Budget 2014 - Roll over of investment for Section 54 and 54F exemptions to be restricted to one house only
S. KRISHNAN
1. Introduction:
The provisions of section 54 prior to its amendment proposed in the Finance Bill 2014 introduced today reads as under:
Section 54. (1) Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset , being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head "Income from house property" (hereafter in this section referred to as the original asset), and 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,------------------------------.
The proposed amendment as per clause (22) runs as under-
In section 54 of the Income-tax Act, in sub-section (1), for the words "constructed, a residential house", the words "constructed, one residential house in India" shall be substituted with effect from the1st day of April, 2015.
There has been similar amendment to section 54F of the Income-tax Act and the amendment proposed reads as under-
In section 54F of the Income-tax Act, in sub-section (1), for the words "constructed, a residential house", the words "constructed, one residential house in India" shall be substituted with effect from the 1st day of April, 2015 (clause 24 of the Finance Bill)
2. Why was this amendment thought of?
The amendment to these two sections by replacing words "constructed, a residential house", with the words "constructed, one residential house in India" was thought for the following two reasons:
a) In the following cases it was held that investment in more than one residential unit is possible:
(i) In CIT vs. D. Ananda Basappa (2009) 180 Taxman 4 (Karnataka) it has been held that exemption under section 54 is available when two flats purchased were combined to make one residential unit. The High Court referred to section 13 of the General Clauses Act which states that whenever the singular is used for a word, it is permissible to include the plural. The High Court also observed that the contention of the Revenue that the expression "a" residential house should be understood in a sense that the building should be residential in nature and "a" should not be understood to indicate a singular number. The High Court finally held in favour of the assessee by observing as under-
"On facts, it is shown by the assessee that the apartments are situated side by side. The builder has also stated that he has effected modification of the flats to make it as one unit by opening the door in between two apartments. The fact that at the time when the inspector inspected the premises, the flats were occupied by two different tenants is not the ground to hold that the apartment is not a one residential unit. The fact that the assessee could have purchased both the flats in one single sale deed or could have narrated the purchase of two premises as one unit in the sale deed is not the ground to hold that the assessee had no intention to purchase the two flats as one unit."
It is to be noted that the assessee in the case before the Karnataka High Court was a Hindu undivided family, the High Court referred to the fact that in the case of a Hindu undivided family, property is held by the members as joint tenants and went to hold that "the members keeping in view the future needs in event of separation, purchase of more than one residential building cannot be said that the benefit of exemption is to be denied under section 54(1) of the Income-tax Act."
It is also to be noted that the Supreme Court on 10-08-2009 has dismissed the Department's special leave petition against the judgment of the Karnataka High Court in the case of CIT vs. Ananda Basappa (Supra) wherein the High Court held that the assessee was entitled to exemption on purchase of 2 flats which were combined to make one residential flat.
(ii) In the case of CIT vs. Smt. Rukminiamma (2011)196 Taxman 87 the Karnataka High Court following its earlier decision in the case of D. Ananda Basappa (supra) has held that the expression "a residential house" should be understood in a sense that the building should be of residential nature and "a" should not be understood to indicate a singular number.
(iii) The Karnataka High Court in its judgment dated 05-01-2011 in ITA No.194 of 2010 in the case of CIT vs. Jyoti K.Mehta following its earlier decision in the case of Smt. Rukminiamma (supra) has held that "the evidence on record also discloses that the units are situated side by side, modifications were made, the door was opened making it as a single unit and the consideration from the sale of the sale of the residential unit is utilized to purchase these residential units and therefore, the assessee is entitled to the benefit of section 54. As such, she is not liable to pay the capital gains"
(iv) The Madras High Court in the case of Dr. (Smt.) P.K. Vasanthi Rangarajan vs. CIT [2012] 23 taxmann.com 299 following the decision of the Karnataka High Court in the cases of Smt. K.G. Rukminiamma (supra) and D. Ananda Basappa (supra) has held that "four residential flats (constructed in this case) constituted "a residential house" for the purpose of section 54 of the Act"
(v) The pertinent observations made by the Delhi High Court in the case of CIT vs. Gita Duggal [2013] 30 taxmann.com 230 (Del) may be noted.
