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Facts
The assessee claimed exemption under Section 54 of the Income Tax Act for the purchase of a new residential property after selling an old one. The Assessing Officer and CIT(A) disallowed the exemption, treating two floors of the purchased property as separate residential units and also disallowed the claim for cost of improvement.
Held
The Tribunal held that the term 'a residential house' in Section 54 includes multiple units within the same building, and the disallowance of exemption based on the property being comprised of separate units was incorrect. The Tribunal also found substance in the claim for cost of improvement, directing it to be considered.
Key Issues
Whether deduction u/s 54 is allowable when the new residential property consists of multiple units, and whether cost of improvement is to be considered for LTCG calculation.
Sections Cited
54, 143(3), 54F, 13(2)
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Income Tax Appellate Tribunal, DELHI ‘E’ BENCH,
Before: SHRI ANUBHAV SHARMA & SHRI AMITABH SHUKLA
The present appeal filed by the assessee is directed against the order dated 25.06.2019 passed by the CIT(A)-34, New Delhi, arising out of 1
I T A N o . 7 8 4 1 / D E L / 2 0 1 9 S m t K a m l e s h K h a n n a V s A C I T [ A . Y 2 0 1 5 - 1 6 ] the Assessment Order dated 31.12.2017 passed by the ACIT, Circle 40(1), New Delhi, U/S 143(3) of the Income Tax Act, 1961 (for short ‘the Act’) for Assessment Year 2015-16.
The grounds raised by the assessee read as under:
“1. That the assessment order passed 3 under section 143(3) of the Income Tax Act, 1961 ('the Act') dated 31.12.2017 by the Assessing Officer and ('Α.Ο.') also has additions/disallowance made therein are illegal, bad in law, without jurisdiction and void ab initio. The Ld. Commissioner of Income Tax (Appeals) ('CIT(Appeals)') grossly erred in upholding the action of AO in assessing the total income of the assessee at Rs. 1,56,03,349/- as against the returned income of Rs. 24,51,630/-.
2. That, on the facts and circumstances of the case, the CIT(Appeals) has erred in law and on facts in upholding the disallowance of Section 54 amounting to Rs. 1,13,04,000/- made by the AO. The CIT(Appeals) as well as the AO failed to appreciate that the Assessee had purchased only one residential property.
That, on the facts and circumstances of the case, the CIT(Appeals) as well as the AO have erred in law and on facts in treating the two floors of the same residential property as two
I T A N o . 7 8 4 1 / D E L / 2 0 1 9 S m t K a m l e s h K h a n n a V s A C I T [ A . Y 2 0 1 5 - 1 6 ] separate residential units and therefore, have consequently erred in denying deduction u/s 54 on the alleged second residential unit.
That, without prejudice to the aforementioned contention, on the facts and circumstances of the case, the CIT(Appeals) has erred on facts and in law in upholding the computation of Long Term Capital Gain ('LTCG') done by the AO at Rs. 2,11,68,800/- disallowing indexed cost of improvement incurred by the Assessee-Appellant on the property.
5. That, without prejudice to the aforementioned contention, the AO as well as the CIT(Appeals) have erred in not considering the cost of improvement amounting to Rs. 74,74,524/- (Rs. 43,25,517/-, 27,28,791/- and 4,20,216/- for Financial Year 1983-84, 1990-91 and 2003-04) incurred by the Assessee while computing Long Term Capital Gain ('LTCG'), whereas the same had to be reduced while computing the LTCG.
That, on the facts and circumstances of the case, the assessment order as well as the CIT(Appeals) order have been passed without affording proper opportunity of hearing to the Assessee and therefore, the assessment order and CIT(Appeals) order so passed are in violation of the principles of natural justice.
I T A N o . 7 8 4 1 / D E L / 2 0 1 9 S m t K a m l e s h K h a n n a V s A C I T [ A . Y 2 0 1 5 - 1 6 ]
7. That the explanations given, evidence produced and material placed and made available on record have not been properly considered and judicially interpreted and the same do not justify the addition made.
