PAN: AAGPT-7541-K] (अपीला थ&/Appellant) ('(थ&/Respondent) अपीला थ& की ओर से/Appellant by : Shri. B. Ramakrishnan, F.C.A. '(थ& की ओर से/Respondent by : Ms. Gouthami Manivasagam, J.C.I.T. सुनवा ई की ता रीख/Date of Hearing : 30.10.2025 घोषणा की ता रीख/Date of Pronouncement : 05.01.2026 आदेश /O R D E R PER S. R. RAGHUNATHA, AM: The present appeal is filed by the assessee against the order dated 19.11.2024 passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (hereinafter referred to as “ld.CIT(A)”), dismissing the appeal filed by the assessee against the assessment order dated 14.12.2018 passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as the “Act”), pertaining to Assessment Year (A.Y.) 2016-17. 2. The brief facts of the case emanating from the records are that the assessee is an individual and has filed his original return of income for the Printed from counselvise.com :-2-: ITA. No.:3351 /Chny/2024 impugned A.Y.2016-17 on 17.10.2016 admitting a total income of Rs.95,67,520/-. The assessee’s case was selected for scrutiny under CASS and thereafter notice u/s.143(2) of the Act was issued on 21.08.2018. Subsequently, notices u/s.142(1) was issued to the assessee on 19.09.2018, 29.10.2018 & 10.12.2018. In response to the aforesaid notices, the assessee had e-filed the details called for. Thereafter, the assessment was completed by the Assessing Officer by passing the order dated 14.12.2018 u/s. 143(3) of the Act by making following additions: Nature of Addition/Disallowance Amount (in Rs.) Disallowance of claim u/s.54F 2,45,95,000/- Addition u/s.56(2)(vii)(b) 27,23,000/- Total Addition/Disallowance 2,73,18,000/- 2.1 Thereby the assessed income of the assessee was arrived at Rs.3,68,85,720/- and a demand of Rs.92,54,757/- was raised. Aggrieved by the above additions, the assessee had preferred an appeal before the ld.CIT(A) on various grounds. The ld.CIT(A) vide order dated 19.11.2024 decided the appeal as follows: • Upheld the addition made pertaining to disallowance of claim u/s.54F of the Act amounting to Rs.2,45,95,000/- and • Partly allowed the appeal w.r.t addition u/s.56(2)(vii)(b) by deleting the addition to the tune of Rs.26,67,150/- thereby restricted the addition to Rs.56,050/- 2.2 Aggrieved by the above order of the ld.CIT(A), the assessee has preferred the present appeal before us. Disallowance u/s.54F is as follows: 3. The assessee sold a residential property at Triplicane High Road, Chennai, on 29.06.2015 for Rs.3,00,00,000/- (his share) and claimed exemption u/s.54F of the Act by investing the net capital gains in a property at Padur via Sale Deed No.14126/2015 dated 13.11.2015 (registered at Thiruporur SRO). 4. Subsequently, the assessee entered into a Construction Agreement dated 07.09.2017 with M/s.S.R.Builders Chennai LLP for building a single- Printed from counselvise.com :-3-: ITA. No.:3351 /Chny/2024 storied residential house comprising two rooms and a kitchen. The builder’s confirmation dated 05.12.2018 states that planning began in October 2017, with design approval obtained and plan approval granted on 30.07.2018. To verify the veracity of the claim made by the assessee, the Assessing Officer deputed the Inspector to visit the property and submit a report. The Inspector’s report stated that the land is vacant with a small old room with asbestos roof, where a security stays there. Therefore, the Assessing Officer held that such room for security cannot be equated with a residential house property and denied the claim made u/s.54 of the Act. The action of the Assessing Officer was upheld by the ld.CIT(A) and the same has been challenged. 5. Before us, the ld.AR for the assessee filed a paper book and submitted that the Padur Village Panchayat house-tax receipt dated 14.12.2018 assesses the structure as a residential building, clearly demonstrating that the local body recognized it as a habitual house. The receipt was filed before the Assessing Officer as well as before the ld.CIT(A). The Assessing Officer disallowed the claim solely on the basis of an Inspector’s report dated 07.12.2018, which stated that the property was largely vacant with “a small metal-roofed shed supported with iron rod pillars at one corner of the land”. The photographs annexed to the report were taken from outside the compound and at a distance, failing to depict the actual constructed portion. In contrast, the assessee produced photographs