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Judicial Position on Exemption u/s. 54F where investment is made in more than one Residential House Property units/adjacent flats/more than one unit on different floors:

1. Section 54F is reproduced as under:

Section 54F provides that-

a. In the case of an assessee being an individual or a Hindu undivided family,

b. the capital gain arises from the transfer of any long-term capital asset, not being a residential house, and

c. the assessee has, within a period of one year before or two years 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,

d.  the capital gain shall be dealt as under:

(i) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45;

(ii)  if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45:

2.  Department’s View/Stand:

Department is of the general and consistent view that the exemption u/s.54F shall be allowed in respect of a single house property unit only. It restricts the exemption to a single house unit and whether more than one of such units are part of a residential house or not, is not a matter of concern for the Department.

In case, if the assessee has made investment in two adjacent flats or different flats in a same building/tower, the Assessing Officer is reluctant/not willing to accept the assessee’s purpose of investing in the different unit of house property that even though investment is made in separate units, the intention was to reside in all the units along with family by treating all the units jointly as a single residential house, with or without modification in the structure of the units.

3.0 Judicial Position of Law:

3.1 Income Tax Officer vs. Ms. Sushila M. Jhaveri (2007) 14 SOT 394 (Mumbai) (SB):

Giving view on the issue of allowability of exemption for two adjacent flats, In this case, Hon’ble Special Bench of Mumbai ITAT Held as under:

“Where more than one unit are 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. Coming to the facts of the present case, investment was made in two flats located at different localities in Mumbai. Accordingly, the assessee was entitled to exemption in respect of investment in one house only of her choice.”

“Expression "a residential house" in ss. 54 and 54F means one residential house; assessee having invested capital gains in two residential houses situated in different localities of the same city, she was entitled to exemption under s. 54/54F in respect of investment in one house as per her choice but was not entitled to exemption in respect of investment in both the residential houses.”

Conclusion:

a. If residential house is situated in different localities of the same city, exemption is available in respect of one house of choice only;

b. Two adjacent flats should be converted to establish them as “a residential house”.

3.2 CIT vs. Gita Duggal (ITA No. 1237/2011); Delhi High Court ( decided on February 21, 2013):

Facts:

Assessee is an individual. In the COI filed along with the ROI, she had declared LTCG of Rs. 2,68,25,750/- in respect of sale of property. During assessment, the AO took the view that on the terms of the agreement entered into with M/s Thapar Homes Ltd., the cost of construction of the building incurred by the aforesaid company which was the developer of the property would also be included in the total sale consideration. In reply, the assessee had submitted that the entire cost of construction was incurred by the builder and even if it was considered as part of the sale consideration, since it had been fully invested in the residential house itself, the same would be exempt u/s 54. The AO had not accepted the assessee’s submission. He therefore, added an amount of Rs. 3,43,72,529/- which was the cost of construction incurred by the developer to the sale consideration of Rs. four crores received by the assessee and computed the total sale consideration at Rs. 7,43,72,529/-. It was further held that the two floors which were given to the assessee by the developer and on which the developer had incurred construction cost were independent of each other and self-contained and therefore they cannot be considered as one unit of residence. Accordingly, AO held that the assessee was not eligible for the exemption u/s 54. Dealing with the claim for relief u/s 54F, the AO held that the exemption would be available only in respect of one unit, since the two residential units were independent of each other and the assessee cannot therefore claim exemption on the footing that both constituted a single residence. In this view of the matter AO recomputed the capital gains by making an addition of Rs. 98,20,722/-.

On appeal, CIT(A) had agreed with the assessee’s contention and following the judgment of the Karnataka HC, held that the assessee was eligible for the deduction u/s 54 in respect of the basement, ground floor, first floor and the second floor. He accordingly, allowed the appeal.

On further appeal, the Tribunal had confirmed the decision of the CIT (A) and in the case of CIT & Anr. Vs. Smt. K.G.Rukminiamma, HC had held that the context in which the expression 'a residential house' is used in Section 54 makes it clear that, it was not the intention of the legislation to convey the meaning that: it refers to a single residential house, if, that was the intention, they would have used the word "one." As in the earlier part, the words used are buildings or lands which are plural in number and that: is referred to as "a residential house", the original asset. An asset newly acquired after the sale of the original asset also can be buildings or lands appurtenant thereto, which also should be "a residential house." Therefore the letter 'a' in the context it is used should not be construed as meaning "singular." But, being an indefinite article, the said expression should be read in consonance with the other words 'buildings' and 'lands' and, therefore, the singular 'a residential house' also permits use of plural by virtue of Section 13(2) of the General Clauses Act. – CIT V. D. Ananda Bassappa, (2008-TIOL-254-HC-KAR-IT) followed. Upon careful consideration, we find that the contentions of the assessee that the issue is covered in favour of the assessee are correct.

