Case Law Details
Arun K Thiagarajan Vs CIT (Appeals) (Karnataka High Court)
In the case of Arun K Thiagarajan vs. CIT (Appeals), the Karnataka High Court addressed an appeal under Section 260A of the Income Tax Act, 1961, pertaining to the assessment year 2003-04. The appeal was admitted based on the substantial question of law regarding the entitlement of the assessee to claim exemption under Section 54 of the Act, despite purchasing more than one house.
The factual background of the case involved the assessee selling a residential property in Chennai and claiming exemption under Section 54 for investments made in two residential properties in Bangalore. The assessing officer initially restricted the exemption to one property based on the decision in ITO vs. SMT.H.V.Rajlakshmi by the Income Tax Appellate Tribunal (ITAT). Subsequently, the Commissioner of Income Tax (Appeals) partially allowed the appeal, maintaining that the exemption under Section 54 could not be granted for investments in multiple properties.
The assessee then appealed to the ITAT, which upheld the decision of the Commissioner of Income Tax (Appeals) regarding the denial of exemption under Section 54. However, it made adjustments to the valuation of the property.
The key contention raised by the assessee was regarding the interpretation of the expression “a residential house” in Section 54(1) of the Act. The assessee argued that the expression should not be construed as singular but should include plural interpretations, citing various decisions from different High Courts, including the Karnataka High Court.
The Karnataka High Court, in its analysis, examined the language of Section 54(1) of the Act prior to its amendment by the Finance Act, 2014. It noted that the provision referred to “a residential house” but did not specifically limit the exemption to one property. The Court referred to previous decisions, including KG Rukminiamma vs. CIT, where it was held that the expression “a residential house” should not be construed as singular but could include plural interpretations, considering the context in which it was used.
The Court also highlighted the subsequent amendment to Section 54(1) by the Finance Act, 2014, which replaced “a residential house” with “one residential house,” indicating a legislative intent to restrict the interpretation to a single property. However, it noted that this amendment was prospective and did not apply to the relevant assessment year.
Based on the interpretation of the expression “a residential house” in Section 54(1) and the precedent set by previous decisions, the Karnataka High Court held that the assessee was entitled to claim exemption under Section 54 for investments made in multiple residential properties. It quashed the orders of the assessing officer, the Commissioner of Income Tax (Appeals), and the ITAT, and allowed the appeal in favor of the assessee.
In conclusion, the Karnataka High Court’s judgment emphasized the interpretation of statutory provisions in light of established legal principles and precedent, ultimately ruling in favor of the assessee’s entitlement to exemption under Section 54 for investments in multiple residential properties.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the assessee. The subject matter of the appeal pertains to Assessment year 2003-04. The appeal was admitted by a bench of this Court vide order dated 29.06.2011 on the following substantial question of law:
(i) Whether the order passed by the Income Tax Appellate Tribunal confirming he order passed by the appellate authority and the assessing officer that the appellant is not entitled to exemption under Section 54 as he has purchased more than one house is perverse, arbitrary and contrary to law laid down by the division bench of this court in ITA No.783/2008 dated 27.08.2010?
2. The issue, which arises for consideration in this appeal is whether the assessee is entitled to claim exemption under Section 54 of the Act as he had purchased more than two houses. In order to appreciate the factual background, in which the aforesaid issue arises for consideration, reference to relevant facts is necessary, which are stated herein after:
3. The assessee was the owner of a residential property situate at Harrington Road Chetpet, Chennai. The said property was sold vide registered sale deed dated 09.10.2002 for a consideration of Rs.2,68,89,375/-. The assessee filed return of income on 09.07.2003 for Assessment year 2003-04 declaring income of Rs.1,68,52,920/-, under the head income from salary, house property, capital gains and income from other sources and paid tax of Rs.49,57,706/-. The assessing officer issued a notice under Section 148 of the Act calling upon the assessee to file the return of income disclosing true particulars of income chargeable to tax. The assessee vide communication dated 31.03.2008 submitted that original return of income be treated as return of income for proceeding under Section 148 of the Act. The assessee also sought for the reasons recorded for issue of notice, which were provided to him on 12.08.2008.
