In this article, author attempts to highlight judgments of tax courts with regard to investment made in multiple houses for claiming exemption under section 54 and section 54F. The views expressed in this article are personal. For any queries, author can be reached at firstname.lastname@example.org
Section 54 of the Income Tax Act, 1961 (‘the Act’) provides that in case of an assessee, being an individual or HUF, where capital gains arises from transfer of a long term capital asset, being building or land appurtenant thereto, being a residential house, the income of which is chargeable under the head income from house property and if the assessee, within a period of one year before or two years after the date on which transfer took place, purchases or has within a period of 3 years after that date, constructed one residential house in India, then capital gain will not be charged to tax.
Section 54F of the Act provides that in case where the assessee has transferred any long-term capital asset not being a residential house and within a period of one year before or two year after the date on which transfer took place, purchased or within period of 3 years after the date, constructed one residential house in India, then no capital gain will be chargeable to tax.
However the benefit of section 54F is available if the following conditions are satisfied:
However, nothing contained in this sub-section (1) of section 54F shall apply where—
(a) the assessee,—
(i) owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or
(ii) purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or
(iii) constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and
(b) the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head “Income from house property”.
Controversy always cropped between taxpayer and income tax department whenever taxpayer claim exemption under section 54 and 54F for investment made in multiple houses. Question that now arise whether the prefix ‘a’ used before the word residential house is interpreted in singular or plural sense.
Some of the judgments delivered by tax courts in context of this issue are as follows:
In Gita Duggal case 257 CTR 208 (Del) (2013), High Court held that “the expression “a” residential house should be understood in a sense that building should be of residential in nature and “a” should not be understood to indicate a singular number. Also, section 54/54F uses the expression “a residential house” and not “a residential unit”. Section 54/54F requires the assessee to acquire a “residential house” and so long as the assessee acquires a building, which may be constructed, for the sake of convenience, in such a manner as to consist of several units which can, if the need arises, be conveniently and independently used as an independent residence, the requirement of the Section should be taken to have been satisfied. There is nothing in these sections which require the residential house to be constructed in a particular manner. The only requirement is that it should be for the residential use and not for commercial use. If there is nothing in the section which requires that the residential house should be built in a particular manner, it seems that the income tax authorities cannot insist upon that requirement. A person may construct a house according to his plans, requirements and compulsions. A person may construct a residential house in such a manner that he may use the ground floor for his own residence and let out the first floor having an independent entry so that his income is augmented. It is quite common to find such arrangements, particularly post-retirement. One may build a house consisting of four bedrooms (all in the same or different floors) in such a manner that an independent residential unit consisting of two or three bedrooms may be carved out with an independent entrance so that it can be let out. He may even arrange for his children and family to stay there, so that they are nearby, an arrangement which can be mutually supportive. He may construct his residence in such a manner that in case of a future need he may be able to dispose of a part thereof as an independent house. There may be several such considerations for a person while constructing a residential house. The physical structuring of the new residential house, whether it is lateral or vertical, cannot come in the way of considering the building as a residential house. The fact that the residential house consists of several independent units cannot be permitted to act as an impediment to the allowance of the deduction under section 54/54F. It is neither expressly nor by necessary implication prohibited.”
In the case of CIT v. Syed Ali Adil (AP)(HC) (2013) 260 CTR 219, High Court, held that the expression “a residential house” in section. 54 (1) has to be understood in the sense that the building should be of residential nature and “a” should not be understood to indicate a singular number. Where an assessee had purchased two residential flats, he is entitled to exemption under section 54 in respect of capital gains on sale of its property on purchase of both the flats, despite the fact that the flats were purchased by separate sale deeds. Deduction is allowable even if the flats are on different floors. On facts, as the two flats purchased by the assessee are adjacent to one another and have a common meeting point, the deduction cannot be denied.
In CIT vs. D. Ananda Basappa 309 ITR 329 (Kar.), multiple flats in the same complex were used as one unit and the exemption under section 54 was allowed. The special leave petition filed by the department against this decision was also rejected by the Supreme Court [320 ITR (St.) 19].
In CIT vs. K.G. Rukminiamma 331 ITR 211 (Kar.), there were four residential units, but all of them were in the same building acquired in pursuance of a development agreement. It was held that exemption was allowable.
