MR. ARUNKUMAR NATHAN,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 2(3)(1), BANGALORE

Per Shri Vijay Pal Rao, J.M. : This appeal by the assessee is directed against the order dt.13.03.2017 of Commissioner of Income Tax (Appeals) for the Assessment Year 2013-14. 2. The assessee has raised the following grounds :

2 ITA No.1014/Bang/2017

3 ITA No.1014/Bang/2017 claim of the assessee for the second apartment and restricted the benefit under Section 54 only for one flat at Prestige Silverdale which is of higher value of two. Thus the Assessing Officer assessed the balance capital gain of Rs.65,39,851 to tax. The Assessing Officer was of the view that the assessee has purchased two flats in two different locations and claimed exemption under Section 54 of the Act which is not permissible. The assessee challenged the action of the Assessing Officer before the CIT (Appeals) and relied upon the decision of Hon'ble jurisdictional High Court in the case of CIT Vs. Rukmaniamma 331 ITR 211. The assessee also relied upon the decision of Hon'ble jurisdictional High Court in the case of DIT Vs. Khoobchand M Makhija 223 Taxman 189 as well as the decision in the case of CIT Vs. Sambandam Udaykumar 345 ITR 389. The CIT (Appeals) was not impressed with the contention of the assessee and also distinguished the decisions relied upon by the assessee because of the fact that in the present case these two flats are situated in different locations and therefore would not constitute single residential house property. Accordingly, the CIT (Appeals) upheld the action of the Assessing Officer. 4. Before us, the learned Authorised Representative of the assessee has submitted that the assessee has purchased two flats at different locations due to the family requirement of the assessee. The flat in Jalahalli was purchased for the residential purpose of the assessee because the assessee was working in Peenya area but his son and daughter-in-law were working in Sarjapur Road area. Therefore the

4 ITA No.1014/Bang/2017 assessee purchased another flat near Sarjapur Road and henc, both these flats will constitute a residential house to meet the requirement of the family of the assessee. He has relied upon the decision of the Hon'ble High Court in the case of CIT Vs. K.G. Rukmaniamma (surpa) as well as other decisions as relied upon by the assessee before the authorities below. The learned Authorised Representative of the assessee has pointed out that in the said case the assessee has purchased two residential houses and the deduction under Section 54 was allowed by this Tribunal and upheld by the Hon'ble High Court. He has also referred to the communication from the CBDT dt.22.7.1960 whereby the decision of the Hon'ble High Court in case of K.G. Rukmaniamma (supra) has been accepted by the department and it was also clarified that the amendment in section 54 and 54F substituting “one residential house” in place of “a residential house” vide Finance Act, 2014 is not retrospective and cannot be applied to pre-amendment assessment years. Thus the learned Authorised Representative has submitted that this issue is covered by various decisions of the Hon'ble jurisdictional High Court as relied upon by the assessee. 5. On the other hand, the learned Departmental Representative has submitted that the decisions relied upon by the assessee are not applicable in the facts of the present case as the assessee has purchased two separate flats in two different localities and further both the flats are not used for residential purpose of the assessee but one flat was let out by the assessee. The decisions of Hon'ble High Court in the peculiar

5 ITA No.1014/Bang/2017 facts of those cases cannot be applied in the present case. He has referrd to the decision of Hon'ble jurisdictional High Court in the case of K.G Rukmaniamma (supra) and submitted that in the said case all four flats were in the same building and contiguous and the same were treated by the Hon'ble High Court as adjacently situated therefore would constitute a residential house. 6. Similarly in the case of DCIT Vs. Khoobchand M Makhija 223 Taxman 189, the Hon'ble High Court has decided the issue on the basis of peculiar facts of the case and has observed in para 18 that their decision cannot be read as a singular unit or a multiple so as to avoid paying tax under Section 45 of the Act. He has relied upon the decision of Hon'ble Punjab & Haryana High Court in the case of Pawan Arya Vs. CIT 200 Taxman 66, the decision of Special Bench of Mumbai Bench of this Tribunal in th case of ITO Vs. Ms. Sushila M Jhaveri 107 ITD 327 and decision of the Chennai Benches of the Tribunal dt.4.7.2013 in the case of Sri A. Kodanda Rami Reddy Vs. ITO in ITA No.1865/C/2012.

