S. 54 Exemption available on capital gain from sale of multiple house invested in a new house

IN THE ITAT MUMBAI BENCH ‘A’

Deputy Commissioner of Income-tax

V/s.

Ranjit Vithaldas

IT APPEAL NO. 7443 (MUM.) OF 2002

[ASSESSMENT YEAR 1998-99]

JUNE 22, 2012

ORDER

Rajendra Singh, Accountant Member

This appeal by the Revenue is directed against the order dated 7.10.2002 of CIT(A) for the assessment year 1998-99.

2. The dispute raised by the Revenue in this appeal relates to claim of deduction u/s 54 of the Income Tax Act, 1961 (the Act) in respect of investment of capital gain in the new residential property.

3. The facts in brief as borne out from the records are that the assessee along with his three brothers had purchased Flat No. 201 in Ramkrishna Sadan, Plot No. 63, Sir Pochkanwala Road, Worli, Mumbai – 400018 on 9.1.1984 and another Flat in Vishnu Villa Co-operative Hsg. Soc. Ltd., on 1.4.1981. In both the flats, the assessee held 25% share. The flat at Ramkrishna Sadan had been sold on 4.10.1996 for a total consideration of Rs. 1,77,00,000/- whereas the flat in Vishnu Villa Co-op. Hsg. Soc. had been sold on 8.10.1997 for a total consideration of Rs. 3,30,00,000/-. The assessee had invested the capital gain arising from the sale of two flats in construction of a residential house. The assessee purchased a plot admeasuring 2015 sq.ft on 25.4.1996 at Bangalore from M/s Adarsh Builders and vide another agreement, the assessee had engaged the said builder for a construction of house on the said land. The assessee had treated both the flats sold by him as one residential house. The assessee computed the long term capital gain in respect of the two flats treating the same as one property after deducting the indexed cost of acquisition and other expenses. The long term capital gain was computed at Rs. 4,87,65,778/- in which the 25% share of the assessee came to Rs. 1,21,91,445/- of which Rs. 42,43,197/- related to the assessment year 1997-98 in which the Ramkrishna Society flat was sold and a sum of Rs. 79,48,248/- related to the assessment year 1998-99 in which Vishnu Villa Co-operative Hsg. Soc. Ltd. property was sold. The assessee had invested total sum of Rs. 88,73,548/- in construction of new residential house at Bangalore. The assessee, therefore, claimed the capital gain arising from the sale of two flats exempt u/s 54 of the Act to the above extent out of which the sum of Rs. 42,43,197/- was claimed in the assessment year 1997-98 and the balance amount of Rs. 46,30,351/- was claimed as deduction in the assessment year 1998-99. The balance capital gain for the assessment year 1998-99 of Rs. 33,17,897/- was offered for tax.

4. The assessee submitted before the AO that the two flats which were in proximate buildings in Worli constituted one residential house as the four brothers were using both the flats for the residential purposes. It was also submitted, that in the Wealth Tax Returns in the earlier years, the flats had been treated as a single property value of which had been shown at Rs. 78,420/- which was the cost of the two flats. Though the two flats were not contiguous, both had been used as one residential house and, therefore, it was submitted that the same should be treated as one house in view of judgment of the Hon’ble Allahabad High Court in the case of Shiv Narain Chaudhari v. CWT (108 ITR 104). The AO, however, did not accept the contentions raised. It was observed by him that the flat in Vishnu Villa Co-operative Hsg. Soc. Ltd. was located at 7B, Worli Seaface, Mumbai, whereas the flat No. 201, located at Ramkrishna Sadan, was at plot No. 63, Sir Pochkanwala Road, Worli, Mumbai – 400018. These flats were located in different buildings and were situated at different roads and these had also been acquired in different years. The flat at Ramkrishna Sadan, had been purchased on 9-1-1984 whereas the flat at Vishnu Villa had been acquired in the earlier year. The AO, therefore, did not accept the claim of the assessee that both flats constituted one residential house. The AO also observed that section 54 allowed exemption in respect of one residential house, the income from which was chargeable under the head “income from house property”. In this case, the assessee owned two residential houses and exemption from house property income was available only in respect of one house as self occupied property. The assessee had claimed exemption u/s 54 in respect of flat at Ramkrishna Sadan in the assessment year 1997-98, meaning thereby that the said flat had been treated as self occupied property. Therefore, the income from Vishnu Villa flat was chargeable to tax but since the assessee had not declared any income under the head “income from house property” in respect of the said flat, the assessee had treated the flat as being used for the purpose of business because only in such a case, the income from the property is not chargeable. The AO, therefore, held that since the flat at Vishnu Villa had been used for the purpose of business, income from which was not chargeable to tax under the head “income from house property” and hence the exemption u/s 54 was not available. He, therefore, held that the assessee was not entitled to exemption u/s 54 in the assessment year 1998-99.