4. The assessee declared long term capital gain arising out of the sale of the above property of Rs.15,44,009/- after claiming deduction towards incidental charges for transfer of property, the cost of acquisition and the deduction admissible under Section 54 of the Act in respect of two properties purchased in Bangalore viz., Koramangala and Domlur, II Stage, Bangalore, respectively on 23.09.2002 and 23.10.2002. The assessing officer by an order dated 24.12.2008 inter alia held that fair market value for the proposes of assessment is to be adopted on the basis of guidance value as prescribed by stamp valuation authorities. It was further held that the guidance value of the property sold was Rs.4,62,56,000/- and the aforesaid value was adopted subject to valuation report. It was further held that assessee’s claim for deduction under Section 54 of the Act in respect of investments made in acquiring two residential properties is not admissible in view of the decision of the Income Tax Appellate Tribunal (hereinafter referred to as ‘the Tribunal’ for short) dated 30.04.2008 in ITO VS. SMT.H.V.RAJLAKSHMI. Therefore, the assessee’s claim for deduction under Section 54 of the Act was restricted to acquiring one residential building and deduction was allowed in respect of higher value of investment i.e., Rs.97,15,652/-, which was in respect of property situate in Koramangala. Thus, it was held that assessee had deliberately furnished inaccurate particulars in relation to sale consideration of the property sold disregarding the guidance value as required under Section 50C of the Act and therefore, the assessee has rendered himself liable for levy of penalty under Section 271(1)(c) of the Act.
5. Being aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) by an order dated 15.03.2010 inter alia held that Section 50C comes into play only when there is a valuation at a higher value for stamp valuation purposes by the state authority then declared by the assessee concerned in the sale deed. It was further held that the property was registered for a consideration of Rs.2,68,89,375/-, whereas, the valuation adopted by the stamp valuation authority is Rs.4,06,56,735/-. Therefore, by placing reliance on decision of the Lucknow Bench of the tribunal in ‘JITENDRA MOHAN SAXENA VS. ITO’, (305 ITR (AT) 62), the assessing officer was directed to re-compute the value of the property at Rs.4,06,56,735/-. It was further held that decision of this court in ‘CIT VS. ANAND BASAPPA’, 309 ITR 329 does not apply to the fact situation of the case as the assessee had made investment in residential properties, which are situate in different places in Bangalore and therefore, the benefit of exemption under Section 54 of the Act cannot be granted. In the result, the appeal was partly allowed.
6. The assessee approached the tribunal by filing an appeal. The tribunal by an order dated 17.09.2010 inter alia by taking into account the sale instances in the vicinity during the relevant period put forth by the assessee, subject property being a corner plot and the fact that District Valuation Officer had fixed land rate at Rs.2,220/- per square feet without assigning any basis or comparison / citing any sale instances in the vicinity for the relevant period, the value of the land was fixed at Rs.1,869/- per square feet. Accordingly, the value of the property was determined at Rs.2,71,03,329/- and the assessing officer was directed to re-compute the value of the property at Rs.2,71,03,330/- instead of Rs.4,06,56,735/-. The tribunal agreed with the findings recorded by the Commissioner of Income Tax (Appeals) insofar as it pertains to denial of benefit under Section 54 of the Act. In the result, the appeal was partly allowed. In the aforesaid factual background, the assesses have approached this court.