"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. Therefore, one cannot 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. The fact that residential house consists of several independent units cannot be permitted to act as an impediment to allowance of deduction under section 54/54F of the Income-tax Act."
The Delhi High Court has followed the two well known decisions of the Karnataka High Court in the cases of D. Ananda Basappa (supra) and Smt. K.G.Rukminiamma (supra) while arriving at a decision favourable to the assessee.
(vi) The High Court of Andhra Pradesh in the case of CIT vs. Syed Ali Adil reported in (2013) 33 taxmann.com 212 (AP) has held that purchase of 2 flats adjacent to one another and had a common meeting point would fulfill the requirement of exemption provisions of section 54 of the Income Tax Act. The High Court has followed the two well known decisions of the Karnataka High Court in the cases of D. Ananda Basappa (supra) and Smt. K.G.Rukminiamma (supra). One redeeming feature is that the decision of the Mumbai Special Bench of ITAT in the case of ITO vs. Sushila M. Jhaveri [2007] 107 ITD 327 which held that investment in more than one house is not eligible for exemption under section 54 of the Act, has been disapproved in this decision whereas the decisions in the cases of K.G. Vyas vs. Seventh ITO [1986] 26 TTJ 491 (Bom), ITO vs. P.C.Ramakrishna HUF [2007]107 TTJ 351(Chennai) and Prem Prakah Bhutani vs. Asst. CIT [2007] 110 TTJ 440 (Del) which held otherwise-in favour of assessees-have been approved.
(vii) In context of section 54F, 'residential house' cannot be construed as a singular and, moreover, it is not necessary that all residential units should have a single door number allotted to it. Smt. V.R. Karpagam vs. ITO [2013] 34 taxmann.com 98 (Chennai - Trib.). It is to be noted that the assessee in this case claimed exemption in respect of all five flats received by her in lieu of land she had parted with and the Tribunal held in favour of the assessee.
b) In the following cases it was held that investment out of sale proceeds in residential properties outside India (also) qualifies for exemption under section 54 of the Act
(i) Mrs. Prema P. Shah, Sanjiv P. Shah vs ITO (2006) 282 ITR (AT) 211 (Mumbai)
(ii) Vinay Mishra vs. Asstt.CIT –ITA NO.895(Ban) of 2012-order dated 12-10-12-[2012] 79 DTR (Bang) (Trib.) 1- The Bangalore Bench followed decision in (i) above after observing that there is nothing to suggest that the new residential property acquired should be situated in India.
The following observations made by the Bangalore Bench in this case are worth noticing:
(i) The jurisdictional High Court in the case of Director of Income-tax (International Taxation) v. Mrs. Jennifer Bhide [2012] 15 taxmann.com 82 (Kar.) has held that introducing a word which is not there into a section amounts to legislating when Parliament has not used these words in the said section
(ii) The latter decision of the Mumbai, Income-tax Appellate Tribunal in the case of Dr. Girish M. Shah noted the order of the Ahmedabad Bench of the Tribunal in the case of Leena J. Shah [2006] 6 SOT 721 (Ahd) but still preferred to follow the order of the Mumbai Income-tax Appellate Tribunal in the case of Mrs. Prema P. Shah and Sanjiv P. Shah [2006] 282 ITR (AT) 211 (Mumbai)
However the view in favour of Revenue was expressed in the following cases.
(i) Leena J Shah v. Asstt. CIT (2006) 6 SOT 721(Ahd)
(ii) Farhad Bottlewala vs. Asstt.CIT [ITA NO.1761/MUM/2012]-Order dated 31-08-2012
The Tribunal in Farhad Bottlewala's case (supra) noted the distinction brought out by the Mumbai Bench between the provisions of section 54 and 54F in the case of Girish M.Shah – a decision rendered by subsequent Mumbai Bench of ITAT following Mrs. Prema P. Shah (supra) – and following the decision of the Ahmedabad Bench in the case of Leena J.Shah (supra) held in favour of the Revenue.
