Prior to A.Y 2015-16 no restriction on number of residential houses U/s. 54

Ravi Shankar Vs. ACIT (ITAT Mumbai)

It was submitted by the ld. A.R that the term “a residential house” nowhere provided any restriction as regards the number of the residential houses in which an investment could validly be made by an assessee for claim of deduction under Sec. 54 of the Act. The ld. A.R in order to fortify his aforesaid contention submitted that the legislature in all its wisdom had substituted the term “a residential house” by “one residential house in India”, vide the Finance (No. 2) Act. 2014, with effect from 01.04.2015. It was thus the claim of the ld. A.R that as the aforesaid amendment which restricted the entitlement of an assessee towards claim of deduction under Sec. 54 to one residential house in India was made available on the statute with effect from A.Y 2015-16 and was prospective in nature, therefore, the same would have no bearing to the case of the assessee for the year under consideration. Per contra, the ld. D.R relied on the orders of the lower authorities.

We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. We find that Sec. 54 of the Act which provides for a deduction to an assessee in respect of the capital gain that arises from transfer of a long term capital asset being a residential house, as was available on the statute during the year under consideration, viz. A.Y 2012-13, clearly provided that the deduction would be available to an assessee either where he had within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed ^„a residential house^‟. We find that the legislature in all its wisdom had came up with a prospective amendment to Sec. 54 of the Act, vide the Finance (No. 2) Act, 2014 with effect from 01.04.2015, as per which the term “a residential house” was substituted by “one residential house in India”. We are of the considered view that the pre- amended Sec. 54 as would be applicable to the case of the present assessee, by using the term “a residential house” though characterized the nature of investment and thus required that the investment was to be made towards purchase or construction of a residential house, but however, it did not place any restriction as regards the number of residential houses in which the assessee could invest for claiming deduction under the said statutory provision. We are of the considered view that the amendment made available on the statute, vide the Finance(No.2) Act, 2014, with effect from 01.04.20 15, pursuant whereto the term “a residential house” had been substituted by “one residential house in  India”, rather supports the fact that the restriction of making the investment in only one residential house had been made available on the statute only with effect from A.Y 2015-16, and as such cannot be extended to the years prior to that.

Prior to A.Y 2015-16 no restriction was placed by the legislature in respect of investments in the residential houses that an assessee could make for claiming deduction under Sec. 54 of the Act. We thus are of the view that the claim of deduction raised by the assessee under Sec. 54 in respect of investment made towards purchase of residential house at Mumbai and Pune was well in order. We thus in context of the issue under consideration set aside the order of the CIT and uphold the claim of deduction as was raised by the assessee.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

The present appeal is directed against the order passed by the CIT(A)-7, Mumbai dated 25.02.2016, which in itself arises from the order passed by the A.O under Sec. 143(3) of the Income tax Act, 1961 (for short ^„Act^‟), dated 23.02.2015. The assessee had assailed the order passed by the CIT(A) on the following grounds :

“This appeal is against the order dated 25.02.2016 of the Commissioner of Income Tax (Appeals)- 7, Mumbai, (hereinafter referred to as the ‘CIT(A)’) in appeal against Order dated 23.02.2015 u/s 143(3) of the Income-tax Act, 1961, passed by the Assistant Commissioner of income-tax- 16(3), Mumbai (hereinafter referred to as ‘the A.O.’) and relates to the Assessment Year 2012-13.

The under mentioned grounds of appeal are without prejudice to one another:-

1. The CIT(A) erred in upholding the dis allowance made by the A.O. in respect of the appellant claims for exemption/deduction u/s 54 of the Income Tax Act, 1961.

2. The CIT(A) and the A.O. failed to correctly interpret the amendment made by the Finance Act, 2014, wherein the words “a residential house” appearing in section 54 of the Act were changed to “one residential house”, thereby making a prospective amendment in the Act, that implied that, prior to the amendment the word “a” in a residential house was a grammatical reference and not a numeric reference, meaning one residential house.

3. The CIT(A) failed to appreciate this amendment and wrongly upheld the A.O.’s action of denying the benefits of the provisions of section 54 of the Income Tax Act, 1961 to the appellant.

