Purchased Flat in Minor Daughter’s Name, Deduction U/S 54F Allowed by ITAT

N. Ram Kumar Vs ACIT (ITAT Hyderabad)

Purchased Flat in Minor Daughter’s Name, Deduction U/S 54F Allowed by ITAT: N. Ram Kumar Vs ACIT (ITAT Hyderabad)

Introduction: The Income Tax Appellate Tribunal (ITAT) Hyderabad recently delivered a significant judgment in the case of N. Ram Kumar vs. ACIT concerning the eligibility of an assessee for exemption under Section 54F of the Income Tax Act, 1961. The central issue revolved around the assessee’s claim for deduction under Section 54F for investing the sale proceeds of shares in a residential flat purchased in the name of his minor daughter. The ITAT’s decision offers clarity on the interpretation of Section 54F and the eligibility criteria for claiming exemptions.

Factual Background: During the relevant assessment year 2008-09, N. Ram Kumar sold 1,10,000 shares for a total consideration of Rs. 96,36,519. Out of the sale proceeds, he invested Rs. 55,68,662 in purchasing a residential flat, which was registered in the name of his minor daughter. The assessee claimed the amount invested in the flat as a deduction under Section 54F of the Income Tax Act.

However, the Assessing Officer (AO) disallowed the deduction, arguing that the flat was not purchased in the name of the assessee himself. The AO relied on various High Court decisions and an ITAT decision to support the disallowance of the deduction under Section 54F. Aggrieved by the assessment order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)].

The CIT(A) upheld the AO’s decision, stating that since the property was registered in the name of the assessee’s minor daughter and not in the name of the assessee himself, the deduction under Section 54F could not be allowed.

Arguments Before ITAT: The learned Authorized Representative (AR) for the assessee contended that the investment in the property was made by the assessee himself, even though it was registered in the name of his minor daughter. The AR argued that the term “purchase” is not defined in the Income Tax Act and should be interpreted in common parlance. Emphasizing a liberal and wider interpretation, the AR cited case law to support the contention that registration in the name of a minor should not be a bar to claiming the exemption.

On the other hand, the Departmental Representative (DR) argued that the minor daughter has a separate legal identity, and her income is clubbed with her father’s income only for tax purposes. The DR contended that the issues involved in the cited cases were factually distinguishable and focused on Section 54 rather than Section 54F.

ITAT’s Decision: The ITAT carefully analyzed Section 54F(1) of the Income Tax Act, which requires the assessee to have purchased a residential house within a specified period. The ITAT observed that there is no explicit requirement for the house to be purchased in the name of the assessee only. The crucial factor, as per the ITAT, is that the assessee must have purchased the house.

The ITAT further noted that the minor daughter had no ostensible source to make the investment in the flat; it was the assessee who had made the actual investment using the sale proceeds of the shares. Citing decisions by the Andhra Pradesh High Court and the Delhi High Court, the ITAT held that the word “assessee” in Section 54F must be given a wide and liberal interpretation, which includes legal heirs.

The ITAT emphasized the legislative intent behind Section 54F, which aims to encourage house construction and investment in house property. Quoting the Supreme Court, the ITAT stated that a statutory provision should be construed to avoid absurd and unjust results. In cases with divergent views, a beneficial interpretation favoring the assessee should be adopted.

Conclusion: In conclusion, the ITAT allowed the appeal filed by the assessee, holding that the assessee was entitled to deduction under Section 54F for the flat purchased in the name of his minor daughter. The decision provides clarity on the interpretation of Section 54F, emphasizing the substance of the transaction over the technicality of registration in the name of the assessee. It also underscores the need for a liberal interpretation of beneficial provisions to achieve the legislative intent.

FULL TEXT OF THE ORDER OF ITAT HYDERABAD

This appeal filed by the assessee is directed against order dated30-9-2011 of CIT (A)-IV, Hyderabad passed in Appeal No. 253/ACIT 6(1)/CIT(A)-IV/10-11 and it pertains to the assessment year 2008-09.