8. That, without prejudice, the Assessee was prevented by sufficient cause for not furnishing all the documents before the lower authorities.
9. That the disallowances made by the AO and upheld by the CIT (Appeals) are illegal and bad in law. The disallowances have been wrongly made and have been made on incorrect facts. The income is also wrongly computed.
10. The Appellant craves leave to add, amend, alter and/or delete any of the above grounds of appeal at or before the time of hearing.”
3. A perusal of the grounds raised by the assessee shows that there are two main issues involved in this case, namely,
(i) disallowance u/s 54 of the Act, and (ii) not considering the cost of improvement while computing long term capital gain
I T A N o . 7 8 4 1 / D E L / 2 0 1 9 S m t K a m l e s h K h a n n a V s A C I T [ A . Y 2 0 1 5 - 1 6 ] 4. Briefly stated, the facts of the case are that the assessee derived income from capital gains and income from other sources. The assessee e-filed his return of income for the A.Y under consideration declaring income of Rs. 24,51,630/- on 30.03.2016 which was processed u/s 143(1) of the Act. Subsequently, this case was selected for limited scrutiny under CASS to examine (i) Large investment in property as compared to total income (ii) Sale consideration of property in ITR is less than sale consideration and (iii) Large deduction claimed u/s 54B, 54C, 54D, 54G, 54GA. Statutory notices u/s 143(2) of the Act was issued on 20.09.2016 and served upon the assessee.
During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has claimed indexed cost of improvement of Rs. 43,25,517/-, Rs.27,28,791/- and Rs.4.20,216/- respectively for the FYs 1983-84, 1990-91 and 2003-04 for which the assessee has not submitted any evidence.
6. The Assessing Officer issued the show cause to the assessee stating the CBDT Circular no. 1/2015 dated 31.01.2015 provides that benefit was intended for investment in one residential house within India. 5
I T A N o . 7 8 4 1 / D E L / 2 0 1 9 S m t K a m l e s h K h a n n a V s A C I T [ A . Y 2 0 1 5 - 1 6 ] Accordingly, sub section (1) of section 54 of the Act has been amended to provide that the rollover relied under the said section is available if the investment is made in one residential house.
The Assessing Officer further observed that the assessee has merely submitted that the assessee has discarded/weeded out all documents.
Therefore, the Assessing Officer was of the opinion that the onus was on the assessee to submit the evidence of cost of improvement which the assessee has failed despite getting repeated opportunities. Accordingly, the Assessing Officer rejected the claim of cost of improvement for above mentioned F.Ys and the claim of deduction u/s 54 of the Act was restricted to one floor, i.e. 'one residential house' and deduction claimed for second unit was disallowed and added back to the income of assessee.
8. Aggrieved, the assessee went in appeal before the ld. CIT(A).
9. After considering the facts and submissions, the ld. CIT(A) came to the conclusion as under:
“6.3 I have considered the facts of the case, finding of the AO and submissions of the appellant. The appellant has sold the property at Ashok Vihar Phase II, Delhi for consideration of Rs.
I T A N o . 7 8 4 1 / D E L / 2 0 1 9 S m t K a m l e s h K h a n n a V s A C I T [ A . Y 2 0 1 5 - 1 6 ]
2,25,00,000/- and claimed deduction of cost of improvement and purchase of new property against the income shown under the head long term capital gain. The appellant has claimed the cost of improvement in the FY 1983-84, 1990-91 & 2003-04 at Rs.43,25,217/-, Rs.27,28,791/- and Rs.4,20,216/- respectively. Appellant has not furnished any evidence in support of cost of improvement and only taken a plea that she has sold the three storey house. In absence of any documentary evidence in support of cost of improvement it could not be allowed as deduction for the purpose of long term capital gain.”