5. The assessee disputed the decision of the AO and submitted before the CIT(A) that both the flats constituted one residential house and had been treated as one residential unit in the Wealth-tax return of earlier years and for the purpose of computation of income from house property. Since both the flats constituted one unit and were used for the purpose of residence, there was no question of the other flat being treated as being used for the purpose of business. It was therefore pleaded that the claim of exemption u/s 54 should be allowed. The CIT(A) after considering the submissions of the assessee observed that though the flats in question were not contiguous, these were part of one and the same residential house which had been accepted as one house by the CIT(A) in the case of one of the assessee’s brothers i.e. Mr. Mahesh Vithaldas and, therefore, two flats had to be treated as one residential property in view of the judgment of the Hon’ble High Court of Allahabad in the case of Shiv Narain Chaudhari v. CWT (supra). The CIT(A) accordingly held that the AO was not justified in treating one of the flats as business asset and in denying benefit of claim of deduction u/s 54. The CIT(A), thus, directed the AO to allow the claim of the assessee after verifying the conditions laid down u/s 54 of the Act and after verifying the cost of acquisition, etc. Aggrieved by the said decision, the revenue is in appeal before the Tribunal in which the decision of the CIT(A) treating the two flats as a single residential house and allowing exemption u/s 54 subject to verification of conditions and not treating one of the flats as being used for business, have been contested.

6. Before us, the Ld. DR appearing for the Revenue assailed the order of the CIT(A). It was submitted that the two flats which were located in two different buildings on different roads having no common approach road could not be considered as one residential house. It was pointed out that the judgment of the Hon’ble High Court of Allahabad in the case of Shiv Narain Chaudhari v. CWT (supra), was distinguishable and not applicable to the facts of the present case. He also referred to the judgment of Hon’ble Bombay high Court in the case of K.C. Kaushik v. P.B. Rane (185 ITR 499) and the judgment of the Hon’ble Punjab and Haryana High Court in the case of Pawan Arya v. CIT (237 CTR 210) in support of the case of the Revenue.

7. On the other hand, the ld. Counsel for the assessee submitted that though the two flats were located in different buildings on different roads but were within walking distance and had been used as one residential house by the four brothers in which the share of the assessee was 25%, These flats had been treated as one residential house for the purpose of wealth tax as well as income tax purpose in earlier years. He referred to the decision of the Tribunal in the case of ITO v. Shri Mahesh Vithaldas one of the brothers of the assessee in ITA No. 2486/Mum/2002 order dated 31.10.2005 for the assessment year 1998-99, in which, it has been accepted that both the flats had been used as one residential house. The sale proceeds of the two flats had been invested in construction of a new residential house. The assessee had constructed the new residential house with total investment of Rs. 88,73,548/- and therefore the assessee was entitled for exemption u/s 54 of the Act to the extent of investment made. The Ld. Counsel also submitted that the AO had no material to show that the flat at Vishnu Villa had been used by the assessee for the purpose of business. Alternatively, it was argued that even if the two flats are treated as separate residential houses, the assessee was entitled for exemption u/s 54 in respect of capital gain arising from each flat as the capital gain had been invested in acquisition of a residential house within the prescribed time limit provided u/s 54. It was pointed out that there was no restriction that sale proceeds of two residential houses could not be invested in one residential house. It was also submitted that exemption u/s 54 was available in respect of sale of more than one residential houses provided that the capital gain was invested in a residential house within the prescribed time limit. In this regard, the Ld. Counsel also referred to the decision of the Tribunal in the case of Rajesh Keshav Pillai v. Income-tax Officer [2011] 44 SOT 617 (Mum.) wherein it has been held that exemption u/s 54 is available in respect of transfer of any number of residential flats. It was, accordingly, urged that the claim of the assessee should be allowed subject to fulfilment of other conditions of section 54.