In the case of CIT v. Raman Kumar Suri (2013) 81 DTR 33, High Court held that two flats were joined before assessee became owner of said property and certificate from society also established fact that these two flats were considered as one residential house property , therefore, exemption was fully allowable.
In the case of V.R. Karpaam (Smt.) v. ITO (2013) 143 ITD 126 (Chennai)(Trib.), Tribunal held that ‘a residential house’ in the context could not be construed as a singular. Meaning given in section 54 would apply to section 54F also. New asset defined in section 54F as ‘a residential house’ has to be understood in plural. It is not necessary that all residential units should be single door number allotted. Following the ratio in CIT v.K.G.Rukminiamma (2011) 331 ITR 211 (Karn.)(HC), the claim of assessee was allowed.
In ACIT v. Deepak S. Bheda (2012) 52 SOT 327 (Mum.)(Trib.), Tribunal held that if requirement of assessee family was met out only by enlarging residential unit by merging 4 flats and that too prior to handing over of the possession of said residential unit, then said converted residential unit would be treated as a residential house as stipulated under section 54F and thus, claim of the assessee was allowed.
In ITO v. Ms. Shushila M. Jhaveri (2007) 107 ITD 327 (Mum.-Trib.) (SB), exemption under section 54 of the Act was held to be allowable only in case of purchase of single house. It was held that the word “any” used by the Legislature in section 54B, 54D, 54E, 54EA and 54EB of the Act while the word “a” used only in section 54 and 54F of the Act. This clearly showed that the Legislature intended different meaning to these two words. Thus, exemption under section 54 or section 54F of the Act would be available in respect of one house only. But where two houses joint together constitutes a single unit for residence, then exemption under section 54 would be available to such joint residential house. On the other hand, where two units were distantly located, then it could not be constituted to be “a residential house” and therefore, exemption under section 54 of the Act will be available only to one residential house at the option of the assesse.
In ACIT v. Leela P. Nanda (2006) 286 ITR (AT) 113 (Mum.), it was held that where an assessee purchased two adjoining flats converting into a single residence, exemption under section 54 of the Act shall be allowed.
In CIT v. Smt. Sunita Aggarwal (2006) 284 ITR 20 (Delhi), the fact was that the assessee had acquired four portions of property by four different sale deeds, but they all constituted one residential house, where she was residing with her husband and children. It was held that the benefit under section 54 of the Act would be available in respect of all the four portions.
In K.C. Kaushik v P.B. Rane, ITO (1990) 185 ITR 499 (Bom.), it was held that where the assesse purchases more than one house, then he can claim relief in respect of only one house provided he satisfies the conditions of section 54 of the Act.
In Vyas (K.G.) v. 7th ITO (1986) 16 ITD 195 (Bom.), it was held that where the assesse had purchased four flats in the same building though on different floors and since all the flats were required because of large size of the family, which maintained a common kitchen and a common ration card.
The aforesaid judgments should be borne in mind while claiming exemption under section 54 or section 54F of the Act and can be usefully relied upon after careful consideration of facts of the case and appropriate circumstances.
Over a decade, the above issue is controversial and a matter of litigation. It is high time now that Government should insert necessary provisions in the Act by way of clarification in order to settle the said controversy.
However in nutshell, present scenario for claiming exemptions under section 54/54F in respect of said issue may be concluded below:
A residential house is not defined anywhere and the same may comprise several residential units. Even if the assesse makes investment in purchase of different residential units which are located on different floors but are used as residential house, it cannot be considered as more than one residential house and where two adjacent flats are purchased and used by the assesse as a single residential house, both flats would be considered for claiming exemption notwithstanding the fact that they are converted into one residential unit or not. The Hon’ble Delhi High Court judgment in case of Gita Duggal (Supra) that there is no specific requirement in the law that house should be constructed in a particular manner and thus, if several units were used by assesse as single house, requirements laid down in section 54F will be satisfied.
Thus, judgment of Delhi High Court in Gita Duggal case is more comprehensive and considers the practical view also.
