ISSUE FOR CONSIDERATION
An assessee, whether an individual or an
HUF, is exempted u/s 54 of the Income-tax Act from capital gains arising from
the transfer of a long-term capital asset, being a residential house, on the
purchase or construction of a residential house within the specified period.
Similar exemption is granted u/s 54F of the Act for capital gains arising from
the transfer of any long-term capital asset, not being a residential house, on
the purchase or construction of a residential house, within the specified
period and subject to other conditions as provided therein. One of the
essential conditions for availing the exemption under both these provisions is
that the house purchased or constructed should be a ‘residential house’.
Quite often, an issue arises as to whether
the exemption can be availed when the new property purchased or constructed,
though approved and referred to as a residential house, has been used for
non-residential or commercial purposes. Such issues arise in implementation of
sections 54 and 54F, including for compliance with conditions that apply
post-exemption. The issue may arise even where one is required to determine the
nature of premises under transfer, for ascertaining the application of sections
54 or 54F, which are believed to be mutually exclusive, that call for
compliance with
different conditions.
The Hyderabad bench of the Tribunal has held
for the purposes of section 54F that the new house constructed for residential
use, consisting of all the required amenities, accordingly would not lose its
character of a residential house even if it was used for some commercial
purposes. As against this, the Delhi bench of the Tribunal has held that the
existing residential house which was used by the assessee as his office would
not be taken into consideration while determining whether the assessee owned
more than one residential house as on the date of transfer of the original
asset while applying the provisions of section 54F.
THE N. REVATHI CASE
The issue
first came up for consideration of the Hyderabad Bench of the Tribunal in the
case of N. Revathi vs. ITO 45 taxmann.com 30 (Hyderabad – Trib.).
In this case, the assessee claimed the exemption u/s 54F on transfer of a
long-term capital asset, not being a residential house, on utilisation of the
net consideration in constructing a residential building over the plot of land
owned by her jointly with her sister for assessment year 2007-08. The building
consisted of ten flats, five each belonging to the assessee and her sister.
Since the AO was of the view that the exemption could be claimed only for one
flat, he deputed the Inspector to make a spot inquiry for verifying the
assessee’s claim. Upon verification, it was also found that the said building
was used for running a school by the assessee and her friend and it had
classrooms, a big hall and a play area for children in the cellar of the
premises. The exemption u/s 54F was denied by the AO on the ground that the
building constructed was not a residential house. While passing an ex parte
order on account of non-appearance on the part of the assessee, the CIT (A)
concurred with the view of the AO by holding that the term ‘residential’
clearly implied usage as a ‘home’.
Before the Tribunal, it was argued on behalf
of the assessee that the Inspector, while submitting his report on 23rd
December, 2009, had categorically stated that the school had started
functioning six months earlier. Therefore, it implied that no school was
functioning in the said residential building during the relevant assessment
year.
The Tribunal held that only because the
building was used as a school could not change the nature and character of the
building from residential to commercial; even a residential building could be
used as a school or for any other commercial purpose; the relevant factor to
judge was whether the construction made was for residential purpose or for
commercial purpose; if the building had been constructed for residential use
with all amenities like kitchen, bathroom, etc., which were necessary for
residential accommodation, then even if it was used as a school or for any
other commercial purpose, it could not lose its character as a residential
building. However, it further held that if the construction was made in such a
way that it was not normally for residential use but for purely commercial use,
then it could not be considered to be a residential house; the primary fact
which was required to be examined was whether the building had been constructed
for residential use or not, a fact that could be verified from the approved
plan and architectural design of the building.
As the approved plan of the building
constructed by the assessee was not brought on record, the Tribunal remitted
the matter back to the file of the AO to conduct an inquiry to find out the
exact nature of construction, i.e., whether the said building was constructed
for residential use or for commercial use. The AO was directed to allow the
exemption if it was found that the building had been constructed for
residential use with all amenities which were necessary for a residential
accommodation. Insofar as the allowability of the exemption with respect to
more than one flat was concerned, the Tribunal decided the issue in favour of
the assessee.
THE SANJEEV PURI CASE
The issue, thereafter, came up for
consideration of the Delhi Bench of the Tribunal in the case of Sanjeev
Puri vs. DCIT 72 taxmann.com 147 (Delhi – Trib.).
In this case (assessment year 2010-11) the
assessee, who was a senior advocate, owned three different properties as
follows:
(i) E-549A, which was used for residential
purposes;
(ii) E-575A, used
as office for conducting the legal profession; and
(iii) Gurgaon flat which was still under
construction.
