Exemption u/s 54 of Income Tax Act includes more than one residential house

Smt. Parthiban Kalavathi Vs ACIT (ITAT Chennai)

ITAT Chennai held that capital gain exemption under section 54 of the Income Tax Act includes investment in purchase or construction of one or more than one residential house

Facts- The assessee sold a plot of land to a builder by entering into an agreement of sale dated 11.02.2013 by entrusting by way of GPA to the sale 10832 Sq.ft. of land fully developed on her behalf and in return, the assessee withheld fully developed land of 3973 Sq.ft. The assessee also entered into a construction agreement dated 12.08.2013 with a builder for a total sale consideration of Rs.1,43,97,600/- and the builder, in turn, to give constructed four Flats No.1A, 1B, 2A & 2B at first floor and second floor, respectfully of Block C-1.

According to A.O, the activity is adventure in nature of trade and this venture entered into by the assessee is of a commercial purpose. The A.O assessed this as business profit amounting to Rs. 1,44,31,642/- and made a protective assessment and also treated the income from the sale of the house property as Long Term Capital Gain, but denied the claim of deduction u/s. 54F of the Act for the reason that the assessee has invested the sale consideration in the purchase/construction of four Flats. The CIT(A) confirmed the action of the A.O. Being aggrieved, the present appeal is filed.

Conclusion- According to us, as per records assessee neither had any knowledge or capability about the business or property development nor had any intention to do so as the assessee gave a general power of attorney in favour of the builder accordingly. All the activities were done by builder through GPA dated 10.07.2013, whereby builder was authorized to do all such things as is necessary to enable construction of flats and also to sell the same. The GPA was restricted to the extent of builder’s right at 73.33% of the land and that portion allotted as builder’s share and the balance 26.67% was retained by the assessee. In our view, the entire above transaction is purely sale of plot to the builder and in turn received monetary consideration of Rs.2.85 Crore and balance 4 Flats valued at Rs. 1,44,31,642/-. Hence, according to us, this is a transaction of capital gains and assessee’s transaction is that of Long Term Capital Gain. Hence, we direct the A.O to treat the transaction as LTCG and assess the same accordingly.

We noted that this issue has been considered by the Hon’ble Madras High Court in the case of Tilokchand & Sons Vs. ITO [2019] 413 ITR 189 (Madras), wherein a residential house as occurring in s. 54(1) of the Act can include more than one or plural residential house.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

This appeal by the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-13, Chennai, in ITA No.93/CIT(A)-13/2014-15 dated 20.02.2018. The Assessment was framed by Asst. Commissioner of Income Tax, Non Corporate Circle-11, Chennai for the Assessment Year 2013-14 u/s. 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’) vide order dated 29.12.2016. The assessee raised the following two interconnected issues:

I) The CIT(A) erred in confirming the action of the A.O in making assessment on surplus arising from Joint Development Agreement (JDA) as business profit as against the assessee treating the same under the head “Long Term Capital Gains”.

II) The CIT(A) erred in confirming the action of A.O in rejecting the claim of exemption u/s. 54F of the Act pertaining to multiple units obtained under the JDA in the said computation under the head “Long Term Capital Gains”.

2. For this, the assessee has raised various grounds, but the issue is interconnected and classified into above two issues. Hence, we need not to reproduce the various grounds, which are argumentative and exhaustive.

