MRS KAMALA AJMERA,NEW DELHI vs. ITO, NEW DELHI

1. On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in confirming the action of the Assessing Officer in not allowing deduction u/s.54/54F of the Income Tax Act, 1961 on account of Long Term Gains on sale of property and thereby making an addition of Rs.77,21,957/-. The order being arbitrary, erroneous and unlawful must be quashed with directions for appropriate relief.”

The facts in brief qua the issue are that, assessee is an individual and has claimed Long Term Capital Gain of Rs.77,21,957/- as exempt u/s.54 of the Act. The assessee had sold one residential plot situated at Jaipur for a consideration of Rs.77,75,000/-, against which the assessee has claimed cost of acquisition at Rs.53,043/-, resulting into Long Term Capital Gain of Rs.77,21,957/-. The Assessing Officer noted that assessee has claimed exemption of Long Term Capital Gain u/s.54 on account of investment made in two residential properties, viz., A-1501 and A-1602, Tower AAON, GH-4/B, GH-4/B, Sector 45, NOIDA for a consideration of Rs.44,13,775/- and Rs.42,39,275/-, respectively. The assessee before the Assessing Officer had made an alternative claim of 54F, if the said claim is not available u/s 54; however, the learned Assessing Officer observed that exemption u/s.54F is not an admissible. The reason being the assessee has purchased two residential properties at two different floors and are not adjoining. The Assessing Officer required the assessee to furnish purchase deed and cost of acquisition and all the other relevant details, in response to which it was stated that she has inherited the property which was purchased way back on 15th November, 1983 for Rs.2,490/-, and thereafter a dwelling unit was constructed in the property. The copy of the purchase deed dated 15.11.1983 was furnished and all the requisite details as required were also furnished. The Assessing Officer thereafter sought information u/s. 133(6) from the purchaser of the property and in response, it was confirmed by him that he had purchased only plot and construction is undergoing on it. After detailed discussion, the Assessing Officer deduced following facts:- In view of the above, the following facts emerge: • the property sold by the assessee is a plot only; • this has duly been confirmed by the purchaser; • the assessee has not furnished any evidence to prove that any construction activity was carried out on the said plot; • the only expenditure incurred in FY 2001-02 is in relation to the conversion of the property in free-hold; • the assessee acquired two flats vide two different allotment letters from M/s. Prateek Buildtech (India) Pvt. Ltd.; • the builder in compliance to notice issued u/s.133(6) has affirmed that the two flats cannot be converted into one unit, as claimed by the assessee in reply dated 26.10.2015 reproduced above.

Ld. CIT (A) too has confirmed the action of the Assessing Officer after detailed reasoning. Sum and substance of his reason can be summarized in the following manner:-  Firstly, the benefit of Section 54F with respect to one house property is though applicable w.e.f. 1st April, 2015 (Assessment Year 2015-16), however, he held that such an amendment is clarificatory in nature and will apply retrospectively, because the intention of the legislature was to provide benefit of one residential house in India and amendment has been brought only with the intention to clarify the controversy going on in the judicial forum. While coming to this conclusion, he has referred to various judgments of Hon'ble Supreme Court including that of the Special Bench judgment in the case of ITO vs. Sushila M. Jhaveri, reported in 107 ITD 327.  Secondly, he distinguished the judgment of Geeta Duggal (supra) on the ground that two flats purchased were adjacent to each other which in the present case is not applicable, because they are not adjacent and are at two different floors, and therefore, such a benefit is not available to the assessee as the two properties are distinct from each other.  Lastly, the property purchased has not been completed within the prescribed period of three years.

After hearing both the parties at length and on perusal of the relevant findings given in the impugned orders, we find that assessee has made the claim of exemption of Long Term Capital Gain u/s.54 on the ground that there was a sale of house property but later on she has made an alternative claim u/s.54F which was based on the background of the inquiry made by the Assessing Officer wherein it was found that the property which was sold was a residential plot and not house property. It is an undisputed fact that the proceeds of the Long Term Capital Gain has been invested in purchase of two flats, viz., A-150 and A-162 in one particular tower AAON for a consideration of Rs.44,13,775/- and Rs.42,39,275/- respectively. The assessee has been denied entire exemption u/s.54F on the ground that, firstly, two flats were differently located and cannot be converted into one residential house and therefore, same cannot be considered as one house for the purpose of allowability of deduction; and secondly, the construction of the tower was not completed within the period of 3 years. Ld. CIT (A) has denied the exemption u/s.54F even with respect to one flat also on the ground that construction of the tower has not been completed within the prescribed period of three years and assessee has not purchased one residential house but two, therefore, the entire exemption cannot be given. In the detailed order of the ld. CIT (A), he has observed that earlier the phrase use in Section 54F was that assessee has purchased or has constructed “a residential house” and the amendment brought in the statute amending ‘a residential house’ to “one residential house” has been brought w.e.f. 1st April, 2014, and therefore, such an amendment being clarificatory in nature has to be given retrospective effect. Catena of judgments including of High Courts and Tribunal which has been noted by the ld. CIT (A) in the impugned order wherein the word ‘residential house’ has been interpreted to mean more than one residential house and he observed that such an interpretation was based on the reasoning that if the legislature intended to restrict the investment to only one house property then instead of using the word ‘a’, Legislature should have used the word ‘one’. Such an interpretation was based on the controversies where assessee has purchased two flats which were situated adjacent to each other or side by side and the flats were purchased with intention of treating as one. Here, in this case, it is an undisputed fact that both the flats purchased by the assessee were on two different storeys and were not adjacent to each other nor could have been joined to form one dwelling unit. Without going into the interpretation as to whether “a residential house” would mean “one house” or plural house, because in the case of Gita Duggal (supra) Hon'ble Delhi High Court have interpreted that a residential house can be construed to two unit only if they have been purchased to be use as one and are adjacent to each other and if there is an adjacent flat with common facilities, then same can be constituted to be “a residential house’ and therefore, assessee is entitled to the benefit u/s.54/54F. However, such an interpretation cannot be stretched so as to hold that two different residential flats which are not adjacent and separated with space and on two different storeys so as to constitute “a residential house”. Under these facts and circumstances, exemption if at all which can be claimed by the assessee in terms of Section 54F would be only with respect to one of the flat only. This is also duly supported by the judgment of Hon'ble Punjab & Haryana High Court in the case of Pavan Arya vs. CIT, reported in (2011) 11 taxmann.com 312.

Now coming to the issue, whether exemption can be denied on the ground that tower on which the flats were purchased were not found to be completed within the period of three years. On the perusal of the impugned assessment order, it is seen that ITI has reported that the lift was not installed and the project is still not completed, however if the assessee has made the entire investment in the purchase of the flat and substantial construction has been completed and merely because lift has not been installed it cannot be held that benefit of exemption should be denied to the assessee. Section 54F is a beneficial provision giving benefit to the assessee who has invested the Long Term Capital Gain for a purchase of residential house. The assessee has made the entire payment and flat has been in complete possession of the assessee and simply because certain finishing work has not been done it cannot be held that exemption u/s.54F should be denied. Accordingly, we hold that assessee is entitled for exemption of Section 54F on the higher amount invested in the flat amounting to Rs.44,13,775/- and Assessing Officer is directed to allow exemption u/s.54F for this amount and the balance would be liable for taxation under Long Term Capital Gain.

In the result, the appeal of the assessee is partly allowed. Order pronounced in the open Court on 17th September, 2018.