Issue/Justification

Section 54(1) has been amended by the Finance (No.2) Act, 2014 by substituting “constructed, a residential house”, with “constructed, one residential house in India”. Similar amendment is made in section 54F(1).

Even though there is a positive intent to put to rest the controversy and the conflicting judgements on the meaning of ‘a residential house’, certain issues are still expected to continue. A doubt would still remain as to what constitutes one “RESIDENTIAL HOUSE” as most of the past litigations on Section 54(1) and 54F(1) is on this very issue.

In ITO vs. SushilaJhaveri 292 ITR (AT) 1 (Mum)(SB), Hon’ble Special Bench of Mumbai ITAT held that where more than one unit is purchased which are adjacent to each other and are converted into one house for the purpose of residence by having common passage, common kitchen, etc., then, it would be a case of investment in one residential house and consequently, the assessee would be entitled to exemption. The assessee making investment in two flats located at different localities in Mumbai will be entitled to exemption in respect of investment in one house only of her choice. It was further held that the expression “a residential house” in sections 54 and 54F means one residential house.

In Karnataka High Court in CIT v. D. AnandaBasappa [2009] 180 Taxman 4 the taxpayer transferred a residential building and invested the long-term capital gain in acquisition of two residential flats situated side by side by means of two separate registered sale deeds and claimed exemption for both the residential units acquired. Both the units were in the occupation of two different tenants. The Court held that the apartments were situated side by side and
the builder had made necessary modifications to make them one unit by fixing opening door in between those two apartments. The mere fact that when the Inspector visited the premises they were occupied by two different tenants was not a ground to hold that the apartments were not one residential unit. The aspect of one registered sale deed or more than one deed could not be determinative of the building being considered as one residential unit or otherwise.

In the case of CIT vs. Gita Duggal [2013] 357 ITR 153 (Delhi), the Assessing officer disallowed the exemption in respect of one floor out of two floors constructed by the assessee through a developer since the floors were independent of each other and self-contained and therefore they cannot be considered as one unit of residence. Accordingly, he held that the assessee was not eligible for the exemption under Section 54. The Delhi High Court decided in favour of assessee on the ground that section 54/54F uses the expression “a residential house”. The expression used is not “a residential unit”. The Court felt that 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 since it is neither expressly nor by necessary
implication prohibited.

The above noted case laws clearly bring out the point on the confusion surrounding the definition of ‘a residential house’. Even after the amendment made by the Finance (N.2) Act, 2014, doubts will persist as to what would constitute one RESIDENTIAL HOUSE.

Suggestion by ICAI for Budget 2018

It is suggested that an explanation be inserted in the sections 54 and section 54F clarifying the intent with regard to meaning of one RESIDENTIAL HOUSE in the context of the aforesaid sections.

Source-  ICAI Pre-Budget Memorandum–2018 (Direct Taxes and International Tax) 

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Category : Income Tax (27233)
Type : News (13568)
Tags : Budget (1956) ICAI (2585) section 54 (137) Section 54F (165)

One response to “Clarify Section 54 and 54F – Capital gains exemption in case of investment in ONE residential house property in INDIA: ICAI”

  1. Shalibhadra Rameshbhai Shah says:

    Sir, I have one Question. I have already one residencial house.. I piurchased 2nd residentioan house on 01.04.2017… with in 6 months i.e 01.09.2017 i sold commerciaol property.. So, can i take exemption u/s. 54F while i invested before six months in residential house

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