Capital Gain Exemption – Absolute Ownership of Property

In the realm of tax laws, the concept of capital gain exemption is a significant one, especially when it comes to long-term capital assets. Section 54F of the Income Tax Act lays down specific provisions that allow taxpayers to claim exemptions under certain conditions when they invest the proceeds from the sale of property in the purchase or construction of a new property within the stipulated time frame. One crucial eligibility condition under Section 54F is related to the ownership of residential houses, which can have a profound impact on the taxpayer’s ability to claim this exemption. This article delves into the importance of absolute ownership of property concerning capital gain exemptions, with a focus on legal cases and key insights from judicial pronouncements.

1. Section 54F of the Income Tax Act provides exemption towards long-term capital gain when the net sale proceeds from the sale of property (other than residential) are invested in the purchase/ construction of a new property within the prescribed time.

1.1 One of the eligibility conditions prescribed under Section 54F is that the taxpayer should not own more than one residential house as of the date of sale of the long-term capital asset. (proviso to Section 54F)

1.2 However, the exemption cannot be denied to the assessee, if he owns a residential house (other than a new house) in joint ownership.

2. The article covers judicial pronouncements confirming the view that joint ownership of a property could not be held to stand in the way of claiming an exemption. There should be absolute ownership of more than one residential house for denial of exemption under proviso to Section 54F of the Act.

3. Madras High Court in the case of Dr. Smt. P.K. Vasanthi Rangarajan v COIT Chennai

3.1 Brief Fact of the Case: Ms. Vasanthi owned a property along with her husband in equal proportion. Both the husband and wife show a 50 percent share concerning the residential house in their respective returns.

3.1 She owned another property (land) owned by her individually. Ms. Vasanthi sold the said land and invested the net consideration in the purchase of another residential property within the prescribed time.

3.2 In the returns filed, Ms. Vasanthi claimed exemption of section 54F. The said claim was sought to be rejected by the Assessing Authority on the ground that persons who own a residential house as on the date of transfer, would not be entitled to the exemption under Section 54F.

3.3 Judicial Pronouncement: It was held by the Hon’ble Madras High Court that joint ownership of a property could not be held to stand in the way of claiming exemption under section 54F. Since the assessee did not own any property in the status of an individual as of the date of transfer, her claim for exemption under Section 54F was to be allowed.

4. Mumbai Tribunal in the case of Ashok G. Chauhan v. ACIT, Mumbai (2019)

4.1 Brief Fact of the Case: Mr. Ashok filed his return claiming deduction under section 54 F in respect of capital gain arising from the transfer of capital assets. At the time of transfer of capital assets, he was the owner of two residential houses out of which one flat at Goa was purchased by him jointly with his wife.

4.2 The Assessing Officer rejected his claim for deduction on the grounds that Mr. Ashok was the owner of two flats on the date of the transfer of capital assets.

4.3 Judicial Pronouncement: It was held by the Mumbai Tribunal that where one residential property was co-jointly owned in the name of assessee and his wife, he could not be treated as ‘absolute owner’ of said property, deduction under section 54F could not be denied to him.

4.3.1 Mumbai Tribunal further stated that, it is an undisputed fact that Mr. Ashok, the assessee was co-owner of the property along with his wife. He cannot be said to be the full owner of the property and thus cannot be denied exemption under section 54 of the Act as claimed by him.

4.3.2 The legislature has used the word ‘a before the words ‘residential house’. It must mean a complete residential house and would not include a shared interest in a residential house. Where the property is owned by more than one person, it cannot be said that any of them is the owner of the property. In such a case, no person on his own can sell the entire property. No doubt, he can sell his share of interest in the property but as far as the property is considered, it would continue to be owned by co-owners. Joint ownership is different from absolute ownership. In the case of the residential unit, none of the co-owners can claim that he is the owner of a residential house. Ownership of a residential house means ownership to the exclusion of all others. Therefore, where a house is jointly owned by two or more persons, none of them can be said to be the owner of that house.

4.3.3 In this way, in the present case, admittedly the flat at Goa was not fully and wholly owned by the assessee as the same was owned co-jointly in the name of the assessee and his wife

4.3.4 Therefore, in such circumstances, the assessee could not be treated as the ‘absolute owner’ of the residential flat situated at Goa and the exemption under section 54F cannot be denied to the assessee.

5. Chennai Tribunal in case of Mrs. V.R. Usha v ITO, Chennai (2016)

5.1 Brief Fact of the Case: Ms. Usha sold land and claimed exemption under section 54F on the sale of land. On that date, she held another residential property, that was conveyed by her mother using a registered settlement deed.

5.1.1 Her mother retained the life interest over the property. On the date of the sale of the land admittedly, the mother, who settled the property, was alive Therefore, the property which was conveyed by her mother by way of a settlement deed cannot convey full ownership. Ms. Usha could enjoy the property only subject to the life interest of her mother.

5.2 The Assessing Officer disallowed the assessee’s claim on the ground that the assessee owned more than one house on the date of the sale of land.

5.3 Judicial Pronouncement: It was held by the Chennai Tribunal that another property was conveyed by means of a settlement deed. It was only a partial interest on the property and such partial interest could not be considered to be full ownership to deny the exemption under section 54F.

6. Mumbai Tribunal in case of Zainul Abedin Ghazala v. COIT (Appeals) 2023

6.1 Brief Fact of the Case: Mr. Zainul along with other five family members had inherited land on which all members constructed six flats which were occupied by each owner and he claimed exemption under section 54F against capital gain on the transfer of his flat.

6.1.1 Mr. Zainul claimed to have filed those electricity bills before the Assessing officer coupled with confirmation letters from the owners of the other flats to the effect that none of them had any right/or interest of whatsoever nature in each other’s flats.

6.2 The Assessing Officer denied exemption on the ground that the assessee owned six residential house properties jointly and, therefore, the conditions mentioned in section 54F were not fulfilled in the instant case and hence the assessee was not eligible for exemption under section 54F.

6.3 Judicial Pronouncement: It was held by the Mumbai Tribunal that since there was no material to show that the assessee was exclusively the owner of the other five flats which were occupied by other family members, he was entitled to exemption.

7. Conclusion: The legal cases discussed above demonstrate that joint ownership of a residential property does not necessarily disqualify a taxpayer from claiming exemptions under Section 54F. What matters is absolute ownership, and taxpayers should carefully consider the nuances of their property ownership when seeking such exemptions. It’s essential to use these legal precedents judiciously, keeping in mind the potential consequences if the Revenue does not accept the claim.

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Disclaimer: Please note that this article is for educational purposes only, and taxpayers should always seek professional advice to ensure compliance with tax laws and regulations.

The author can be approached at caanitabhadra@gmail.com