3. Proposed Amendment
So, perhaps, in order to clear the controversy arising out of these decisions because the purpose of introducing these exemptions was not to incentivize the taxpayers purchasing the residential accommodations for investment purposes rather than for their own self-accommodations the amendment to these sections was thought of. Moreover the proposed amendment seems to fall in line with the following observations of the Supreme Court in the case of Padmasundara Rao v. State of Tamil Nadu [2002] 255 ITR 147 which are to the following effect.-
"Two principles of construction - one relating to casus omissus and the other in regard to reading the statute as a whole appear to be well-settled. Under the first principle a casus omissus cannot be supplied by the Court except in the case of clear necessity and when reason for it is found in the four corners of the statute itself but at the same time a casus omissus should not be readily inferred and for that purpose all the parts of a statute or section must be construed together and every clause of a section should be construed with reference to the context and other clauses thereof so that the construction to be put on a particular provision makes a consistent enactment of the whole statute. This would be more so if literal construction of a particular clause leads to manifestly absurd or anomalous results which could not have been intended by the Legislature. "An intention to produce an unreasonable result", said Danckwerts L. J. in Artemiou v. Procopiou [1966] 1 QB 878 (CA) "is not to be imputed to a statute if there is some other construction available". Where to apply words literally would "defeat the obvious intention of the legislation and produce a wholly unreasonable result" we must "do some violence to the words" and so achieve that obvious intention and produce a rational construction (per Lord Reid in Luke v. IRC [1964] 54 ITR 692/[1963] AC 557 where at page 577, he also observed: "this is not a new problem, though our standard of drafting is such that it rarely emerges."
4. Points to be noted
(i) Though the decision of the Delhi High Court in the case of Gita Duggal (supra) may still seems to suggest that it is possible in the light of the following observations-
"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."
It may not hold after the proposed amendment.
(ii) The Madras Bench of ITAT in the case of Asst. CIT v. T.N. Gopal (IT Appeal No.231of 2008, decided on 25-05-2009)/(2009)-16-CPT-363(Chennai-Trib.)(T.M) has held that mere extension of the existing building would not give benefit to the assessee under section 54F. Applying this principle in reverse direction it can, as well, be argued that nothing would prevent an assessee from acquiring (distinguished from purchasing) a building with more than one storey for his use as it would not give raise to existence of more than one building disentitling the assessee from claiming exemption under section 54 of the Income-tax Act towards investment in (purchase of) a single residential house property even after the proposed amendment.
IT-Sec. 54 only requires investment of cap gains, which can be in several independent residential units, HC rules
IT : Exemption under section 54 cannot be denied, where residential house property purchased by assessee consists of several independent units
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[2013] 33 taxmann.com 212 (Andhra Pradesh)
HIGH COURT OF ANDHRA PRADESH
Commissioner of Income-tax-II, Hyderabad
v.
Syed Ali Adil*
GODA RAGHURAM AND M.S.RAMACHANDRA RAO, JJ.
I.T.T.A.No.410 of 2012†
DECEMBER 20, 2012
Section 54 of the Income-tax Act, 1961 - Capital gains - Profit on sale of property used for residential house - Whether exemption under section 54 only requires that property purchased by assessee out of sale proceeds should be of residential nature and fact that residential house consisted of several independent units could not be an impediment for granting relief under said section, even if such independent units were situated side by side, on different floors or were purchased under separate sale deeds - Held, yes [Para 10] [In favour of assessee]
FACTS
| ■ | The assessee claimed deduction under section 54, by purchasing two independent flats with sale proceeds of an ancestral house property. | |
