PERSONAL TAX: Deduction under wrong head may be allowed

If a taxpayer while making a claim for a deduction refers a wrong section under the Income Tax Act for the same; can the taxman deny the benefit of this deduction to the taxpayer?

A taxpayer filed its return of income for assessment year 2013-14 on July 31, 2013 and declared his total income at Rs 1.11 crore. While examining the income tax return filed the taxman observed that the taxpayer had 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 crore 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. In view of the same, the tax officer proposed to disallow the claim for deduction u/s 54 of the Act.

Section 54 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.

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 his 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 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 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 as per the prescribed provisions, 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. 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.

The writer is a Seni-registered investment advisor