Hon’ble Delhi High Court observed and held as under:

It was at this stage that the assessing officer rejected the claim for deduction under Section 54 on the footing that the two floors obtained by the assessee contained two separate residential units having separate entrances and cannot qualify as a single residential unit. He agreed that the assessee was eligible for the relief u/s 54F in respect of the cost of construction incurred on one unit. He noted that the assessee has retained the ground floor and the basement. He therefore, apportioned the construction cost of Rs. 3,43,72,529/- to have been incurred on the basement, ground floor, first floor and second floor in the ratio of 1:1:1:0.5 for second floor, first floor, ground floor, basement respectively. Since he was allowing the relief u/s 54F only in respect of one unit, he added Rs. 98,20,722/- which is the figure arrived at by dividing the total cost of construction. The Tribunal expressed the view that the words “a residential house” appearing in Section 54/54F of the Act cannot be construed to mean a single residential house since u/s 13(2) of the General Clauses Act, a singular includes plural;

In the case of CIT Vs. B. Ananda Basappa, the Karnataka HC supports the contention of the assessee. An identical contention raised by the revenue before HC was rejected and it was observed that a plain reading of the provision of section 54(1) discloses that when an individual-assessee or HUF- assessee sells a residential building or lands appurtenant thereto, he can invest capital gains for purchase of residential building to seek exemption of the capital gains tax. Section 13 of the General Clauses Act declares that whenever the singular is used for a word, it is permissible to include the plural. The contention of the Revenue is that the phrase "a" residential house would mean one residential house and it does not appear to the correct understanding. The expression "a" residential house should be understood in a sense that building should be of residential in nature and "a" should not be understood to indicate a singular number. The combined reading of sections 54(1) and 54F of the Income-tax Act discloses that, a non residential building can be sold, the capital gain of which can be invested in a residential building to seek exemption of capital gain tax. However, the proviso to section 54, lays down that if the assessee has already one residential building, he is not entitled to exemption of capital gains tax, when he invests the capital gain in purchase of additional residential building. This judgment was followed by the same HC in the decision in CIT Vs. Smt. K G Rukminiamma (2010-TIOL-778-HC-KAR-IT);

There could also be another angle. Section 54/54F uses the expression “a residential house”. The expression used is not “a residential unit”. This is a new concept introduced by the assessing officer into the section. Section 54/54F requires the assessee to acquire a “residential house” and so long as the assessee acquires a building, which may be constructed, for the sake of convenience, in such a manner as to consist of several units which can, if the need arises, be conveniently and independently used as an independent residence, the requirement of the Section should be taken to have been satisfied. There is nothing in these sections which require the residential house to be constructed in a particular manner. The only requirement is that it should be for the residential use and not for commercial use. If there is nothing in the section which requires that the residential house should be built in a particular manner, it seems to us that the income tax authorities cannot insist upon that requirement. A person may construct a house according to his plans and requirements. Most of the houses are constructed according to the needs and requirements and even compulsions. For instance, a person may construct a residential house in such a manner that he may use the ground floor for his own residence and let out the first floor having an independent entry so that his income is augmented. It is quite common to find such arrangements, particularly post-retirement. One may build a house consisting of four bedrooms (all in the same or different floors) in such a manner that an independent residential unit consisting of two or three bedrooms may be carved out with an independent entrance so that it can be let out. He may even arrange for his children and family to stay there, so that they are nearby, an arrangement which can be mutually supportive. He may construct his residence in such a manner that in case of a future need he may be able to dispose of a part thereof as an independent house. There may be several such considerations for a person while constructing a residential house. We are therefore, unable to see how or why the physical structuring of the new residential house, whether it is lateral or vertical, should come in the way of considering the building as a residential house. We do not think that the fact that the residential house consists of several independent units can be permitted to act as an impediment to the allowance of the deduction under Section 54/54F. It is neither expressly nor by necessary implication prohibited. For the above reasons we are of the view that the Tribunal took the correct view. No substantial question of law arises for our consideration. The appeal is accordingly dismissed with no order as to costs.

3.3  In case of CIT vs. B. Ananda Basappa, the Hon’ble Karnataka High Court has also taken the same view.

4.0Conclusion:

4.1 Section 54F provides the exemption for a residential house.

4.2 However, ‘a residential house’ is not defined anywhere in the Act.

4.3 “A residential house” may comprise several residential units.

4.4  Even if the assessee makes the investment in purchase of different residential units which are located on different floor but are used as a residential house, it cannot be considered as more than one residential house.

4.5 Where two adjacent flats are purchased by the assessee and used by the assessee as a single residential house, the both flats/units will be considered as “a residential house” for the purpose of exemption u/s. 54F, whether they are converted into one residential unit or not.

4.6 The intention of the Assessee is important. The Hon’ble Delhi High Court in case of “Gita Duggal (supra), as mentioned above, held that there is no specific requirement under the law that the house should be constructed in particular manner. Further, if several units are used by the assessee as a single house, the requirement/conditions of section 54F would be satisfied.

4.7 The view of Special Bench Judgment in case of Sushila M. Jhaveri (supra) that to establish “a residential house” the assessee should convert the two residential units into one residential unit, does not stand a good law because no such requirement is provided under the Act or anywhere else.

4.8 Thus, the Judgment of Delhi High Court is more comprehensive and covers directly the position of section 54F prevailing in the Income tax Act and also it considers the practical view as well. Same is the judgment of Karnataka HC in the case of Ananda Basappa.

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