6.4 Further appellant has claimed deduction in respect of two floors purchased in Ashok Vihar, Phase II, Delhi. Both the units are independent and registered separately. The appellant has not brought any evidence on record which may prove that both the floors are contiguous units converted into one residential house. After the amendment in the provisions in section 54(1) w.e.f. 01.04.2015 i.e. AY 2015-16 deduction u/s 54 is available in respect of one residential house only situated in India. Thus as per the CBDT circular no. 1/2015 dated 21.01.2015 and amended provisions of section 54(1) appellant is entitled to claim deduction u/s 54(1) in respect of one residential house only therefore AO is justified in disallowing the claim in respect of second residential unit and disallowance made by the AO in respect of second residential unit is I T A N o . 7 8 4 1 / D E L / 2 0 1 9 S m t K a m l e s h K h a n n a V s A C I T [ A . Y 2 0 1 5 - 1 6 ] hereby confirmed. Thus addition made by the AO at Rs.1,23,80,889/- is hereby confirmed.”
Aggrieved further, the assessee is in appeal before us.
Before us, the ld. counsel for the assessee vehemently stated that at the time of sale of the said property during the FY 2014-15, it was a three storey fully built up residential house property. Regularization fees for construction of property were paid to MCD on 15-05-2007 and proof of the same had been submitted. The assessee had discarded/weeded out all the documents concerning the construction of the property as per the provisions of the Act 1961 as these documents were more than six years old. At the time of purchase of the said property by the assessee, the said property was a small single story building whereas, at the time of sale of the said property, the same property was a three storied fully built up property proves that improvements have been made on the said property.
The ld. counsel for the assessee vehemently contended that the purchase of two connected flats is to be considered as a purchase of one new property and the deduction should be allowed in respect of the I T A N o . 7 8 4 1 / D E L / 2 0 1 9 S m t K a m l e s h K h a n n a V s A C I T [ A . Y 2 0 1 5 - 1 6 ] whole property consisting of both the floors. For this proposition, the ld. counsel for the assessee drew support from various decisions of Tribunals and contended that even the decision of the Hon'ble Jurisdictional Hon'ble Delhi High Court supports the view of the assessee in its decision in the case of CIT v. Gita Duggal ITA 1237/2011 (Delhi HC) wherein the Hon'ble High Court followed a Supreme Court decision and dismissed the appeal of the department. The ld. counsel for the assessee also relied upon the decision of the co-ordinate bench at Mumbai order dated 14.05.2025 in the case of Mrs. Ratan Mahendra Jain Vs. ITO 174 taxmann.com 909 and the decision of the Hon'ble High Court of Punjab and Haryana in the case of Jaswant Raj Vs. CWT 107 ITR 477
Per contra, the ld. DR relied upon the orders of the authorities below.
We have heard the rival submissions and have perused the relevant material on record. We find that the during the year under consideration, the assessee has claimed deduction u/s 54 of the Act of an amount of Rs. 1,13,04,000/- from long term capital gain arising on sale of property for consideration price of Rs.2,25,00,000/-. The assessee had purchased two
I T A N o . 7 8 4 1 / D E L / 2 0 1 9 S m t K a m l e s h K h a n n a V s A C I T [ A . Y 2 0 1 5 - 1 6 ] properties located at Ashok Vihar, Phase II and claimed deduction u/s 54 of the Act. The assessee has purchased two floors at Rs. 1,25,04,000/- and claimed exemption @ 90% of the share at Rs.1,13,04,000/-.
