The Income Tax Act (‘the Act’) has allowed various deductions (for example, Tax-saving investments u/s 80C, Mediclaim u/s 80D, claim for house rent paid u/s 10, etc) which a taxpayer can claim from their taxable income.
While these deductions are available to every taxpayer, a critical prerequisite attached to all these deductions are the taxpayer has to claim these deductions in their return of income. But if a taxpayer, while making a claim for a deduction refers to a wrong section for the same; can the taxman deny the benefit of this deduction to the taxpayer?
For instance, a taxpayer filed its return of income within the due date and declared his total income at Rs 1.11 crores. During the course of assessment, the taxman examined the income tax return filed and observed that during the year the taxpayer has sold various residential as well as commercial properties and earned capital gains on the same.
The tax officer observed that the taxpayer had offered net long-term capital gains (LTCG) of Rs. 3.37 crores on the sale of a residential house after claiming deduction under section 54F of the Act. After calling for further details in regard to the properties of the taxpayer, the tax officer observed that the taxpayer had investment in more than one residential house as on the date of investment.
Section 54F allows a deduction from LTCG earned from sale of any capital asset, other than a residential house, to the extent the sale proceeds are invested in a residential house. The section also provides that the taxpayer should not have investment in more than one more residential house as on the date of investment in the new residential house.
As the officer observed a violation of the condition prescribed u/s 54F, the tax officer proposed to disallow the claim for deduction u/s 54F of the Act.
Section 54, on the other hand, allows for deduction from LTCG on sale of a house only, to the extent the capital gains are invested in a residential house. There is no restriction under this section on the number of properties that the taxpayer can own in order to claim this deduction. Thus, section 54 and 54F are very similar except for the differences noted here.
The taxpayer submitted that he had wrongly claimed deduction u/s 54F instead of section 54 and requested the tax officer to consider claim for the deduction u/s 54 only. However, the taxpayer’s claim was rejected.
Before the first appellate authority, the taxpayer argued that as the capital asset sold was a residential house and the capital gain derived from the transfer was invested in the purchase of another residential house, he was eligible to claim deduction u/s 54 of the Act. The taxpayer further argued that although he had revised its claim of deduction from section 54F to section 54 of the Act, he claimed his right to make a fresh claim for deduction u/s 54 before the appellate authority too.
The taxpayer relied upon numerous decisions in support of his claim. The appellate Commissioner, in the light of the taxpayer’s arguments, observed that if by ignorance of law or mistake, a taxpayer has claimed deduction under a wrong section; the tax officer cannot take advantage of it. Notwithstanding the same, the appellate Commissioner also observed that as the taxpayer had filed its revised computation for claiming deduction u/s 54 of the Act, the tax officer was wrong in rejecting his claim.
When the case came up for hearing before the Tribunal, the tax officer argued that as the taxpayer had not revised his claim of deduction u/s 54 of the Act by filing a revised return of income before the assessment was started, the claim made during the assessment stage cannot be accepted.
The Tribunal observed that it is the duty of the tax officer to correctly compute the real income of the taxpayer in accordance with the provisions of the Act. While the tax officer is empowered to disallow any deduction claimed by a taxpayer if it is not in accordance with the provisions of the Act, in the same manner, he is duty bound to allow deduction if the taxpayer is eligible for such deduction under the provisions of the Act. As in the present case, as capital gains arose from the sale of a residential house, the taxpayer was eligible to claim deduction u/s 54 of the Act.
BOX
Summary
· Deductions allowed under the IT Act have to be claimed by the taxpayer in the return of income
· If not claimed, tax officer may reject the deduction even if all other conditions are prescribed
· Tribunal noted that an officer is duty-bound to allow deduction if the taxpayer is otherwise eligible for such deduction under the Act
(The writer is the Founder of Arvind Rao and Associates, a tax and financial consulting firm based in Mumbai)
