Year: 2014

Section 54F, which allows exemption to an assessee from capital gains tax upon reinvestment of sale proceeds into a residential property, has been prone to litigation. A new area of controversy is now emerging with conflicting decisions rendered by various tribunals – whether part or joint ownership of a property at the time of transfer of the original asset could be construed as ownership of “one” residential property as intended under the proviso to section 54F(1). In this article, the authors discuss the conflicting tribunal judgments and their interpretation on this issue.

Issue for Consideration

An assessee, being an individual or a HUF, is exempted from payment of income tax on capital gains arising from the transfer of an asset, not being a residential house, u/s. 54F of the Income-tax Act on reinvestment of the net consideration in purchase or construction of a residential house, within the specified period. This exemption from tax is subject to fulfillment of the other conditions specified in section 54F, one of which is that the assessee should not own more than one residential house, other than the new house, on the date of transfer of the said asset. 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…..”. Till 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.

An ownership of more than one house is fatal to the claim of exemption from tax on capital gains. The term ‘more than one residential house’ and the term ‘owns’ are not defined by section 54F or the Income-tax Act. Whether the Income-tax Department, while applying these terms, is required to establish that the assessee is the sole owner of a whole house, absolutely to the exclusion of other persons or is it sufficient if it establishes the co-ownership or joint ownership of the house or a part of the house by the assessee held together with the other persons, is the question that is being debated by the different benches of the tribunal. The issue involves the interpretation of these terms on which the different benches of the tribunal have taken conflicting stands that require due consideration. The Mumbai and the Chennai benches of the tribunal have 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, while the Hyderabad and the Chennai benches of the tribunal have denied the benefit of section 54F in cases where the assessees have been found to be holding a share in the ownership of the house as on the date of transfer of the asset.

Rasiklal N. Satra’s Case

The issue first came up for consideration of the Mumbai bench of the tribunal in the case of Rasiklal N. Satra, 98 ITD 335. In that case, the assessee had derived capital gains of Rs. 6,68,698 for A.Y. 1998-99 on sale of shares in respect of which gains, an exemption u/s. 54F was claimed on the strength of purchase of a house at Vashi, Navi Mumbai. The AO in the course of assessment noticed that the assessee was the co-owner of a house at Sion on the date of transfer of the said shares which co-ownership was held to be in violation of one of the conditions of section 54F. The AO accordingly denied the claim of exemption, on the ground that the assessee owned another house on the date of transfer of the shares.

Before the CIT (Appeals) it was contended that a shared interest in the property did not amount to ownership of the property, a contention that was accepted by the CIT (Appeals) who allowed the claim of the assessee for exemption from tax.

In the appeal by the AO to the tribunal, the Income-tax Department contended that a share in the ownership of a house amounted to the ownership of house and as such the assessee had violated the condition in section 54F and as a result was not eligible for the claim of exemption from tax. The assessee reiterated his contention that a shared interest in the property was not equivalent to the ownership of the house. He also relied on the provisions of section 26 of the Act to contend that the joint owners were to be assessed in the status of an AOP unless the shares of the owners were definite and ascertainable. He contended that he had no definite share in the house and he could not be held to be the owner of the house.

The tribunal noted that the only issue before it was as to whether the assessee could be said to be the owner of the Sion house or not. In the context, it observed that the Legislature had used the word ‘a’ before the words ‘residential house’ which must mean a complete residential house and would not include a shared interest in a residential house; where the property was owned by more than one person, it could not be said that any one of them was the owner of the property; in such a case no individual person, of his own, could sell the entire property though no doubt, he could sell his share of interest in the property but as far as the property was considered, it would continue to be owned by co-owners; joint ownership was different from absolute ownership; in the case of a residential unit, none of the co-owners could claim that he was the owner of a residential house; ownership of a residential house meant an ownership to the exclusion of all others and where a house was jointly owned by two or more persons, none of them could be said to be the owner of that house.