The Hon'ble Jurisdictional High Court in the case of Gita Duggal [supra] has elaborately discussed the issue and has come to a conclusion which reads as under:
“7. We have considered the facts and taken note of the rival submissions. To complete the narration of facts, it needs to be noticed that the assessee was the owner of property at A/22, Westend Colony, New Delhi comprising of the basement, ground floor, first floor and second floor. She was deriving rental income from the property. On 08.05.2006 she entered into a collaboration agreement with M/s Thapar Homes Ltd. for developing the property. According to its terms, the assessee being desirous of getting the property redeveloped/reconstructed and not being possessed of sufficient finance and lacking in experience in construction, approached the builder to develop the property for and on behalf of the owner at the cost of the builder. The builder was to demolish the existing structure on the plot of land and develop, construct, and/or put up a building consisting of basement, ground floor, first floor, second floor and third floor with terrace at its own costs and expenses. In addition to the cost of construction incurred by the builder on development of the property, a further payment of `four crores was payable to the assessee as consideration against the rights of the assessee. The builder was to get the third floor. The assessee accordingly handed over vacant physical possession of the entire property along with 22.5% undivided interest over the land. The handing over of possession of the entire property was however only for the limited purpose of development; the undivided interest in I T A N o . 7 8 4 1 / D E L / 2 0 1 9 S m t K a m l e s h K h a n n a V s A C I T [ A . Y 2 0 1 5 - 1 6 ] the land stood transferred to the developer/builder only to the extent of 22.5% for his exclusive enjoyment. It was on these facts that the assessing officer first took the view that the sale consideration for the transfer of the capital asset should be taken not merely at `four crores which was the cash amount received by the assessee, but the cost of construction incurred by the developer on the development of the property amounting to Rs. 3,43,72,529/- should also be added to the sale consideration. The assessee thereupon claimed that if the cost of construction incurred by the builder is to be added to the sale price, then the same should also be correspondingly taken to have been invested in the residential house namely the two floors which the assessee was to get in addition to the cash amount under the agreement with the builder, and the amount so spent on the construction should be allowed as deduction under Section 54 of the Act. It was at this stage that the assessing officer rejected the claim for deduction under Section 54 on the footing that the two floors obtained by the assessee contained two separate residential units having separate entrances and cannot qualify as a single residential unit. He agreed that the assessee was eligible for the relief under Section 54F in respect of the cost of construction incurred on one unit. He noted that the assessee has retained the ground floor and the basement. He therefore, apportioned the construction cost of Rs.3,43,72,529/- to have been incurred on the basement, ground floor, first floor and second floor in the ratio of 1:1:1:0.5 for second floor, first floor, ground floor, basement respectively. Since he was allowing the relief under Section 54F of the Act only in respect of one unit, he added Rs.98,20,722/- which is the figure arrived at by dividing the total cost of construction of Rs.3,43,72,529/- by 3.5. This is how the assessment was made. What in effect the assessing officer had done was to reject the assessee's claim for deduction under Section 54/54F of the Act in respect of the house/units in the first and second floors holding that they were separate and independent residential units having separate entrances and cannot be considered as one unit to enable the assessee to claim the deduction. This was disapproved by the CIT(Appeals) on the basis of the judgment of the Karnataka High Court (supra) and his decision was approved by the I T A N o . 7 8 4 1 / D E L / 2 0 1 9 S m t K a m l e s h K h a n n a V s A C I T [ A . Y 2 0 1 5 - 1 6 ]
Tribunal. The Tribunal expressed the view that the words "a residential house" appearing in Section 54/54F of the Act cannot be construed to mean a single residential house since under Section 13(2) of the General Clauses Act, a singular includes plural.
It is the correctness of the above view that is questioned by the revenue and it is contended that the interpretation placed by the Tribunal gives rise to a substantial question of law. The assessee strongly relies upon the judgment of the Karnataka High Court (supra) which, it is stated, has become final, the special leave petition filed by the revenue against the said decision having been dismissed by the Supreme Court as reported in the annual digest of Taxman publication. The judgment of the Karnataka High Court supports the contention of the assessee. An identical contention raised by the revenue before that Court was rejected in the following terms :
"A plain reading of the provision of section 54(1) of the Income-tax Act discloses that when an individual-assessee or Hindu undivided family- assessee sells a residential building or lands appurtenant thereto, he can invest capital gains for purchase of residential building to seek exemption of the capital gains tax. Section 13 of the General Clauses Act declares that whenever the singular is used for a word, it is permissible to include the plural. The contention of the Revenue is that the phrase "a" residential house would mean one residential house and it does not appear to the correct understanding. The expression "a" residential house should be understood in a sense that building should be of residential in nature and "a" should not be understood to indicate a singular number. The combined reading of sections 54(1) and 54F of the Income- tax Act discloses that, a non residential building can be sold, the capital gain of which can be invested in a residential building to seek exemption of capital gain tax. However, the proviso to section 54 of the Income- tax Act, lays down that if the I T A N o . 7 8 4 1 / D E L / 2 0 1 9 S m t K a m l e s h K h a n n a V s A C I T [ A . Y 2 0 1 5 - 1 6 ] assessee has already one residential building, he is not entitled to exemption of capital gains tax, when he invests the capital gain in purchase of additional residential building."
