IN THE ITAT MUMBAI BENCH ‘G’
Yogesh Sunderlal Shah
Assistant Commissioner of Income-tax 24(1)
IT Appeal No. 1876 (Mum.) of 2012
[Assessment Year 2008-09]
September 21, 2012
Rajendra Singh, Accountant Member
This appeal by the assessee is directed against the order dated 27.2.2012 of CIT(A) for the assessment year 2008-2009. The only dispute raised in this appeal is regarding allowability of exemption u/s 54 of the Act in respect of capital gain earned by the assessee from sale of house property.
2. The facts in brief are that during the assessment proceedings it was noted by the AO that the assessee had sold a Bungalow No. 32 at Dariyalal C.H. Society, Mumbai 49, for a consideration of Rs. 3.50 crores on 8.8.2007. On 16.8.2007, the assessee purchased tenancy rights in two flats in the third floor of ‘Symphony’ situated at junction of 8th and 12th Road, Khar (West), Mumbai, for a consideration of Rs. 1.85 crores. The assessee computed the long term capital gain from sale of residential Bungalow at Rs. 2,13,02,427/- which was claimed exempt to the extent of Rs. 2,04,11,610/- because of the investments made in acquisition of the tenancy rights in the new two flats. The AO, however, observed that the exemption u/s 54 in respect of capital gain from sale of residential house property was available only when the assessee purchased or constructed a new residential flat. The assessee purchased only tenancy rights. The AO, therefore, asked the assessee to explain as to why the claim u/s 54 should not be rejected. The assessee submitted that he had acquired tenancy rights in perpetuity in the new flat which had to be considered as transfer of ownership of the flat. It was pointed out that as per the tenancy agreement, the assessee was required to use the said flat for residential purposes only and not for other purposes and the assessee was also entitled to bequeath rights in respect of the said flat to any other person subject to beneficiary complying with the terms of agreement. The assessee was also entitled to sublet or to give on leave and license the said flat and the landlord was not required to levy and charge transfer fees in respect of such assignment. The assessee could also avail or raise loan against the flat. Therefore, it was submitted that the assessee was as good as owner of the flat which had been acquired for use as a residential house and, therefore, the assessee was entitled to exemption u/s 54 of the Income Tax Act.
2.1 The AO, however, did not accept the contentions raised. It was observed by him that there could not be any dispute that the assessee had purchased only the tenancy rights on paying the monthly rent of Rs. 500/- p.m. to the landlord. The assessee had neither purchased the flat nor constructed the flat as required u/s 54. He also referred to clause-12 of the agreement as per which the tenant was not required to make any structural alteration in the flat let out. Further, clause-17 provided that the right of the tenant was limited and restricted to the said flat and nothing more. The said clause also provided that the landlord was entitled to carryout further construction on the said plot and/or building without any recourse to tenant and in case any specific permission/no objection certificate was required, the tenant was required to grant his irrevocable consent/no objection. AO also observed that all the rights of the assessee regarding raising loan, transferring the flat were subject to the permissions or conditions laid down by the society. Further, the owner of the flats was the Laxminagar Co-operative Housing Society and the subsequent purchasers were tenants. The AO also observed that no doubt the tenancy right was a capital asset but this was not the type of the asset for which exemption u/s 54 was available. The exemption was available only in case of purchase or construction of the flat. The AO referred to the judgment of the Hon’ble Supreme Court in the case of CIT v. TN Aravinda Reddy 120 ITR 46 (SC) in which it was held that the word “purchase” occurring in section 54(1) had to be given its common meaning i.e. buy for a price or equivalent of price by payment in kind or adjustment towards a debt or for other monetary consideration. The person who is the owner of the property should possess absolute right in the property which was not so in this case. The AO, therefore, rejected the claim of the assessee of exemption u/s 54 of the Act in respect of tenancy rights acquired in the new flat. Accordingly, the claim of deduction u/s 54 of Rs. 2,04,11,610/- was disallowed.