3. The brief facts of the case are that the assessee sold plot of land i.e., schedule property measuring a total extent of 14805 Sq.ft., bearing Plot No. “C”, S. No.276, situated at Sasthiri Street as per Document (Annai Indira Nagar 1^st Main Road as per Patta), Velachery, Chennai – 600 042 to a builder by entering into an agreement of sale dated 11.02.2013 by entrusting by way of GPA to sale 10832 Sq.ft. of land fully developed on her behalf and in return, the assessee withheld fully developed land of 3973 Sq.ft. The assessee also entered into construction agreement dated 12.08.2013 with builder for a total sale consideration of Rs.1,43,97,600/- and builder in turn to give constructed four Flats No.1A, 1B, 2A & 2B at first floor and second floor, respectfully of Block C-1. The A.O on perusal of these agreements noted that the assessee agreed to sale the concern land of 14805 Sq.ft. by agreement to sale dated 11.02.2013 to Mrs. Sangeethaa Sree. B, W/o Shri S.P. Babuvijay, Managing Director of Indu Housing Development (Chennai) Pvt. Ltd. The A.O on perusal of the GPA was of the view that out of the total 14800 Sq.ft., the assessee has entrusted 10832 Sq. ft. to the builder to sale on her behalf and the share of land withheld by the assessee works out to 3973 Sq.ft. Post this, an agreement for construction was entered into between the assessee and Indu Housing Development (Chennai) Pvt. Ltd. on 12.08.2013. As per the sale agreement and supplementary agreement dated 10.07.2013, the builder agreed to carry out construction work for a total consideration of Rs. 1,43,97,600/- for construction of four flats in the first and second floors at Block C-1 of the above land. The A.O noted that in a nutsheel at para 10 as under:

“10. In a nutshell, the following events unfolded :-

The assessee entered in to a Joint Development Agreement with the builder to construct residential homes on his vacant plot of land, However,, as an afterthought, to make use of section 54F deduction for the purpose of avoiding tax payments, maze of supplementary agreements were entered, including the Construction Agreement. Out of the total 14 Flats built by the builder, 4 Flats were retained by the assesses. It is prudent to mention here that the assesses did not get any other flats or payments from the Builder, except these 4 flats. That shows that 4 flats was the full and final payment to the assesses.”

4. According to A.O, the above activity is adventure in nature of trade and this venture entered into by the assessee is of a commercial purpose. The A.O assessed this as business profit amounting to Rs. 1,44,31,642/-. Alternatively, the A.O made protective assessment also treated the income from sale of house property as Long Term Capital Gain, but denied the claim of deduction u/s. 54F of the Act for the reason that the assessee has invested the sale consideration in purchase/construction of four Flats thereby, he denied the claim of deduction by observing as under:

“(i) Assesses sold a piece of land and received 4 different residential house properties In return. All 4 flats have different addresses namely 1-A, 1-B, 2A, 2B. The facts of the Hon. Madras-High Court Order, in the case of of Smt V.R, Karpagam Vs. CIT Coimbattore (Tax case [Appeal] No.301 of 2014), submitted by the assessee are different in this regard. In the cited case, the house property had a single address though 4 units held by the assessee in. this case are clearly distinct. 4 different electricity bills are paid as its evidenced from the records available, which were called for and submitted by the assessee.

(il) “Section 54F states that assessee can have only one house property on the date of sale other than the House Property bought, However, in this case, assessee had 4 different house properties as she bought 4 flats- together.

Hence, even if the income was assessed as income from House Property, the claims of 54F would not have been allowed. This addition is being made for as protective in nature if the appellate authorities decide to treat the income earned by the assessee as LTCG and not business income”.

5. It means that the A.O on one hand assessed the income earned by the assessee from sale of land and further, conversion into four different flats by collaborated with the builder as business income from business or profession by way of adventure in nature of trade. The A.O also disallowed the claim of deduction u/s. 54F of the Act. Aggrieved, the assessee preferred appeal before CIT(A).

6. The CIT(A) confirmed the action of the A.O by observing as under:

“In view of the above discussion, facts of circumstances of the case, the income earned by the assessee from sale of land and further conversion into four different flats by collaborating with the builder, is treated as income from business by way of adventure in the nature of trade. Accordingly on the issue whether the transaction is in the nature of trade the AO’s action is confirmed and ground of appeal is therefore dismissed.”

7. The CIT(A) also dismissed the claim of deduction by observing as under:

“I have carefully considered the appellant’s above contentions since the appeal authority has upheld the action of the assessing officer that income from the joint development agreement is in nature of adventure and therefore it is a business income and as claim of deduction u/s 54F is not available to the business income. Therefore the AO’s action to disallow the claim of deduction u/s 54F of the Act is hereby confirmed.

Alternatively, the assessee has not complied the eligibility condition under section 54F of the Act. The AO had rightly disallowed the claim of deduction u/s 54F of the Act. The ground of appeal on this issue is therefore dismissed.”