The assessee sold the rights in the
under-construction Gurgaon flat which resulted in long-term capital gains of
Rs. 1,48,23,645. Proceeds from the aforesaid sale were invested in purchase of
a new residential house for which the assessee claimed an exemption u/s 54F of
the Act. The exemption claimed u/s 54F was denied by the AO on the ground that
the assessee on the date of transfer of the rights held more than one
residential house, namely, E-549A and another at E-575A, holding that the
latter was also a residential property and, therefore, the assessee owned more
than one residential house at the time of transfer. He held that a residential
property could not be used as an office and that there was no distinction
between the ‘type’ of the property and its ‘actual use’. In other words, the
actual use of E-575A for commercial purposes did not make the premises
non-residential. The CIT (A) upheld the view of the AO and confirmed the
disallowance.
Before the Tribunal, it was argued by the
assessee that the house at E-575A was not used for residential purposes and was
put to use for the purposes of his profession being carried on by the assessee
from the said premises; holding the said property to be residential house
merely on the basis that the same was classified as residential property as per
municipal laws and in the registered sale deed executed at the time of purchase
of such property and disregarding the actual use thereof for professional
purposes, was not justified.
The Revenue argued before the Tribunal that
the manner of the construction would decide the nature of the house, as to
whether it was residential or commercial. The usage of the property was
immaterial if the property was shown as residential on the records of the
corporation. The capability of the premises for use as a residential house was
enough and it was not necessary to reside there. Therefore, it was claimed that
the exemption was rightly denied on the basis of the fact that the property was
classified as residential property as per municipal laws and in the registered
sale deed executed at the time of purchase of such property, disregarding the
actual use thereof for professional purposes.
The Tribunal
held that for availing deduction u/s 54F, the test to be applied would be that
of the actual use of the premises by the assessee during the relevant period.
In other words, it did not make a difference whether the property had been
shown as residential house on the records of the government authority but it
was actually used for non-residential purpose. The actual usage of the house by
the assessee would be considered while adjudicating upon the eligibility of exemption
u/s 54F. Accordingly, the AO was directed to allow the exemption u/s 54F as
claimed by the assessee for the reason that E-575A was used for commercial
purposes, i.e., non-residential purposes, and therefore the assessee could not
be held to have held more than one residential premises.
OBSERVATIONS
The primary issue under consideration is the
basis on which a particular house should be recognised as a residential house,
i.e., whether the premises by its plans and approval and its design should be a
residential house, or whether it should have been used as a residential house,
or whether both these conditions should have been satisfied. While the
Hyderabad Bench of the Tribunal has considered the nature of the house, i.e.,
how it has been built and how it has been classified in the records of the
local authorities as the basis, the Delhi Bench of the Tribunal has considered
the actual usage of the premises as the basis for determination.
The provisions of sections 54 and 54F use
the term ‘residential house’, but without defining it. One possibility is to
apply a common parlance test to understand the meaning of such term, which has
not been defined expressly under the Act. It should be attributed a meaning
supplied to it by a common man, i.e., a meaning accorded to the term in the
popular sense. In that sense, a house is considered to be a residential house
when it has all the facilities which makes that house capable of residing in,
i.e., facilities for living, cooking and sanitary requirements, when its
location is in a residential area, when it has been recognised as a residential
house by the local authorities for the purpose of levying different types of
taxes. The house satisfying these conditions, not necessarily all of them, can
be regarded as a residential house irrespective of the purpose for which that
house has been put to use, unless it is found that it was always intended to be
used for non-residential purposes and it was shown to be a residential house
only for the purpose of availing the benefit of exemption.
A useful reference can be made to the
observations of the Delhi High Court in the case of CIT vs. Purshottam
Dass 112 Taxman 122 (Delhi) for understanding the meaning of the term
‘residential house’. In this case, the High Court was dealing with the issue of
eligibility of exemption granted under erstwhile provisions of section
23(1)(b)(ii), which was available only in respect of ‘residential unit’. The
relevant observations of the High Court in this regard are reproduced below:
Question whether a particular unit is
residential or not is to be determined by taking into account various factors,
like, the intention of the constructor at the time of construction, intended
user, actual user, potentiality for a different user and several other related
factual aspects. The provision only stresses on erection of a building
comprising of residence(s) during a particular period.
In a given case, the constructor may have
constructed a particular unit as the residential unit, but to avoid deterioration
on account of non-user, may have temporarily let out for office purposes. There
may be a case where for some period of a particular assessment year, the
building has been used for residential purposes and for the residual period for
office purposes. There may be another case when during the period of five years
referred to in the provision for three years building is used for residential
purposes and for balance period for office purposes. Can it be said in the
above three contingencies, the unit ceases to be a residential unit for some
periods? These factual aspects have great relevance while adjudicating the
question whether the exemption is to be allowed. We may state that user is one
of several relevant factors and not the conclusive or determinative one. The
intention of constructor at the time of erection is one of the relevant
factors, as stated above. If intention at the time of erection was use for
residential purposes, it is of great relevance and significance.