dated 17.12.2018 taken from inside the house, clearly showing a kitchen area and two rooms with plastered walls, tiled floor, windows and electrical fittings – demonstrating the building’s residential character. These were genuine contemporaneous photos, not post-event fabrication. The structure, though modest in size, is a fully enclosed brick-walled, cement floored, asbestos-roofed dwelling capable of habitation. Section 54F of the Act does not prescribe any minimum plinth area or a construction cost. The statute only requires that the assessee construct a residential house within three years. Thus, the ld. CIT(A)’s observation that the building occupies “less than 0.5% of 92 cents is immaterial. Printed from counselvise.com :-4-: ITA. No.:3351 /Chny/2024 5.1 The Department’s reliance on the Inspector’s brief report while ignoring the house-tax receipt and interior photos violates the principles of natural justice and results in perverse finding. All these documents conclusively prove the existence of a residential structure within the stipulated period. The assessee had constructed a residential house on the Padur Property, though small in size, comprising two rooms and kitchen, as evidenced by interior photographs and the Panchayat House-Tax Receipt recognizing it as a residential building. The mere fact that the construction occupied a limited portion of the total land cannot be a ground to deny exemption u/s.54F of the Act. The ld.AR also relied upon the following judgments in support of his contentions.  CIT vs. Smt. M. Kalpagam in TCA No.984 of 1984  CIT vs. Smt. Sunita Aggarwal [2006] 284 ITR 20 (Delhi)  CIT vs. Kalyanaraman Nataraja [2017] 82 taxmann.com 93 (Chennai – Trib.)  ACIT vs. Anandhi Karthikeyan in ITA No.1242/Mds/2009  Girish Mohan vs. ACIT [2023] 153 taxmann.com 554 (Delhi – Trib.)  DCIT vs. Kanwal Mohan Singh Sehgal in ITA No.500/Del/2019  Addl CIT vs. Narendra Mohan Uniyal in ITA No.1624/Del/2009  ACIT vs. Somchand Kanji in ITA No.1717/Bang/2016 6. It was thus prayed that the addition made towards disallowance of deduction u/s. 54F of the Act be deleted. 7. Per contra, the ld.DR relies upon the order of the authorities below and on the Inspector’s report dated 07.12.2018 and submits that the land was largely vacant and contained only a shed-like structure unfit for residential use. There was no residential house, constructed within three years. The alleged construction was insignificant, temporary and lacks basic amenities. The sanctioned plans or completion certificate were not produced. Cost of the structure was very negligible compared to the land cost. Shed-like structure used by a security guard lacks residential character. Reliance was placed on the judgment rendered by the Ahmedabad bench in Harshad M Thakkar v DCIT, ITA no.784/Ahd/2018, order dated 21.01.2019. The ld.DR thus, prayed that the appeal be dismissed. Printed from counselvise.com :-5-: ITA. No.:3351 /Chny/2024 8. We have heard the rival contentions perused the material available on record and gone through the orders of the authorities and along with the paper book and the judicial precedents cited. 9. The core issue for determination is whether the assessee constructed a “residential house” within the meaning of section 54F within the prescribed time. If we look into the statutory interpretation of section 54 of the Act, we can see that it requires construction of a residential house within three years. The provision, however, does not prescribe minimum plinth area, does not mandate municipal approval, does not require occupation by the assessee and does not link exemption to cost of construction. The test is capability of habitation but not the magnitude. 10. Coming to the evidentiary value of the documents produced by both the parties. In the present case, the assessee has produced: 1. Panchayat house-tax receipt classifying the structure as a residential building, 2. Interior photographs showing rooms, kitchen, flooring, plastered walls, windows and electrical fittings. 11. These documents are contemporaneous and issued by statutory/local authorities. 12. On the other hand, the Inspector’s report is brief, based on external observation, photographs were taken from outside the compound and does not negate existence of a residential structure inside. The reliance placed on Harshad M. Thakkar v. DCIT is misplaced, as in that case no habitable residential unit was proved to exist. In the present case, the assessee has produced documentary, photographic, and local authority evidence establishing the residential nature of the construction. 