4. The appellant craves leave to add, alter and/or amend all/any foregoing Grounds of Appeal.

2. Briefly stated, the facts of the case are that the assessee who is an architect by profession had filed his return of income for A.Y. 2012-13 on 26.09.2012, declaring total income of Rs. 59,07,550/-. The return of income was processed as such under Sec. 143(1) of the Act. The case of the assessee was selected for scrutiny assessment under 143(2).

3. During the course of the assessment proceedings the A.O observed that the assessee had during the year under consideration sold his residential property, viz. Flat No. 501, Kisna, 18^th Road, Khar (W), Mumbai, for a consideration of Rs.5,30,00,000/-. It was observed by the A.O that the long term capital gain (for short ^„LTCG^‟) shown by the assessee on the sale of the aforesaid property at Rs. 2,63,81,538/- , was claimed as exempt under Sec. 54 of the Act by the assessee, as under:-

The computation of income under the head LTCG and the claim of deduction under Sec. 54 was revised by the assessee during the course of the assessment proceedings by way of a statement dated 07.01.2015. The assessee came up with another revised working of capital gain and claim of deduction under Sec. 54 by way of another statement dated 10.02.2015, as per which the income under the head LTCG was shown at an amount of Rs. 10,138/-.

5. The A.O observed that the claim of deduction raised by the assessee under Sec. 54 was comprised of (i). investment in purchase of a residential property at Pune; (ii). investment in a flat, viz. 4-5, Apsara CHS Ltd, Nargis Dutt Road, Pali Hill, Mumbai; and (iii). deposit of amount in the ^„Capital gain account scheme^‟with SBI. The A.O being of the view that as the claim of deduction under Sec. 54 was allowed for purchase of one residential house only, therefore, called upon the assessee to justify the deduction claimed by him in respect of purchase of the aforesaid two properties. The assessee in his reply submitted that both of the new houses purchased by him were meant for his self occupation. The assessee submitted that as he was an architect by profession and had business clients in Mumbai and Pune, therefore, to facilitate his stay at both the places he had purchased the aforesaid residential houses. It was the claim of the assessee that as there was no express limitation in Sec. 54 to the effect that the assessee should own only one residential house, therefore, his claim of deduction under Sec. 54 was well in order. The assessee fortified his aforesaid view by claiming that the term “a residential house” used in Sec. 54 would mean “any residential house”. It was the claim of the assessee that the expression “a residential house” was descriptive of the nature of property and in no way had any reference to the numerical strength of the house property. However, the submissions of the assessee did not find favour with the A.O, who holding a conviction that the claim of deduction under Sec. 54 could not be extended beyond the investment made by the assessee in one residential house, therefore, called upon the assessee to choose the property against which he sought to claim deduction under Sec. 54. The assessee however being of the view that he was duly entitled for claim of deduction in respect of the investment made in both of the residential houses, therefore, pressed upon his entitlement towards deduction as regards the investment made in both of the aforesaid residential houses, as was claimed by him.

6. That in the backdrop of the aforesaid facts the A.O declined to accept the aforesaid claim of the assessee and restricted his entitlement towards claim of deduction under Sec. 54 only in respect of the residential property at Mumbai, viz. 4-5 Apsara CHS Ltd, Nargis Dutt Road, Pali Hill, Mumbai, 400 050. The AO further observed that as the deduction under the said statutory provision could only be claimed in respect of the amount of capital gain that was to be used for purchase/acquisition/construction of a new asset and not for renovation purposes, therefore, did not allow the claim of Rs.9,04,3 13/- that was raised by the assessee towards renovation carried out in respect of the aforesaid residential house at Mumbai. The A.O deliberating on the claim of deduction raised by the assessee under Sec. 54, observed that as the assessee had purchased the residential flat at Mumbai, vide a purchase agreement dated 24.02.2012, therefore, the purchase of the new asset was completed before the date of filing of the return of income under Sec. 139 of the Act. The A.O on the basis of his aforesaid observations concluded that now when the purchase of the ^„new asset^‟ already stood completed within the time limit stipulated under Sec.54(1), therefore, there remained no occasion for claim of any further deduction in respect of the amount of capital gain which was deposited by the assessee in the Capital Gain Account Scheme with SBI. The A.O in the backdrop of his aforesaid observations also declined to allow deduction under Sec.54 in respect of the amount of Rs. 15,25,000/- that was deposited by the assessee in the Capital Gain Account Scheme with SBI. The A.O on the basis of his aforesaid observations recomputed the income of the assessee chargeable to tax under the head LTCG at Rs. 1,32,58,394/-

7. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating on the contentions of the assessee was however not persuaded to accept the same. The CIT(A) observed that as the assessee had invested in a residential property in Pune and the second one in Mumbai, therefore, the benefit of provision of Sec.54 by no stretch of examination could be extended to such separate investments made by him in two distinct residential houses in two different cities. The CIT(A) being of the view that the entitlement of the assessee towards the claim of deduction under Sec. 54 was rightly restricted by the A.O only as regards the investment made in one residential property, viz. flat in Mumbai, which was of the higher value, therefore, upheld the order passed by the A.O.

8. The assessee being aggrieved with the order of the CIT(A) had carried the matter in appeal before us. The ld. Authorized Representative (for short ^„A.R^‟) for the assessee submitted that Sec. 54 as was available on the statute during the year under consideration, clearly provided that the claim of entitlement of the assessee for deduction under the said statutory provision was available if the assessee had within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of 3 years after that date constructed, a residential house. It was submitted by the ld. A.R that the term “a residential house” nowhere provided any restriction as regards the number of the residential houses in which an investment could validly be made by an assessee for claim of deduction under Sec. 54 of the Act. The ld. A.R in order to fortify his aforesaid contention submitted that the legislature in all its wisdom had substituted the term “a residential house” by “one residential house in India”, vide the Finance (No. 2) Act. 2014, with effect from 01.04.2015. It was thus the claim of the ld. A.R that as the aforesaid amendment which restricted the entitlement of an assessee towards claim of deduction under Sec. 54 to one residential house in India was made available on the statute with effect from A.Y 2015-16 and was prospective in nature, therefore, the same would have no bearing to the case of the assessee for the year under consideration. Per contra, the ld. D.R relied on the orders of the lower authorities.

9. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. We find that Sec. 54 of the Act which provides for a deduction to an assessee in respect of the capital gain that arises from transfer of a long term capital asset being a residential house, as was available on the statute during the year under consideration, viz. A.Y 2012-13, clearly provided that the deduction would be available to an assessee either where he had within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed ^„a residential house^‟. We find that the legislature in all its wisdom had came up with a prospective amendment to Sec. 54 of the Act, vide the Finance (No. 2) Act, 2014 with effect from 01.04.2015, as per which the term “a residential house” was substituted by “one residential house in India”. We are of the considered view that the pre- amended Sec. 54 as would be applicable to the case of the present assessee, by using the term “a residential house” though characterized the nature of investment and thus required that the investment was to be made towards purchase or construction of a residential house, but however, it did not place any restriction as regards the number of residential houses in which the assessee could invest for claiming deduction under the said statutory provision. We are of the considered view that the amendment made available on the statute, vide the Finance(No.2) Act, 2014, with effect from 01.04.20 15, pursuant whereto the term “a residential house” had been substituted by “one residential house in  India”, rather supports the fact that the restriction of making the investment in only one residential house had been made available on the statute only with effect from A.Y 2015-16, and as such cannot be extended to the years prior to that. We find that our aforesaid view is fortified by the judgment of the High Court of Karnataka in the case of Commissioner of Income tax Vs. Khoobchand M. Makhija (2014) 223 taxman 189 (Kar), wherein the High Court after deliberating at length on the issue under consideration, had observed as under:

9. The word ^‘a’ is not defined in the Act. When a word is not defined in the Act itself, it is permissible to refer to dictionaries to find out the general sense in which that word is understood in common parlance. However, in selecting one out of the various meanings of a word, regard must always be had to the context as it is a fundamental rule that the meanings of words and expressions used in an Act must take their colour from the context in which they appear. Therefore, when the context makes the meaning of a word quite clear, it becomes unnecessary to search for and select a particular meaning out of the diverse meanings a word is capable of, according to lexicographers. Dictionaries are not dictators of statutory construction where the benignant mood of a law, and more emphatically, the definition clause furnishes a different denotation. A statute cannot always be construed with the dictionary in one hand and the statute in the Regard must also be had to the scheme, context and to the legislative history. Words and expressions at times have a ^„technical^‟or a legal meaning^‟ and in that case they are understood in that sense, Judicial decisions expounding the meaning of words in construing statutes in parimateria will have more weight than the meaning furnished by dictionaries. (Principles of Statutory Interpretation by Justice G.P.Singh – pages 279 and 280). It is in this background, it is necessary to understand the meaning of the word ^„a^‟ in the context in which it is used in the said Section.

10. The words “a” or “an” and “the” are called Articles. They come before nouns. There are two Articles – a (or an) and the. “a” or “an” is called the Indefinite Article, because it usually leaves indefinite the person or thing spoken of. “The” is called the Definite Article, because it normally points out some particular person or thing. The indefinite article is used before singular countable nouns. The definite article ⁱ‘s used before singular countable nouns, plural countable nouns and uncountable nouns. The indefinite Article ¹‘s used in two contexts, firstly, in its original numerical sense of one. Secondly, in the vague sense of a certain. It is also used in the sense of any, to single cut an individual as the representative of a It is also used to make a common noun of a proper noun.

11. In the Strouds Judicial Dictionary of Words and Phrcses dealing with this letter ^‘a^‘, it is said ^‘a’ is sometimes read as the^‟. ^‘a’ may sometimes be read as ^„some^‟. But, more frequently ^„a^‟ is the equivalent of ^‘any^‘. However, it is difficult to read ^„a^‟ as „all‟.

12. In the Concise Oxford Dictionary of Current English, dealing with the letter ^‘a^‘ is stated that, ^‘a’ sometimes called indefinite article, used with apparent plurals of number.

13. Section 13 of the General Clauses Act, 1897 deals with gender and It reads as under : –

“13. Gender and number.-In all Central Acts and Regulations, unless there is anything repugnant in the subject or context.-

(1) words importing the masculine gender shall be taken to include females; and

(2) words in the singular shall include the plural, and vice versa.

14. This Court in the case of Commissioner of Income-Tax and Another -vs- Smt. K.G. Rukminiamma reported in (2011) 331 ITR 211 (Karn), had an occasion to consider Section 54 of the Act and had held as under:

“For a proper appreciation of the aforesaid contention, it is necessary to have a careful look at Section 54 of the Income Tax Act, which reads as under:

“54. Profit on sale of property used for residence – (1) Subject to the provisions of sub-section (2), where, in the case of an assesses being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of winch is chargeable under the head ^“Income from house property^‟ (hereafter in this section referred to as the original asset), and the assesses has within a period of one year before or two years after the dole on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say, – ”

A reading of the aforesaid provision makes it very clear that the property sold is referred to as original asset in the section. That original asset is described as buildings or lands appurtenant thereto and being a residential house. Therefore, it is not mere “a residential house”. The residential house may include buildings or lands appurtenant there to. The stress is on the use to which the property is put to. Only when that asset was used as a residential house, which may consist of buildings or lands appurtenant thereto, the income derived from the sale of such a residential house is chargeable under the head “Income from house property.” If the assessee has within a period of one year before or two years after the dale on which the transfer took place purchased, or has within a period of three years after that date constructed a residential house, then, instead of the capital gain being charged to income-tax as income of the previous years in which the transfer took place, it shall be dealt with in accordance with the aforesaid provisions. In this part of the section also, the words “a residential house” is again used. The said residential house necessarily has to include buildings or lands appurtenant thereto. It cannot be construed as one residential house. In this context, it is useful to refer- to Section 13 of the. General Clauses Act, 1897, which reads as under:

“13. Gender and number. – In all Central Acts and Regulations, unless there is anything repugnant in the subject or context –

(1) words importing the masculine gender shall be taken to include females; and

(2) words in the singular shall include the plural, and vide versa”