3. The assessee disputed the decision of AO and submitted before the CIT (A) that all the conditions for purchase of a flat were satisfied as the assessee had taken possession of the flat and full payment of purchase consideration of Rs. 1.85 crores had been made in addition to monthly rent of Rs. 500/-. The assessee had also paid stamp duty @ 5% of the consideration of Rs. 1.85 crores amounting to Rs. 9.25 lakhs. Thus, the residential house had been conveyed to the assessee within the meaning of the word “conveyance” as defined in clause-9 of section 2 of Bombay Stamp Act, 1958. The assessee had the right to mortgage the said flat or re-sale the said flat and all future benefits on the said flat were allowed to the assessee. The assessee was also authorised to bequeath the rights with respect to the said flat. It was also pointed out that under the provisions of Section 27(iii)(b), the acquisition of tenancy rights in perpetuity amounted to ownership of the property for the purposes of computation of income from house property. Similar provisions were contained in section 269UA(f). Since, the assessee had been given the possession of the property, it would constitute transfer u/s 2(47) for the purpose of capital gain. It was further pointed out that legal title in respect of the flat was not necessary for the purpose of claiming exemption u/s 54 of the Act. The assessee placed reliance on the judgment of Hon’ble Supreme Court in case of CIT v. Podar Cement Ltd. 226 ITR 625 (SC), judgment of Hon’ble Supreme Court in case of R.B. Jodha Mal Kuthiala v. CIT 82 ITR 570 and the judgment of Hon’ble Bombay High Court in case of CIT v. D.V. Laxmichang Nagpal Nagda 211 ITR 804. It had been held in the said judgments that owner is the person who can exercise the right of owner in his own right and legal title of the property was not necessary. The CIT(A), however, was not satisfied with the explanation given. It was observed by him that the judgments relied upon were distinguishable and were not applicable to the present case. The CIT(A) referred to the judgment of Hon’ble Bombay High Court in case of Hameed Jaffery v. CIT reported in 227 ITR 724 (Bom) in which it was held that as per the provisions contained u/s 54 at the relevant time, the assessee was required to be in occupation of the property for his own residence or residence of his parents as a owner in the two year period preceding to the date of transfer. Since, the assessee was not owner of the property for the full two year period, the claim of exemption u/s 54 was denied. The same view was followed in CIT v. Gopaldas H. Hansrajani 239 ITR 523. By applying the same principle, the CIT(A) observed that purchase of property by the assessee should be as a owner and not as a tenant. The assessee in this case was not a owner of the property and was only a tenant on a monthly rent of Rs. 500/- and therefore, the provisions of section 54 were not applicable for exemption of capital gain on sale of the residential house as the capital gain had not been invested in purchase or construction of a new residential house. The provisions of section 54 were plain and unambiguous and, therefore, the same could not be applied in case of purchase of tenancy right in respect of flat. CIT(A) accordingly confirmed the disallowance of claim of deduction u/s 54 of the Act aggrieved by which the assessee is in appeal before the Tribunal.
4. Before us, the learned AR for the assessee submitted that Laxminagar Cooperative Housing Society was the owner of the property. Since, the rules of the society did not permit conveyance of the land, only the tenancy rights were given. The property had been constructed by Kasmita Properties Pvt. Ltd., to whom the landlord i.e. A.D. Daru and S.D. Daru had given development rights. The assessee had acquired the tenancy right on payment of non-refundable deposit of Rs. 1.85 crores in addition to monthly rent of Rs. 500/-. The learned AR for the assessee reiterated the submissions made before the lower authorities that as per clause-12 of the agreement, the tenant had unfettered rights to assign, transfer or sublet his flat. The assessee was also entitled to make alternation in the interior of flat in terms of clause-12 of the agreement. It was pointed out that the assessee had perpetual tenancy right which had been deemed as a owner under the provisions of section 27(iii)(b) and also for the purposes of section 269UA(f). Thus, the income from the flat was assessable as the income from house property. Further, the assessee had been handed over the possession of the flat which amounted to transfer under the provisions of section 2(47). The assessee had also paid stamp duty @ 5% which also shows that it had been treated as a case of transfer of flat. The learned AR argued that the purposes of section 54 was to acquire a new residential house and mode of acquisition was not very relevant. The assessee had, therefore, to be treated as legal owner for all purposes. Reference in this regard was made to the CBDT Circular No. 8/2/169/15(A-1). He also referred to the legal opinion of Maya Bhatt & Co., a copy of which was placed at page 61 of the paper book. The learned AR also placed reliance on the decision of Mumbai Bench of the Tribunal in the case of M/s Prema P Shah v. ITO 100 ITD 60 in support of his contentions.