6 ITA No.1014/Bang/2017 High Court in the case of CIT Vs. K.G. Rukmaniamma (supra), CIT Vs. Sambandan (supra) as well as Smt. B.S. Shantakumari (supra). As regards the decision of Hon'ble jurisdictional High Court in the case of K.G. Rukmaniamma (supra), it was a case of JDA entered into with the builder and under the said agreement the assessee was to receive 48% super built up area in the form of residential apartments. Therefore the built up area received by the assessee in the same project and under JDA in the shape of four flats were adjacent and accordingly, this Tribunal as well as Hon'ble High Court has held that these four flats received by the assessee under the JDA in the project will constitute a residential house as per the provisions of Section 54 of the Act. In the case of CIT Vs. Sambandam Udaykumar (supra) the substantial question for consideration of the Hon'ble High Court was regarding eligibility of deduction under Section 54 of the Act in respect of the building under construction and not being constructed within the stipulated period of three years. Therefore, there was no dispute in the said case regarding the purchase or construction of more than one house or unit. In the case of CIT Vs. B.S. Shantakumrari (supra), again the dispute was regarding the eligibility to claim deduction under Section 54F in respect of a house construction was yet to be completed. The only principle laid down in these decisions that may be applied to all the cases of claiming benefit of section under Section 54/54F of the Act is that this provision is a beneficial incentive to permit the construction of residential house and therefore, to be construed liberally to achieve the purpose for which it is

7 ITA No.1014/Bang/2017 incorporated in the statute. Therefore there is no quarrel on this principle so far as liberal meaning has to be given to the provisions for achieving the object and purpose and to the extent the investment has been made by the assessee in the construction of house well within the period prescribed under Section 54/54F then even if the house was not completed in all respects but the assessee has already incurred the entire expenditure then the benefit of section 54/54F cannot be denied. 8. In the case of the assessee two flats were purchased in different localities and undisputedly no connection or nexus with each other then the case of the assessee has to be decided by considering the purpose, objective and scheme of provision as incorporated in the statute. The provision does not restrict the assessee from buying more than one asset but this incentive is provided under Section 54/54F only against the property so purchased or constructed for his residential purpose. Therefore these provisions will apply in the case of house property which is purchased or constructed for the assessee's own residential purpose. This intention of the legislature is clear from the fact that the benefit of these provisions of Section 54/54F are available only to the individual and later on extended to HUF and not available to the artificial person. Having regard to object and purpose of the provision if a property though actually purchased or constructed is not to be used for the purpose of residence by the assessee then allowing the benefit under Section 54/54F on such investment will defeat the very purpose for which this beneficial provisions have been inserted in the statute.

8 ITA No.1014/Bang/2017 Therefore, in the case of more than one properties are purchased by the assessee, the option is available with the assessee to claim benefit under Section 54 in respect of the residential house purchased for the assessee's own residence. On this point the decision of Hon'ble Gujarat High Court in the case of CIT Vs. Nathu Hansraj 105 ITR 43 is relevant wherein the Hon'ble High Court has held as under : “ It is well settled that words of a statute, when there is doubt about their meaning, are to be understood in the sense in which they best harmonise with the subject of the enactment and the object which the legislature has in view. Their meaning is found not so much in a strictly grammatical or etymological propriety of language, nor even in its popular use, as in the subject or in the occasion on which they are used, and the object to be attained. (See Workmen of Dimakuchi Tea Estate v. Management of Dimakuchi Tea Estate AIR 1958 SC 353). The expressions used in a statute should ordinarily be understood in a sense in which they best harmonise with the object of the statute and which effectuate the object of the legislature (See New India Sugar Mills v. Commissioner of Sales Tax AIR 1963 SC 1207). It is necessary, therefore, to read section 54 in the context of the subject-matter and its setting in the scheme of capital gains and the object of exemption and then to ascertain the true import of the relevant part thereof. Now, section 45 read with section 48 treats the profits or gains arising from the transfer of a capital asset as income and brings them to tax in the hands of the assessee after deducting from such gross profits or gains, firstly, the expenditure incurred wholly and exclusively in connection with such transfer, and, secondly, the cost of acquisition of the capital asset and the cost of any improvement thereto. By enacting section 54, however, the legislature has provided that profits or gains derived from each and every transfer of a capital asset is not to be brought to tax. If a house property, which was used mainly for the purpose of the assessee's or his parent's own residence during the prescribed period, is transferred and the assessee, within the stipulated time- limit, purchases or constructs a new property for the purpose of his own residence, then, the surplus resulting upon the sale of the old house property is not to be brought to tax, for the transaction is in reality a case merely of change of capital asset without change of purpose and the resultant profit is ploughed back into the acquisition of a new capital asset of same nature for a similar purpose. The legislative object in enacting the exemption provisions is thus clear that when an assessee utilises the surplus money realised on the sale of the old house property, which was mainly in his or his parent's self- occupation, for acquiring a new house property, which he purchases or

