The residential house property sold must consist of buildings or lands appurtenant to the building. The meaning of the term ‘lands appurtenant’ to the building requires elucidation. Whether a small building surrounded by large vacant lands qualifies for deduction u/s.54 on overall basis is the issue requiring consideration. In CIT v. M. Kalpagam, (1997) 227 ITR 733 (Mad.), the following tests were provided for determining whether the land appurtenant to the building must be considered for the purpose of deduction u/s.54 :
(a) If the land and building forms part of an indivisible unit and are enjoyed by the persons occupying the building, then the entire extent of land is treated as appurtenant to the building, and the sale consideration relating to such land is also eligible for deduction u/s.54 upon reinvestment.
(b) If the land and building can be put to use by independent users without causing any detriment to the enjoyment of the building or land by other set of users, then the land cannot be treated as appurtenant to the building.
(c) The persons occupying the building and requirements of vacant land for their use taking into account their social standing, etc. would be eligible for deduction u/s.54, and any surplus land beyond such requirements cannot be treated as land appurtenant to the building. In other words, long-term capital gain from transfer of such lands will not be considered for deduction u/s.54.
(d) If the land appurtenant to the building is put to use for any other purpose, such as commercial or agricultural, then such lands will not qualify for treatment as land appurtenant to the building.
(e) If the owner of the land derives any income and if such income is not chargeable to tax u/s.22, then such land does not qualify to be treated as land appurtenant to the building.
Where the assessee buys more than one flat in the same building for the purpose of accommodating his large-sized family, maintaining a common kitchen and common ration card, it was held that the assessee is eligible for deduction u/s.54 in respect of all such flats so acquired by him (K. G. Vyas v. Seventh ITO, (1986) 16 ITD 195 (Bom-Trib)).
However, in Mrs. Gulshanbanoo R. Mukhi v. Joint CIT, (2002) 83 ITD 649 (Mum-Trib), it was held that the statute unambiguously provides for deduction u/s.54 for one residential house only. Hence, acquisition of more than one residential house by the assessee will not entitle the as-sessee to claim deduction u/s.54 for all such residential houses so acquired by him. The assessee has to claim deduction u/s.54 only in respect of one house and not more than one house.
Finally, it is advisable to purchase/construct only one residential house to get exemption. You may know plot is different from flat (residential apartment). To get exemption land and building must be an indivisible unit. Purchase of separate land is not come here.