2. The sole issue arising in the present appeal of the assessee is the claim of exemption u/s 54F made by the assessee.

3. Briefly the facts are during the relevant previous year, the assessee has sold 1,10,000 shares for a consideration of Rs.96,36,519. Out of sale consideration of shares, the assessee invested a sum of Rs.55,68,662/- for purchasing a flat in the name of his minor daughter. The assessee claimed the amount invested in purchase of flat as a deduction u/s 54F (1) of the Act. The AO disallowed the deduction claimed on the ground that the flat was not purchased by the assessee in his own name. The AO relying upon different High Courts’ decisions and also a decision of ITAT, Nagpur Bench in case of ITO vs. Prakash Timaji Dhanjode 258 ITR (AT) 0114 held that the assessee is not entitled for deduction u/s 54F(i). Assessee being aggrieved by the assessment order filed an appeal before the CIT (A). Since the AR of the assessee or no one appeared before the CIT (A) on the last date fixed on 28-11-2011 the appeal was decided by the CIT (A) on the basis of statement of facts and grounds of appeal filed before him. The CIT (A) upheld the reasoning of the AO that since the property was purchased in the name of the assessee’s daughter and not in the name of the assessee himself, no deduction u/s 54F can be allowed.

4. The learned AR for the assessee submitted before us that the property was purchased in the name of minor daughter who is considered to be very auspicious for the assessee. However, the entire investment in the purchase of property was made by the assessee himself. It was submitted that the income of the minor daughter is also assessed at the hands of the assessee only. The learned AR submitted that the term /meaning of the word “purchase” has not been defined in the IT Act. Therefore, the meaning is to be construed/understood in common parlance as accepted in the daily transactions of the business world. Further, the meaning of the word purchase in section 54F of the Act has to be given the meaning as understood by a layman and that a liberal and wider  interpretation must be given as against literal interpretation. It was argued that in a case no registration is made on account   of certain technical problems and the whole consideration  is paid and possession is also obtained, in such situations also the claim of exemption is held as valid. The learned AR submitted that when there is no dispute raised by the department to the fact that the investment was made by the assessee in purchasing the flat only because the registration was made in the name of minor daughter, the assessee cannot be deprived of the exemption u/s 54 of the Act. In support of his contentions, the assessee relied upon the following case law.

i) CIT vs. V. Natarajan (2006) (287 ITR 271 (Madras)

ii) CIT Vs. Gurnam Singh (2010) (327 ITR 278

iii) CIT vs. Ravinder Kumar Atrora (2011) 42 (I) ITCL 0498

The   learned AR relying upon a judgment of Jurisdictional High Court in the case of late Mir Gulam Ali Khan (165 ITR 228) submitted that the word ‘assessee’ also includes the legal heir.

5. The learned DR, on the other hand, contended that minor daughter has a separate legal identity from her father and her income is clubbed for the income tax purposes with the income of her father. This does not abolishes her legal identity as an individual and it is to the limited purpose of calculating tax under the Income-tax Act, her income is clubbed to the father’s income. Therefore, the assessee and his minor daughter cannot be held to be the same. Distinguishing the case laws cited by the learned AR,   the learned DR submitted that the issues involved in  the cases are factually distinguishable since they are relating to section 54 of the Act and not relating to section 54F. The learned DR submitted that section 54F is more legal in approach since u/s 54F, the ownership rights in the name of the assessee is required to enable him to get the benefits of section 54F of the Act. In support of her contention, the learned DR relied upon following case law.

i) Jainarayan Vs. ITO (306 ITR 335 ) (P & H)

ii) Prakash Vs. ITO (Mumb)220 CTR 249

iii) ITO vs. Prakash Timaji Dhanjode (ITAT Nagpur) 81 TTJ 694

iv) Ram Kishan vs. ITO 2007 TIOL 178 ITAT Delhi

6. We have heard rival submissions and perused the materials on record and also gone through the decisions relied upon by both the parties. Undisputedly, the assessee has made investments in purchasing the flat out of the consideration receive d from sale of shares. The AO has disallowed exemption claimed u/s 54F solely on the ground that the flat has been registered in the name of his minor daughter. The AO on interpreting section 54F came to hold that for claiming exemption u/s 54F, the house has to be purchased in the name of the assessee only. At this stage, it is necessary to look into the provisions of section 54F(1) of the Act which are quoted hereunder.