4.1 The learned DR, on the other hand, strongly supported the orders of the authorities below. It was argued that the words u/s 54 were ‘purchase or construction of a new house’ and not acquisition and, therefore, the section could apply only in case of the purchase of a new flat or construction of a new flat and not to acquisition by any other mode. It was also submitted that the provisions of section 27(iii)(b) relied upon by the learned AR, treating the perpetual tenancy as ownership, was limited to the application of the section 22 of the Act regarding assessment of income from house property. Similarly, the provisions of section 269UA(f) were applicable for the purposes of presumptive purchase of the properties. These provisions had no application to section 54 of the Act. The learned DR also argued that the provisions of section 54 were exemption provisions and in respect of such provisions, in case there are two interpretations, the one which is favourable to the Revenue has to be followed as held by the Hon’ble Supreme Court in case of Novopan India Ltd. 3 SCR 549. He placed reliance on the judgment of Hon’ble Bombay High Court in case of Hameed Jaffery v. CIT 227 ITR 724 which was later followed in 239 ITR 523 (Mum). He also placed reliance on judgment of Hon’ble Supreme Court in case of Suraj Lamp and Industries Pvt. Ltd. 340 ITR 1 in which it was held that the registered deed of conveyance is the only mode of legal transfer and that general power of attorney, etc do not create title or interest in the property. The learned DR referred to the various provisions of the tenancy agreement to point out that the rights of the tenant in the flat were limited. He referred to clause-15 of the agreement which provided that the landlord was permitted to let out the flat only on tenancy basis and in no other manner. Thus, agreement itself provided that it was a case of tenancy and not purchase. It was also submitted that though as per clause-10, the tenant was entitled to take loan, that was only against right of the tenant in the flat and not against any ownership right. The clause-17 provided that the right of tenancy was limited and restricted to the said flat and no more. Further, clause-19 provided that the tenant was not entitled to do any act that affected the right of the landlord in the said building and in the said property. It was pointed that in the agreement the words “tenant” and “landlord” had been used and not “purchaser or seller” of the flat. Learned DR also referred to clause-12 of the agreement which clearly provided that the tenant was not entitled to make any structural changes in the said flat. He was entitled to make changes only inside the flat with MCD permission without affecting the outer walls. The learned DR further pointed out that though clause-21 gave unfettered right to the tenant to assign, transfer or sublet the flat but such unfettered right was only in respect of tenancy right and not as owner of the flat. It was accordingly argued that the assessee was only a tenant in the new flat and not owner of the flat and, therefore, it could not be said that the assessee had purchased or constructed a new flat. Accordingly, the claim of exemption under section 54 was not allowable and it was therefore urged that the order of the CIT(A) should be upheld.
