July 2019

CO-OWNERSHIP AND EXEMPTION UNDER SECTION 54F

Pradip Kapasi|Gautam Nayak|Bhadresh Doshi
Chartered Accountants

ISSUE FOR CONSIDERATION

An assessee, whether an individual or an HUF, is exempted from payment of income tax on capital gains arising from the transfer of any long-term capital asset, not being a residential house, u/s. 54F of the Income-tax Act on the purchase or construction of a residential house within the specified period. This exemption from tax is subject to fulfilment of the other conditions specified in section 54F. One of the important conditions required to be satisfied in order to be eligible for claiming exemption u/s. 54F is about the ownership of another residential house, other than the one in respect of which the assessee intends to claim the exemption, as on the date of transfer of the asset.

 

This limitation on ownership of another house is placed in the Proviso to section 54F(1). Till the assessment year 2000-01, the condition was that the assessee should not own any other residential house on the date of transfer other than the new house in respect of which the assessee intends to claim the exemption. Thereafter, the rigours of the Proviso to section 54F(1) were relaxed by amending the same by the Finance Act, 2000 w.e.f. 1st April, 2001 so as to provide that the assessee owning one residential house as on the date of transfer of the original asset, other than the new house, is also eligible to claim the exemption u/s. 54F. This condition prescribed by item (i) of clause (a) of the Proviso to section 54F(1) reads as under: “Provided that nothing contained in this sub-section shall apply where – (a) the assessee - (i) owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or...”

 

Therefore, ownership of more than one residential house, on the date of transfer, is fatal to the claim of exemption u/s. 54F.

 

In respect of this condition, the controversy has arisen in cases where the assessee is a co-owner of a house besides owning one house on the date of the transfer. The question that has arisen is whether the residential house which is not owned by the assessee exclusively but is co-owned jointly with some other person should also be considered while ascertaining the number of houses owned by the assessee as on the date of transfer of the original asset. The issue involves the interpretation of the terms ‘owns’ and ‘more than one residential house’ as used in the provision concerned.

 

The Madras High Court has allowed the exemption by holding that the co-ownership of a house as on the date of transfer of the original capital asset was not an impediment in the claim of exemption, while the Karnataka High Court has denied the benefit of exemption by considering the house jointly owned by the assessee with others as the house owned by the assessee which disqualified the assessee from claiming the exemption.

 

The conflict was first examined by BCAJ in March, 2014 when the controversy was fuelled by the two conflicting decisions of the appellate Tribunal. In the case of Rasiklal N. Satra, 98 ITD 335, the Mumbai bench of the Tribunal had taken a stand that the co-ownership of a house at the time of transfer does not amount to ownership of a house and is not an impediment for the claim of exemption u/s. 54F; on the other hand, the Hyderabad bench of the Tribunal had denied the benefit of section 54F in the Apsara Bhavana Sai case, 40 taxmann.com 528 where the assesses have been found to be holding a share in the ownership of the house as on the date of transfer of the asset. This difference of view continues at the high court level and therefore requires a fresh look.

 

THE DR. P. K. VASANTHI RANGARAJAN CASE

The issue first came up for consideration of the Madras High Court in the case of Dr. P.K. Vasanthi Rangarajan vs. CIT [2012] 209 Taxman 628 (Madras). In this case, the long-term capital gains arising from the execution of a joint development agreement was offered to tax in the return of income for the assessment year (AY) 2001-02 and the corresponding exemption was claimed u/s. 54F on reinvestment of such gains in purchasing the residential premises. However, considering the fact that possession of the property was handed over in the previous year relevant to AY 2000-01, the assessee finally conceded the view of the  assessing officer that the gains were taxable in AY 2000-01. So, the exemption provisions contained in section 54F, as it then stood prior to the amendment by the Finance Act, 2000, effective from 1st April, 2001, were applicable to the case.

 

So far as the exemption u/s. 54F was concerned, the AO observed that the assessee owned 50% share in the property situated at 828 and 828A, Poonamallee High Road which consisted of a clinic on the ground floor and a residential portion on the first floor. The balance 50% share was owned by the husband of the assessee. In view of the fact that the assessee owned a residential house as on the date of transfer of the rights by virtue of the development agreement, the exemption u/s. 54F was denied by the AO as the conditions prescribed therein in his opinion were not satisfied. The CIT (A) confirmed the rejection of the claim by the AO.

 

On appeal by the assessee, the Tribunal rejected the assessee's claim u/s. 54F on the ground that the assessee was the owner of 50% share in the residential property on the date of transfer and as a result was disentitled to the benefit of section 54F inasmuch as she was found to be the owner of the premises other than the new house on the date of transfer. It was held that even though the property was not owned fully, yet, as the assessee was having 50% share in the residential property, the conditions envisaged u/s. 54F were not fully satisfied, hence the assessee was not entitled to exemption u/s. 54F.

