54 is allowable where capital gains arising from sale of two residential houses are invested in a single residential house.
Facts
The assessee sold one residential flat in A.Y.1997-98 and another residential flat in 1998-99. He invested part of the capital gain arising from sale of these two flats for construction of a residential house and paid tax on the balance (uninvested) amount. He claimed exemption u/s. 54 in respect of the amount invested. The assessee contended that though the two flats were not contiguous, both had been used as one residential house and, therefore, it was submitted that the same should be treated as one house in view of judgment of the Honourable Allahabad High Court in the case of Shiv Narain Chaudhari vs. CWT 1977 CTR (All) 149: (1977) 108 ITR 104 (All).
The Assessing Officer did not accept the claim of the assessee that both flats constituted one residential house. The Assessing Officer also observed that section 54 allowed exemption in respect of one residential house, the income from which was chargeable under the head “Income from house property”. In this case, the assessee owned two residential houses and exemption from house property income was available only in respect of one house as self-occupied property. The assessee had claimed exemption u/s. 54 in respect of the first flat in the A.Y.1997-98, meaning thereby that the said flat had been treated as selfoccupied property. Therefore, the income from the second flat was chargeable to tax but since the assessee had not declared any income under the head “Income from house property” in respect of the said flat, the assessee had treated the flat as being used for the purpose of business because only in such a case, the income from the property is not chargeable. The Assessing Officer, therefore, held that since the second flat had been used for the purpose of business, income from the same was not chargeable to tax under the head “Income from house property”. Hence, the exemption u/s. 54 was not available. He, therefore, held that the assessee was not entitled to exemption u/s. 54 in the A.Y.1998-99.
The CIT(A) allowed the contentions of the assessee and allowed the exemption u/s. 54.
Held
The Tribunal allowed the exemption u/s. 54, but it was unable to agree with the view taken by the CIT(A) that the two flats constituted one residential house. The flats were located in two different buildings owned by the two different housing societies and were situated on two different roads. These flats were acquired in two different years. There was no common approach road to the buildings. Therefore, the two flats cannot be treated as one residential property only on the ground that two buildings in which the flats were located were within walking distance, as claimed by the learned Authorised Representative. The judgment of the Honourable Allahabad High Court in the case of Shiv Narain Chaudhari (supra) is distinguishable and not applicable to the facts of the present case. Therefore, the CIT(A) has wrongly placed reliance on the judgment of the Honourable High Court of Allahabad (supra) which is not applicable to the facts of the present case.
Having held that the two flats were two different residential houses, the Tribunal proceeded to examine whether the assessee was entitled for exemption u/s. 54 of the Act in respect of the sale of more than one residential house. The Tribunal noted as under:
No restriction has been placed in section 54 that exemption is allowable only in respect of sale of one residential house. Even if the assessee sells more than one residential house in the same year and the capital gain is invested in a new residential house, the claim of exemption cannot be denied if the other conditions of section 54 are fulfilled.
In section 54, there is an in-built restriction that capital gain arising from the 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 house cannot be invested in one residential house. In case capital gain arising from sale of more than one residential house is invested in one residential house, the condition that capital gain from sale of a residential house should be invested in a new residential house gets fulfilled in each case individually, because the capital gain arising from sale of each residential house has been invested in a residential house. Therefore, even if two flats are sold in two different years and the 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.
The assessee had shown no income from the second flat because the assessee had treated both the flats as one residential house which had been used as a self-acquired property. Therefore, only on the ground that the assessee had not shown any income from the second 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. Even at the time of hearing before the Tribunal, the Departmental Representative did not produce any material to show that the second flat had been used for the purposes of business. Therefore, the flat had to be treated as residential house, the income from which is chargeable to tax under the head “Income from house property”.
The only requirement of section 54 is that income should be chargeable to tax under the head “House property income” and it is not necessary that income should have been actually charged. Therefore, capital gain arising from the sale of the second flat would be eligible for exemption u/s. 54 subject to fulfillment of other conditions.