13. It is settled law that an Inspector’s report cannot override documentary evidence issued by a statutory local body. Printed from counselvise.com :-6-: ITA. No.:3351 /Chny/2024 14. While dealing with the contention on the size of construction, we hold that it is irrelevant. The lower authorities have laid undue emphasis on the fact that the construction occupies a small portion of the total land. This approach is contrary to settled law. The observation of the ld. CIT(A) that the construction occupied less than 0.5% of 92 cents of land is legally irrelevant. Courts have consistently held that: • Size of the house is immaterial. • A small or modest dwelling still qualifies as a “residential house”. 15. The Hon’ble Madras High Court in CIT v. Smt. M. Kalpagam (cited supra) has held that ‘extent of construction is not decisive, and liberal interpretation must be adopted’. 16. Similarly, Chennai Bench in ACIT v. Anandhi Karthikeyan (cited supra) has held that ‘exemption u/s.54F of the Act cannot be denied merely because the constructed house is smaller in size or not fully as per the approved plan, so long as a genuine residential house has been built’. The Tribunal further observed, ‘relying on CBDT Circular No.667, that the investment in land forms part of the cost of the residential house for the purpose of section 54F of the Act’. 17. The Delhi Bench in Addl CIT vs. Narendra Mohan Uniyal (cited supra) held as follows: “It is crystal clear from the plain reading of Section 54 & 54F that exemption is allowable in respect of amount invested in the construction of a residential house. There is no any rider u/s 54F that no deduction would be allowed in respect of investment of capital gains made on acquisition of land appurtenant to the building or on the investment on land on which building is being constructed. When the land is purchased and building is constructed thereon, it is not necessary that such construction should be on the entire plot of land, meaning thereby a part of the land which is appurtenant to the building and on which no construction is made, there is no denial of exemption on such investment.” 18. The Bangalore bench In ACIT vs. Somchand Kanji (cited supra) held as follows: “The question that arising for consideration in this appeal is as to whether the Assessee can be said to have purchased “a residential house”. The requirement of law is that the property should be a residential house. The Printed from counselvise.com :-7-: ITA. No.:3351 /Chny/2024 expression residential house has not been defined in the Act. The popular meaning of the word is a place or building used for habitation of people. It is used in contradistinction to a place which is used for the purpose of business, office, shop, etc., It is not necessary that a person should reside in the house to call it a residential house. If it is capable of being used for the purpose of residence then the requirement of section is satisfied. The fact that civic amenities were not available in the building constructed cannot be the basis to hold that the property in question is not a residential house. It was capable of being used as a residential house de hors these facilities. These facilities could come in due course and make the property more habitable. The section does not lay down any standards of habitation like existence of civic amenities etc. Besides the above, the undisputed factual position is that there was a constructed shed of 100 Sq.ft. with ACC sheet roofing with walls of brick and mortar and cement flooring and the Assessee's employee has been staying to look after the property. Since there was a person already living in the structure, it can be said that it was in a habitable condition even though basic amenities such as Electricity and water supply was not there. The Khate issued by the BBMP mentions the description of the property as residential property and determined annual value at Rs.780/-. Keeping in mind the above facts, we are of the view that the CIT(A) was justified in directing the AO to allow deduction u/s.54F of the Act to the Assessee. The order of CIT(A) does not call for any interference. Consequently, the appeal by the revenue is dismissed.” 