8. We have perused the records and considered the rival contentions carefully. The dispute raised in this appeal is regarding the claim of exemption of capital gain arising from sale of residential house under the provisions of section 54 of the Act. The said section allows exemption of capital gain arising from the sale of a residential house income from which is chargeable under the head “income from house property” if one year before or two years after the date of transfer, the assessee has purchased a new residential house or within a period of three years from the date of transfer, has constructed a new residential house. Further, in case, the investment in new residential house is less than the capital gain arising from the transfer of residential house; the excess of capital gain over the investment is chargeable to tax. In the present case, the assessee along with his three brothers had purchased flat No. 201 in Ramkrishna Sadan, Plot No.63, Sir Pochkanwala Road, Worli, Mumbai-400018 on 9.1.1984 and another flat in Vishnu Villa Co-operative Hsg. Soc. Ltd. located at 7B, Worli seaface, Mumbai had been purchased in earlier year. The assessee had 25% interests in both the flats. The flat at Ramkrishna Sadan was sold on 4.10.1996 for a consideration of Rs. 1,77,00,000/- in the assessment year 1997-98 and the flat in Vishnu Villa Co-op.Hsg. Soc. had been sold on 8.10.1997 i.e. assessment year 1998-99 for a total consideration of Rs. 3,30,00,000/-.

8.1 The assessee computed the 25% share in the capital gain arising from the sale of flat in Ramkrishna Sadan in assessment year 1997-98 at Rs.42,43,197/- and the share in the capital gain arising from the sale of the flat in Vishnu Villa Co-op. Hsg. Soc. in the assessment year 1998-99 at Rs. 79,48,248/-. The assessee constructed a new residential house at Bangalore for the purpose of which the land had been purchased on 25.4.1996 and, for the purpose of construction, the assessee had engaged M/s Adarsh Builders. The claim of the assessee is that it invested a sum of Rs. 88,73,548/- in the construction of new residential house. As both the flats were used by four brothers and their family members for their own residential purpose, the assessee treated the two flats as one residential property which was used as self occupied property. The assessee claimed the capital gain of Rs. 42,43,197/- as exempt in the assessment year 1997-98 which had been allowed. In the assessment year 1998-99, out of the capital gain of Rs. 79,48,248/-, the assessee claimed exemption u/s 54 of the Act to the extent of Rs. 46,30,351/- being balance amount of investment in the new residential house property.

8.2 The AO has not accepted the claim of the assessee that the two flats at Mumbai which were located in two different buildings and on two different roads constituted one residential house. The CIT(A) has however accepted the claim of the assessee on the ground that in the earlier assessment years both in the Income Tax as well as in the Wealth Tax returns, the two flats had been treated as one residential property. The CIT(A) has also derived support from the judgment of the Hon’ble Allahabad High Court in the case of Shiv Narain Chaudhari v. CWT (supra).

8.3 On careful consideration of the facts of the present case, we are unable to agree with the view taken by the CIT(A) that the two flats constituted one residential house. The flats were located in two different buildings owned by the two different housing societies and were situated on two different roads. These flats were acquired in two different years. There was no common approach road to the buildings. Therefore, in our view, the two flats cannot be treated as one residential property only on the ground that two buildings in which the flats were located were within the walking distance as claimed by the ld. AR. The judgment of the Hon’ble Allahabad High Court in the case of Shiv Narain Chaudhari v. CWT (supra) is distinguishable and not applicable to the facts of the present case. In the said case, the Hon’ble Allahabad High Court had clearly held that two separate buildings situated in two different locality cannot be regarded as one unit even if the members of the HUF were using both the houses exclusively for residential purposes. The Hon’ble High Court, however, held that self-contained dwelling units which are contiguous and situated in the same compound and within a common boundary and having unity of structure could be regarded as one house. In the present case the two flats were located in two different buildings not situated in the same compound and within common boundary. Secondly, the flats being located in two different buildings on different roads, there could not be unity of structure of the two flats. Therefore, in our view, the CIT(A) has wrongly placed reliance on the judgment of the Hon’ble High Court of Allahabad (supra) which is not applicable to the facts of the present case.

9. The ld. AR for the assessee has also argued that in case of one of the brothers viz. Shri Mahesh Vithaldas, the Tribunal in ITA No. 2486/Mum/2002 (supra) for the assessment year 1998-99 has accepted the claim of the assessee that two flats constituted one residential house. We have perused the said order of the Tribunal dated 31.10.2005 and find that the only ground raised in that case was whether the share of the assessee in the capital gain was 25% or 50% as taken in the assessment order. The Tribunal held that share of the assessee was 25%. Though the Tribunal, in the said order, also observed that the two flats constituted one residential house, this could not be considered a precedent for the issue whether two flats constituted one unit because no such ground had been raised before the Tribunal. Further, merely on the ground that, in earlier years, the two flats had been treated as one residential house cannot be the basis to accept the claim of the assessee in this year as there is no res judicata in the income tax proceedings and each assessment year is independent and distinct. In the present year, we are concerned with the claim of exemption u/s 54 of the Act and, for this purpose, it is required to be ascertained whether the assessee had sold one residential flat or two residential flats. A clear finding is required on this aspect. As we have held earlier, the two flats were different and independent residential properties and could not be considered as one residential house. The order of the CIT(A) treating the two flats as one residential property is, therefore, set aside.