The tribunal fortified its views with the judgment of the Supreme Court in the case of Seth Banarsi Dass Gupta vs. CIT, 166 ITR 833, wherein, it was held that a fractional ownership was not sufficient for claiming even fractional depreciation u/s. 32 of the Act. It observed that because of the said judgment, the Legislature had to amend the provisions of section 32 with effect from 01-04-1997 by using the expres-sion ‘owned wholly or partly’. It held that the word ‘own’ would not include a case where a residential house was partly owned by one person or partly owned by other person(s). It further observed that after the judgment of Supreme Court in the case of Seth Banarsi Dass Gupta (supra), the Legislature could have also amended the provisions of section 54F so as to include part ownership and since, the Legislature had not amended the provisions of section 54F, it had to be held that the word ‘own’ in section 54F would include only the case where a residential house was fully and wholly owned by assessee and consequently would not include a residential house owned by more than one person. In the present case, admittedly the house at Sion, Mumbai, the tribunal further noted, was purchased jointly by assessee and his wife. As it was nobody’s case that wife was a benami of assessee, as such it had to be held that assessee was not the owner of a residential house on the date of transfer of original asset. Consequently, the exemption u/s. 54F could not be denied to assessee.

Holding of a share or a part ownership in the house was not considered by the tribunal to be representing the ownership of a house for the purposes of compliance of conditions contained in the Proviso to section 54F(1) of the Act. The benefit of section 54F conferred on the assessee by the CIT (Appeals) was confirmed by the tribunal.

Apsara Bhavana Sai’s Case

The issue recently came up for consideration of the Hyderabad bench of the tribunal in Apsara Bhavana Sai’s case, 40 taxmann.com 528.

In this case, the assessee had claimed an exemption u/s. 54F in respect of long term capital gains arising from sale of shares, for A.Y. 2008-09. During the course of assessment, the AO noticed that the as-sessee owned two houses, i.e. more than one house, as she had declared income from these two houses under the head ‘Income from House Property’. He was of the opinion that the assessee had violated the condition of section 54F(1) that prohibited her from owning more than one house on the date of transfer of shares. He accordingly called upon the assessee to explain her case for the exemption.

The assessee, inter alia, claimed that one of the houses at ‘My Home Navadeep’ was held jointly by her with her husband. Relying on the decision in the case of Rasiklal N. Satra (supra), she argued that a share in a house, per se, was not equated with the ownership of the house and her co-ownership of the said house, should not be a ground for denial of benefit of section 54F to her.

The AO noted that the assessee, as a joint owner, was holding the rights of ownership over the house and could not be said to be not the owner of the property, more so where the entire rental income of the house was offered for taxation in her hands. Relying on an unreported decision of the Chennai bench of the tribunal, in the case of Dr. P. K. Vasanthi Rangrajan dated 25-07-2005 in ITA No. 1753/MDS/2004, the AO denied the exemption to the assessee. He also relied on the decision of the Gujarat High Court in the case of Chandanben Maganlal, 245 ITR 182 to support his action.

Before the CIT(A), the assessee reiterated that a share in the joint property should be regarded as a share only and not as an ownership, relying on the decisions in the cases of Rasiklal N. Satra (supra) and Seth Banarsi Dass Gupta, 166 ITR 783 (SC) where it was held that a co-owner was a person entitled to a share in the property but could not be recognised as the single owner. The decisions in the cases of Shiv Narain Chaudhary, 108 ITR 104 (All.) and in T. N. Aravinda Reddy, 120 ITR 46 (SC) were also relied upon. The assessee further contended that the decision of the tribunal in the case of Rasikal N. Satra (supra) was not contested further, and therefore, shall be considered as final. She maintained that part ownership of the house property could not be a disqualification for claiming exemption u/s. 54F as a joint ownership in a house should not be considered in counting the numeric strength of the house property as envisaged under the provisions for claiming exemption u/s. 54F. The assessee submitted that that the share in a joint ownership in the property at ‘My Home Navadeep’ should be excluded and not considered as disqualification for claiming exemption u/s. 54F of the Act.

The CIT(A) observed that;

•    admittedly the house was jointly owned by the assessee with her husband and the question, therefore, was whether the part ownership of the assessee of the said flat could be considered as ownership of the flat.

•    in the case of Dr. P. K. Vasanthi Rangarajan (supra), wherein it had been held that if an assessee owned a part of a residential property, though not fully, it amounted to owning of a residential property as envisaged in section 54F and the assessee became disqualified for exemption u/s. 54F,

•    Mumbai bench in the case of Rasiklal N. Satra (supra) had taken a view that ownership was different from absolute ownership and that none of the co-owners could claim that he was the owner of the residential house as the ownership of a residential house meant ownership to the exclusion of all others relying on the decision of the Supreme Court in the case of Seth Banarasi Dass Gupta (supra), holding that fractional ownership was not sufficient for claiming even fractional depreciation u/s. 32 of the Act.

