Section 54F – Assessee cannot be presumed to be owner of Property Purchased by Minor Daughter Out of own resources

Section 54F – Assessee cannot be presumed to be owner of  Property Purchases by Minor Daughter Out of own resources

Office space, situated in a commercial complex cannot be treated as residential House Property despite showing rent as  Income from House Property.

The ld CIT raised query at para 2.1 of 263 order that the assessee had disclosed long term capital gain on sale of undivided share in land situated at Rajat Manzil, Somajiguda, Hyderabad at Rs.2,18,46,264 and long term gain of Rs.26,54,263 on sale of land at Ramantapur. He stated that she had admittedly invested an amount of Rs.91,34,388 in a house property at Visakhapatnam and claimed deduction of Rs.61,91,673 u/s 54F from the long term capital gain and as per proviso to section 54F(1) deduction is not allowable in case the assessee owns more than one residential house on the date of transfer of original asset. It was further observed by the CIT that as per the assessment record, it can be seen that the assessee owns residential property at Jubilee Hills and also at Pancom Chambers.

Assessee submitted that during the previous year relevant to the A.Y under consideration, assessee sold long term assets for Rs.3,22,29,760 and declared long term capital gain of Rs.2,18,46,264, out of which she invested Rs.91,34,264 in a new residential property and claimed deduction of Rs.61,91,673  u/s 54F of the Income Tax Act, 1961 which the CIT did not allow on the ground that assessee owned two residential houses, one at Jubilee Hills and another at Pancom Chambers and that exemption u/s 54F is available for an assessee who owns only one residential property.

It was submitted that the assessee actually owns only one residential property and not two as presumed by the CIT. The
property situated at Suite No.11, Pancom Chambers, Rajbhavan Road is a commercial property which was purchased by the assessee way back in February, 1995. The same was let out for commercial purposes for the year under consideration to M/s Sumit Inotech Ltd New Delhi and in the current year to M/s M.U Associates, Hyderabad fortheir business purposes, copies of purchase deed and lease agreements were enclosed. The assessee further submitted that though residential house has not been defined in the statute, the issue as to whether the particular property is a residential house or not arises in the context of concession for self occupation for residential purpose u/s 23(1) and exemption given under Wealth Tax Act for one residential house. The word “residence” signified a man’s abode or continuance in a place and where there is nothing to show that it is used in a more extensive sense. In P.N. Shukla vs. CIT (2005) 276 ITR 642, the Allahabad High Court held that “The nature of the user of the building let out determines the grant or denial of relief envisaged by clause (b) of the second proviso to section 23(1) of the Act. Had the object of the Legislature been to allow this concession irrespective of the user of the building, it was not necessary to qualify the word ‘unit’ by the expression ‘residential’. An owner may construct a building with self- contained floors with the object of letting out the same to tenants, but such letting out has to be for the purpose of residence of the tenants and not otherwise. Admittedly, in this case, the units, which were let out to the bank, were not constructed as residential units. A residential unit is that which is used as a residence”.

It was submitted further that the intention of the assessee was to construct the building for non residential purpose as the
property had been let to the Fertilizer Corporation of India for non residential purpose. Hence the assessee was not entitled for deduction under clause (c) of the second proviso to section 23(1). Keeping in view the above legal preposition, it was submitted that in the instant case, the unit owned by the assessee in Pancom Chambers is an office space, situated in a commercial complex, which is being used by the tenants for their business purposes; hence the same cannot be treated as a residential house. As the assessee owned only one residential property on the date of transfer, she prayed that she is entitled for deduction u/s 54F as claimed by her in the return of income.

The CIT observed that the amount exemption claimed is Rs.61,91,673, the ground on which the said exemption claimed
was that the assessee had invested Rs.91,34,588 in residential house at Visakhapatnam. The CIT noticed from the assessee’s return that she had disclosed rent from the let-out properties under the head “income from house property”. Further, u/s 64(1A) of the I.T. Act, 1961, assessee had clubbed in her own hands the rents received from Chennai flat which property stands in the names of her two minor children. Hence the CIT disallowed her claim of exemption u/s 54F as ownership of more than one residential house on the date of transfer of the original asset is laid down u/s 54F (i.e. proviso to sub section (1) as disqualifying factor for the exemption. During the appellate proceedings, the AR submitted that the property situated at Suite No.11 Pancom Chambers, Raj Bhavan Road is a commercial property which was let out for commercial purposes. The user of the property being commercial, it should not be considered as residential house for disqualifying the assessee’s claim for exemption. According to the CIT, the undeniable point is that it was the assessee who treated the rent from Pancom Chamber as income from house property and claimed all incidental deductions and this she had done consistently over the years. Further, the assessee had invested in purchase of residential flat in Chennai in the names of her two minor children – the rents of which are offered to tax in her own hands u/s 64(1A). All these properties existed on the date of transfer of the original asset. Hence the assessee would not be eligible for exemption u/s 54.

The assessee reiterated the submissions as made before the CIT and submitted that under the provisions of Income Tax Act, 1961 income from property whether commercial or residential is to be offered for taxation under the head “Income from House Property” unless the same assessable under any other head of income like business or income from other sources. If the income from a property is offered under the head house property, it cannot be presumed that it is a residential property. As the assessee has offered income from Pancom chambers office under the head “income from house property”, it cannot be presumed that it is a residential property.

Further, by virtue of fiction created by section 64(IA) of the I.T. Act, 1961, the incomes of properties owned by the two minor daughters, were clubbed in the hands of the assessee since the date of purchase of the said properties. The investment for purchase of said properties has come from the independent sources of these daughters, which has been accepted by the Department year after year. Simply, by virtue of inclusion of rental income of minor daughters u/s 64(IA) of the I.T. Act, 1961, it cannot be presumed that the assessee was owner of these properties. Thus, the findings of the ld CIT are factually incorrect and are unsustainable legally.

We have heard both the parties. The ld Counsel for the assessee has pointed to the page No.72 of the Paper Book wherein  the lease agreement has been produced. Since the assessee has treated one property as commercial property and the other property is the only residential house in the possession of the assessee, the assessee is entitled to exemption u/s 54F. Further the incomes of the properties owned by the minor daughters were clubbed in the hands of the assessee, but the investment for purchase of the said properties has come from the independent sources of the daughters and hence it cannot be presumed that assessee is the owner of the properties. Hence in our opinion the assessee having only one residential house is eligible for claiming exemption u/s 54F.