5. We have perused the records and considered the rival contentions carefully. The dispute is regarding allowability of exemption under section 54 of the I.T. Act in respect of capital gain earned by the assessee from sale of a residential property. Under the provisions of section 54, capital gain arising from transfer of a residential house income from which is chargeable under the head income from house property is exempt if the capital gain is invested in purchase of a new residential house within one year before or two years after date on which transfer took place or assessee has constructed a new residential house within the period of three years after the date of transfer. In the present case, assessee had sold the residential property for Rs. 3.50 crores on 8.8.2007 and thereafter on 16.8.2007 assessee purchased tenancy rights in flats in the building “Symphony” on deposit of Rs. 1.85 crores which was not refundable and on payment of monthly rent of Rs. 500/-. The case of the assessee is that tenancy right was perpetual and assessee was therefore deemed owner of the property under section 27(iiib). The flat taken for tenancy was to be used for residential purposes and income from the same was chargeable under income from house property. It has also been submitted that under the provisions of tenancy agreement, the assessee was entitled to subletting the flat or to give on leave and license and could also avail loan against said tenancy right. The assessee had also the right to assign or transfer the right in the flat and further entitled to make alteration in the flat. Therefore, it has been argued that for all practical purposes, the assessee was owner of new residential property and therefore, assessee should be entitled for exemption under section 54 of the Act. The case of the revenue is that as per requirement of section 54, the assessee had to purchase or construct a new residential house and then only is entitled for exemption under the said section. Acquisition of new residential house by any other mode is not prescribed and, therefore, assessee is not entitled for exemption.
5.1 We have carefully considered the various aspects of the matter. We find that under the provisions of section 54, exemption of capital gain is available in respect of transfer of residential house owned by the assessee. The purpose of the section is to grant exemption in case the assessee acquires a new residential house by investing the capital gain as an owner. It is because of this reason, the words used in section 54 are “purchase” or “construction” of a new residential house. The requirement of section is not that assessee may acquire a new residential house by any other mode. The word “purchase” appearing in section 54 had come for consideration before Hon’ble Supreme Court in case of CIT v. T.N. Arvinda Reddy 120 ITR 46 in which Hon’ble Supreme Court held that the word “purchase” appearing in section 54(1) has to be given its common meaning i.e. buy for a price or equivalent of price by payment in kind or adjustment towards a debt or for other monetary consideration. Thus, for application of provisions of section 54, the assessee has to buy a property as an owner. In this context, it may be appropriate to refer to the judgment of Hon’ble High Court of Bombay in case of Hameed Jaffery v. CIT 227 ITR 724 which was in the context of old provision of section 54 which required that the property which had been transferred should be in the occupation of the assessee for his own residence or for the residence of his parents. The Hon’ble High Court held that occupation should be as an owner and not as tenant. The exemption under section 54 from capital gain is available to an assessee, who invests the capital gain in similar asset being a residential house which would obviously mean that acquisition of the house should be as an owner as the capital gain covered under section 54 is the capital gain arising from transfer of a residential house owned by the assessee.
5.2 Further, as rightly pointed out by the ld. CIT-DR, provisions of section 54 are exemption provisions and, therefore, in case two interpretations are possible i.e. whether assessee should acquire the new residential house as owner or even the perpetual tenancy right would suffice, the interpretation favorable to the revenue shall be followed as held by Hon’ble Supreme Court in case of Novopan India Ltd. 3 SCR 549. In the said case, the Hon’ble Supreme Court held that the principle that in case of ambiguity, a taxing statute should be construed in favour of the assessee would not apply to the construction of an exception or an exempting provision; these have to be construed strictly. The Hon’ble Supreme Court also held that the person invoking an exception or an exemption provision to relieve him of the tax liability must establish clearly that he is covered by the said provision. In case of doubt or ambiguity, benefit of it must go to the State. Following the said judgment, therefore, even if there is some ambiguity in the provision, the same has to be interpreted in favour of the revenue because it is an exemption provision. In the present case, there is no ambiguity. The provision refers to purchase or construction of a new residential house and it is quite obvious that the same should be as an owner and not as perpetual tenant.
5.3 The ld. AR for the assessee has referred to the provisions of section 27(iiib) r.w.s. 269UA(f) as per which a person having lease hold right for more than 12 years in property including the period renewal of lease if any has to be considered as deemed owner. Since the assessee in this case had perpetual lease, it has been argued that the assessee was deemed owner and therefore, should be entitled to exemption under section 54 of the Act. However, we find that the provision of deemed owner under section 27(iiib) is only for the purposes of section 22 to 26 as clearly mentioned in the said section, which relate to computation of income from house property. Therefore, argument of deemed owner is relevant only in connection with computation of income from house property and not in relation to exemption provisions of section 54. Similarly, treating the tenancy as conveyance under the Bombay Stamp Act was only for the purpose of payment of stamp duty and cannot be considered as conveyance of the title of the property to the assessee as an owner. As for taking possession of the flat, taking possession can not be considered as ownership as the possession had been taken as a tenant and not as an owner of the flat.