”………The assessee has within a period of one year before or 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………”

A bare reading of section 54F (1) makes it clear that there is no requirement that the house has to be purchased in the name of the assessee only. The only requirement of the provision is the assessee must have purchased the house. In the present appeal, the fact remains that the minor daughter has no ostensible source to make such investment in purchase of flat. It is the assessee who had actually made the investment out of the consideration received towards sale of shares. The assessee has also explained the reason behind registration of the house in the name of his minor daughter. In the aforesaid factual backdrop, the decisions cited at the Bar are found to be expressing divergent view. The A P High Court in the case of Late Mir Gulam Ali Khan vs. CIT (165 ITR 228) while examining he allow ability of exemption u/s 54 of the Act held that the word ‘assessee’ must be given a wide and liberal interpretation so as to include his legal heirs also. The Honourable AP High Court further held the provision contained u/s 54 of the Act also must be given a liberal interpretation. For the sake of convenience, the observation mad by the Honourable High Court is extracted hereunder:-

“Relying upon the expression “assessee” occurring in section 54 of the Act, it is contended for the Department that in order to claim the exemption, the person who sold the house must be the same as the person who purchased the house, that is, the assessee must be one and the same person. The identity must be the same. We are unable to accept this contention. The object of grating exemption u/s 54 of the Act is that a person who sells a residential house for the purpose of purchasing another convenient house must be given exemption so far as capital gains are concerned. As long as the sale of the house and purchase of another house are part of the same scheme, the lapse of sometime between the sale and purchase makes no difference. The word “assessee” must be given a wise and liberal interpretation so as to include his legal heirs also. There is no warrant for giving too strict an interpretation the word “assessee” as that would frustrate the object of granting the exemption and what is more, in the instant case, the very same assessee immediately after the sale of the house entered into an agreement for purchasing another house and paid a sum of Rs.1,000 as earnest money and subsequently the legal representative completed the transaction within a period of one year from the date of the death of the deceased. The sale and purchase are two links in the same chain. We are fortified in this view by a decision of the Madras High court in C.V. Ramanathan v. CIT (198)) 125 ITR 191.”

7. The Hon’ble Delhi High Court in the case of CIT vs. Ravinder Kumar Arora (2011) 42(1) ITCL 0498 following the principles laid down by the Hon’ble Andhra Pradesh High Court in the case of Late Mir Gulam Ali Khan vs. CIT(supra) held that the language of section 54F does not mandate that the house property should be purchased in the name of the assessee alone. The Honourable Delhi High Court held that the word “assessee” must be given wide and liberal interpretation as held by the Hon’ble AP High Court in the case of Late Mir Gulam Ali Khan (supra). The Hon’ble Delhi High Court further held that language contained u/s 54F(1) is pari materia with section 54 of the Act. Similar is also the view in the case of CIT vs. Gurnam Singh (2010) 327 ITR 278 and Hon’ble Madras High court in the case of CIT vs. V. Natarajan (2006) 287 ITR 271. The ITAT, Madras Bench in the case reported in 33 TTJ 466 while considering a case of identical nature where the assessee purchased the property in the name of his wife and claimed exemption u/s 54 held that the assessee is entitled to exemption u/s 54 of the Act. However, it is seen that the Hon’ble Punjab & Haryana High Court in the case of Jai Narayan vs. ITO 306 ITR 335 (P & H) and in the case of Prakash Vs. ITO 220 CTR 249 (Mumbai) and ITAT in the case of ITO vs. Prakash Timaji Dhanjode ITAT Nagpur 81 TTJ 694 have held a different view to the effect that for getting exemption u/s 54F, the property has to be purchased in assessee’s name. The intention of the legislature in introducing sec. 54F as explained in Board’s Circular No.346 dated 30^th June, 1982 is for encouraging house construction. It is an encouragement given to the assessee to exchange one of the residential houses for another or where he has none to convert any of his long term assets into a residential house. The object behind such a provision is to encourage large scale house building activity or investment in house property to meet acute housing shortage in the country. Therefore, looking at the legislative intent, a liberal interpretation has to be given to section 54F which is a beneficial provision. The Hon’ble Supreme Court in case of K.P. Verghese vs. ITO reported in 131 ITR 597 has observed in the following manner:-

“A statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. Where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the legislature, the court may modify the language used by the legislature or even do some violence to it, so as to achieve the obvious intention of the legislature and produce a rational construction.”

It is also well settled principle of law that when there are divergent views, to give effect to a beneficial provision the view favourable to the assessee has to be adopted. In the aforesaid view of the matter, following the ratio laid  down by the jurisdictional High Court in case of late Mir Gulam Ali Khan(supra), by the Hon’ble Delhi High Court in case of CIT vs. Ravinder Kumar Arora (supra) and also by the ITAT, Madras Bench in 33 TTJ 466 (supra), we hold that the assessee will be entitled for deduction u/s 54F for the flat purchased in the name of his daughter subject to the restrictions under the proviso to section 54F(1) of the Act. Hence the grounds raised by the assessee are allowed.

8. In the result, the appeal filed by the assessee is allowed.

Order pronounced in the court on 10- 8-20 12