This judgment was followed by the same High Court in the decision in CIT Vs. Smt. K G Rukminiamma in dated 27.08.2010.
There could also be another angle. Section 54/54F uses the expression "a residential house". The expression used is not "a residential unit". This is a new concept introduced by the assessing officer into the section. Section 54/54F requires the assessee to acquire a "residential house" and so long as the assessee acquires a building, which may be constructed, for the sake of convenience, in such a manner as to consist of several units which can, if the need arises, be conveniently and independently used as an independent residence, the requirement of the Section should be taken to have been satisfied. There is nothing in these sections which require the residential house to be constructed in a particular manner. The only requirement is that it should be for the residential use and not for commercial use. If there is nothing in the section which requires that the residential house should be built in a particular manner, it seems to us that the income tax authorities cannot insist upon that requirement. A person may construct a house according to his plans and requirements. Most of the houses are constructed 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. It is quite common to find such arrangements, particularly post- retirement. 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 I T A N o . 7 8 4 1 / D E L / 2 0 1 9 S m t K a m l e s h K h a n n a V s A C I T [ A . Y 2 0 1 5 - 1 6 ]
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. 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.
For the above reasons we are of the view that the Tribunal took the correct view. No substantial question of law arises for our consideration. The appeal is accordingly dismissed with no order as to costs.”
SLP filed by the department before the Hon'ble Apex Court against the order of the Hon'ble High Court [supra] was held in favour of the assessee and against the Revenue by holding that merely because a residential house consists of several independent residential units, deduction u/s 54/54F cannot be disallowed.
A perusal of the above order shows that all the facts were before the Assessing Officer who misconstrued the property as two different units. We find force in the contention of the ld. counsel for the assessee that the lower authorities have not understood the facts of the case in their true perspective. Further, Section 54 of the Act exempts capital
I T A N o . 7 8 4 1 / D E L / 2 0 1 9 S m t K a m l e s h K h a n n a V s A C I T [ A . Y 2 0 1 5 - 1 6 ] gain to the extent the consideration is paid for the purpose of a residential property.
Considering the facts of the case in totality, in light of the discussion made hereinabove, respectfully following the decision of the Hon'ble Supreme Court [supra], we direct the Assessing Officer to allow exemption u/s 54 of the Act to the assessee. All the grounds of appeal raised by the assessee on this issue are, therefore, allowed.
19. As regards cost of improvement amounting to Rs. 74,74,524/-, it is the say of the ld. counsel for the assessee that the Assessing Officer as well as the ld. CIT(A) were not justified in not considering the cost of improvement incurred by the assessee while computing long term capital gain whereas the same had to be reduced while computing the long term capital gain.
20. The Assessing Officer observed that the assessee has not furnished any reply in compliance to the show cause notice issued and the assessee has not furnished any evidence in support of indexed cost of I T A N o . 7 8 4 1 / D E L / 2 0 1 9 S m t K a m l e s h K h a n n a V s A C I T [ A . Y 2 0 1 5 - 1 6 ] improvement. The ld. CIT(A) also held that in the absence of any documentary evidence cost of improve cannot be allowed as deduction.
We find that the assessee has stated that regularization fees for construction of property were paid to MCD and proof of the same was furnished on record. The Assessing Officer has himself in the assessment order mentioned that there were three floors during the F.Y. 2014-15. We find substance in the argument that at the time of sale of the said property, the same property was a three storied fully built up property which proved that improvements have been made in the said property.
Admittedly, we can give benefit of doubt to the assessee. All the grounds relating to this issue are also allowed. is allowed.
The order is pronounced in the open court o 24.07.2025.