| ■ | The Assessing Officer held that deduction under section 54 was to be restricted to only one flat since the two residential units purchased by the assessee was separated by a strong wall and moreover they were purchased from two different vendors under separate sale deeds. | |
| ■ | On first appeal, Commissioner (Appeals) allowed 100 per cent deduction under section 54 to the assessee. | |
| ■ | On second appeal, Tribunal confirmed the decision of Commissioner (Appeals). | |
| ■ | On appeal by the revenue, before the High Court: |
HELD
| ■ | As held in CIT v. D. Ananda Basappa's[2009] 309 ITR 329/180 Taxman 4 case by the Karnataka High Court, the expression 'a residential house' in section 54(1) has to be understood in a sense that the building should be of residential nature and 'a' should not be understood to indicate a singular number and where an assessee had purchased two residential flats, he is entitled to exemption under section 54 in respect of capital gains on sale of its property on purchase of both the flats, more so, when the flats are situated side by side and the builder has effected modification of the flats to make it as one unit, despite the fact that the flats were purchased by separate sale deeds. This decision was followed by the Karnataka High Court in CIT v. Smt. K.G. Rukminiamma[2011] 196 Taxman 87/[2010] 8 taxmann.com 121 where a residential house was transferred and four flats in a single residential complex were purchased by the assessee, it was held that all four residential flats constituted a residential house for the purpose of section 54 and that the four residential flats cannot be construed as four residential houses for the purpose of section 54. Admittedly, the two flats purchased by the assessee are adjacent to one another and have a common meeting point. In the impugned order, the Tribunal has also relied upon the decisions in K.G. Vyas v. Seventh ITO [1986] 16 ITD 195 (Bom.) case, ITO v. P.C. Ramakrishna, (HUF)'s [2007] 108 ITD 251 (Chennai) case and Prem Prakash Bhutani v. Asstt. CIT [2009] 31 SOT 38 (Delhi) (URO) case wherein it was held that exemption under section 54 only requires that the property should be of residential nature and the fact that the residential house consists of several independent units cannot be an impediment to grant relief under section 54 even if such independent units were on different floors. The decision in ITO v. Shushila M. Jhaveri [2007] 107 ITD 327 (Mum.) (SB) case holding that only one residential house should be given the relief under section 54 does not appear to be correct and was to be disapproved. Therefore, it was held that the Commissioner (Appeals) was correct in setting aside the order of the Assessing Officer and the Tribunal rightly confirmed the decision of the Commissioner (Appeals). [Para 10] |
CASE REVIEW
CIT v. D. Ananda Basappa's [2009] 309 ITR 329/180 Taxman 4 (Kar.) (para 10); K.G. Vyas v. Seventh ITO [1986] 16 ITD 195 (Bom.) (para 10); ITO v. P.C. Ramakrishna, (HUF) [2007] 108 ITD 251 (Chennai) and Prem Prakash Bhutani v. Asstt. CIT [2009] 31 SOT 38 (Delhi) (URO) (para 10) followed.
ITO v. Ms. Shushila M. Jhaveri [2007] 107 ITD 327 (Mum.) (SB) (para 10) disapproved.
CASES REFERRED TO
CIT v. D. Ananda Basappa's [2009] 309 ITR 329/180 Taxman 4 (Kar.) (para 3), K.G. Vyas v. Seventh ITO [1986] 16 ITD 195 (Bom.) (para 6), ITO v. P.C. Ramakrishna, (HUF) [2007] 108 ITD 251 (Chennai) (para 6), Prem Prakash Bhutani v. Asstt. CIT [2009] 31 SOT 38 (Delhi) (URO) (para 6), ITO v. Ms. Shushila M. Jhaveri [2007] 107 ITD 327 (Mum.) (SB) (para 9) and CIT v. Smt. K.G. Rukminiamma [2011] 196 Taxman 87/[2010] 8 taxmann.com 121 (Kar.) (para 10).
B. Narasimha Sarma for the Appellant.
JUDGMENT
M.S. Ramachandra Rao, J. - This appeal is filed under section 260-A of the Income Tax Act, 1961 (for short 'the Act') by the Revenue challenging the order dated 09-09-2011 in I.T.A.No.284/Hyd/2011 of the Income Tax Appellate Tribunal, Hyderabad Bench "B", Hyderabad.
2. The respondent is an individual assessee. He filed his return of income for the assessment year 2007-08 on 31-08-2007 with the Assistant Commissioner of Income Tax, Circle-VI (1), Hyderabad admitting therein a net income of Rs. 43,97,840/-. The said return was processed under section 143(1) of the Act on 24-02-2009. Meanwhile, the case was taken up for scrutiny by issuing notice dt.25-08-2008 under section 143(2) of the Act. A notice dt.15-06-2009 under section 142(1) was issued calling for various details.
