Property Used for Religious Purpose Barred from Sec. 54F Relief – ITAT

Income Tax Ruling: In a case where the assessee sought an exemption under Section 54F for a building they constructed, it was found that the building was primarily used for religious purposes, including a mosque, an orphanage school, and staff quarters. Consequently, this building did not conform to the definition of a ‘residential house’ as envisioned in Section 54F. Therefore, the assessee was not eligible for relief under this section.

Section 54F of the Income Tax Act, 1961, pertains to the exemption of capital gains in cases of investment in residential houses. During the assessment year 2013-14, the assessee sold two properties in the financial year 2012-13 and sought an exemption under Section 54F, claiming to have constructed a residential building within three years. The Assessing Officer observed that the new building comprised a mosque, an orphanage school, and staff quarters. He noted the absence of evidence demonstrating the assessee’s investment in the construction of a residential house. Consequently, he concluded that the assessee was not entitled to relief under Section 54F.

Inspections by the revenue department revealed that the building was primarily used for religious purposes, such as a mosque, orphanage school, and staff quarters, and therefore did not qualify as a ‘residential house’ as defined in Section 54F. Additionally, the assessee’s report claiming the third floor as residential was contradicted by their statement to the GHMC (Greater Hyderabad Municipal Corporation) for regularization of the property, which stated it was used for a mosque, orphanage school, and staff residence.

Given these findings, and considering that Section 54F of Income Tax Act 1961, does not allow for pro-rata deductions, the assessee was not granted any relief under this section. This decision was made in favor of the revenue department [Paragraph 16].

1. Case Background: This case, ITA No. 505 of 2020, involves the appellant, the Assistant Commissioner of Income Tax, Circle 6(1), Hyderabad, and the respondent, Shri Iqbal Ali Khan. It relates to the assessment year 2013-14.
2. Primary Issue: The main contention revolves around the exemption claimed by the assessee, Shri Iqbal Ali Khan, under Section 54F of the Income Tax Act, 1961. He claimed this exemption for a building he constructed, arguing it was a residential house.
3. Sale of Properties: The assessee sold two properties during the financial year 2012-13. These sales led to long-term capital gains, against which the exemption under Section 54F was claimed.
4. Nature of Constructed Building: The Assessing Officer noted that the new building consisted of a Mosque, Orphanage School, and Staff Quarters. This raised doubts about the building being a ‘residential house’ as required under Section 54F for claiming exemption.
5. Assessee’s Claim: The assessee claimed that the third floor of the building was used for residential purposes.
6. Revenue’s Argument: The Revenue argued that the entire building was predominantly used for religious and educational purposes, not as a residential house. They pointed out inconsistencies in the assessee’s statements regarding the use of the building.
7. Inspection Reports: Various inspections and reports suggested that the building was mainly used for non-residential purposes. The reports highlighted the use of different floors for activities like teaching Quran, running a Madrasa, and maintaining a mosque.
8. Assessing Officer’s Decision: The Assessing Officer disallowed the exemption under Section 54F, citing that the property did not meet the criteria of a residential house and that there was no evidence of investment in a residential property.
9. CIT (A)’s Decision: The Commissioner of Income Tax (Appeals) granted partial relief to the assessee, allowing a pro-rata benefit for the claim under Section 54F.
10. Income Tax Appellate Tribunal’s Conclusion: The Tribunal concluded that the property does not fit the definition of a residential house as contemplated under Section 54F of the IT Act. It was primarily used for religious and educational purposes, and the claim of the third floor being used for residential purposes was inconsistent with other evidence. Therefore, the assessee was not entitled to any relief under Section 54F, and the Tribunal upheld the Assessing Officer’s decision.
11. Final Outcome: The appeal by the Revenue was allowed, and the order of the Assessing Officer was upheld. The Tribunal found no provision for a pro-rata deduction under Section 54F in this case.