Whether Owning a House will deny the exemption from Capital Gains under Section 54 F of Income Tax Act

A mother wanted to sell a old house which was bought by her late husband.So,  the property was sold and proceeds were divided between her three sons to  purchase three separate properties. This arrangement was fine so far as  practical life was concerned. However, wherever there is money, there is taxation. You have to pay either a short-term capital gain or long-term capital gain taxes .

Like,  it is in the above case , sons’ purchased  three properties from the sale  of one. The question: Is the exemption available when a person sells one residential house and reinvests the long-term capital gain in more than one house? The main issue causing the confusion and ambiguity is the usage of the  article ‘a’ before ‘residential house’. The word seems to imply that the  exemption would be available only against purchase of one residential house  and not two or more. In other words, the law seems to suggest that when a  taxpayer invests the capital gains in purchasing or constructing two  residential houses, only one of these, as opted for by the taxpayer, could be  allowed for the tax concession. But whether  this the true intention of the  legislation? Adopting the literal meaning of the article “a” as “only one”  in  Mukhi v Joint CIT Appeal no 3369 (BOM) of 2000 [AY 96-97] dt 16.1.02 ITD  649 (Mum) ITAT Mumbai Bench ‘C’, it was held that ‘a’ can be ‘any’ but ‘any’  cannot be ‘many’.

Then  there is the Allahabad High Court case of Shiv Narain Chaudhari v CWT  (108ITR104) where it was held that if the two flats of the building are  situated in same compound and within common boundaries and have unity of  structure, then they could be regarded as constituting one house.

Section 54F was that the investor should not be owning another house  other than the new house. In other words, say the taxpayer had sold some  commercial property. He could save the consequent capital gains tax by  investing the net sale proceeds in a residential house (new house). However,  this was allowed only upon the condition that he didn’t already own another  residential house (old house). (Subsequently the law has been amended and now  the taxpayer can own one residential house other than the new house –but this  was before the amendment was carried out. However, the principle applies  equally even today.)

 In the case of ITO vs Rasiklal N. Satra  (280ITR243 dt 19.9.05) ,the assessee sold shares (this was when long-term capital  gains earned on shares were taxable) and claimed exemption under Sec. 54F by  investing the same in purchase of residential flat at Vashi, Navi Mumbai. The  Assessing Officer (AO) noticed that the assessee was co-owner of a flat in  Sion (West), Mumbai.

Now  since the assessee already owned an old house, the AO denied him the Sec. 54F  exemption. To this, the assessee contended that since he co-owned the old  house along with his wife (they were joint owners), he was not an independent  owner of the house and exemption can be denied only where he was the absolute  owner of the house. It was held that since the legislature has used the word  ‘a’ before the words ‘residential house’, it must mean a complete residential  house and would not include a shared interest in the house. Where the  property is owned by more than one person, it cannot be said that any one of  them is the sole owner of the property. In such case, no individual person on  his own can sell the entire property. Joint ownership is different from absolute  ownership. Ownership of a residential house meant ownership to the exclusion  of all others. Since Satra did not have full ownership of the house, it was  held that the he was not the owner of ‘a’ residential house on the date of  sale of the shares. Consequently, the exemption under section 54F could not  be denied to him.

In  spite of such contradictory decisions arising out of ambiguity, CBDT has not  issued any clarification in spite of requests from many quarters. We have  been given to understand that some of the ITOs have been sticking to the  literal meaning of ‘a’ as ‘one’, and others don’t. A clear cut clarification  from CBDT would help a number of taxpayers as also reduce the number of  litigations arising out of this issue.

 

Courtesy - Business Standard and Mr.SANDEEP SHANBHAG , Director, Wonderland Consultants