Case Law Details
Humayun S.Rangila Vs ITO (ITAT Mumbai)
The assessee appealed against the order of the Commissioner of Income Tax (Appeals) for Assessment Year 2006-07, challenging the disallowance of exemption claimed under Section 54 of the Income-tax Act, 1961. The dispute concerned whether exemption under Section 54 could be claimed where capital gains arose from the sale of more than one residential house and were invested in residential flats acquired by the assessee.
During the relevant year, the assessee sold three residential flats situated at Oshiwara and Bandra, Mumbai. The long-term capital gains arising from the three sales amounted to ₹8,92,781, ₹36,08,400 and ₹4,70,194 respectively, aggregating to ₹49,71,375. The assessee invested the capital gains in purchasing three residential flats in the same building known as Silver Arc, Andheri (West), Mumbai. Two of the purchased flats, Nos. 1101 and 1201, were adjacent and had been converted into a single residential unit. The Assessing Officer accepted this factual position and treated the two flats as one residential house. The assessee contended that exemption under Section 54 was available in respect of each residential flat sold because the total investment in the new residential flats exceeded the aggregate capital gains.
The Assessing Officer, however, interpreted Section 54 to apply only to the transfer of one long-term capital asset, observing that the provision referred to “a long-term capital asset” and not “any long-term capital asset.” Relying on the Special Bench decision in ITO v. Miss Sushila M. Jhaveri, the Assessing Officer held that exemption under Section 54 was available only in respect of the capital gain arising from the sale of one residential house and corresponding investment in one residential house. Since the highest capital gain of ₹36,08,400 arose from the sale of Flat No. 302, Saqib Apartment, exemption was allowed only against the investment in Flats Nos. 1101 and 1201 treated as one residential unit. The remaining capital gains of ₹13,62,975 arising from the other two flats were denied exemption and added to the total income. The Commissioner (Appeals) upheld this view.
Before the Tribunal, the assessee argued that Section 54 applies to the transfer of any long-term residential house and does not restrict the exemption to only one residential house sold. The assessee relied upon CBDT Circular F. No. 207/24/76-IT(ii) dated 25 March 1977, which clarified that where an assessee transfers more than one residential house used for self-residence or parents’ residence, the capital gain arising from the transfer of each such house would qualify for exemption under Section 54 if the prescribed conditions are fulfilled. The assessee further submitted that the Special Bench decision in Miss Sushila M. Jhaveri dealt only with the proposition that capital gains arising from the transfer of one residential house could not be invested in more than one residential house for claiming exemption. It did not prohibit investment of capital gains arising from multiple residential houses into a single residential house. Reliance was also placed on the Tribunal’s decision in Ravindra K. Mariwala v. JCIT, where exemptions under Sections 54 and 54F were allowed in respect of investment in the same residential house.
The Revenue supported the orders of the lower authorities.
After examining the provisions of Section 54, the Tribunal observed that there was no dispute regarding the ownership and residential use of the three houses or regarding the investments made by the assessee. It held that Section 54 exempts capital gains arising from the transfer of a long-term capital asset being a residential house, and therefore applies to the sale of any residential house, provided the statutory conditions are satisfied. The Tribunal noted that this interpretation was also supported by the CBDT Circular, which specifically clarified that capital gains arising from the transfer of each residential house qualify for exemption where the prescribed conditions are met.
The Tribunal further held that Section 54 requires investment of the capital gains in one residential house, but does not prohibit capital gains arising from the sale of more than one residential house from being invested in the same residential house. Consequently, where gains from multiple residential houses are invested in a single residential house, exemption under Section 54 is available, subject to satisfaction of the other statutory conditions. The Tribunal also found support for this interpretation in the earlier decision permitting exemptions under Sections 54 and 54F in respect of investment in the same residential house.
Accordingly, the Tribunal set aside the order of the Commissioner (Appeals), allowed the assessee’s appeal, and held that the capital gains arising from the sale of the other two residential houses were also eligible for exemption under Section 54 against the investment made in the residential flat.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal by the assessee is directed against the order dated 30.11.2009 of CIT(A) for the assessment year 2006-07. The only dispute raised by the assessee is regarding disallowance of claim under section 54 of the income-tax Act 1961.
2. Briefly stated the facts of the case are that the assessee during the year had sold three residential flats as per details given below :
1. Flat No. 25/501, MHADA, Oshiwara, Andheri, Mumbai
2. Flat No.302, Saqib Apartment, 24, Turner Road, Bandra (W), Mumbai
3. Flat No.303, Blue Bird, Sherly Rajan Road, Bandra (W), Mumbai
2.1 The capital gain arising from the sale of above three flats after considering the indexed cost of acquisition were Rs.8,92,781/-, Rs.36,08,400/-and Rs.4,70,194/- respectively. The total capital gain was Rs.49,71,375/-. The assessee invested the capital gain in purchase of three residential flats in the same building known as Silver Arc, Andheri (W), Mumbai being the flat Nos.1003, 1101 and 1201. The assessee claimed that flats No.1101 and 1201 were adjacent to each other and had been converted into one house for the purpose of residence. AO accepted the claim and treated the flat No.1101 and 1201 as one flat. The assessee took the view that exemption under section 54 in respect of capital gain was available to any flat sold and the corresponding investment in a residential flat. Therefore as per the assessee the capital gain arising in respect of all the three flats was exempt as the assessee had invested money in the three residential flats which was more than the capital gain earned. Relevant provisions of section 54 are reproduced below as a ready reference.