3. Before the Assessing Officer, the assessee offered under the head, long term capital gains, a sum of Rs. 41.00 lakhs contending that he had inherited an ancestral house property which was sold during the year under consideration and the resultant long term capital gains were offered from sale of the said house; that he had taken the sale consideration of Rs.1,99,50,000/- for arriving at the capital gains even though the sale deed mentioned the sale consideration as Rs. 2,66,00,000/-; that out of the sale consideration he had purchased two flats in Mayfair Apartment, Banjara Hills, Hyderabad and he is entitled to claim deduction/exemption under section 54 of the Act for an amount of Rs.93,80,192/- and that in view of the decision in CIT v. D. Ananda Basappa [2009] 309 ITR 329/180 Taxman 4 (Kar.), even though section 54 mentions that the proceeds should be invested in "a residential house", it being a beneficial provision, it should be construed liberally and the deduction cannot be restricted to only one residential house and it should be extended to the purchase of two adjacent residential flats.
4. The Assessing Officer by order dt.25-08-2009 held that the assessee is not entitled to claim exemption in respect of Rs.93,80,192/- but only to the extent of Rs.45,52,860/- comprising of consideration of Rs.42,36,000/- and a stamp duty of Rs.3,16,860/- utilized for investment on one of the flats by the assessee on the ground that the inspection report of the I.T.I. deputed by the Assessing Officer showed that what was purchased were two residential units separated by a strong wall; that they were purchased from two different vendors under two separate sale deeds and as such the deduction under section 54 has to be restricted to only one flat.
5. Aggrieved thereby, the assessee filed an appeal to the CIT (Appeals), Guntur. He allowed the appeal by order dt.13-10-2010 holding that the Assessing Officer had acted too technically and had erroneously denied the assessee the deduction to the extent of 50% and that since the assessee had purchased two flats having adjacent kitchens and toilets which have a common meeting point, he is entitled to 100% deduction under section 54 for both the flats purchased by him.
6. Challenging the same, the Revenue filed I.T.A.No.284/Hyd/2011 to the Income Tax Appellate Tribunal. By order dt.09-09-2011, the Tribunal dismissed the appeal of the Revenue on the ground that it had consistently taken the view that even though flats are located at different floors, when they could be combined, it should be construed as a single residential accommodation only; that the said view is supported by the decisions of the Tribunal reported in K.G. Vyas v. Seventh ITO [1986] 16 ITD 195 (Bom.), ITO v. P.C. Ramakrishna, (HUF) [2007] 108 ITD 251 (Chennai) and Prem Prakash Bhutani v. Asstt. CIT [2009] 31 SOT 38 (Delhi) (URO)
7. Challenging the same, the Revenue has filed the present appeal.
8. Heard Sri B. Narasimha Sarma, learned Standing Counsel for the Income Tax Department at the stage of admission.
9. He contended that the deduction under section 54 of the Act is allowable only for one residential house and not for more than one residential house and that the Tribunal erred in holding that the deduction under section 54 of the Act is allowable for two independent residential flats in the same complex. He also placed reliance on the decision of the Special Bench of the Tribunal in ITO v. Ms. Sushila M. Jhaveri [2007] 107 ITD 327 (Mum.)
10. We see no force in the said contention. As held in D. Ananda Basappa's case (supra) by the Karnataka High Court, the expression "a residential house" in section 54 (1) of the Act has to be understood in a sense that the building should be of residential nature and "a" should not be understood to indicate a singular number and where an assessee had purchased two residential flats, he is entitled to exemption under section 54 in respect of capital gains on sale of its property on purchase of both the flats, more so, when the flats are situated side by side and the builder has effected modification of the flats to make it as one unit, despite the fact that the flats were purchased by separate sale deeds. This decision was followed by the Karnataka High Court in CIT v. Smt. K.G. Rukminiamma [2011] 196 Taxman 87/[2010] 8 taxmann.com 121 (Kar.) where a residential house was transferred and four flats in a single residential complex were purchased by the assessee, it was held that all four residential flats constituted "a residential house" for the purpose of section 54 and that the four residential flats cannot be construed as four residential houses for the purpose of section 54. Admittedly the two flats purchased by the assessee are adjacent to one another and have a common meeting point. In the impugned order, the Tribunal has also relied upon the decisions in K.G. Vyas's case (supra), P.C. Ramakrishna, HUF's case (supra) and PremPrakash Bhutani's case (supra) wherein it was held that exemption under section 54 only requires that the property should be of residential nature and the fact that the residential house consists of several independent units cannot be an impediment to grant relief under section 54 even if such independent units were on different floors. The decision in Ms.Suseela M.Jhaveri's case (supra) holding that only one residential house should be given the relief under section 54 does not appear to be correct and we disapprove of it. We agree with the interpretation placed on section 54 by the High Court of Karnataka in D. Ananda Basappa's case (supra) and Smt. K.G. Rukminiamma's case (supra) and the decisions of the Mumbai, Chennai and Delhi Benches of the Tribunal in K.G. Vyas (supra), P.C. Ramakrishna, HUF (supra) and Prakash Bhutani (supra). We therefore hold that the CIT (Appeals) was correct in setting aside the order of the Assessing Officer and the Tribunal rightly confirmed the decision of the CIT (Appeals).
