2025 (5) TMI 1247 - HC - Income Tax

LTCG - denial of deduction u/s 54F - whether the new asset purchased is a residential house - an expression used in Section 54 and 54F? - HELD THAT - We find no infirmity with the decision of the ITAT in holding that the Assessee could not be denied the deduction u/s 54F of the Act on the ground that she holds more than one residential unit. We also find that there has been no failure on the part of the Assessee to truly and fairly disclose all the material facts in her return. Assessee had fairly disclosed about the sale of the original asset in respect of which capital gains had arisen as well as about the house property purchased from the said sale proceeds. The configuration of ownership of the property as recorded in the South Delhi Municipal Corporation records for D-6/5 does not lead to the conclusion that there was any failure on the part of the Assessee in disclosing the material facts relevant for claiming the deduction sought by the Assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

(a) Whether the Assessee is entitled to claim deduction under Section 54F of the Income Tax Act, 1961, in respect of capital gains arising from the sale of shares of an unlisted company, where the sale consideration was invested in acquiring a residential house property.

(b) Whether the amount received from the sale of shares must be directly and specifically traced to the acquisition of the new residential asset to claim deduction under Section 54F.

(c) Whether the reopening of assessment under Section 147 of the Act was valid, particularly whether the notice issued under Section 148 was barred by limitation due to absence of failure to disclose material facts.

(d) Whether the Assessee owned more than one residential house on the date of transfer of the original asset, thereby disqualifying the Assessee from claiming deduction under Section 54F as per the proviso to Section 54F(1)(i).

(e) The interpretation of the expression "one residential house" under Section 54F, specifically whether different floors of a single building owned by the Assessee and family members constitute multiple residential houses or a single residential house.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Entitlement to deduction under Section 54F and requirement of direct tracing of sale proceeds

Relevant legal framework and precedents: Section 54F of the Income Tax Act provides for exemption from capital gains tax if the capital gains arising from the transfer of a capital asset (other than a residential house) are invested in acquiring a residential house within the prescribed period.

Court's interpretation and reasoning: The AO initially restricted the deduction under Section 54F to Rs. 30 crores from the Rs. 90 crores claimed by the Assessee, on the ground that the amount of Rs. 60 crores was not directly invested in the new asset but was routed through a charitable trust and other entities, and continued to be reflected as outstanding.

The CIT(A) reversed this finding, holding that there is no requirement under Section 54F that the sale consideration must be directly traced in specie to the acquisition of the new asset. The essential requirement is that the investment in the new asset must have been made. The fact that the amount was reflected as outstanding did not disentitle the Assessee from claiming the deduction.

Key evidence and findings: The Assessee had deposited the sale consideration in the capital gains account in two tranches and subsequently acquired the residential property. The flow of funds through intermediary entities did not alter the fact of investment in the new asset.

Application of law to facts: The Court endorsed the CIT(A)'s approach, emphasizing that the statutory language does not mandate tracing the exact funds from sale to purchase. The focus is on the investment made in the residential house property.

Treatment of competing arguments: The Revenue's argument that the indirect route of funds and outstanding amount precluded the deduction was rejected as inconsistent with the statutory scheme and judicial precedents.

Conclusions: The Assessee was entitled to the full deduction under Section 54F as claimed, without the need for direct tracing of sale proceeds.

Issue (c): Validity of reassessment notice under Section 148 and limitation

Relevant legal framework: Section 148 allows reopening of assessment if the AO has reason to believe that income has escaped assessment. However, such reopening is subject to limitation periods and requires failure to disclose material facts.

Court's interpretation and reasoning: The ITAT accepted the Assessee's objection that there was no failure to disclose material facts in the original return. The Assessee had fairly disclosed the sale of the original asset and the acquisition of the new house property.

Key evidence and findings: The AO's basis for reopening was the SDMC records indicating ownership of more than one residential property. The Court found that this did not amount to failure to disclose material facts.

Application of law to facts: Since there was no failure to disclose, the reopening notice issued beyond four years was barred by limitation.

Treatment of competing arguments: The Revenue's contention that the AO had reason to reopen was rejected due to lack of any new material or failure on the Assessee's part.

Conclusions: The reassessment notice was invalid as barred by limitation and absence of failure to disclose.

Issue (d) and (e): Interpretation of "one residential house" and ownership of multiple properties

Relevant legal framework and precedents: The proviso to Section 54F(1)(i) disallows exemption if the Assessee owns more than one residential house (other than the new asset) on the date of transfer of the original asset.

Judicial precedents considered include:

• Commissioner of Income-tax v. D. Ananda Basappa: The term "a residential house" should be understood as a building of residential nature, and "a" does not necessarily mean singular number. Two adjacent apartments joined to form a single unit were treated as one residential house.
• Pawan Arya v. Commissioner of Income Tax: Distinguished the above, holding exemption under Section 54F not available if units are in different locations.
• Commissioner of Income-tax v. Gita Duggal: Held that the expression "a residential house" does not require the house to be constructed in a particular manner. Multiple independent units within a building may still constitute one residential house if used as a single unit.
• Mrs. Kamla Ajmera v. Pr. Commissioner of Income Tax: Affirmed that multiple residential units or floors may be considered as a single residential house if constructed or capable of being used as a singular unit.
• Commissioner of Income-tax v. Gumanmal Jain: Madras High Court supported similar view.

Court's interpretation and reasoning: The Court examined the ownership of different floors of the property at D-6/5, Vasant Vihar, New Delhi, which were owned partly by the Assessee and partly by family members. The Court held that different floors of the same building should be considered as one residential house and not multiple houses.

Key evidence and findings: Sale deeds indicated ownership of basement and second floor by the Assessee (50% share), ground floor by family members, and first floor purchased but possession taken later. The physical structure was a single building with multiple floors.

Application of law to facts: The Court applied the principles from the above precedents to conclude that the Assessee did not own more than one residential house within the meaning of Section 54F proviso.

Treatment of competing arguments: The AO's view that each floor constituted a separate residential house was rejected as contrary to judicial interpretation and the practical understanding of "a residential house."

Conclusions: The Assessee was eligible to claim deduction under Section 54F as the multiple floors did not amount to ownership of more than one residential house.

3. SIGNIFICANT HOLDINGS

"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."

"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."

"The physical structuring of the new residential house, whether it is lateral or vertical, should not come in the way of considering the building as a residential house."

"Multiple residential units may be considered as a single residential house for the purposes of exemption under Section 54F of the Act if the floors or houses are so constructed as to be used as one singular unit or capable of being used as such."

"There has been no failure on the part of the Assessee to truly and fairly disclose all the material facts in her return. The reopening notice issued beyond four years is barred by limitation."

"Different floors of a house owned by the Assessee and family members cannot be treated as more than one residential house for the purpose of disallowance under the proviso to Section 54F(1)(i)."

Final determinations:

• The Assessee is entitled to the full deduction claimed under Section 54F of the Income Tax Act.
• The AO's restriction of deduction on the ground of non-tracing of sale proceeds is unsustainable.
• The reopening of assessment under Section 147 was barred by limitation due to absence of failure to disclose material facts.
• The Assessee did not own more than one residential house on the date of transfer of the original asset; different floors of a single building constitute one residential house.
• No substantial question of law arises; the Revenue's appeal is dismissed.