Exemption u/s 54F extendable to the total consideration paid for purchase of property in Joint names

[C.A.Sapna Avasthi]

Property may be owned either singly or jointly, however buying properties jointly with one's spouse is very common.  Joint ownership can be beneficial if one partner dies, as property does not have to go through probate. Also, in many states, a lower property registration fee is levied in case the property is owned by women either individually or jointly.  Further, in case of husband and wife, joint ownership also helps reduce succession issues. Therefore, property is purchased in joint name of wife as a precautionary or safety measure to retain ownership or smooth transfer of ownership in the case of any eventuality likes the husband's death. But, in such cases the cost of property may or may not be shared between the spouses. Usually, the husband funds the cost of property while wife is just a co-owner. As a result, question arises about who is the beneficial owner of the property and about liabilities and right in the property, especially tax related.

Recently Delhi Court in case of Commissioner of Income-tax Versus Ravinder Kumar Arora (2011 (9) TMI 343 (HC)) discussed about constructive ownership and objective of Section 54

FACTS OF THE CASE:
Assessee during the relevant year sold land held by him in his name and claimed exemption of capital gain u/s 54F of the Act with reference to the full amount of consideration paid by him for the purchase of residential house property. Said house property was however purchased jointly in the name of assessee and his wife.

Assessing Officer noted that though all the payments were made by the assessee( as was evident from his bank statement), the residential house was purchased jointly in the names of the assessee and his wife. The AO, therefore, allowed 50% of the exemption claimed under Section 54F with reference to the extent of assessee’s right in the new residential house purchased jointly with his wife. CIT(A) confirmed the view of Assessing Officer.

On appeal, Tribunal decided in favor of assessee holding that the assessee is entitled for benefit of Section 54F of the Act with reference to the total investment. Aggrieved by the order, Revenue filed an appeal.

ORDER:
High Court on observing factual findings recorded by the Tribunal in this case that:
 - Assessee, independently invested in the purchase of new residential house though in joint names.
 - it was Assessee who paid stamp duty and corporation tax at the time of the registration and also paid commission and legal expenses in connection with the purchase of the house.
 - Not even a single penny has been contributed by the wife.
 - As a matter of fact, the assessee was the real owner of the residential house in question.
held that the conditions stipulated in Section 54F stands fulfilled. It would be treated as the property purchased by the assessee in his name and merely because he has included the name of his wife and the property purchased in the joint names would not make any difference.

Court further elaborated that Section 54F mandates that the house should be purchased by the assessee and it does not stipulate that the house should be purchased in the name of the assessee only. Inclusion of the name of the wife should not stand in the way of the deduction legitimately accruing to the assessee.

Objective of Section 54F and the like provision such as Section 54 is to provide impetus to the house construction and so long as the purpose of house construction is achieved, such hyper technicality should not impede the way of deduction which the legislature has allowed. Purposive construction is to be preferred as against the literal construction, more so when even literal construction also does not say that the house should be purchased in the name of the assessee only. Section 54F of the Act is the beneficial provision which should be interpreted liberally in favour of the exemption/deduction to the taxpayer and deduction should not be denied on hyper technical ground.

The court further went on to observe that the word 'assessee' must be given wide and liberal interpretation so as to include the assessee's legal heirs also.

In view of the aforesaid discussion, the Court ruled that the exemption under section 54F is extendible to assessee for the total consideration paid by him, for the purchase of the new asset (the residential property) in the joint name of himself and his wife. 

The court pointed out that that there were judgments of other High Courts giving benefit of Section 54F of the Income Tax Act when the house of an assessee is purchased jointly with his wife.

COMMENTS:

If both spouses have contributed to the purchase of a property, they can claim tax exemption in the proportion of their contribution.

Crucial point is that only the person who has effectively paid for the property will be eligible to and can claim the tax deductions notwithstanding that property stands in joint ownership Also see Commissioner of Income Tax, Ludhiana-I Versus Shri Gurnam Singh [2008 (4) TMI 28 (HC)]

Generally, in the case of properties bought out of borrowed funds, both husband and wife claim the interest deduction on ground of their joint ownership. Once again, here it needs to be ascertained which spouse has funded the property and the interest deduction has to be apportioned proportionally.

Principally, following rule of 'Substance over form' it is effective ownership that matters.