8. Before us, the Ld. counsel for the assessee filed paper book consisting of 93 pages, which include the agreement of sale entered into between the assessee and the developer dated 11.02.2013, general power of attorney executed by the assessee in favour of the Director of the developer company dated 10.07.2013, supplementary agreement entered into between the assessee and the developer company dated 10.07.2013, construction agreement entered into between the assessee and the developer of the company dated 18.08.2013 and finally confirmation given by the developer dated 23.12.2017. Before us, the Ld. counsel for the assessee argued that the assessee has sold entire ancestral property and in return got new flats on monetary consideration. Accordingly, the assessee has declared capital gains on the sale of ancestral property and in lieu whatever flats he has got in consideration, the same were claimed as exempt u/s. 54F of the Act. He stated that the A.O as well as CIT(A) erred in observing consequent to the various clauses in the agreement that there is a joint business effort and therefore, the surplus rising out of the sale of above ancestral land becomes income from business or profession. The Ld. counsel for the assessee stated that the assessee’s income in the above transaction for development is limited to the monetary consideration of Rs. 2.85 Crores and four flats for her residence valued at Rs. 1,44,31,642/-. He drew our attention to the agreement of sale dated 11.02.2013 and filed a quantification of the entire transaction, which reads as under:

9. The Ld. Counsel for the assessee stated that the ancestral land held by the assessee through attorney and now this is sold to the builder, but in turn received monetary consideration of Rs. 2.85 Crores and four flats for her residence valued at Rs. 1,44,31,642/-. Therefore, the Ld. counsel stated that the consideration and income of the assessee was frozen at the time of entering into agreement for sale and even before construction and hence, assessee’s income is only in the nature of capital gains arising out of sale of 26.67% of her ancestral land. He also countered the order of the A.O and that of the CIT(A) that they have unnecessarily relied on the terms of GPA rather, he argued that the terms of GPA as highlighted in the assessment order or standard terms of GPA and are applicable only to 73.33% of the land and super build up area. According to assessee, the ancestral land is assessable only as a capital gain and not as business income for the following reasons:

i. The appellant sold her ancestral land for a new residence

ii. The consideration is fixed at the beginning of the negotiations

iii. The GPA given by the appellant in favour of the builder is a standard format / to enable the builder to construct.

iv. The GPA is restricted to 73.33% of the land for which the appellant’s consideration is pre-fixed.

v. The appellant did not share the risk and rewards of the builder on sale of the UDS as well as Super Built Up area of 73.33% of the property.

10. On the other hand, the Ld. Sr. D.R heavily relied on the assessment order and the order of CIT(A). He stated that the land sold after entering into JDA with the builder and converting her share of land into four residential houses, clearly shows it is adventure in the nature of trade and thereby, the A.O has rightly assessed under the head “income from business or profession”. He stated the organized activity carried out by the assessee through JDA is nothing but adventure in the nature of trade and thereby, the surplus rising out of this transaction of JDA, is assessable as business income and not capital gains as claimed by the assessee.

11. We have heard the rival contentions and gone through the facts and circumstances of the case. We noted that the assessee is holding this ancestral land and sold by her and in return got new flats in 4 Nos. for a consideration of Rs. 1,44,31,642/- and monetary consideration of Rs. 2.85 Crores. We noted that the assessee contracted with the builder for development of the property i.e., construction and sales.

The land was apportioned into as many members of unit for as many residential units with 26.67% retained by the assessee. The builder has allowed 73.33% and sold the flats to other buyers. In term of agreement to sale dated 11.02.2013, the builder agreed to construct four flats with a total build up area of 5120 Sq.ft. and also paid a sum of Rs. 2.85 Crore as monetary consideration in lieu of assessee agreeing to sale 7.33% of land to the nominees of the builder and accordingly, builder cum construction agreement dated 18.08.2013 was entered into. From the above GPA’s supplementary agreement and construction agreement entered into between the assessee and the developer company, it shows only the intent of the assessee and purpose of the assessee in all the above to get the new residential house in lieu of old without any outflow of money. According to us, as per records assessee neither had any knowledge or capability about the business or property development nor had any intention to do so as the assessee gave a general power of attorney in favour of the builder accordingly. All the activities were done by builder through GPA dated 10.07.2013, whereby builder was authorized to do all such things as is necessary to enable construction of flats and also to sell the same. The GPA was restricted to the extent of builder’s right at 73.33% of the land and that portion allotted as builder’s share and the balance 26.67% was retained by the assessee. In our view, the entire above transaction is purely sale of plot to the builder and in turn received monetary consideration of Rs.2.85 Crore and balance 4 Flats valued at Rs. 1,44,31,642/-. Hence, according to us, this is a transaction of capital gains and assessee’s transaction is that of Long Term Capital Gain. Hence, we direct the A.O to treat the transaction as LTCG and assess the same accordingly.

