Wednesday 12 June 2013

Whether expression 'a residential house' mentioned in Sec 54 effectively means one flat - NO, AP High Court upholds Karnataka HC decision

THE issues before the Bench are - Whether the expression 'a residential house' mentioned in Sec 54 effectively means one flat and Whether when assessee purchases two adjoining flats from two different sellers under two separate sale deeds, the same is to be treated as a single house for the purpose of Sec 54 benefits. And the verdict favours the assessee.
Facts of the case
The assessee is an individual. He filed his return of income for the assessment year 2007-08 declaring a net income of Rs.43,97,840/-. The said return was processed under Section 143 (1) of the Act on 24-02-2009. Meanwhile, the case was taken up for scrutiny by issuing notice dt.25-08-2008 under Section 143 (2) of the Act. A notice dt.15-06-2009 under Section 142 (1) was issued calling for various details. Before the assessing officer, the assessee offered under the head, long term capital gains, a sum of Rs.41.00 lakhs contending that he had inherited an ancestral house property which was sold during the year under consideration and the resultant long term capital gains were offered from sale of the said house; that he had taken the sale consideration of Rs.1,99,50,000/- for arriving at the capital gains even though the sale deed mentioned the sale consideration as Rs.2,66,00,000/-; that out of the sale consideration he had purchased two flats in May Fair Apartment, Banjara Hills, Hyderabad and he was entitled to claim deduction/exemption under Section 54 of the Act for an amount of Rs.93,80,192/- and that in view of the decision in CIT Vs. Ananda Basappa (2008-TIOL-254-HC-KAR-IT), even though Section 54 mentioned that the proceeds should be invested in "a residential house", it being a beneficial provision, it should be construed liberally and the deduction cannot be restricted to only one residential house and it should be extended to the purchase of two adjacent residential flats. The assessing officer held that the assessee was not entitled to claim exemption in respect of Rs.93,80,192/- but only to the extent of Rs.45,52,860/- comprising of consideration of Rs.42,36,000/- and a stamp duty of Rs.3,16,860/- utilized for investment on one of the flats by the assessee on the ground that the inspection report of the I.T.I. deputed by the assessing officer showed that what was purchased were two residential units separated by a strong wall; that they were purchased from two different vendors under two separate sale deeds and as such the deduction under Section 54 has to be restricted to only one flat.
On appeal, the CIT (A) allowed the appeal holding that the assessing officer had acted too technically and had erroneously denied the assessee the deduction to the extent of 50% and that since the assessee had purchased two flats having adjacent kitchens and toilets which have a common meeting point, he was entitled to 100% deduction under Section 54 for both the flats purchased by him. Revenue challenged the order before the Tribunal, which dismissed the appeal of the Revenue on the ground that it had consistently taken the view that even though flats were located at different floors, when they could be combined, it should be construed as a single residential accommodation only.
On appeal before the High Couret, the counsel for the Revenue argued that the deduction under Section 54 of the Act was allowable only for one residential house and not for more than one residential house and that the Tribunal erred in holding that the deduction under Section 54 of the Act was allowable for two independent residential flats in the same complex.
Held that,
++ we see no force in the said contention. As held in D.Ananda Basappa's case by the Karnataka High Court, the expression "a residential house" in Section 54 (1) of the Act has to be understood in a sense that the building should be of residential nature and "a" should not be understood to indicate a singular number and where an assessee had purchased two residential flats, he is entitled to exemption under Section 54 in respect of capital gains on sale of its property on purchase of both the flats, more so, when the flats are situated side by side and the builder has effected modification of the flats to make it as one unit, despite the fact that the flats were purchased by separate sale deeds. This decision was followed by the Karnataka High Court in CIT Vs. Smt. K.G. Rukminiamma (2010-TIOL-778-HC-KAR-IT) where a residential house was transferred and four flats in a single residential complex were purchased by the assessee, it was held that all four residential flats constituted "a residential house" for the purpose of Section 54 and that the four residential flats cannot be construed as four residential houses for the purpose of Section 54. Admittedly the two flats purchased by the assessee are adjacent to one another and have a common meeting point;
++ in the impugned order, the Tribunal has also relied upon the decisions in K.G.Vyas's case, P.C.Ramakrishna, HUF's case and Prakash Bhutani's case wherein it was held that exemption under Section 54 only requires that the property should be of residential nature and the fact that the residential house consists of several independent units cannot be an impediment to grant relief under Section 54 even if such independent units were on different floors. The decision in Suseela M.Jhaveri's case holding that only one residential house should be given the relief under Section 54 does not appear to be correct and we disapprove of it;
++ we agree with the interpretation placed on Section 54 by the High Court of Karnataka in D.Ananda Basappa's case and Smt. K.G.Rukminiamma's case and the decisions of the Mumbai, Chennai and Delhi Benches of the Tribunal in K.G.Vyas, P.C.Ramakrishna, HUF and Prakash Bhutani . We therefore hold that the CIT (Appeals) was correct in setting aside the order of the assessing officer and the Tribunal rightly confirmed the decision of the CIT (Appeals);
++ we hold that no substantial question of law arises for consideration in this appeal and the same is accordingly dismissed.

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