Mukesh Patel.in
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FREEDOM OF CHOICE FOR HOUSE!

Courts hold that exemption u/s. 54 is available even for multiple houses, if they are adjacent, lateral or vertical!

The term ‘a residential house’ used in the Sections 54 & 54F of the Income-tax Act has of late drawn quite significant and interesting interpretations from Courts paving way for an investor to invest his taxable capital gains in even more than one residential house and claim exemption, if the residential units are adjacent or have a common point of entry or are located in the same building, though on different floors.

In its very recent decision in the case of CIT vs. Syed Ali Adil 33 taxmann.com 212, (2013) the Andhra Pradesh High Court has clarified that the expression ‘a residential house’ has to be understood in a sense that the building should be of residential nature and should not be understood to indicate a singular number. The Court thus held that even where a taxpayer had purchased two residential flats under separate purchase deeds out of the capital gains arising out of sale of his residential house, he was entitled to exemption under Section 54, more so, since the flats were situated side by side and the builder had carried out modifications in the same, so as to make it as one unit.

The Andhra Pradesh High Court disapproved the decision of the ITAT Special Bench (Mumbai) in the case of Sushila M. Jhaveri 107 ITD 327, holding that the view of the Tribunal to the effect that only one residential house should be given relief under Section 54 does not appear to be correct.

On this very issue, the Karnataka High Court in the case of CIT vs. Smt. K.G.Rukminiamma 196 Taxmann 87 has also held that the expression ‘a residential house’ used in Section 54 makes it clear that it was not the intention of the legislation to convey the meaning that it refers to a single residential house. If that was the intention, they would have used the word ‘one’.

‘A’ NOT NECESSARILY SINGULAR

The Court went on to observe that the context in which the expression ‘a residential house’ is used in Section 54 makes it clear that, it was not the intention of the legislation to convey the meaning that it refers to a single residential house. If that was the intention, they would have used the word ‘one.’ As in the earlier part, the words used are buildings or lands which are plural in number and that is referred to as ‘a residential house,’ the original asset. An asset newly acquired after the sale of the original asset also can be buildings or lands appurtenant thereto, which also should be ‘a residential house.’ Therefore, the letter ‘a’ in the context it is used should not be construed as meaning ‘singular.’ But, being an indefinite article, the said expression should be read in consonance with the other words ‘buildings’ and ‘lands’ and, therefore, the singular ‘a residential house’ also permits use of plural by virtue of section 13(2) of the General Clauses Act. A similar view has also been taken by the Karnataka High Court in the case of CIT vs. Anand Basappa 180 Taxman 4.

NO RESTRICTION ON CONSTRUCTION

In the above context, the ratio of the Delhi High Court in the case of CIT vs. Gita Duggal 214 Taxman 51 also makes a very interesting reading. The Court noted that if there is nothing in Section 54 or 54F which requires that the residential house should be built in a particular manner, the income tax authorities cannot insist upon that requirement. A person may construct a house according to the needs and requirements and even compulsions. For instance, a person may construct a residential house in such a manner that he may use the ground floor for his own residence and let out the first floor having an independent entry so that his income is augmented. One may build a house consisting of four bedrooms (all in the same or different floors) in such a manner that an independent residential unit consisting of two or three bedrooms may be carved out with an independent entrance so that it can be let out. He may even arrange for his children and family to stay there, so that they are nearby, an arrangement which can be mutually supportive. He may construct his residence in such a manner that in case of a future need he may be able to dispose of a part thereof as an independent house. There may be several such considerations for a person while constructing a residential house.

The Court finally concluded stating, “we are therefore, unable to see how or why the physical structuring of the new residential house, whether it is lateral or vertical, should come in the way of considering the building as a residential house. We do not think that the fact that the residential house consists of several independent units can be permitted to act as an impediment to the allowance of the deduction under Section 54/54F. It is neither expressly nor by necessary implication prohibited.”

 

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