We have Further list out few of the recent rulings related to section 54 and 54F below:
Smt. M.K. Vithya Vs ITO(ITAT Chennai)
Where investment in a new residential house was made within three years from date of transfer of assets, exemption Under section 54F could not be denied on the ground that unutilized amount was not deposited in Capital Gains Account Scheme before due date prescribed under section 139(1).
ACIT Vs Shri. Sunil Bandacharya Joshi (ITAT Bengaluru)
In terms of Section 54F the assessee is only entitled to proportionate exemption vis-a-vis, cost of the original asset and the cost of the new assets. In the light of the above, the AO is directed to recomputed the capital gains exemption.
Satyavati Arvind Kotian Vs ITO (ITAT Mumbai)
This is an appeal filed by the assessee against the order of Commissioner (Appeals)- 46, Mumbai dated 20-1-2017 for assessment year 2011-12 in the matter of order passed under section 143(3) of the Income Tax Act wherein following grounds have been taken by the assessee
M/s. Chawala Sweets Vs ACIT (ITAT Jaipur)
Merely because the new house is constructed on a plot of land owned by the mother of the assessee will not disentitle the assesee for claim of deduction u/s 54F of the Income Tax Act
Tarun Jalali Vs Dy. DIT (ITAT Delhi)
sub-section 4 of section 54F prescribes appropriation of sale consideration of original asset towards provision of new asset made within one year before the date of transfer of original asset, two years from the date of transfer or construction of new in-house property, within three years from the date of transfer of original receipt but the Act does not prescribe any condition as to the date of commencement of construction of house property which may be commenced even before the date of transfer of original receipt. Similarly, the (Kar.) had expressed similar view and had held that investment made towards construction of house property prior to the date of transfer should also be eligible as deduction for the purpose of section 54 of the Act. Accordingly, respectfully following the ratio laid down by the Hon’ble Delhi High Court and the Hon’ble Karnataka High Court as aforementioned, we are of the view that provisions of section 54F do not prescribe any condition as to the date of commencement of construction of new house property, meaning thereby that the construction of house property may be commenced even before the date of transfer of original asset. However, it should be completed within three years after the date of transfer of original asset. On the facts of this case, we find that the construction of house property had been completed within three years from the date of transfer and accordingly, we are of the view that the assessee is eligible for exemption u/s 54F in respect of the two disputed amounts viz. Rs. 12 lakh paid on 20.06.2008 and Rs. 14,91,697 paid on 22.08.2008 which were expended prior to the date of transfer of original asset.
S.H.R. Trading (P) Ltd. Vs Dy. CIT (Bombay High Court)
Assessee-company engaged in business of letting out of immovable property, had claimed benefit of section 54. AO found that assessee, being a company was not entitled to claim deduction under section 54; thus, he initiated penalty proceedings under section 271(1)(c) for furnishing of inaccurate particulars of income. However, assessee contended that penalty was not imposable, only on account of having made an ineligible claim.
Asstt. CIT Vs M. Raghuraman (ITAT Chennai)
This appeal of the revenue is directed against the order of the Commissioner (Appeals)-9, Chennai, dated 30-5-2017 and pertains to assessment year 2013-14.
Shri Mahesh H. Hinduja Vs. ITO( ITAT Mumbai)
There is no bar / restriction in the provisions of section 139(5) of the Act that the assessee cannot file a revised return of income after issuance of notice under section 143(2) of the Act. It is trite law, the assessee can file a revised return of income even in course of the assessment proceedings, provided, the time limit prescribed .
A.C.I.T. Vs Smt. Reshmi P. Loyalka (ITAT Kolkata)
Whether the reinvestment made by the assessee in 3 residential houses having common amenities, kitchen, common entrance, common house name, common electrical, common storage, common water, common garden, common boundary wall, common guard room, etc would give eligibility to claim exemption u/s 54 of the Act by construing all the three units as a single residential house ?
ACIT Vs Vineet Kumar Kapila (ITAT Delhi).
The brief facts of the case are that the assessee case was selected for scrutiny through CASS and notice u/s 143(2) of the Income Tax Act, 1961 (hereinafter referred as the Act) was issued and served upon the assessee requiring him to furnish necessary details and documents along with supporting evidence.
(Republished With Amendments)