Summary: The Income Tax Appellate Tribunal (ITAT) Bangalore in Pavan Kumar Agarwal Vs DCIT held that exemption under Section 54 must be computed asset-wise with reference to each residential house transferred and not by aggregating the capital gains arising from the sale of multiple residential houses during the year. The assessee had sold 17 residential flats and earned long-term capital gains of ₹11.80 crore, which were fully invested in the construction of one residential house and the purchase of four other residential properties. The Assessing Officer restricted the exemption to investment in one house following the amendment introducing the expression “one residential house in India”, but the Tribunal held that the amendment only limits the exemption for each transferred residential house to one new residential house and does not require aggregation of gains from multiple transfers. The Tribunal also applied the rule of consistency, noting that identical claims had been accepted in earlier assessment years, and accordingly allowed the entire exemption while deleting the disallowance of ₹5.89 crore.
Core Issue: The principal issue before the Tribunal was whether the exemption under section 54 is to be computed asset-wise with reference to each residential house transferred or by aggregating the capital gains arising from sale of multiple residential houses during the year and restricting the exemption to investment in only one residential house. The Tribunal also examined the scope of the expression “one residential house in India” introduced by the Finance (No. 2) Act, 2014, and the applicability of the rule of consistency.
Facts: The assessee had entered into Joint Development Agreements in respect of two parcels of land at Bengaluru and, under the sharing arrangements, received 76 flats in “Mahaveer Tranquil” and 46 flats in “Mahaveer Willet”. During AY 2020-21, the assessee sold 17 residential flats, resulting in long-term capital gains of Rs.11,80,61,786. The entire capital gains were invested in construction of one residential house and purchase of four other residential properties, aggregating exactly Rs.11,80,61,786, and exemption under section 54 was claimed accordingly.
The Assessing Officer held that after the amendment substituting the words “one residential house in India”, exemption under section 54 could be allowed only against investment in one residential property. Accordingly, exemption was restricted to Rs.5,91,80,000, being the cost of the first residential house purchased, and the balance Rs.5,88,81,786 was taxed as long-term capital gains. The CIT(A) affirmed the disallowance.
Findings of the ITAT: The Tribunal undertook an elaborate analysis of the scheme of sections 45, 48 and 54. It observed that under the Act, capital gains are computed separately for each capital asset transferred. Every transfer constitutes a distinct source of income, and only after computation of capital gain in respect of each individual asset are the gains aggregated under the head “Capital Gains”. Relying upon the Special Bench decision in JCIT v. Montgomery Emerging Markets Fund, the Tribunal held that every transfer of a capital asset represents a separate source of income and, therefore, the exemption under section 54 must also be examined asset-wise and not by clubbing all gains together.
The Tribunal observed that section 54 grants exemption in respect of capital gain arising from transfer of a long-term capital asset being a residential house. Nothing in the provision requires aggregation of capital gains arising from transfer of multiple residential houses into one composite figure. Consequently, where several residential houses are sold during the same previous year, the eligibility under section 54 has to be examined independently with reference to each transferred residential house.
The Tribunal further analysed the amendment made by the Finance (No.2) Act, 2014, whereby the expression “a residential house” was substituted with “one residential house in India”. It held that the amendment merely restricts the capital gain arising from one transferred residential house to investment in one new residential house. The amendment does not provide that where an assessee transfers several residential houses during the year, the aggregate capital gains can be invested in only one residential house for claiming exemption. Had Parliament intended such a restriction, it would have expressly stated so, as it has done in provisions such as sections 54EC, 54EE and section 23, where specific statutory limits have been incorporated.
The Tribunal also examined the first proviso to section 54, permitting investment in two residential houses where the capital gain does not exceed Rs.2 crore. It held that this proviso also operates with reference to the capital gain arising from one transferred residential house, and cannot be interpreted to mean that capital gains arising from multiple transfers should first be clubbed for applying the monetary threshold.
Applying these principles, the Tribunal held that since the assessee had transferred 17 residential flats, he was legally entitled to claim exemption by investing the capital gains in 17 or fewer residential houses. As the assessee had invested the entire capital gains in only five residential houses, the statutory conditions under section 54 stood fully satisfied.
The Tribunal also noticed that in the assessee’s own case for AYs 2018-19 and 2019-20, after detailed scrutiny under sections 143(3) and 153C, the Department had accepted identical claims of exemption under section 54 in respect of investment in multiple residential houses. Applying the rule of consistency, the Tribunal held that the Revenue could not adopt a contrary interpretation for the year under appeal in the absence of any distinguishing facts or change in law.
The Tribunal further observed that even the Income-tax Return Form requires disclosure of exemption under section 54 property-wise, thereby supporting the legislative scheme that exemption is to be examined with reference to each capital asset transferred.
Decision: The Tribunal allowed the appeal and held that section 54 exemption is to be computed with reference to each transferred residential house independently and not by aggregating capital gains arising from multiple residential houses. The restriction introduced by the Finance (No.2) Act, 2014, limits investment to one new residential house for each transferred residential house, but does not prohibit exemption where capital gains from multiple residential houses are invested in multiple new residential houses. Accordingly, the disallowance of Rs.5,88,81,786 was deleted and the assessee’s entire claim of exemption under section 54 amounting to Rs.11,80,61,786 was allowed.
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