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.
