Whether when assessee invests capital gains in purchase of a new house and REC bonds, there is no restriction from claiming exemption under Sections 54F as well as 54EC

THE issues before the Tribunal are - Whether when assessee invests capital gains in purchase of a new house and REC bonds, there is no restriction from claiming exemption under Sections 54F as well as 54EC and Whether, for the purpose of claiming Sec 54F benefits, adjacent residential unit purchased can be considered as a single unit. And the verdict goes in favour of the assessee.

Facts of the case

A) Assessee is an individual. It had sold his ancestral property for a consideration of Rs 3.4 crores. The
cost of the ancestral property was taken at nil whereby the entire consideration was taken as LTCG. Out of the total capital gain, the assessee invested a sum of Rs. 2.60 crores for the purchase of housing unit and Rs. 50 lakh invested in REC bonds. Apart from claiming exemption under section 54F, the assessee also claimed exemption under section 54 EC on account of investment in REC bonds. During assessment, AO denied the claim of the assessee on the basis that in case the exemption under section 54F is claimed the balance amount can only be invested in the banks or financial institutions as notified in the capital gain account scheme 1988 and not for any investment made under section 54 EC. On appeal the CIT(A) allowed the claim of the assessee.

On an appeal before ITAT, DR submitted that in view of section 54F(1) and (4), the exemption is available only to the extent of amount of capital gain which has been invested in purchase of residential house and the balance amount which is not appropriated by the assessee towards purchase of new asset within the period as prescribed u/s 54F and also not deposited by the assessee prior to the due date of furnishing of return of income u/s 139 (1) in the account in such bank or institution as may be specified and utilise in accordance with any scheme with the Central Government. DR relied upon the decision of AO and submitted that after availing the exemption under section 54F, no further exemption can be availed on same capital gain under section 54 EC. In response, AR submitted that there is no restriction under the provisions of section 54 that an exemption is claimed under section 54 for a part of capital gain, then no exemption can be availed for the amount of capital gain, which was invested in the REC bonds as per section 54EC.

B) Out of the total capital gain of Rs. 3.40 crores arising from sale of ancestral property, the assessee invested Rs. 2.60 crores for the purchase of 4 flats. The assessee claimed exemption under section 54F against this amount of Rs. 2.60 crores invested towards purchase of flats; but the AO allowed the exemption only in respect of one flat by holding that these are separate and independent residential units having separate kitchen and entrance; therefore, cannot be said as adjacent flats; even though the builder has referred them as composite unit. On appeal, the CIT(A) allowed the claim of the assessee u/s 54F towards purchase of 4 flats by following the decision in case of ITO vs Ms Sushila M Jhaveri.

The agreement by which the assessee has purchased these flats, clearly stipulates that the building in question consisting of duplex houses on top two floors of the building. The flat number 9A, 9B, 10A and 10B are so situated that the flat number 9A and 9B at 9th floor are just below the flat number 10A and 10B at 10th floor. The agreement clearly mentions that one duplex flat was converted from 4 units. This fact has not been disputed that the builder has agreed to convert 4 flats into one duplex flat as borne out from the agreement between the assessee and the builder for the purchase of these flats. Thus, if the requirement of the assessee family is met-out only by enlarging the residential unit by merging of 4 flats originally planed into one unit and that too prior to handing over of the possession of the said residential unit, then the said converted residential unit will be treated as a residential house as stipulated under section 54F. The case of the assessee is better then where more than one units are purchased which are adjacent to each other and are converted into one house for the purpose of residence by having common passage, common kitchen because in the case of the assessee the conversion was agreed by the builder prior to purchase. On an appeal before ITAT, DR submitted that at the time of purchase agreement the new residential houses purchased were not physically in existence. Thus, the transaction of purchase was not completed and the exemption under section 54F cannot be allowed.

Having heard the parties, the Tribunal held that,

A) ++ it is to be noted that it is not a case of availing double exemption on the same amount but the assessee has claimed exemption under section 54F as well as under section 54 EC for the respective amount of capital gain invested in purchase of new house and REC bonds. Wherever any such restriction is deemed fit, the legislature has provided in the statute a sufficient check under chapter VI-A of the Income Tax Act. As far as the claim of exemption under section 54F and under section 54 EC, there is no such restriction in the statute that the assessee cannot claim the exemption under both sections, even if the conditions provided under the respective sections are complied with and the same does not result in availing double exemption on the same amount. The expression 'the whole or any part of capital gains in the long term specified assets' makes it clear that the exemption under section 54 EC is available even when the part of capital gain is invested in specified long-term asset. There is no dispute that the assessee has invested out of the total capital gain in REC bonds within the prescribed period of time as provided under section 54 EC. Therefore, once the conditions as prescribed under section 54 EC are complied with, than the deduction cannot be denied on the ground that the assessee has also availed another exemption against the part of the capital gain;

B) ++ the tribunal in case of Ms Sushila M Jhaver held that exemption under sections 54 and 54F would be allowable in respect of one residential house only. If the assessee has purchased more than one residential house, then the choice would be with assessee to avail the exemption in respect of either of the houses provided the other conditions are fulfilled. However, where more than one unit are purchased which are adjacent to each other and are converted into one house for the purpose of residence by having common passage, common kitchen, etc., then, it would be a case of investment in one residential house and consequently, the assessee would be entitled to exemption. Having regard to the facts and circumstances of the case and following the decision of Tribunal in case of Ms Sushila M Jhaver , we are in agreement with the view and the findings of the CIT(A) on this issue.