11. We hold that no substantial question of law arises for consideration in this appeal and the same is accordingly dismissed. No costs.
Esha [2011] 13 taxmann.com 59 (Article)
IT : Exemption under section 54 in respect of two or more houses
V.K. SUBRAMANI
CA
One raging controversy in recent times has been in relation to section 54 exemption whether the taxpayer must reinvest in one residential house or he can reinvest in more than one house. The author has cited a host of case laws where exemption has been allowed in case of reinvestment in two adjoining flats. It would be interesting to wait and watch whether a decision in favour of the taxpayer would be rendered if the residential units are located at different places.
1. INTRODUCTION
CIT v. Smt. Jyothi K. Mehta [2011] 12 taxman.com 440 (Kar.)
Capital gains tax is one of the interesting features of tax law which is somewhat different from regular sources of income comprised in other heads. A capital gains transaction is an occasional transaction of a taxpayer and the income-tax law provides for some exemptions to reduce the rigour of law by way of reinvestment in another eligible investment. Such an eligible reinvestment for exemption could be with reference to net sale consideration or the amount of capital gain chargeable to tax.
One of the exemption provisions applicable to personal taxpayers is contained in section 54 of the Income-tax Act, 1961. When a residential house of taxpayer is transferred and yet another residential house is acquired or constructed by him, the amount of long-term capital gain arising from the transfer of the residential house is exempt to the extent it is reinvested in acquisition or construction of yet another residential house. It merits mentioning that 'residential house' would mean a house used for residence not necessarily by the taxpayer but also by the tenant or any other person for residential purposes.
Reinvestment of capital gain arising from sale of a residential house in another residential house has been a subject-matter of controversy in the context of interpreting whether the taxpayer should acquire only one residential house or more than one residential house.
2. COVERAGE OF SECTION 54
The coverage of section 54 could be simplified into the following points:
(i) It is applicable to an individual or HUF taxpayers only.
(ii) The subject-matter of transfer must be a house used for residence which was owned by the taxpayer for more than 36 months before the date of transfer. In other words, it should be a long-term capital asset.
(iii) Cases where the residential house was obtained by the taxpayer in any manner mentioned in section 47 such as by way of gift, will or partition of HUF, etc., the holding period of the previous owner will also be considered for determining the status of the asset, viz., long-term or short-term.
(iv) The amount eligible for exemption is with reference to the capital gain computed by indexing the cost of acquisition and cost of improvement, if any. Such indexed cost of acquisition and improvement would be deducted from the net sale consideration.
(v) The capital gain, if it is long-term in nature, the amount invested within a period of one year before or two years after the date of transfer in acquisition of another residential house is eligible for exemption. Where the taxpayer decides to construct a residential house, the time period for completing the construction is three years from the date of transfer of the original capital asset i.e. a house used for residence.
(vi) Nexus of sale consideration from which eligible investment is made is not required. That is why even acquisition within one year before the sale of house used for residence is also stated as eligible for exemption.
(vii) Where the taxpayer could not acquire the residential house or employ the capital gain in yet another residential house by way of construction, the amount has to be deposited in capital gain account maintained in various scheduled banks. The time-limit for deposit of unutilized long-term capital gain is upto the due date for filing the return prescribed in section 139(1).