12. Coming to the next interconnected issue whether the assessee is entitled to claim of deduction u/s. 54 or 54F of the Act as the case may be, because the assessee has been allotted 4 residential Flats against the sale of her ancestral land or in lieu of development of her ancestral land. We noted that this issue has been considered by the Hon’ble Madras High Court in the case of Tilokchand & Sons Vs. ITO [2019] 413 ITR 189 (Madras), wherein a residential house as occurring in s. 54(1) of the Act can include more than one or plural residential house. The Hon’ble High court has considered even the amendment which is effective from 01.04.2015 and applicable far and from assessment year 2015-16 and the relevant assessment year before us 2014-15. Hence, the amendment will not apply in this case. The Hon’ble Madras High Court has finally considered this issue in para 20 & 21 as under:

“20. We have discussed about the two decisions from the Karnataka High Court, which, in our opinion, dealt with similar controversy as is raised before us herein. The only difference which we find is that the purchase of the residential houses in the present case is at different address in the same city of Madurai. In D. Ananda Basappa case stated (supra), two flats in question were admitedly adjacent to each other and which were joined to become one residential house. In the case of Khoobchand M.Makhija (supra), two door nos are given viz., 623 and 729, but the complete addresses and even the name of the city is not clear in the facts narrated in the said Judgment. But in our considered opinion, the difference of location of the newly purchased residential house(s) will not alter the position for interpretation of the word ‘a residential house’ to the effect that it may include more than one or plural residential houses, as held by Karnataka High Court, with which we respectfully agree. The location of the newly purchased houses by the same assessee viz., HUF out of sale consideration received on the sale of original capital Asset or a residential house in the given circumstances of availability of such residential houses as per the requirement of the HUF will not alter the position of interpretation.

21. In our understanding, if the word ‘a’ as employed under Section 54 prior to its amendment and substitution by the words ‘one’ with effect from 01.04.2015 could not include plural units of residential houses, there was no need to amend the said provisions by Finance Act No.2 of 2014 with effect from 01.04.2015 which the Legislature specifically made it clear to operate only prospectively from A.Y.2015-2016. Once we can hold that the word ‘a’ employed can include plural residential houses also in Section 54 prior to its amendment such interpretations will not change merely because the purchase of new assets in the form of residential houses is at different addresses which would depend upon the facts and circumstances of each case. So long as the same Assessee (HUF) purchased one or more residential houses out of the sale consideration for which the capital gain tax liability is in question in its own name, the same Assessee should be held entitled to the benefit of deduction under Section 54 of the Act, subject to the purchase or construction being within the stipulated time limit in respect of the plural number of residential houses also. The said provision also envisages an investment in the prescribed securities which to some extent the present Assessee also made and even that was held entitled to deduction from Capital Gains tax liability by the authorities below. If that be so, the Assessee-HUF in the present case, in our opinion, complied with the conditions of Section 54 of the Act in its true letter and spirit and, therefore was entitled to the deduction under Section 54 of the Act for the entire investment in the properties and securities. Therefore, in our opinion, Judgment rendered by the Karnataka High Court in D. Ananda Basappa (supra) & Khoobchand M.Makhija (supra) cited at bar by the learned counsel for the Assessee apply on all fours to the facts of the present case.”

13. Respectfully following the decision of Hon’ble Madras High Court in the case of Tilokchand & Sons v. ITO, supra, we direct the A.O to allow the claim of deduction u/s. 54 of the Act as considered by the Hon’ble Madras High Court and allow the claim of the assessee.

14. In the result, the appeal of the assessee is allowed.

Order pronounced on 21^st September, 2022.