THE issue before the Tribunal is - Whether the assessee is entitled to exemption u/s 54 in respect of purchase of tenancy rights in a residential property. And the answer goes against the assessee.
Facts of the case
Assessee sold a bungalow and purchased tenancy rights in two flats. Assessee claimed exemption u/s 54 of the Act because of the investments made in acquisition of the tenancy rights. AO observed that the exemption u/s 54 in respect of capital gain from sale of residential house property was available only when the assessee purchased or constructed a new residential flat. Assessee purchased only tenancy rights.
Assessee contended that he acquired tenancy rights in perpetuity which had to be considered as transfer of ownership of the
Assessee contended that he acquired tenancy rights in perpetuity which had to be considered as transfer of ownership of the
flat. As per the tenancy agreement, assessee was required to use the said flat for residential purposes only and not for other purposes. Assessee was also entitled to sublet or to give on leave and license the said flat and the landlord was not required to levy and charge transfer fees in respect of such assignment. Assessee could also avail or raise loan against the flat. Therefore, it was submitted that the assessee was as good as owner of the flat which had been acquired for use as a residential house and, therefore, the assessee was entitled to exemption u/s 54.
AO disallowed the claim observing that the assessee had purchased only the tenancy rights on paying the monthly rent of Rs. 500/- p.m.. Assessee had neither purchased the flat nor constructed the flat as required u/s 54. The tenant was not required to make any structural alteration in the flat let out. The right of the tenant was limited and restricted to the said flat and nothing more. The landlord was entitled to carryout further construction on the said plot and / or building without any recourse to tenant and in case any specific permission / no objection certificate was required, the tenant was required to grant his irrevocable consent / no objection. AO also observed that though the tenancy right was a capital asset but this was not the type of the asset for which exemption u/s 54 was available.
Before CIT (A), assessee contended that all the conditions for purchase of a flat were satisfied as the assessee had taken possession of the flat and full payment of purchase consideration had been made. Assessee had also paid stamp duty @ 5%. Thus, the residential house had been conveyed to the assessee. Assessee had the right to mortgage the said flat or re-sale the said flat and all future benefits on the said flat. Under Section 27(iii)(b), the acquisition of tenancy rights in perpetuity amounted to ownership of the property for the purposes of computation of income from house property. Similar provisions were contained in section 269UA(f). Since, the assessee had been given the possession of the property, it would constitute, transfer u/s 2(47) for the purpose of capital gain.
CIT (A) dismissed the claim of the assessee observing that purchase of property by the assessee should be as a owner and not as a tenant. The assessee in this case was not a owner of the property and was only a tenant on a monthly rent of Rs. 500/- and therefore, the provisions of section 54 were not applicable for exemption of capital gain on sale of the residential house as the capital gain had not been invested in purchase or construction of a new residential house. The provisions of section 54 were plain and unambiguous and, therefore, the same could not be applied in case of purchase of tenancy right in respect of flat.
After hearing both the parties, the ITAT held that,
++ as per section 54, exemption of capital gain is available in respect of transfer of residential house owned by the assessee. The purpose of the section is to grant exemption in case the assessee acquires a new residential house by investing the capital gain as an owner. It is because of this reason, the words used in section 54 are “purchase” or “construction” of a new residential house. The requirement of section is not that assessee may acquire a new residential house by any other mode. The word “purchase” appearing in section 54(1) has to be given its common meaning i.e. buy for a price or equivalent of price by payment in kind or adjustment towards a debt or for other monetary consideration. Thus, for application of provisions of section 54, the assessee has to buy a property as an owner. The Bombay High Court held in the case of Hameed Jaffery vs. CIT that occupation should be as an owner and not as tenant. The exemption under section 54 from capital gain is available to an assessee, who invests the capital gain in similar asset being a residential house which would obviously mean that acquisition of the house should be as an owner as the capital gain covered under section 54 is the capital gain arising from transfer of a residential house owned by the assessee;
++ the Supreme Court in case of Novopan India Ltd. has held that the person invoking an exception or an exemption provision to relieve him of the tax liability must establish clearly that he is covered by the said provision. In case of doubt or ambiguity, benefit of it must go to the State. Even if there is some ambiguity in the provision, the same has to be interpreted in favour of the revenue because it is an exemption provision. In the present case, there is no ambiguity. The provision refers to purchase or construction of a new residential house and it is quite obvious that the same should be as an owner and not as perpetual tenant;
++ since the assessee in this case had perpetual lease, it has been argued that the assessee was deemed owner and therefore, should be entitled to exemption u/s 54 of the Act. However, it is found that the provision of deemed owner u/s 27(iiib) is only for the purposes of section 22 to 26 as clearly mentioned in the said section, which relate to computation of income from house property. Therefore, argument of deemed owner is relevant only in connection with computation of income from house property and not in relation to exemption provisions of section 54. Similarly, treating the tenancy as conveyance under the Bombay Stamp Act was only for the purpose of payment of stamp duty and cannot be considered as conveyance of the title of the property to the assessee as an owner. As for taking possession of the flat, taking possession can not be considered as ownership as the possession had been taken as a tenant and not as an owner of the flat;
++ no doubt, the assessee was permitted to sub-let the flat, to bequeath it and to raise loan but such powers were only in relation to tenancy right of the assessee and not as owner of the flat. All these facilities to which assessee was entitled was only against right of the assessee as tenant in the flat and not as owner. Right of tenant was limited and restricted to the said flat. As per the agreement, tenant was not entitled to do any act that affected the right of the land lord in the said building and in the said property which clearly shows that the assessee did not have the status of land lord and was only a tenant. Thus, the order of CIT (A) disallowing the exemption claimed u/s 54 is upheld.