9 ITA No.1014/Bang/2017 constructs with the end in view of his own immediate residential purpose, then, he should not be made subject to the charge of capital gains. In order to effectuate this object, therefore, what the legislature could have intended to provide is that the new property must have been really and substantially purchased or constructed by the assessee for the immediate purpose of his own residence.”

Thus in case where a residential house is purchased not for the end purpose of assessee's own residential house but only as an investment or earning income then the benefit of the provision under Section 54/54F would not be available. The Hon'ble High Court in the case of CIT Vs. Khoobchand M Makhija (supra) again had an occasion to consider this issue and held in paras 16 to 18 as under : “ 16. In the instant case, one residential house is sold. Out of the sale consideration, it was open to the assessee to purchase a big residential house so as to accommodate both his sons, in which event in terms of Section 54 (1), he would have been entitled to the benefit of the said Section. However, instead of purchasing one big house, having regard to the fact that both his sons are grown up, have families and in order to see that in future there won't be any litigation or disharmony, he chose to purchase two small residential houses to accommodate both his sons. 17. It is clear that the assessee was not attempting to evade tax. In fact, after purchasing two residential houses, still there remained unutilized capital gain, which he has offered for tax. Therefore, as held in the aforesaid Rukminiamma's case, 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 legislature to convey the meaning that it refers to a single residential house. The letter "a" in the context, which is used, should not be construed as meaning singular, but being a 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. 18. Therefore, we are of the view, in the facts and circumstances of this case, the acquisition of two residential houses by the assessee out of the capital gains falls within the phrase "residential house" and accordingly, the assessee is entitled to the benefit conferred under Section 54(1) of the Act. However, we make it clear that while interpreting this word, the Court or the Tribunal or the authorities have to keep in mind the facts of the particular case. When we have held "a" cannot be read as singular, it also cannot be read as multiples and so as to avoid paying tax under Section 45 of the

10 ITA No.1014/Bang/2017 Act. Therefore, in the facts and circumstances of this case, we answer the first substantial question of law raised in favour of the assessee and against the Revenue.”

The peculiar facts of the said case has been considered by the Hon'ble High Court is that the assessee had grown up children therefore, the assessee purchased houses for his two sons to avoid future disputes and litigation and after considering those peculiar facts, the Hon'ble High Court has held that it was not a case where the assessee attempted to avoid tax but even after purchasing two residential houses still there remains unutilized capital gain which was offered to tax. Accordingly having regard to the residential need of the family of the assessee, the Hon'ble High Court has considered these two houses as a single residential house for the purpose of Section 54/54(1) of the Act. It was specifically made clear by the Hon'ble High Court that while interpreting this word ‘peculiar facts of the case’ are kept in mind and the decision cannot be read as a singular and also cannot be read as multiple so as to avoid the tax under Section 54 of the Act. The learned Departmental Representative has relied upon the decision of Hon'ble Punjab & Haryana High Court in the case of Pawan Arya Vs. CIT (supra) wherein the Hon'ble High Court while considering the issue of allowability of claim under Section 54 in respect of two residential houses has observed in paras 2 to 4 as under : “ 2. The assessee claimed exemption on capital gains on sale of flat on the ground of acquisition of two houses. The AO set off the capital gain against one of the houses but held the claim not to be admissible against second house. However, the CIT(A)