 

It was innovatively claimed before the High Court on behalf of the assessee that the assessee’s share in the property was to be taken as representing the clinic portion alone and that the residential portion being in the name of her husband, the proviso denying the exemption u/s. 54F had no application to the assessee's case. However, this contention was found to be contrary to the facts of the case by the High Court. The assessee as well as her husband had offered 50% share each in the income of the clinic in the income-tax assessment and had claimed depreciation thereon. Besides, 50% share in the said property in the wealth tax proceedings was offered by the assessee and her husband.

 

It was further argued that for grant of exemption u/s. 54F, the limitation applied only where the premises in question were a residential house, was owned in the status as an individual or an HUF as on the date of the transfer; that holding the house jointly could not be held to be owned in the status of individual or HUF. As against this, the Revenue contended that the co-ownership of another house as on the date of transfer, even in part, would disentitle the assessee of the benefit of section 54F and the proviso would be applicable to her case.

 

Given the fact that the assessee had not exclusively owned the house, but owned it jointly with her husband, the High Court held that unless and until the assessee was the exclusive owner of the residential property, the harshness of the proviso to section 54F could not be applied to deny the exemption. A reading of section 54F, the court noted, clearly pointed out that the holding of the residential house as on the date of transfer had relevance to the status of the assessee as an individual or HUF and when the assessee, as an individual, did not own any property in the status of an individual as on the date of transfer, joint ownership of the house would not stand in the way of claiming an exemption u/s. 54F. Accordingly, the High Court allowed the exemption to the assessee.

 

THE M.J. SIWANI CASE

The issue, thereafter, came up for consideration of the Karnataka High Court in CIT vs. M.J. Siwani [2014] 366 ITR 356 (Karnataka).

 

In this case, the assessee and his brother, H.J. Siwani, jointly owned a property at 28, Davis Road, Bangalore which consisted of land and an old building. During the year relevant to the assessment year 1997-98, they transferred this property by executing an agreement to sell. The resultant long-term capital gains arising on the transfer of the said property was claimed to be exempt u/s. 54 or, in the alternative, u/s. 54F. The claim of exemption was denied on various grounds including for owning few more houses as a co-owner on the date of the transfer.

 

The claim of exemption u/s. 54F was denied since as on the date of transfer, both the assessees owned two residential houses having one-half share each therein. As the assessee was in possession of a residential house on the date on which the transaction resulting in long-term capital gains took place, the AO as well as the first appellate authority refused to grant any benefit either u/s. 54 (for reasons not relevant for our discussion) or u/s. 54F in respect of capital gains income derived by the assessees.

 

The Tribunal, on appeal, however, reversed the findings of the authorities below holding that 'a residential house' meant a complete (exclusively owned) residential house and would not include a shared interest in a residential house; in other words, where a property was owned by more than one person it could not be said that any one of them was the owner. A shared property, as observed by the Tribunal, continued to be of the co-owners and such joint ownership was different from absolute ownership. The Tribunal relied upon the decision of the Supreme Court in Seth Banarasi Dass Gupta vs. CIT [1987] 166 ITR 783 wherein it was held that a fractional ownership was not sufficient for claiming even fractional depreciation u/s. 32 as it stood prior to the amendment with effect from 1st April, 1997 whereby the expression ‘owned wholly or partly’ was inserted.

 

On appeal by the Revenue, the High Court, allowing the appeal held that even where the residential house was shared by the assessee, his right and ownership in the house, to whatever extent, was exclusive and nobody could take away his right in the house without due process of law. In other words, a co-owner was the owner of a house in which he had a share and that his right, title and interest was exclusive to the extent of his share and that he was the owner of the entire undivided house till it was partitioned. The Court observed that the right of a person, might be one half, in the residential house could not be taken away without due process of law and such right continued till there was a partition of such residential house. Disagreeing with the view of the Tribunal, the High Court decided the issue in favour of the Revenue denying the exemption u/s. 54F to both the assessees by holding that the ownership of a house, though jointly, violated the condition of section 54F and the benefit could not be granted to the assessees.

