Section 54 – Exemption u/s 54 would be available in respect of long term capital gain arising on sale of two flats, in two different years, invested in one residential house. Capital gain arising on sale of more than one residential house can be invested in one residential house. One of the requirements for claiming exemption u/s 54 is that the income of the residential house which has been sold, should be chargeable to tax under the head `Income from House Property’ and not that income should have actually been so charged.
Facts:
The assessee alongwith his three brothers had purchased two residential houses situated in two separate buildings viz. R and V. The assessee had 25% share in each of these two flats. Flat in R was sold on 4.10.1996 for Rs. 1,77,00,000 and flat in V was sold on 8.10.1997 for Rs. 3,30,00,000. The assessee had invested the capital gain arising on sale of two flats in construction of a residential house by purchasing a plot on 25.4.1996 at Bangalore from M/s Adarsh Builders and vide another agreement, had engaged the same builder for construction of a house on the said land. The assessee computed his share of capital gain and therefrom claimed exemption u/s 54 in respect of amount spent on construction of a new residential house and the balance was offered for tax. In response to the AO’s contention that exemption u/s 54 can be claimed only with reference to capital gain arising on transfer of one residential house, the assessee submitted that both R and V need to be regarded as one residential house on the ground that they were proximately located and in the earlier years in wealth-tax returns they were regarded as one residential house and this contention was accepted.
The AO noted that in AY 1997-98 the assessee had claimed exemption in respect of capital gain arising on sale of flat R meaning thereby that it was treated as its SOP and therefore the annual value of flat V was chargeable to tax but the assessee had not included its annual value in returned income and the AO concluded that the only reason it could be excluded was that the flat was used for the purposes of the business by the assessee. The AO concluded that the flat V was used for the purposes of the business and also that in AY 1997-98 capital gain arising on sale of flat R was claimed to be exempt with reference to new house constructed. He therefore, denied claim for exemption u/s 54.
Aggrieved, the assessee preferred an appeal to CIT(A) who allowed the appeal.
Aggrieved the revenue preferred an appeal to the Tribunal.
Held:
The Tribunal noted that the two flats sold were located in two different buildings on two different roads and were acquired in two different years. There was no common approach road to the buildings. Hence, it held that the two flats sold could not be regarded as one residential house as was held by CIT(A).
The Tribunal held that there is no restriction placed in section 54 that exemption is allowable only in respect of sale of one residential house. Even if assessee sells more than one residential houses in the same year and capital gain is invested in a new residential house, the claim for exemption cannot be denied if other conditions of section 54 are fulfilled. It noted that the Mumbai Bench of ITAT in the case of Rajesh Keshav Pillai has held that exemption u/s 54 will be available in respect of transfer of any number of long term capital assets being residential houses if other conditions are fulfilled. The only restriction is that the capital gain arising from sale of one residential house must be invested in one residential house and not in two residential houses.
There is an inbuilt restriction that capital gain arising from sale of one residential house cannot be invested in more than one residential house. However, there is no restriction that capital gain arising from sale of more than one residential houses cannot be invested in one residential house. Therefore, even if two flats are sold in two different years, and capital gain of both the flats is invested in one residential house, exemption u/s 54 will be available in case of sale of each flat provided the time limit of construction or purchase of the new residential house is fulfilled in case of each flat sold.
As regards the finding of the AO that flat V was used for the purposes of the business, the Tribunal noted that this conclusion was based only on the finding that the asssessee had not returned any income in respect of this flat under the head `Income from House Property’. The Tribunal held that only on the ground that the assessee had not shown any income from the property, it cannot be concluded that the flat had been used for the purposes of business when there is no material to support the said conclusion. It held that the only requirement of section 54 is that the income should be chargeable to tax under the head `Income from House Property’ and it is not necessary that income should have been actually charged.
The appeal filed by the revenue was partly allowed.