•    the said decision in the case of Rasiklal N. Satra (supra) was not contested further,

•    the Chennai bench of the tribunal, in a later decision in the case of Asstt. CIT vs. K. Surendra Kumar in ITA No. 1324/Mds/2010 dated 12-08-2011, had followed the same decision of the Mumbai bench going against the decision of their co-ordinate bench in the case of Dr. P.K. Vasanthi Rangarajan (supra), wherein the tribunal noted that the decision of the Supreme Court in the case of Seth Banarasi Dass Gupta (supra) had not been considered in Dr. P.K.Vasanthi Rangrajan’s case, whereas the same was considered by the Mumbai bench in the case of Rasiklal N. Satra (supra).

•    the Chennai bench in the said K. Surendra Kumar ‘s case held that since in the said case the assessee was only a part owner of the two residential properties, he could not be said to be owning a residential house as required for the purpose of benefit u/s. 54F of the Act.

The CIT(A) held that as the assessee was only a part owner of the property at ‘My Home Navadeep’, in the light of the decisions of the Mumbai and Chennai benches, the assessee could not be considered as owning the said property, to the exclusion of the joint owner, i.e., her husband, so as to be called the ‘owner’ for the purpose of section 54F of the Act. The CIT(A) held that the assessee could be said to be owning only one property as on the date of sale of shares, and therefore, was eligible for deduction u/s. 54F and accordingly, decided the grounds raised by the assessee in her favour and directed the Assessing Officer to revise the computation of income.

Against the order of the CIT(Appeals), the Income tax Department filed an appeal before the tribunal wherein it was pleaded; that the CIT(A) wrongly granted deduction u/s. 54F of the Act, though the assessee was owning more than one residential house; that the assessee being partial owner of the property at ‘My Home Navdeep’ and absolute owner of the other house situated at Meenakshi Royal Court, was owning more than one house and was not entitled for deduction u/s. 54F of the Act; even fractional or partial ownership of the immovable property disentitled the assessee for claiming deduction u/s. 54F of the Act ; that the judgments relied on by the assessee were relating to granting of deduction u/s. 32 and the language used therein was entirely different from section 54F of the Income- tax Act and these judgments were not applicable to the facts of the case; that the assessee was to be treated as owning more than one residential house and she could not granted deduction u/s. 54F of the Act in view of the judg-ments in the cases of CIT vs. Ravinder Kumar Arora, 342 ITR 38(Delhi), Mrs. Kamlesh Bansal vs. ITO, 26 SOT 3 (Delhi) (URO), Madgul Udyog vs. CIT, 184 ITR 484 (Cal.)and Dy. CIT vs. Greenko Energies (P.) Ltd. in ITA Nos. 3-7/Hyd/13 dated 10.5.2013.

The tribunal, on due consideration of the material on record, observed that the exemption u/s. 54F had been granted to the assessee with a view to encourage construction of one residential house and the construction/purchase of a house other than one residential house was not covered by section 54F of the Act; that the concession provided u/s. 54F w.e.f. 01-04-2001 would not be available in a case where the assessee already owned, on the date of transfer of the original assets, more than one residential house; it was clear that emphasis had been given on owning more than one residential house by an assessee and the assessees who already owned more than one residential house on the date of transfer of the original asset, were not eligible for the concession provided u/s. 54F of the Act even if the other residential house might be either owned by the assessee wholly or partially. In other words, when any assessee who owned more than one residential in his/her own title exercising such dominion over the residential house as would enable other being excluded therefrom and having right to use and occupy the said house and/or to enjoy its usufruct in his/her own right should be deemed to be the owner of the residential house for the purpose of section 54F of the Act and that the proviso to section 54F of the Act clearly provided that no deduction shall be allowed if the assessee owned on the date of transfer of the residential asset more than one residential house.

For concluding the case in favour of the Income tax Department, the tribunal relied upon the decisions in cases of Smt. Bhavna Thanawala vs. ITO, 15 SOT 377 (Mum), Ravinder Kumar Arora vs. Asstt. CIT, 52 SOT 201(Delhi) and V. K. S. Bawa vs. Asstt. CIT, 56 ITD 232 (Delhi).