10. The context in which the expression “a residential house” is used in Section 54 makes it clear that, it was not the intention of the legislation to convey the meaning that it refers to a single residential house. If that was the intention, they would have used the word “one.” As in the earlier part, the words used are buildings or lands which are plural in number and that is referred to as a residential house”, the original asset. An asset newly acquired after the sale of the original asset also can be buildings or lands appurtenant thereto, which also should be “a residential house.” Therefore the letter “a” in the context it is used should not be construed as meaning “singular.” But, being an indefinite article, the said expression should be read in consonance with the other words “buildings and lands” and, therefore, the singular “a residential house” also permits use of plural by virtue of Section 13(2) of the General Clauses Act. This is the view which is taken by this court in the aforesaid Anand Basappa’s case in I.T.A. No. 113/2004, disposed of on September 20, 2008([2009] 309 ITR 329 (Kam)]. ”

15. That was the case where the assessee gave his property for joint development agreement for putting up flats. Under the terms of the agreement, out of eight flats to be put up, four flats had to be given to the assessee, representing 48%, the consideration for the said four flats was consideration for selling 52% of the site. It was held that, though under the joint development agreement, the assessee received four residential flats, it constituted a residential house for the purpose of Section 54 and therefore, entitled to the said benefit.

16. In the instant case, one residential house is sold. Out of the sale consideration, it was open to the assessee to purchase a big residential house so as to accommodate both his sons, in which event in terms of Section 54 (1), he would have been entitled to the benefit of the said However, instead of purchasing one big house, having regard to the fact that both his sons are grown up, have families and in order to see that in future there won^‟t be any litigation or disharmony, he chose to purchase two small residential houses to accommodate both his sons.

17. It is clear that the assessee was not attempting to evade tax. In fact, after purchasing two residential houses, still there remained unutilized capital gain, which he has offered for tax. Therefore, as held in the aforesaid Rukminiamma^‟s case, the context in which the expression “a residential house ” is used in Section 54 makes it clear that it was not the intention of the legislature to convey the meaning that it refers to a single residential house. The letter “a” in the context, which is used, should not be construed as meaning singular, but being a indefinite article, the said expression should be read in consonance with the other words “buildings and lands* and therefore, the singular “a residential house” also permits use of plural by virtue of Section 13(2) of the Genera] Clauses Act.

18. Therefore, we are of the view, in the facts and circumstances of this case, the acquisition of two residential houses by the assessee out of the capital gains falls within the phrase “residential house” and accordingly, the assessee is entitled to the benefit conferred under Section 54(1) of the Act. However, we make it clear that while interpreting this word, the Court or the Tribunal or the authorities have to keep in mind the facts of the particular case. When we have held “a” cannot be read as singular, it also cannot be read as multiples and so as to avoid paying tax under Section 45 of the Act. Therefore, in the facts and circumstances of this case, we answer the first substantial question of law raised in favour of the assessee and against the Revenue.”

11. We further find that the Hon’ble High Court of Madras in the case of CIT Vs. Smt. V. R. Kampagm had further clearly held in context of a similar amendment that was made available to Sec. 54F, that the same was effective from 01.04.2015, which thus made it clear that prior to the said amendment the assessee was entitled the claim deduction in respect of investments made in more than one residential We find that a similar view had also been taken by the Hon’ble High Court of Andhra Pradesh in the case of CIT Vs. Syed Ali Adil (2013) 352 ITR 418 (AP).

12. We have given a thoughtful consideration to the facts of the case in context of the issue under consideration. We are of the considered view that in the backdrop of our aforesaid observations and the judgment of the Honble High Courts as had been deliberated upon by us herein above, it can safely be concluded that prior to A.Y 2015-16 no restriction was placed by the legislature in respect of investments in the residential houses that an assessee could make for claiming deduction under Sec. 54 of the Act. We thus are of the view that the claim of deduction raised by the assessee under Sec. 54 in respect of investment made towards purchase of residential house at Mumbai and Pune was well in order. We thus in context of the issue under consideration set aside the order of the CIT and uphold the claim of deduction as was raised by the assessee. The Grounds of appeal Nos. 1 to 3 are allowed in terms of our aforesaid observations. The Ground of appeal No. 4 being general in nature is dismissed as not pressed.

13. The appeal of the assessee is allowed.

Order pronounced in the open court on 17. 01.2018