3. ONE HOUSE OR TWO HOUSES?
3.1 Case Laws - One raging controversy in recent times in this otherwise innocuous benign section 54 is whether the taxpayer must reinvest in one residential house or in more than one house. The following case laws are worth noting:
3.1-1 In Asstt. CIT v. Dr. P.S. Pasricha [2008] 20 SOT 468 (Mum.) the taxpayer acquired two adjoining residential flats in one building and gave them on rent to two different tenants. The Tribunal held that the eligibility for exemption under section 54 would be limited to one flat only; as it was occupied by two tenants the two flats could not be treated as single residential unit.
3.1-2 In ITO v. Ms. Sushila M.Jhaveri [2000] 107 ITD 327 (Mum.)(SB) the taxpayer acquired two adjoining flats and by removing the intermediate walls with a common kitchen it was used as one residential house. Since both the units were combined and made into one unit, investment in two flats was held as eligible for exemption under section 54.
3.1-3 In Dy. CIT v. Ranjit Vithaldas Lokupavan [2008] 25 SOT 420 (Mum.) the taxpayer reinvested the capital gain in two different places. The taxpayer claimed that, though the flats were located at different places, a common kitchen and common prayer place were held for being treated as single unit. The Tribunal rejected the taxpayer's claim for the reason that they were not contiguous and could not be treated as one unit. In result, the taxpayer became eligible for exemption only for the amount invested in one residential unit.
3.1-4 In Prem Prakash Bhutani v. Asstt. CIT [2009] 31 SOT 38 (Delhi)(URO) even construction of several residential units meant for family members and in the presence of evidence in the form of ration card where all the residents were shown as belonging to same family, it was held that such independent portions occupied by the family members were eligible for exemption notwith-standing fact that several independent residential units were occupied in the same place.
3.1-5 Ananda Basappa's case - The Karnataka High Court in CIT v. D. Ananda Basappa [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.
The Court referred to section 13 of the General Clauses Act, 1897 wherein it is declared that whenever the singular is used for a word, it is permissible to include the plural. The expression 'a' residential house should be understood in a sense that building should be of residential nature and 'a' should not be understood to indicate a singular number.
3.1-6 Smt. Jyothi K. Mehta's case - Again in CIT v. Smt.Jyothi K.Mehta [2011] 12 taxmann.com 440 (Kar.) the taxpayer sold a residential house and acquired two flats and claimed exemption under sections 54 and 54F of the Act. The Assessing Officer held that the taxpayer was already owner of a residential flat at Bombay and she had purchased two flats out of the sale proceeds. Hence, the taxpayer was not entitled to claim exemption from the capital gains. The Commissioner (Appeals) factually found that the two flats were utilized as a common residence and, hence, the taxpayer was eligible for exemption under section 54. The Tribunal too, upheld the order of the Commissioner (Appeals).
3.1-6.1 The Karnataka High Court held that the two flats acquired by a taxpayer were situated side by side. The builder had effected necessary modifications to the flats to make them one unit by opening the door in-between the two apartments. It was further held that the taxpayer could have purchased both the flats in one single sale deed or could not have narrated the purchase of two premises as one unit in the sale deed, did not make any difference. The Court made reference to the precedent in CIT v. Smt.K.G.Rukminiamma [2011] 196 Taxman 87/[2010] 8 taxmann.com 121 (Kar.). In Smt. K.G. Rukminiamma's case (supra) it was held that the expression 'a residential house' used in section 54 does not convey the intention of the Legislature to mean a single residential house as eligible for exemption. If that was the intention, the Legislature might very well have used the word 'one' instead of 'a residential house'.
3.1-6.2 The Court in Smt. Jyothi K. Mehta's case (supra) also made reference to section 13(2) of the General Clauses Act, 1897 and held a new asset acquired after the sale of the original asset can also be buildings or lands appurtenant thereto, which also should be 'a residential house'. The letter 'a' in the context it is used should not be construed as meaning 'singular'. Being an indefinite article the expression should be read in consonance with the other words 'buildings' and 'lands'. A further evidence that the two residential units were situated side by side and necessary modifications were made by means of a door in between the units to make it as a single unit satisfied the requirements. The Court, accordingly, held that the taxpayer was eligible for exemption under section 54 for both the residential units which could be used as a single residential unit.