AO disallowed the claim observing that the assessee had purchased only the tenancy rights on paying the monthly rent of Rs. 500/- p.m.. Assessee had neither purchased the flat nor constructed the flat as required u/s 54. The tenant was not required to make any structural alteration in the flat let out. The right of the tenant was limited and restricted to the said flat and nothing more. The landlord was entitled to carryout further construction on the said plot and / or building without any recourse to tenant and in case any specific permission / no objection certificate was required, the tenant was required to grant his irrevocable consent / no objection. AO also observed that though the tenancy right was a capital asset but this was not the type of the asset for which exemption u/s 54 was available.
Before CIT (A), assessee contended that all the conditions for purchase of a flat were satisfied as the assessee had taken possession of the flat and full payment of purchase consideration had been made. Assessee had also paid stamp duty @ 5%. Thus, the residential house had been conveyed to the assessee. Assessee had the right to mortgage the said flat or re-sale the said flat and all future benefits on the said flat. Under Section 27(iii)(b), the acquisition of tenancy rights in perpetuity amounted to ownership of the property for the purposes of computation of income from house property. Similar provisions were contained in section 269UA(f). Since, the assessee had been given the possession of the property, it would constitute, transfer u/s 2(47) for the purpose of capital gain.
CIT (A) dismissed the claim of the assessee observing that purchase of property by the assessee should be as a owner and not as a tenant. The assessee in this case was not a owner of the property and was only a tenant on a monthly rent of Rs. 500/- and therefore, the provisions of section 54 were not applicable for exemption of capital gain on sale of the residential house as the capital gain had not been invested in purchase or construction of a new residential house. The provisions of section 54 were plain and unambiguous and, therefore, the same could not be applied in case of purchase of tenancy right in respect of flat.
After hearing both the parties, the ITAT held that,
++ as per section 54, exemption of capital gain is available in respect of transfer of residential house owned by the assessee. The purpose of the section is to grant exemption in case the assessee acquires a new residential house by investing the capital gain as an owner. It is because of this reason, the words used in section 54 are “purchase” or “construction” of a new residential house. The requirement of section is not that assessee may acquire a new residential house by any other mode. The word “purchase” appearing in section 54(1) has to be given its common meaning i.e. buy for a price or equivalent of price by payment in kind or adjustment towards a debt or for other monetary consideration. Thus, for application of provisions of section 54, the assessee has to buy a property as an owner. The Bombay High Court held in the case of Hameed Jaffery vs. CIT that occupation should be as an owner and not as tenant. The exemption under section 54 from capital gain is available to an assessee, who invests the capital gain in similar asset being a residential house which would obviously mean that acquisition of the house should be as an owner as the capital gain covered under section 54 is the capital gain arising from transfer of a residential house owned by the assessee;
++ the Supreme Court in case of Novopan India Ltd. has held that the person invoking an exception or an exemption provision to relieve him of the tax liability must establish clearly that he is covered by the said provision. In case of doubt or ambiguity, benefit of it must go to the State. Even if there is some ambiguity in the provision, the same has to be interpreted in favour of the revenue because it is an exemption provision. In the present case, there is no ambiguity. The provision refers to purchase or construction of a new residential house and it is quite obvious that the same should be as an owner and not as perpetual tenant;
++ since the assessee in this case had perpetual lease, it has been argued that the assessee was deemed owner and therefore, should be entitled to exemption u/s 54 of the Act. However, it is found that the provision of deemed owner u/s 27(iiib) is only for the purposes of section 22 to 26 as clearly mentioned in the said section, which relate to computation of income from house property. Therefore, argument of deemed owner is relevant only in connection with computation of income from house property and not in relation to exemption provisions of section 54. Similarly, treating the tenancy as conveyance under the Bombay Stamp Act was only for the purpose of payment of stamp duty and cannot be considered as conveyance of the title of the property to the assessee as an owner. As for taking possession of the flat, taking possession can not be considered as ownership as the possession had been taken as a tenant and not as an owner of the flat;
++ no doubt, the assessee was permitted to sub-let the flat, to bequeath it and to raise loan but such powers were only in relation to tenancy right of the assessee and not as owner of the flat. All these facilities to which assessee was entitled was only against right of the assessee as tenant in the flat and not as owner. Right of tenant was limited and restricted to the said flat. As per the agreement, tenant was not entitled to do any act that affected the right of the land lord in the said building and in the said property which clearly shows that the assessee did not have the status of land lord and was only a tenant. Thus, the order of CIT (A) disallowing the exemption claimed u/s 54 is upheld.
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