2018 (9) TMI 2158 - AT - Income Tax

Deduction u/s.54/54F - Long Term Gains on sale of property arising from the sale of a residential plot - assessee has made the claim of exemption u/s.54 on the ground that there was a sale of house property but later on she has made an alternative claim u/s.54F which was based on the background of the inquiry made by the AO wherein it was found that the property which was sold was a residential plot and not house property - CIT(A) has denied the exemption u/s.54F even with respect to one flat also on the ground that construction of the tower has not been completed within the prescribed period of three years and assessee has not purchased one residential house but two therefore the entire exemption cannot be given HELD THAT - Here in this case it is an undisputed fact that both the flats purchased by the assessee were on two different storeys and were not adjacent to each other nor could have been joined to form one dwelling unit. Without going into the interpretation as to whether a residential house would mean one house or plural house because in the case of Gita Duggal 2013 (3) TMI 101 - DELHI HIGH COURT have interpreted that a residential house can be construed to two unit only if they have been purchased to be use as one and are adjacent to each other and if there is an adjacent flat with common facilities then same can be constituted to be a residential house and therefore assessee is entitled to the benefit u/s.54/54F. However such an interpretation cannot be stretched so as to hold that two different residential flats which are not adjacent and separated with space and on two different storeys so as to constitute a residential house . Under these facts and circumstances exemption if at all which can be claimed by the assessee in terms of Section 54F would be only with respect to one of the flat only. This is also duly supported by Pavan Arya 2010 (12) TMI 44 - PUNJAB AND HARYANA HIGH COURT Whether exemption can be denied on the ground that tower on which the flats were purchased were not found to be completed within the period of three years ? - Section 54F is a beneficial provision giving benefit to the assessee who has invested the Long Term Capital Gain for a purchase of residential house. The assessee has made the entire payment and flat has been in complete possession of the assessee and simply because certain finishing work has not been done it cannot be held that exemption u/s.54F should be denied. Accordingly we hold that assessee is entitled for exemption of Section 54F on the higher amount invested in the flat and AO is directed to allow exemption u/s.54F for this amount and the balance would be liable for taxation under Long Term Capital Gain. Appeal of the assessee is partly allowed.

Summary

The core legal questions considered in this appeal pertain to the allowability of exemption under Sections 54 and 54F of the Income Tax Act, 1961, in respect of long-term capital gains arising from the sale of a residential plot. Specifically, the issues are:

1. Whether the assessee is entitled to exemption under Section 54 on the ground of reinvestment in residential property, given that the original asset sold was a plot and not a constructed house.

2. Whether exemption under Section 54F can be claimed when the assessee has invested in two separate residential flats located on different floors and not adjoining each other, and whether such two flats can be treated as "one residential house" for the purpose of Section 54F.

3. Whether the exemption under Section 54F can be denied on the ground that the construction of the purchased flats or tower was not completed within the prescribed period of three years.

Issue 1: Entitlement to Exemption under Section 54

The assessee initially claimed exemption under Section 54 on long-term capital gains arising from the sale of a residential plot. However, the Assessing Officer found that the asset sold was only a plot and not a constructed house. This was confirmed by the purchaser of the plot, and the assessee failed to furnish evidence of any construction activity on the plot. The legal framework under Section 54 requires the capital gain to arise from the transfer of a residential house and reinvestment in another residential house to claim exemption.

The Court noted that since the asset sold was a plot and not a constructed residential house, the exemption under Section 54 was not applicable. This finding was uncontested and formed the basis for the alternative claim under Section 54F.

Issue 2: Allowability of Exemption under Section 54F for Two Flats

Section 54F provides exemption on long-term capital gains arising from transfer of any asset other than a residential house, if the net consideration is invested in the purchase or construction of "a residential house" within the prescribed period. The assessee claimed exemption under Section 54F based on investment in two residential flats, A-1501 and A-1602, located in the same tower but on different floors and not adjoining each other.

The Assessing Officer denied exemption under Section 54F on the grounds that:

• The two flats were not adjacent or capable of being converted into a single residential house;
• The proviso to Section 54F explicitly allows exemption only if the assessee acquires one residential property;
• There was no written agreement with the builder to treat the two flats as one unit;
• The construction of the flats was incomplete within the stipulated period.

The learned CIT(A) upheld the Assessing Officer's decision, interpreting the amendment brought by the Finance Act, 2014, which replaced "a residential house" with "one residential house" in Section 54F, as clarificatory and retrospective. The Court relied on precedents including the Special Bench judgment in ITO vs. Sushila M. Jhaveri, affirming that the exemption is available only for investment in one residential house.

The Court distinguished the decision in Gita Duggal, where the High Court allowed exemption for two adjacent flats treated as one house, on the basis that in the present case, the flats were on different floors, separated by open space, and could not be treated as one unit. The Court also referred to the report of the Income Tax Inspector confirming that the flats were distinct and the project was incomplete.

Thus, the Court concluded that the assessee cannot claim exemption for both flats together under Section 54F. However, the Court held that exemption can be allowed for investment in one of the flats only, as supported by the judgment of the Punjab & Haryana High Court in Pavan Arya vs. CIT.

Issue 3: Denial of Exemption on Ground of Incomplete Construction

The Assessing Officer and CIT(A) denied exemption under Section 54F partly on the ground that the construction of the flats or the tower was not completed within three years from the date of transfer. The ITI report indicated that the lift was not installed and the project was incomplete.

The Court observed that Section 54F is a beneficial provision intended to encourage reinvestment of long-term capital gains in residential property. The assessee had made full payment for the flats and had taken possession, with substantial construction completed. The Court held that mere non-installation of lift or minor finishing works pending cannot be a ground to deny exemption.

Therefore, the Court directed that exemption under Section 54F be allowed on the higher amount invested in one flat (Rs. 44,13,775/-), while the balance amount invested in the second flat would be liable to tax as long-term capital gain.

Significant Holdings

"The proviso to Section 54F makes it explicitly clear that the exemption is allowable only if the assessee has acquired one residential property only."

"The amendment brought in the statute amending 'a residential house' to 'one residential house' has been brought w.e.f. 1st April, 2014, and therefore, such an amendment being clarificatory in nature has to be given retrospective effect."

"Two different residential flats which are not adjacent and separated with space and on two different storeys cannot constitute 'a residential house' for the purpose of Section 54F."

"Merely because certain finishing work such as installation of lift has not been done, it cannot be held that exemption u/s.54F should be denied where the assessee has made entire payment and taken possession of the flat."

The Court's final determinations were:

• Exemption under Section 54 is not available as the original asset sold was a plot, not a residential house.
• Exemption under Section 54F can be allowed only for investment in one residential flat, not for two separate flats located on different floors and not adjoining.
• Exemption under Section 54F cannot be denied solely on the ground of incomplete construction if possession is taken and substantial construction is complete.
• The Assessing Officer is directed to allow exemption under Section 54F for the amount invested in one flat, and the balance long-term capital gain will be taxable.