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Budget 2014 - Roll over of investment for Section 54 and 54F exemptions to be restricted to one house only

Overseas property buy loses appeal

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.

Article referred: http://www.taxmann.com/topstories/222330000000003369/budget-2014-roll-over-of-investment-for-section-54-and-54f-exemptions-to-be-restricted-to-one-house-only.aspx

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