Capital gains – Exemption u/s 54(1) – Sale of capital asset and acquisition of ‘a residential house’ – Meaning of ‘a residential house’ in section 54(1) – Includes the plural – Purchase of two residential properties – Assessee entitled to benefit of exemption – Amendment substituting ‘a’ by ‘one’ – Applies prospectively

16. Arun K. Thiagarajan vs. CIT(A) [2020] 427 ITR 190 (Kar.) Date of order: 18^th June, 2020 A.Y.: 2003-04

Capital gains – Exemption u/s 54(1) – Sale
of capital asset and acquisition of ‘a residential house’ – Meaning of ‘a
residential house’ in section 54(1) – Includes the plural – Purchase of two
residential properties – Assessee entitled to benefit of exemption – Amendment
substituting ‘a’ by ‘one’ – Applies prospectively

For the A.Y.
2003-04, the assessee declared long-term capital gains from sale of a house
property. Against this, the assessee had claimed deduction u/s 54 in respect of
two house properties purchased in different locations. The A.O. restricted the
deduction to acquisition of one residential building and accordingly allowed
deduction in respect of the higher value of investment in respect of such
property.

The Commissioner
(Appeals) and the Tribunal upheld the decision of the A.O.

The Karnataka High
Court allowed the appeal filed by the assessee and held as under:

‘i)    To give a definite meaning to the expression
“a residential house”, the provisions of section 54(1) were amended with effect
from 25^th April, 2015 by substituting the word “a residential house”
with the word “one residential house”. The amendment specifically applied only
prospectively with effect from the A.Y. 2015-16. The subsequent amendment of
section 54(1) fortifies the need felt by the Legislature to give a definite
meaning to the expression “a residential house”, which was interpreted as
plural by various courts taking into account the context in which the
expression was used.

ii)    The assessee was entitled to the benefit of
exemption u/s 54(1). The courts had interpreted the expression “a residential
house” and the interpretation that it included the plural was binding.

iii)   The substantial question of law framed by
this court is answered in favour of the assessee and against the Revenue. In
the result, the orders passed by the A.O., the Commissioner of Income-tax
(Appeals) and the Income-tax Appellate Tribunal insofar as they deprive the
assessee of the benefit of exemption u/s 54(1) are hereby quashed and the
assessee is held entitled to benefit of exemption u/s 54(1).’