Observations

Section 54F on its original enactment by the Finance Act, 1982 disentitled an assessee for the claim of exemption from tax in a case where he owned any one other house as on the date of transfer, other than the new house. Realising the genuine difficulties faced by the assesses, a relaxation was made by the Finance Act, 2000 with insertion of the Proviso in s/s. (1) so as to enable an assessee to own one residential house as on the date of the transfer of the asset. The sum and the substance of the Proviso is that an assessee is not disentitled from claiming an exemption on account of his ownership of one house as on the date of transfer.

The issue is two dimensional. The Income-tax Department has to cross two hurdles, not one, before it can successfully deny the benefit of exemption to the assessee. One, it has to establish that the term ‘owns’ include an ownership of a ‘part ownership’ or a ‘joint or co-ownership’ of the house. Second, it has to establish that the term ‘one’ includes within its ambit ‘a fraction of one’. In our opinion, the tribunal has not considered the other equally important aspect of the condition stipulated and have emphasised the first aspect of the issue only, while deciding the issue either way.

On a reading of the said Proviso, it is evident that the legislature, unlike other provisions, has not expressly stated that the term ‘owns’, or for that matter the term ‘one residential house’, shall include a co-ownership of a part of the residential house. The Act, at many places, clearly provide that a part of a building is also included in the building. For example; Explanation (b) of section 194IA, 269UA(d)(i) and (ii), section 32, etc.. In the absence of an express provision, it is inappropriate to read the Proviso in a manner so as to include the ownership of a part of the house therein and circuitously hold that such an interpretation represents the legislative intent.

The decisions relied upon by the AO and by the Hyderabad tribunal in the cases of Chandanben Maganlal (Guj) and Ravindar Kumar Arora (Del) are the cases that involved the issue of eligibility of an assessee for exemption u/s. 54F on the strength of acquiring co-ownership rights in a new house on transfer of an asset other than a residential house. These cases, therefore, dealt with the interpretation of the main provision of s/s. (1) which employs a different language than the Proviso and are therefore distinguishable. The main provision requires ‘purchase’ of ‘a’ residential house while the Proviso restricts ownership to ‘one’ residential house. The terms employed are not only different, they are used in different context for different objective and should be interpreted in a manner that facilitates the objective and not frustrate the incentive provisions. While ‘a’ house may include a part of the house, it is very difficult, if not impossible, to state that ‘one’ includes a part of one, as well. Section 54F(1), in three places, has used different terminologies conveying the different objectives of the legislature. At one place in main sub-section (1), it has used ‘a residential house’; in the Proviso ‘one residential house’ is used in Items (a)(i) and (b) while in Items (a)(ii) and (iii) ‘any residential house’ has been used.

Section 13 of the General Clauses Act provide that ‘single’ includes ‘plural’ and the ‘plural’ includes ‘single’. It does not provide that ‘one’ includes a fraction of one. ‘One’ is a full and complete number; an integer; a whole number, complete in itself; single and integral in number, the lowest cardinal number; not capable of being substituted by a part i.e. an incomplete number.

The fact that the different benches have taken conflicting views and even the Chennai bench has taken conflicting views in two different cases clearly indicate that more than one view is available. It is by now a settled a proposition of taxation laws that a view beneficial to the assessee should be adopted in a case where two views are possible. Vegetable Products Ltd. 88 ITR 192 (SC). It is also a settled po-sition in law that an incentive provision should be liberally interpreted to facilitate the conferment of an incentive on the assessee. Bajaj Tempo Ltd. 196 ITR 188 (SC) and Strawboard 177 ITR 431 (SC).

It may be possible to hold that a co-owner or a part owner is also the owner of a house but the same may not be true while supplying a meaning to ‘one’ house. A part of a house cannot be treated as one house and ownership of a part of house cannot be considered as the ownership of one house.

A useful reference may also be made to the provisions of section 32 which expressly covers the cases of the whole or part ownership of an asset for grant of depreciation. The term ‘wholly or partly’ used before the term ‘owned’ in section 32(1) clearly convey 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 better view, in our considered opinion is to ignore the case of co-ownership for the purposes of application of restrictions contained in Proviso to section 54F(1) of the Income-tax Act so as to enable the claim of exemption.