7. Learned Senior Counsel for the assessee has submitted that claim of the assessee in this appeal relates to exemption under Section 54 of the Act in respect of investment made in two residential properties. It is argued that there is no dispute with regard to computation of capital gains or factum of investments in two properties. It is pointed out that Section 54(1) was amended by Finance Act, 2014 with effect from 01.04.2015, by the which the words ‘constructed a residential house’ were substituted and the words ‘constructed one residential house in India’ was substituted. It is argued that the expression ‘a residential house’ used in Section 54 of the Act refers to the nature of house and the number of residential units to be purchased by the assessee and therefore, the assessee was eligible for exemption. In this connection, reliance has been placed on Circular No.1/2015 issued by Central Board of Direct Taxes dated 20.01.2015 and it is argued that the aforesaid amendment is prospective in nature. It is also urged that several courts including a bench of this court has interpreted the expression ‘a residential house’ and have held that the letter ‘a’ in the context, in which it is used should not be construed as singular but the expression also permits use of plural. In support of aforesaid submission, reliance has been placed on the following decisions in ‘CIT VS. KG RUKMINIAMMA’, 331 ITR 211 (KARNATAKA), ‘B.SRINIVAS VS. ITO’, ITA NO.1134/2008, ‘CIT AND ANR. VS. LATE KHOOBCHAND M.MAKHIJA’, ITA NO.496/2007 (KARNATAKA), ‘CIT AND ANR. VS. SMT.JYOTHI K MEHTA’, ITA NO.194/2010 (KARNATAIKA), ‘TILOKCHAND AND SONS VS. ITO’, 413 ITR 189 (MADRAS), ‘CIT VS. GITA DUGGAL’, 228 TAXMAN 62 (SC), ‘CIT VS. GITA DUGGAL’, 357 ITR 153 (DELHI), ‘ CIT VS. D.ANAND BASAPPA’, 309 ITR 329 (KARNATAKA), ‘CIT VS. VR KARPAGAM’, 373 ITR 127 (MADRAS), ‘CIT VS. SYED ALI ADIL’, 352 ITR 418 (ANDHRA PRADESH), ‘G.CHINNADURAI VS. ITO’, 74 TAXMANN.COM 227 (MADRAS).
8. On the other hand, learned counsel for the revenue submitted that the word used ‘a residential house’ has to be interpreted in the facts and circumstances of the case. It is further submitted that assessee in the facts of the case is not entitled to the benefit of Section 54(1) of the Act and the same would amount to abuse of law. It is further submitted that an attempt is made by the assessee to evade the tax. Learned counsel for the revenue has invited our attention to the decision relied by learned Senior Counsel for the assessee in the case of K.G.RUKMINIAMMA supra and has pointed out that on a site a residential premises existed, which was demolished and was given to a builder under a Joint Development Agreement for putting up flats. In the aforesaid factual background, it was held that all four flats are situate in a residential building and therefore, constitute ‘a residential house’ for the purposes of Section 54 of the Act. Similarly, it is pointed out that in all the cases relied upon by the assessee in the fact situation of the cases referred to by the counsel for assessee, it was held that assessee is entitled to benefit to Section 54(1) of the Act. Therefore, the aforesaid decision is of no assistance to the assessee.
9. By way of rejoinder, learned Senior Counsel for the assessee has submitted that there is no finding by any of the authorities that assessee had engaged either in tax planning or tax evasion and in various decisions, the expression ‘a residential house’ has been interpreted and the ratio laid down in the aforesaid decision applies to the fact situation of the instant case.
10. We have considered the submissions made on both the sides and have perused the record. In order to appreciate the rival submissions made at the bar, we deem it appropriate to reproduce Section 54(1) of the Act, which read, prior to its amendment by Finance Act No.2/2014, as under:
54(1) Subject to the provisions of sub-Section (2), where, in the case of an assessee 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 which is chargeable under the head “Income from house property” (hereafter in this section referred to as the original asset), and the assessee has 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, 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.
11. From close scrutiny of the aforesaid provision, it is axiomatic that property sold is referred to as original asset and the original asset is prescribed as buildings and lands appurtenant thereto and being a residential house. The expression ‘a residential house’ therefore, includes building or lands appurtenant thereto. It cannot be construed as one residential house.
12. A Bench of this court in case of KG RUKMINIAMMA supra dealt with the meaning of expression ‘a residential house’ used in Section 54(1) of the Act while taking into account Section 13(2) of the General Clauses Act, 1897 held that unless there is anything repugnant in the subject or context, the words in singular shall include the plural and vice versa. It was further held that context in which the expression ‘a residential house’ is used in Section 54 makes it evident that it is not the intention of the legislature to convey the meaning that it refers to a single residential house. It was also held that an asset newly acquired after sale of original asset can also be buildings or lands appurtenant thereto, which also should be residential house, therefore, the letter ‘a’ in the context it is used should not be construed as meaning singular, but the expression should be read in consonance with other words viz., buildings and lands. Accordingly, the contention raised by the revenue was rejected. Similar view was taken by a bench of this court in KHOOBCHAND M. MAKHIJA supra, B.SRINIVAS supra and in the case of SMT.JYOTHI K MEHTA supra.