In view of these observations, the High
Court allowed the exemption as claimed u/s 23(1)(b)(ii), on the ground that the
construction of the house was made for residential purpose and in a residential
area though there was temporary non-use as residence and, consequently,
temporary use for office purposes. Thus, one of the important criteria which is
required to be considered is the intention of the assessee while purchasing or
constructing a house. If the intention was to use the house as a residential
house at that point in time, then the subsequent usage of that house for a
non-residential purpose for a temporary period should not disqualify that
assessee from claiming the exemption.
Reference can also be made to the definition
of a ‘residential unit’ as provided in section 80-IBA, though it has restricted
applicability only for that section. This definition is reproduced below:
‘residential unit’ means an independent
housing unit with separate facilities for living, cooking and sanitary
requirements, distinctly separated from other residential units within the
building, which is directly accessible from an outer door or through an
interior door in a shared hallway and not by walking through the living space
of another household.
In this definition also, importance has been
given to the structure of the unit, rather than the usage of the unit.
Further, a usage test may not help in
several cases, like in a case where the house has not been put to any use at
all, or a case where the house has been used for both residential as well as commercial
purposes, or a case where the house has been used for different purposes over
different periods. In such cases, it will be difficult to determine the nature
of the house for the purpose of allowing the exemption u/s 54 or 54F. However,
again, the intention may play an important role; commercial premises purchased
with the intention to use them for residential purposes may qualify to satisfy
the test of the provisions.
Importantly, the erstwhile provision of
section 54 as applicable prior to A.Y. 1983-84 was materially different from
its present provision. Under the erstwhile provision, the exemption was
available only when the house property was purchased or constructed by the
assessee for the purpose of his own residence or of the parents. This condition
was omitted by the Finance Act, 1982 with effect from A.Y. 1983-84. The
expression ‘the assessee has within a period of one year before or after
that date purchased, or has within a period of two years after that date
constructed, a house property for the purposes of his own residence’ was
substituted by the expression ‘the assessee has within a period of one year
before or after the date on which the transfer took place purchased or has
within a period of three years after that date constructed, a residential
house’. Circular No. 346 dated 30th June, 1982 explained the
reason for this change as follows:
The conditions of self-occupation of the
property by the assessee or his parents before its transfer and the purchase or
construction of the new property to be used for the residence of the assessee
for the purposes of exemption of capital gains created hardships for assessees.
This was usually due to the fact of employment or business of the assessee at a
place different from the place where such property was situated.
Thus, the fact that the assessee cannot
always occupy the house for his own residential purpose has been recognised
while relaxing the condition for claiming the exemption. In such a case, the
exemption cannot be denied merely because the residential house has been let
out and the tenant has used it for non-residential purpose.
In the case of Dilip Kumar and Co.
(TS-421-SC-2018), it has been held that the notification conferring an
exemption should be interpreted strictly and the assessee should not be given
the benefit of ambiguity. However, the Delhi High Court, in the case of Purshottam
Dass (Supra), has considered this aspect. In this case, the Revenue had
also argued that the exemption provisions or exception provisions have to be
construed strictly and it should be construed against the subject in case of
ambiguity. Reliance was placed upon the decisions of the Supreme Court in the
case of Novopan India Ltd. vs. CCE JT 1994 (6) SC 80; CCE vs. Parle
Exports (P) Ltd. 1989 (1) SCC 345; and Union of India vs. Wood
Papers Ltd. 1990 (4) SCC 246. With regard to this contention, the High
Court held that the language with which the case at hand was concerned was
clear and unambiguous and, therefore, there was no need for seeking the intention
and going into the question whether a strict or liberal interpretation was
called for.
The better view is that a house, which is
otherwise a residential house by its nature, cannot cease to be a residential
house merely on the ground that it has been used for non-residential purpose,
unless it is found that the intention of the assessee was never to put that
house for residential use. This principle should equally apply while
determining the number of houses owned by the assessee as on the date of transfer
of the original asset while applying the proviso to sub-section (1) of section
54F without any exception. Two diagonally opposite views may not be taken while
interpreting the same expression ‘residential house’ used at two different
places in the same section, unless warranted by the rule of beneficial
interpretation, where two views are possible.
It is
interesting to see that the assessee in both the cases, in either of the
situations, has been allowed the exemption by the Tribunal, perhaps indicating
that the benefit of the exemption should not be denied by laying undue emphasis
on the approval by the authorities and the use thereof. As long as the assessee
is seen to have complied with the other conditions, the benefit under the
beneficial provisions should be granted and not denied. Accepting this would
even be the best view.
