Whether exemption u/s 54 is restricted to a 'residential unit' and is not available to a 'residential house' having multiple floors with independent entrace - NO, it is available: ITAT

THE issues before the Bench are - Whether exemption u/s 54 is restricted to a 'residential unit' or a 'residential house' having multiple floors with independent entrace; Whether when there are two views possible on a particular issue, the view of higher authority should be given preference, even if the view taken by the lower authority is sustainable in law and Whether revision can be made on a debatable issue. And the answers go in favour of the assessee.

Facts of the case

Assessee, an individual, had filed his return declaring total income of Rs.38,851. In the annexure to ROI filed, it had also indicated that LTCG of Rs.1,01,73,965 was earned and claimed as exempt u/s 54 and 54EC, on account of investment in new flat at Rs.59,17,500 and

Rs.50,00,000 respectively. The capital gain arose on account of transfer of assessee’s 50% share in property by virtue of Redevelopment agreement. During assessment, AO worked out income under the head "Capital gain" at Rs.76,64,008. On appeal, CIT noticed that the assessee had received a sum of Rs.2.18 crore on account redevelopment agreement and offered the same to capital gain after claiming exemption u/s 54EC. On the perusal of clause 3(1) of the redevelopment agreement, CIT observed that the assessee was further entitled to and in fact received 50% of the constructed area free of cost. Thus, it was opined that the value of such entitlement was also liable to tax. On being show caused, the assessee had furnished the details by stating that the said amount was duly declared. Once again a new notice was issued by the CIT on the ground that exemption u/s 54 which was claimed by the assessee for an amount of Rs.59.17 lakh towards new flats purchased was in respect of five floors. In the opinion of the CIT, the assessee was entitled to exemption u/s 54 in respect of only one of the floors and not all the five. It was contended before CIT, that similar exemption u/s 54 was allowed to his wife by the Tribunal, being equal co-owner of the same property and hence there was no reason to have a different view in his case. Not convinced, the CIT came to hold that the exemption u/s 54 would be permissible only in respect of one floor and not all the five. He, therefore, set aside the assessment order and remitted the matter to the file of A.O. for deciding the question of benefit u/s 54 afresh after allowing a reasonable opportunity of being heard to the assessee.

Having heard the matter, Tribunal held that,

++ in assessee's wife case, the Tribunal finally upheld the CIT(A)’s order granting exemption u/s 54 and 54EC. It is a matter of record that the Revenue filed a Miscellaneous Application against such order, which was registered as MA No.417/Mum/2010. Vide this M/A, the Revenue urged that when the appeal was originally heard the Revenue did not raise any argument as to why exemption u/s 54 could not be allowed to the assessee. The Tribunal vide para 9 of its order passed against the miscellaneous application filed by the Revenue noticed that it was for the first time by this Miscellaneous Application that the Revenue has sought to raise a plea that the conditions for allowing deduction u/s 54 were not satisfied. The right of the Revenue to raise such an issue for the first time was held to be valid. Thereafter, on consideration of the matter, the Tribunal held the assessee to be entitled to exemption u/s 54. Thus, it is patent that the question as to whether exemption u/s 54 should be restricted to one floor or all the floors has been duly considered by the Tribunal and finally the view has been taken that the benefit of section 54 should be granted, being a possible view in the facts and circumstances of the case. Thereafter, the miscellaneous application was dismissed as it cannot be entertained on a debatable issue;

++ coming to the scope of section 263, we find that similar to section 254(2), this section also talks of vesting jurisdiction in respect of issues which are not debatable. The SC in Malabar Industrial Co. Ltd. v. CIT (2002-TIOL-491-SC-IT) has held that : 'Where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the ITO is unsustainable in law.’ The same view has been reiterated by several HCs including the Delhi HC in CIT v. Ansal Properties & Ind. (P) Ltd. [(2009) 315 ITR 225 (Del)]. In this case it has been noticed that: 'That at the time when the Commissioner issued the notice u/s 263 and passed the order dated March 2003- 2004, the question of surcharge on undisclosed income was a debatable one. When an issue was debatable, the provisions of section 263 could not be invoked.’ From the above discussion it is axiomatic that no revision can be done on a debatable issue. An issue becomes debatable if two legally sustainable views exist on a particular point. When the A.O. accepts and adopts one possible view, the power of the CIT is ousted to revise the assessment order on his finding the other legally sustainable view as more logical in preference to the one adopted by the AO. Adverting to the facts of the instant case, we find that the Tribunal in the case of assessee’s wife has granted exemption u/s 54 in respect of all the floors co-owned by the wife along with the assessee under identical circumstances. Once such a view has been held to be possible in the case of a co-owner of the same property, it is beyond our power to hold otherwise;

++ recently the Delhi HC in CIT v. Gita Duggal, has held that relief u/s 54 is available in respect of "a residential house" which should not be restricted to "a residential unit". In this judgment it has also been considered that a person may construct a house according to his plans and requirements. He may use the ground floor for his own residence and let out the first floor having an independent entry so that his income is augmented. One may build a house consisting of four bedrooms (all in the same or different floors) in such a manner that an independent residential unit consisting of two or three bedrooms may be carved out with an independent entrance so that it can be let out. Finally it has held that : "We do not think that the fact that the residential house consists of several independent units can be permitted to act as an impediment to the allowance of the deduction u/s 54/54F;

++ in view of the afore-noted judgment of the Delhi HC and the order passed by the Tribunal in the case of assessee’s wife under similar circumstances granting exemption u/s 54, it is manifest that the question of availability of relief u/s 54 under similar circumstances can not be held as totally against the assessee, so as to take it outside the ambit of 'debatable issue’. Once the AO adopts a possible view, in our considered opinion, it is not open to the CIT to set aside such possible view in the proceedings u/s 263 to impose the other possible view. Considering the judgment of the SC in the case of Malabar Industrial Co. Ltd. and several other judgments on the same line, we hold that the CIT was not justified in denying exemption u/s 54. We, therefore, set aside the impugned order by holding that the denial of exemption u/s 54 does not fall within the pale of section 263, as it is in any case a debatable issue.