11 ITA No.1014/Bang/2017 upheld the claim of the assessee relying upon decision of Bangalore Bench of the Tribunal in D.Anand Basappa v. ITO [2004] 91 ITD 53. The said view has been reversed by the Tribunal as follows : "6. We have carefully considered the rival submissions in the light of the material placed before us. The facts in the present case are clear. The assessee is claiming exemption in respect of two independent residential houses situated at different locations; one is in Dilshad Colony, Delhi and the other is in Faridabad. The assessee in the Special Bench case had also purchased two residential houses against sale consideration of residential flat at 'Gulistan' situated at Bhulabai Desai Road, Mumbai. One residential property was at Varun Apartments at Varsova and the other property was at Erlyn Apartments, Bandra and it was held by the Special Bench in the aforementioned case i.e.ITO v. Ms. Sushila M. Jhaveri (supra) that the assessee is entitled to get exemption only in respect of one house of her choice. Therefore, the decision of Special Bench is fully applicable to the present case and the assessee can avail exemption under section 54 in respect of one residential house only. The factual aspect has not been disputed by learned Authorised Representative. The only dispute before us is legal proposition that whether the assessee is entitled to get exemption in respect of two independent residential houses purchased out of sale consideration of another residential house. Therefore, the issue is decided in favour of the Department and it is held that the assessee is entitled to get exemption under section 54 in respect of one property only and no question has been raised by learned Authorised Representative regarding the choice of the property or the factual aspect of the matter. 7. So it relates to the decision relied upon by learned Authorised Representative of Hon'ble Karnataka High Court in the case of CIT v. D. Anand Basappa, it may be mentioned that the said case cannot be applied to the case of the assessee on the ground that in that case the two houses purchased by the assessee were not independent properties and a factual finding has been recorded that the two apartments which were claimed to be exempted against sale consideration were situated side by side and it was also stated by the builder in that case that he has effected modification of the flats to make it as one unit by opening the door in between two apartments. On these facts, the Hon'ble High Court has observed that the fact that at the time when Inspector inspected the premises, the flats were occupied by two different tenants is not the ground to hold that apartment is not one residential unit. The fact that the assessee could have purchased both the flats in one single sale deed or could have narrated the purchase of two premises as one unit in the sale deed is not the ground to hold that the assessee had no intention to purchase two flats as one unit. From these observations of Hon'ble High Court, it is clear that while rendering the decision they have kept in mind that the purchase of two flats in the same building which were united for living of the assessee by making necessary modifications made the residential unit as one

12 ITA No.1014/Bang/2017 and, thus, that case could not be applied to the facts of the case of the assessee………." 3. We have heard learned counsel for the appellant. 4. As regards claim for exemption against acquisition of two houses under section 54 of the Act, the same is not admissible in plain language of statute. In the judgment of Karnataka High Court in CIT v . D. Ananda Basappa [2009] 309 ITR 329 / 180 Taxman 4 referred to in the impugned order, exemption against purchase of two flats was allowed having regard to the finding that both the flats could be treated to be one house as both had been combined to make one residential unit. The said judgment, thus, proceeds on a different fact situation.” Therefore, so long as more than one unit could be treated as one house by considering the fact that these constitute one combined unit then the benefit of Section 54(1) cannot be denied as per the pre-amended provisions of the Act. However, where it is clear from the fact that in the case what is purchased by the assessee are two separate residential houses located in different and separate localities and by any parameter cannot be treated as one residential unit then the decisions relied upon by the assessee would not help the case of the assessee for allowing the deduction under Section 54 of the Act. So far as the applicability of the amended provisions of Section 54 by Finance Act, 2014 it cannot be applied retrospectively prior to the amendment assessment year. Hence, there is no quarrel on the point that the amendment brought in Section 54 and 54F by the Finance Act, 2014 is prospective and cannot be applied retrospectively. Further the decision as relied upon by the assessee are also binding and applicable so far as pre-amended provisions are concerned however, these decisions are applicable only on the specific facts and not as a general rule. Accordingly, in view of the above facts and circumstances of the case when the assessee has purchased two

13 ITA No.1014/Bang/2017 separate houses in different localities which are not adjacent to each other and further one of the houses was let out by the assessee and was not intended to be used for his residential purpose clearly manifest the intention of the assessee to purchase two separate houses not to be used as one residential house disentitle the assessee to claim the benefit under Section 54 in respect of both the houses. Therefore, we do not find any error or illegality in the orders of the authorities below in restricting the deduction under Section 54 in respect of one house only. 10. In the result, the appeal of the assessee is dismissed.

Order pronounced in the open court on the 25th day of Oct., 2017.

Sd/- Sd/- (JASON P BOAZ) (VIJAY PAL RAO) Accountant Member Judicial Member Bangalore, Dt. 25.10.2017.

*Reddy gp

Copy to : 1 Appellant 4 CIT(A) 2 Respondent 5 DR. ITAT, Bangalore 3 CIT 6 Guard File

Senior Private Secretary Income Tax Appellate Tribunal Bangalore.