10. Having held that the two flats were two different residential houses, it is required to be examined whether the assessee is entitled for exemption u/s 54 of the Act in respect of the sale of more than one residential houses. We see no restriction placed in section 54 that exemption is allowable only in respect of sale of one residential house. Even if the assessee sells more than one residential houses in the same year and the capital gain is invested in a new residential house, the claim of exemption cannot be denied if the other conditions of section 54 are fulfilled. This aspect had been examined by the Mumbai Bench of the Tribunal in Rajesh Keshav Pillai v. Income-tax Officer [2011] 44 SOT 617 (Mum.) in which it has been held that exemption u/s 54 will be available in respect of transfer of any number of long-term capital assets being residential houses if other conditions are fulfilled. The ld. DR appearing for the Revenue has placed reliance on the judgment of the Hon’ble High Court of Punjab and Haryana in the case of Pawan Arya v. CIT (237 CTR 210) (supra) to argue that the claim of exemption is not available in respect of sale of more than one residential house. On careful perusal of the said judgment, we find that no such proposition has been laid down in that case. The Hon’ble High Court in the said case, have only held that the capital gain arising from the transfer of a residential house is not admissible against the investment in second house. Thus, the only restriction is that the capital gain arising from the sale of one residential house must be invested in one residential house and not in two residential houses.

11. Another important aspect which needs to be examined is whether the exemption u/s 54 will be available, in case, capital gain arising from sale of more than one residential house, is invested in one residential house. The ld. counsel appearing for the assessee argued that there was no restriction under section 54 that capital gain arising from two residential houses cannot be invested in one residential house. We find substance in the argument advanced by the Id. counsel for the assessee. No rulings have been brought on record by the ld. DR to show that the capital gain arising from sale of more than one residential houses cannot be invested in one residential house. The provisions of section 54 as pointed out earlier apply to transfer of any number of residential houses by the assessee provided the capital gain arising therefrom is invested in a residential house. The exemption u/s 54 is available if capital gain arising from transfer of a residential house is invested in a new residential house within the prescribed time limit. Thus there is an inbuilt restriction that capital gain arising from the sale of one residential house cannot be invested in more than one residential house. However, there is no restriction that capital gain arising from sale of more than one residential houses cannot be invested in one residential house. In case, capital gain arising from sale of more than one residential houses is invested in one residential house, the condition that capital gain from sale of a residential house should be invested in a new residential house gets fulfilled in each case individually because the capital gain arising from sale of each residential house has been invested in a residential house. Therefore, even if two flats are sold in two different years, and the capital gain of both the flats is invested in one residential house, exemption u/s 54 will be available in case of sale of each flat provided the time limit of construction or purchase of the new residential house is fulfilled in case of each flat sold.

12. In relation to flat in Vishnu Villa, the AO has given a finding that the flat had been used for the purpose of business and, therefore, is not eligible for exemption u/s 54 which allows exemption only in respect of residential house income from which is chargeable under the head “income from house property”. The AO has drawn his conclusion based on the ground that the assessee had not returned any income from Vishnu Vila Flat. The AO had treated the Ramkrishna Sadan flat as self occupied property and, therefore, in his opinion, the income from Vishnu Vila property could be exempt from house property only if the same was used for business as only one flat could be treated as self occupied property. The CIT(A) has not accepted the finding given by the AO and we agree with the view taken by CIT(A). The assessee had shown no income from Vishnu Vila flat because the assessee had treated both the flats as one residential house which had been used as a self acquired property. Therefore, only on the ground that the assessee had not shown any income from the Vishnu Vila property, it cannot be concluded that the flat had been used for the purposes of business when there is no material to support the said conclusion. Even at the time of hearing before the Tribunal, the Ld. DR did not produce any material to show that the Vishnu Vila flat had been used for the purposes of business. Therefore, the flat in Vishnu Vila had to be treated as residential house, the income from which is chargeable to tax under the head “income from house property”. The only requirement of section 54 is that income should be chargeable to tax under the head “house property income” and it is not necessary that income should have been actually charged. Therefore, capital gain arising from the sale of the Vishnu Villa flat would be eligible for exemption u/s 54 subject to fulfilment of other conditions.

13. In view of the foregoing discussion, we direct the AO to allow the capital gain exemption u/s 54 of the Act after verifying that the new residential house had been constructed within prescribed time limit.

14. In the result, the appeal of the Revenue is partly allowed.

NF