Section 54F- exemption for reinvestment in residential house property will not be withdrawn or denied if subsequently residential property is used for non residential purposes- one must be careful in making claims.

[CA DEV KUMAR KOTHARI]

Mahavir Prasad Gupta. Versus Joint Commissioner Of Income-tax  2005 (10) TMI 231 - ITAT DELHI-G [IT APPEAL NO. 1822 (DELHI) OF 2001 order Dated - 07 October 2005]

Shyamlal Tandon v. Income-tax Officer, Ward -7(4), Hyderabad  2014 (4) TMI 867 - ITAT HYDERABAD

Exemption from long-term capital gains:

In some circumstances, long-term capital gains are exempted if the assessee make investment in residential house within prescribed time and subject to other applicable conditions as laid down in S.54F. The deduction is allowed if such investment is made in residential house. Readers are requested to refer to the provisions of S.54F.

The requirement is of investment in a residential house:

The requirement to avail deduction u/s 54F is investment in residential house. If the property in which reinvestment is made is a residential property at the time of making of such investment, then subject to compliance of other conditions, the deduction shall be allowed.

Subsequent change in use for non-residential purposes:

A use of property, as residence  by employees of assessee will be use for residential purposes. Property let out to tenant for residential purposes will be used for residential purposes.

Sometimes a residential property may subsequently be used for non-residential purposes like for office or record room or shop. In such situation, there may not be a change in character of property from residential to non-residential. There can be a temporary use for non-residential purposes. In such circumstances, an entitlement of deduction available based on investment of capital gains in a residential house property will not be effected.

Even if subsequently a property is converted into a non-residential property, still the deduction allowed based on investment made in a residential house at the time of making such investment, will remain intact and cannot be denied or withdrawn. However, there should be bonafide in facts that the property was residential property and its conversion was due to subsequent development. There should be no reason to doubt genuineness of facts. If it can be proved that the property was in fact a non-residential property at the time of making of investment, then a deduction claimed by treating non-residential property as residential property can lead to making a false claim. Therefore, facts and circumstances should establish that honestly speaking property was a residential property.   

Case of Mahavir Prasad Gupta:

In this case the Tribunal held that if  the property was a residential property at the time of making of reinvestment of capital gains then assessee would be entitled to deduction u/s 54F. And subsequent use of such property for non residential purposes or commercial purposes will not affect the eligibility for deduction u/s 54F.  The matter was restored to the AO to examine the nature of property at the time when an eligible  reinvestment was made for availing  the benefit of S.54F. The observations and order on this aspect, of Tribunal is analyzed below:

1. having regard to the circumstances of the instant case, the assessee is eligible for claim of exemption under s. 54F of the Act.
2. to the extent it is necessary for our purpose, we note that s. 54F envisages exemption of long-term capital gain, if the net consideration thereof is appropriated towards the construction of a new residential house.
3. the new property, in the instant case, has been let out for commercial use, and thus Revenue seeks to deny the exemption under s. 54F.
4. in our view, the use of the property is not the relevant criterion to consider the eligibility of s. 54F benefit. A bare reading of the provisions of s. 54F reflect that what is required is investment in a  residential house.
5. Therefore, the question that arises in the instant case is as to whether the new property constructed by the assessee is a residential house or not.
6.  Mere non-residential use would not render a property ineligible for s. 54F benefit, if it otherwise is a residential house.
7. On this aspect, we do not find any positive finding by the lower authorities and neither is there any relevant material before us to arrive at a finding.
8. Thus, for this limited purpose, the issue is restored to the file of the AO.
9.  If the assessee is found to have constructed a residential house, whatever may be the use it has been put to, the assessee can be said to have fulfilled the conditions envisaged under s. 54F.

Case of Shyamlal Tandon:

In this case the Tribunal noted as follows:

1.   It is evident from the impugned orders of the lower authorities and other material on record that intention of the parties when the development agreement was entered into was to construct a residential property.
2.  Municipal permission had also been obtained only for construction of a residential complex.
3.  the assessee had received possession of such residential property but the said property was put to use subsequently for commercial use.
4.   Merely because of change in the use of such property for non-residential purposes, it cannot be said that what was acquired by the assessee was not a residential property, but a commercial one.
5.  Subsequent change in the user of the property does not disentitle the assessee to relief under Section 54F.
6.   Notwithstanding the change in the user of a property, assessee is entitled to relief under section 54F, if what was sought to be acquired and originally acquired is a residential property.
7. In that view of the matter, the impugned order of the Commissioner (Appeals) was set aside.
8.  the matter  was restored to the file of the Assessing Officer, with a direction to consider the assessee's claim for exemption under section 54F subject to fulfillment of other conditions, in accordance with law and after giving reasonable opportunity of hearing to the assessee.

   Learning from these cases:

It is advisable to ensure that the property when acquired ( by way of purchase or construction as the case may be) is a residential property. It is also advisable that use as residential property must be proved by necessary evidence. The residential use can be by assessee himself, his family members or employees or tenant.

It is advisable to avoid change in use for some time so that tax authorities have no reasons to doubt bonafide of assessee about property being a residential property.

In case there are changes in use, there must be some good and substantial reasons for change in use from residential purposes to non-residential purposes so that it can be proved beyond doubt, that the property was in fact residential property, when acquired, and it was not intended to be a non-residential property at least at the time of acquisition and some time thereafter.

Attempt should not be made to claim deduction u/s 54F, by making a false claim that the property is residential property which in fact is a commercial property at the time of investment to claim deduction. If such a wrong claim is made, it will amount of furnishing of false information and inaccurate particulars of income which can lead to liability of tax, interest, and penalty and prosecution.

Now-a-days tax authorities are also equipped by various means of examining claims. For example in one of case discussed herein, the CIT(A) took benefit of google search and google maps. Besides there is easy access to information on websites of Municipalities and other authorities. Therefore, making a false claim  has always chances of being caught and if caught it can be very costly.