The Madras High Court while dealing with Section 54 of the Act as it stood prior to amendment by Finance Act No.2/2014 in the case of TILOKCHAND AND SONS supra took the similar view and held that the word ‘a’ would normally mean one but in some circumstances it may include within its ambit and scope some plural numbers also. The Delhi High Court also took the similar view in case of GITA DUGGAL supra.
13. It is well settled in law that an Amending Act may be purely clarificatory in nature intended to clear a meaning of a provision of the principal Act, which was already implicit. [SEE: DECISION OF THE SUPREME COURT IN ‘CIT VS. NEW DELHI VS. RAMKRISHNA DAS’ IN CIVIL APPEAL NO.3211/2019 DECIDED ON 26.03.2019]. In view of aforesaid enunciation of law by different High Courts including this court and with a view to give definite meaning to the expression ‘a residential house’, the provisions of Section 54(1) were amended with an object to restrict the plurality to mean singularity by substituting the word ‘a residential house’ with the word ‘one residential house’. The aforesaid amendment came into force with effect from 01.04.2015. The relevant extracts of Explanatory note to provisions of Finance Act No.2/2014 reads as under:
20.3 Certain courts had interpreted that the exemption is also available if investment is made in more than one residential house. The benefit was intended for investment in one residential house within India. Accordingly, sub-Section (1) of Section 54 of the Income-Tax Act has been amended to provide that the rollover relief under the said Section is available if the investment is made in one residential house situated in India.
20.5 Applicability:- These amendments take effect from 1st April, 2015 and will accordingly apply in relation to Assessment year 2015-16 and subsequent Assessment years.
Thus it is axiomatic that the aforesaid amendment was specifically applied only prospectively with effect from Assessment year 2015-16.
14. The subsequent amendment of Section 54(1) also fortifies the fact that the legislature felt the need of amending the provisions of the Act with a view to give a definite meaning to the expression ‘a residential house’, which was interpreted as plural by various courts by taking into account the context in which the aforesaid expression was used. The subsequent amendment of the Act also fortifies the view taken by this court as well as Madras High Court and Delhi High Court. It is trite law that the principle underlying the decision would be binding as precedent in a case. In HALSBURY LAWS OF ENGLAND, Volume 22, Para 1682, Page 796, the relevant extract reads as under:
The enunciation of the reasons or principle on which a question before a court has been decided is alone binding as a precedent. This underlying principle is often termed the ratio decidendi, that is to say, the general reasons given for the decision or the general grounds on which it is based, detached or abstracted from the specific peculiarities of the particular case which gives rise to the decision.
[ALSO SEE: ‘STATE OF HARYANA VS. RANBIR’, (2006) 5 SCC 167 & ‘GIRNAR TRADERS VS. STATE OF MAHARASHTRA’, (2007) 7 SCC 555].
15. This Court as well as Madras and Delhi High Court have interpreted the expression ‘a residential house’ and have held that the aforesaid expression includes plural. The ratio of the decisions rendered by coordinate bench of this court are binding on us and we respectively agree with the view taken by this court while interpreting the expression ‘a residential house’. Therefore, the contention of the revenue that the assessee is not entitled to benefit of exemption under Section 54(1) of the Act in the facts of the case does not deserve acceptance.
In view of preceding analysis, the substantial question of law framed by this court is answered in favor of the assessee and against the revenue. In the result, the order passed by the assessing officer and Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal insofar as it deprives the assessee of the benefit of exemption under Section 54(1) of the Act are hereby quashed and the assessee is held entitled to benefit of exemption under Section 54(1) of the Act. In the result, the appeal is allowed.
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