CONCLUSION
4. The host of case laws discussed above throw light on the fact that if the acquisition is of residential units (more than one) situated side by side and a door is fixed in-between these units, the eligibility requirements are satisfied, notwithstanding the fact that occupants may be even tenants with different backgrounds.
Both the High Court decisions given above have identical issue, viz ., residential units located side by side and a door fixed in-between the units and the possibility of using the units as a single residential unit. In spite of making reference to the General Clauses Act, 1897 to hold that the emphasis of the section is not on one residential unit but on investment in residential units, the decisions were based on common fact, viz., a door fixed in-between the units and the possibility of using both the units as a single unit.
It would be interesting to wait and watch whether a decision in favour of the taxpayer would be rendered if the residential units are located at different places. Only time can tell whether any taxpayer would dare to invest in such a manner and make a claim of exemption before the tax authorities.
Budget 2014 - Sec. 54EC exemptions restricted to Rs. 50 lakhs even if investment is made in two financial years
S.KRISHNAN
1. Amendment Proposed
Section 54EC is proposed to be amended by the Finance Bill 2014 by insertion of another proviso in sub-section (1), after the first proviso (now existing) with effect from the 1st day of April, 2015, namely:
"Provided further that the investment made by an assessee in the long-term specified asset, from capital gains arising from transfer of one or more original assets, during the financial year in which the original asset or assets are transferred and in the subsequent financial year does not exceed fifty lakh rupees."
2. Why was this amendment thought of?
This amendment is proposed to be brought in because in the following cases the ITAT benches have held that the assessee can invest up to Rs. 1 Crore in capital gain bonds under section 54EC which is spread over a period of two financial years at Rs. 50 lakhs in each financial year. However, such investment should be made within a period of 6 months from the date of transfer:
i) Aspi Ginwala, Shree Ram Engg. & Mfg. Industries v. Asst. CIT [2012] 20 taxmann.com 75/52 SOT 16 (Ahd.)
ii) Vivek Jairazbhoy v. Dy. CIT [ITA No.236/Bang/2012 vide their order dated 14.12.2012]
iii) Smt. Sriram Indubal v. ITO [2013] 32 taxmann.com 118 (Chennai)
iv) ITO v. Ms. Rania Faleiro [2013] 33 taxmann.com 611 (Panaji - Trib.)
CBDT vide its Circular No. 3/2008, dated 12-3-2008 explains the (existing) proviso introduced by the Finance Act, 2007 as under:
"28.2 The quantum of investible bonds issued by NHAI and REC being limited, it was felt necessary to ensure that the benefit was available to all the investors. For this purpose, it was necessary to ensure that the limited number of bonds available for subscription is also available for small investors. Therefore, with a view to ensure equitable distribution of benefits amongst prospective investors, the Government decided to impose a ceiling on the quantum of investment that could be made in such bonds. Accordingly, the said section has been amended so as to provide for a ceiling on investment by an assessee in such long-term specified assets. Investments in such specified assets to avail of exemption under section 54EC, on or after April 1, 2007 will not exceed fifty lakh rupees in a financial year."
It was sought to be argued from the language used in the aforementioned circular that the cap of Rs. 50 Lakhs in the proviso to section 54EC(1) was only an investment cap and not a deduction cap. In order to get over such argument which appears to be reasonable and the above stated decisions the proposed amendment restricting the claim to Rs. 50 lakhs is brought through necessary amendment to sub-section (1) of section 54EC by adding one more proviso by restricting the total deduction to just Rs. 50 lakhs. The proposed amendment has been carefully worded in such way to cover even cases of transfer of capital asset in the second half of the financial year whereby the assessee gets time till the beginning of the next financial year to make investment under section 54EC of the Act.
3. One Redeeming Feature
However one redeeming feature is that the assessees who resorted to this kind of tax planning by disposing of capital asset in the second half of financial year 2013-14 are still not affected by this proposed amendment as they can invest additional sum in the current financial year (2014-15) provided such investment is made within 6 months from the date of transfer as the proposed amendment would take effect only from the Assessment Year 2015-16 corresponding to the financial year 2014-15. The assessees who would have resorted to tax planning as stated above are liable for capital gains, subject to available exemptions, for the assessment year 2014-15 and as a matter of policy/principle none of the proposed amendments has been given retrospective effect.
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