Recently, in a judgment dated 15th July 2022, in Dilip B. Mundada vs. DCIT, the Income Tax Appellate Tribunal, Pune has held that in order to claim a capital gain exemption under section 54F of the Income Tax Act, 1961, the assessee must have to ‘purchase’ the residential home from the income that is derived from the sale of the asset.

Factual Background of the Case

In the present case, the assessee had sold a property for INR 1,51,00,000 in the assessment year 2013-2014 and had used the money derived from the sale of the property for the purchase of two flats. He purchased the first flat in the name of his wife and the other flat in his own name from the income, he derived from the sale of the property. The assessing officer did not allow the assessee to claim an exemption for the purchase of the first flat. Aggrieved by it, the assessee appealed to Lt Commissioner of Income Tax (Appeal), and the learned CIT (Appeal) in his order rejected the claim of the assessee on the ground that the first flat “was purchased prior to the one year from the sale of the original asset.” Thus, the assessee could not take exemption under section 54F of the Income Tax Act, 1961 as it is mandatory under the provision that the income from the sale of the original asset must be utilized for the purchase of a residential house that was purchased one year before the sale of the original asset or two years after the sale of the original asset. It was against this order of the CIT, the assessee appealed before the ITAT, Pune.

The decision of the ITAT

The Income Tax Appellate Tribunal rejected the appeal of the assessee and declared that the assessee has no right to claim an exemption under section 54F for the purchase of the first flat. The ITAT held that the assessee is not entitled to claim exemption as there was no “purchase” of the first flat by the assessee.

The tribunal concluded that the first flat was purchased by the wife of the assessee from her own income. To buttress its conclusion, the tribunal said that the wife is a director in the assessee’s business and thus, has her own income. Moreover, in order to finance the purchasing of the flat, she had taken loans from financial institutions. Therefore, it is the wife who has purchased the flat not the assessee.

Rejecting, the claim of the assessee that the exemption should be granted as the assessee had provided money to the wife for the purchase of the first flat from the money derived on the sale of the original asset, the tribunal has held that there was no “purchase” of the first flat by the assessee as merely providing money to the wife does not amount to the purchase of the flat.

In order to arrive at this conclusion, the ITAT has interpreted the word “purchase” used in section 54F of the IT Act, 1961 to mean that the purchase under section 54F must be a legal purchase. It means that the assessee must purchase the residential house himself in his own name to avail himself of the benefit provided under section 54F of the act. The act of the assessee to provide money for the purchase of the residential house to his wife cannot be deemed as a purchase under section 54F of the act rather it could be regarded that as the investment that the assessee has made in buying the flat. Thus, the assessee should not get the benefit of exemption under section 54F of the Income Tax Act, 1961.

Analysis and Conclusion

The tribunal has interpreted the term “purchase” in a literal and narrow manner and it does not interpret the term “purchase” in a purposive manner. The interpretation employed by the ITAT is correct as it will prevent the unscrupulous person to take wrongful advantage of the provision, thereby availing wrongful exemption and causing revenue loss to the government.

However, the decision given by the ITAT has indirectly overruled the decision given by the CIT, Pune. This is because the CIT had held in his decision that exemption would not be granted to the assessee as the first flat was purchased seventeen months before the sale of the original asset. This decision reveals that the CIT had agreed that there was a purchase of the first flat by the assessee from the sum derived from the sale of the first flat. The tribunal by declaring that the term “purchase” denotes the actual ownership of a residential house and in the name of the assessee, has indirectly quashed the reasoning employed by the CIT in his decision.

The decision given by the tribunal is the correct position of law and the decision has clearly explained the meaning of “purchase” employed in section 54F of the Income Tax Act, 1961.

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