19. We find merit in the assessee’s contention that selective reliance on the Inspector’s report while ignoring material evidence produced by the assessee results in a perverse finding. 20. In the present facts and circumstances of the case, evidence and judicial precedents, we hold that:  The assessee has constructed a residential house within the meaning of section 54F.  The size or modest nature of the construction cannot be a ground for denial.  The disallowance of Rs.2,45,95,000/- is unsustainable. 20.1 Accordingly, we set aside the order of the ld.CIT(A) and direct the AO to allow the deduction claimed u/s.54F of the Act. Addition of Rs.56,050/- u/s. 56(2)(vii)(b) of the Act: 21. The assessee, along with the co-owners, purchased property situated at Padur vide Sale Deed No.14126/2015 dated 13.11.2015 for a total consideration of Rs.8,28,00,000/- (assessee’s 50% share being Rs.4,14,00,000/-). In the assessment proceedings, the Assessing Officer compared this with a higher guideline value of Rs.8,82,46,400/- and made a proportionate addition of Printed from counselvise.com :-8-: ITA. No.:3351 /Chny/2024 Rs.27,23,200/- in the hands of the assessee u/s.56(2)(vii)(b) of the Act. The matter was thereafter referred to the Department Valuation Officer (“DVO”). The DVO, by final valuation report dated 19.01.2021, determined the fair market value at Rs.8,29,12,000/-. Thus, the difference between the DVO’s value and the stated consideration is merely Rs.1,12,000/-, resulting in assessee’s share difference of Rs.56,050/- 22. The ld.counsel for the assessee submitted that the marginal variation, representing barely 0.135% of the total transaction value, is purely notional and has arisen only due to minor estimation in valuation. There is no evidence whatsoever of any extra consideration having passed on between the parties. The difference is well within the tolerance range of 5% (subsequently raised to 10%) recognized under the Act to account for minor and inevitable valuation variations. It was thus prayed that the addition be deleted. 23. Per contra, the ld.DR contended that the assessee’s share of Rs.56,050/- exceeds the statutory threshold of Rs.50,000/- and therefore, the ground needs to be dismissed. 24. We note that the variation is marginal and purely estimation based. There is no evidence of any unaccounted consideration. The difference is well within the tolerance band subsequently recognized by the statute. The contention of the ld. DR that the addition must survive merely because the difference marginally exceeds Rs.50,000/- cannot be accepted in isolation. The threshold cannot override the substance of the transaction and must be read in harmony with the object of the provision, which is to tax real and not illusory income. A hyper-technical application in a case of insignificant variation, unsupported by evidence of extra consideration, would lead to an unjust and absurd result. 25. The DVO, being a technical authority, has determined the fair market value at Rs.8,29,12,000/-, which is only Rs.1,12,000/- higher than the declared consideration. This valuation virtually corroborates the assessee’s declared Printed from counselvise.com :-9-: ITA. No.:3351 /Chny/2024 purchase price and completely nullifies the Assessing Officer’s reliance on the much higher guideline value. Thus, the very foundation of the original addition stands substantially eroded. 26. We note that Section 56(2)(vii)(b) is a deeming provision, intended to tax real income arising from understatement of consideration. Such provisions must be strictly construed and cannot be applied mechanically in cases where the difference is negligible and purely technical. 27. In view of the above reasoning, we find it appropriate to delete the additions made by the AO by setting aside the order of the ld.CIT(A). Hence, we allow the corresponding ground raised by the assessee. 28. In the result, the appeal of the assessee is allowed. Order pronounced in the court on 05th January, 2026 at Chennai. Sd/- Sd/- (एस एस िव\u0018ने\u001a रिव) (S.S. VISWANETHRA RAVI) ाियक सद /Judicial Member (एस. आर. रघुनाथा) (S. R. RAGHUNATHA) लेखा सद /Accountant Member चे\u0012ई/Chennai, िदनांक/Dated, the 05th January, 2026 SP आदेश की 'ितिलिप अ-ेिषत/Copy to: 1. अपीलाथ&/Appellant 2. '(थ&/Respondent 3.आयकर आयु./CIT– Chennai/Coimbatore/Madurai/Salem 4. िवभागीय 'ितिनिध/DR 5. गाड$ फाईल/GF Printed from counselvise.com "