“[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, that is to say, –
3. AO however observed that the phrase used in section 54 was “a long term capital asset” and not “any long term capital asset” and therefore the provisions of section 54 were applicable only in respect of sale of one residential flat. The AO also held that corresponding investment has also to be only in one flat and not more than one flat. Reliance was placed on the decision of the Special Bench of the tribunal in case of ITO Vs Miss Sushila M. Jhaveri (292 ITR (AT) 1) in which it was held that capital gain arising from sale of residential flat had to be invested only in one residential house for exemption under section 54. AO therefore allowed exemption only in respect of sale of one flat and the corresponding investment in one flat. Since the maximum capital gain had arisen from sale of flat No.302 amounting to Rs.36,08,400/- the AO allowed exemption in respect of flat No.302 and the corresponding investments in the flat No.1101 and 1201 which were treated by him as one residential unit. The total investment in the flats No.1101 and 1201 was Rs.42,12,500/- which was more than the capital gain earned in respect of flat No.302. AO therefore exempted the entire capital gain of Rs.36,08,400/-. The capital gain arising from Flat No.302 Blue Bird (Rs.4,70,194) and from the flat at MHADA (8,92,781) aggregating Rs.13,62,975/-was not considered by the AO for exemption and thus added to the total income. In appeal CIT(A) upheld the view taken by the AO and confirmed the addition made aggrieved by which the assessee is in appeal before the tribunal.
4. Before us the Learned AR for the assessee argued that under the provisions of section 54 capital gain exemption was available in respect of gain arising from transfer of a long term asset and therefore the provision will apply to transfer of any long term capital asset being a residential house. There was no restriction in the section that it will apply only to transfer of one residential house. He also referred to the circular F.No.207/24/76-IT(ii) dated 25.3.97 of CBDT in which it was clarified that if the assessee had retained more than one house for the purpose of his own or parents’ own residence and not for any other purpose the capital gain arising on transfer of each such house would qualify for exemption under section 54 of the Income-tax Act if other conditions were fulfilled. As regards the decision of special bench of tribunal in case of ITO vs Miss Sushila M. Jhaveri (supra), was concerned, it was pointed out that the same was relevant for the proposition that capital gain arising from transfer of one residential house could not be invested in more than one residential house because the phrase used in section 54 was “purchased or constructed a residential house”. However, there was no bar for investment of capital gain arising from transfer of two residential houses into one residential house. He placed reliance on the decision of the tribunal in case of Ravindra K. Mariwala Vs JCIT (86 ITR 35) in support of the said proposition. In the said case the assessee had earned long term capital gain in A.Y.1997-98 and had purchased a new house within a period of one year in the assessment year 1996-97. The investment in purchase of house was more than the capital gain earned. The entire capital gain was therefore exempt under section 54. The assessee had also long term capital gain from sale of a long term asset not being a residential house. Therefore under the provisions of section 54F the capital gain was exempt if the gain was invested in purchase of a residential house within a period of one year before or two years after the date in which the transfer took place or in consideration of a residential house within a period of three years after that date. Since in this case the assessee had already purchased a residential house in assessment year 1996-97 within a period of one year it was held that the assessee was entitled to exemption under section 54F in respect of the balance investment in residential house which was not exhausted by section 54. Following the same analogy the Learned AR argued that exemption under section 54 can be allowed if capital gain arising from more than two residential houses is invested in one residential house.
5. The Learned DR on the other hand supported the orders of authorities below and placed reliance on the findings given in their orders.
6. We have perused the records and considered the rival contentions carefully. The dispute is regarding exemption of capital gain under section 54 arising from sale of more than one residential house. There is no dispute that the assessee owned three residential houses and all of them had been used for residential purposes. The sale consideration had been invested by the assessee in purchase of three residential flats two of which i.e flat No.1101 and 1201 had been treated as one residential unit which had also been accepted by the AO involving total cost of Rs. 42,12,500/-. The investment in third residential flat was Rs.14,96,744/-. The AO had treated the long term capital gain of Rs.36,08,400/- arising from sale of one flat i.e. the flat No.302 Saqib Apartment as fully exempt as corresponding investment in flat No.1101 and 1201 treated as one unit was more than the capital gain i.e. Rs.42,12,500/-. The issue is whether the capital gain of Rs.4,70,194/- and Rs.8,92,781/-arising from sale of other two residential houses could be exempted against the investment in one flat of Rs.14,96,744/-.
6.1 The first issue is whether the provisions of section 54 can be applied to capital gain arising from sale of more than one residential house. In our view the section 54 exempts capital gain arising from sale of a long term capital asset being a residential house and therefore it will apply to sale of any residential house provided other conditions are fulfilled. This position has also been clarified by CBDT vide circular F.No.207/24/76 IT(ii) dated 25.3.97 in which it has been clearly mentioned that capital gain arising on transfer of each house will qualify for exemption in case the assessee had sold more than one residential houses. The other issue is whether capital gain arising from sale of two flats can be exempted under section 54 if the gains are invested in one residential house. In our view this issue is also to be answered in favour of the assessee because the requirement of section 54 is that the capital gain arising from transfer of a residential house should be invested in a residential house. The requirement is that the investment should be in one residential house. There is no bar on investing the capital gain arising from sale of more one residential house in one residential house. Therefore in our view, the capital gains arising from sale of more than one residential house will be eligible for exemption under section 54 if gains from both the houses are invested in the same residential house. This view is also supported by the decision of tribunal in case of Rabindra K.Merchant Vs JCIT (supra) in which case exemption under section 54 and 54F both were found allowable in respect of investment in the same residential house. We therefore set aside the order of CIT(A) and allow the appeal of the assessee.
7. In the result appeal of the assessee is allowed.
The decision was pronounced in the open court on 23.02.2011.
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