5.4 It has also been argued that under the provisions of tenancy agreement, assessee had right to bequeath the flat, sub-let/lease it and was also entitled to raise loan against the flat. The assessee had also right to make alteration in the flat and therefore, considering these factors and also the fact that the lease was perpetual, the assessee had to be considered as owner of the flat, entitled to exemption under section 54. The arguments are however not convincing. No doubt, the assessee was permitted to sub-let the flat, to bequeath it and to raise loan but such powers were only in relation to tenancy right of the assessee and not as owner of the flat. All these facilities to which assessee was entitled was only against right of the assessee as tenant in the flat and not as owner. Further, clause-12 clearly provides that the tenant was not entitled to make any structural changes in the flat which clearly shows that the assessee was not the owner because an owner has full right in relation to his property. The said clause also provided that the tenant had no right to put up any construction on the aforesaid plot of land. The clause-17 provided that right of tenant was limited and restricted to the said flat. Further clause-19 placed restriction that tenant was not entitled to do any act that affected the right of the land lord in the said building and in the said property which clearly shows that the assessee did not have the status of land lord and was only a tenant. The owner of the flat was Laxminagar Co-operative housing Society and as per rules of the society, there was no provision of transfer of land and, therefore, subsequent buyers were only tenants and not owners.
5.5 The ld. AR for the assessee has placed reliance on Circular No. 8/2/169-IT(A)-1 dated 25.3.1969 to argue that in terms of the said Circular the assessee was owner for all practical purposes. The said circular in our view is distinguishable as the same related to a situation in which the builder had transferred land and building to the society and society had allotted the tenancy to the purchasers and possession of the flat had been given. Thus, in that case society had ownership of land as the land had been transferred to the society and it was under these circumstances that it was held that for all purposes including adjustment and recovery, individual members could be regarded as legal owners. In the present case there was restriction on transfer of land which was owned by Laxminagar Co-operative Society. The subsequent buyers were only tenants and not owners of land and this was the reason that only tenancy rights were given to various persons including the assessee. The builder had no right in the land and, therefore, only, tenancy right could be given to the buyers. Moreover the circular related to a case where individual members had paid the entire cost of the flat as purchaser, which is not so in the present case. Therefore, the circular does not find any application to the facts of the case. The ld. AR has also referred to opinion of the solicitor, Maya Bhatt & Co. placed at page 61 of the paper book but there is nothing in the opinion to show that the assessee was an owner. The solicitor had only stated that the land lord had given irrevocable right to the builder Kashmita Property Pvt. Ltd. to enter the property for the purpose of development and that the property was free from any encumbrance. Thus the solicitor had given only an opinion that the builder was entitled to development right in the property for construction of the building. So the opinion given is of no help to the assessee. The ld. AR has also placed reliance on the decision of the Tribunal in the case of Prema P. Shah v. ITO 100 ITD 60 and based on the said decision it has been argued that the assessee has to be treated as owner. However, on careful perusal of the said decision we find that the said decision is distinguishable. The property in the said case was on perpetual lease of 150 years. The Tribunal noted that the rent fixed was ‘peppercorn’ rent and was payable only if demanded. Thus, the assessee in that case was not duty bound to pay rent. It was under these circumstances that the Tribunal held that the assessee had to be treated as an absolute owner and entitled to exemption under section 54. In the present case, the assessee was bound to pay the rent as per the agreement and therefore, it could not be considered as ‘peppercorn’ rent. The case is therefore distinguishable and not applicable to the facts of the present case.
6. In view of the foregoing discussion and for the reasons given earlier, we confirm the order of CIT(A), disallowing the claim of exemption under section 54 of the Income tax Act.
7. In the result, the appeal of the assessee is dismissed.