 

OBSERVATIONS

The issue as to whether the expression “owns more than one residential house” covers the case of co-ownership of the house or not can be examined by comparing it with the expressions used in other provisions of the Act. In this regard, a useful reference may be made to the provisions of section 32 which expressly covers the cases of whole or part ownership of an asset for grant of depreciation. The term ‘wholly or partly’ used after the term ‘owned’ in section 32(1) clearly conveys the legislative intent of covering an asset that is partly owned for grant of depreciation. In its absence, it was not possible for a co-owner of an asset to claim the depreciation as was held in the case of Seth Banarasi Dass Gupta (Supra). In that case, a fractional share in an asset was not considered as coming within the ambit of single ownership. It was held that the test to determine a single owner was that "the ownership should be vested fully in one single name and not as joint owner or a fractional owner". The provisions of section 32 were specifically amended thereafter to insert the words ‘wholly or partly’ in order to extend the benefit of depreciation to the assessee owning the relevant assets in part.

 

Since the words ‘wholly or partly’ have not been used in the Proviso to section 54F(1), its scope cannot be extended to even include the residential house which is owned partly by the assessee or is co-owned by him and to deny the benefit of exemption thereby. The Tribunal did decide the issue in the case of M.J. Siwani (supra) by relying upon the aforesaid decision of the Supreme Court in the case of Seth Banarasi Dass Gupta (Supra).Following the very same decision of the Supreme Court, very recently, the Mumbai bench of the Tribunal has also decided this issue in favour of the assessee in the case of Ashok G. Chauhan [2019] 105 taxmann.com 204.

 

Further, section 54F uses different terms, ‘a residential house’, ‘any residential house’ and ‘one residential house’ at different places. It is also worth noting that one expression has been replaced by another expression through the amendments carried out in the past as summarised below:

AMENDMENTS AND THEIR EFFECT

Prior to the Finance Act, 2000

Main provision of section 54F(1) used the term ‘a residential house’, the purchase or construction of which entitled the assessee to claim the exemption;

Proviso to section 54F(1) used the term ‘any residential house’, the ownership of which disentitled the assessee to claim the exemption

Amendment by the Finance Act, 2000

A new Proviso was inserted replacing the old Proviso whereunder the expression ‘more than one residential house’ was used. After the amendment, the assessee owning more than one residential house was disentitled to claim the exemption; The main provision remained unchanged

Amendment by the Finance (No. 2) Act, 2014

The main provision was also amended replacing the expression ‘a residential house’ by ‘one residential house’

 

The expression ‘one residential house’ used in the Proviso in contrast to the other expressions would mean one, full and complete residential house, exclusively owned, as distinguished from the partial interest in the house though undivided. Holding such a view may cut either way and might lead to the denial of exemption in the case where the assessee has acquired a partial interest in the residential house and seeks to claim the benefit of exemption from gains on the strength of such reinvestment. The main operative part of section 54F itself now refers to ‘one residential house’.

 

In our opinion, for the benefit of reinvestment of gains the case of the assessee requires to be tested under the main provision and not the Proviso thereto. One should be able to distinguish its implication on the basis of the fact that the subsequent amendment replacing ‘a residential house’ by ‘one residential house’ in the main provision is intended to deny the exemption where  more than one house is acquired and not for denying the exemption in cases where a share or a partial interest in one house is acquired. In any case, the provisions being beneficial provisions, the interpretation should be in favour of conferring the benefit against the denial thereof, more so where two views are possible.

 

Further, since the provisions of section 54F apply only to an individual or an HUF, owning of the house by the assessee in his status as individual or HUF is relevant for the purpose of Proviso to section 54F(1) as held by the Madras High Court. If the residential house is owned by a group of individuals and not by the individual alone, then that should not be considered as impediment in the claim of exemption.

The ratio of the Supreme Court decision in the case of Dilip Kumar and Co. (TS-421-SC-2018) holding that the notification conferring an exemption should be interpreted strictly and the assessee should not be given the benefit of ambiguity, would not be applicable where two views are legitimately possible and the benefit is being sought under the provisions of the statute and not under a notification. The inference that ownership of the house should not include part ownership of the house flows from the Supreme Court decision in the case of Seth Banarasi Dass Gupta (Supra) and it can be said that there is no ambiguity in its interpretation.

 

It may be noted that the assessee had filed a Special Leave Petition before the Hon’ble Supreme Court against the decision of the Karnataka High Court in the case of M.J. Siwani (supra) which has been dismissed. However, as held by the Supreme Court in the case of Kunhayammed vs. State of Kerala [2000] 113 Taxman 470 (SC), dismissal of SLP would neither attract the doctrine of merger so as to stand substituted in place of the order put in issue before it, nor would it be a declaration of law by the Supreme Court under Article 141 of the Constitution for there is no law which has been declared. Therefore, it cannot be said that the view of the Karnataka High Court has been affirmed by the Supreme Court.

 

The better view, in our considered opinion, is that the premises held on co-ownership should not be considered to be ‘owned’ for the purposes of the application of restrictions contained in Proviso to section 54F(1) of the Income-tax Act so as to enable the claim of exemption.

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