RAVI SHANKAR,MUMBAI vs. ASST CIT 16(3), MUMBAI

During the course of the assessment proceedings the A.O observed that the assessee had during the year under consideration sold his residential property, viz. Flat No. 501, Kisna, 18th Road, Khar (W), Mumbai, for a consideration of Rs.5,30,00,000/-. It was observed by the A.O that the long term capital gain (for short „LTCG‟) shown by the assessee on the sale of the aforesaid property at Rs. 2,63,81,538/- , was claimed as exempt under Sec. 54 of the Act by the assessee, as under:-

The A.O observed that the claim of deduction raised by the assessee under Sec. 54 was comprised of (i). investment in purchase of a residential property at Pune; (ii). investment in a flat, viz. 4-5, Apsara CHS Ltd, Nargis Dutt Road, Pali Hill, Mumbai; and (iii). deposit of amount in the „Capital gain account scheme‟ with SBI. The A.O being of the view that as the claim of deduction under Sec. 54 was allowed for purchase of one residential house only, therefore, called P a g e | Mr. Ravi Shankar Vs. ACIT-16(3) upon the assessee to justify the deduction claimed by him in respect of purchase of the aforesaid two properties. The assessee in his reply submitted that both of the new houses purchased by him were meant for his self occupation. The assessee submitted that as he was an architect by profession and had business clients in Mumbai and Pune, therefore, to facilitate his stay at both the places he had purchased the aforesaid residential houses. It was the claim of the assessee that as there was no express limitation in Sec. 54 to the effect that the assessee should own only one residential house, therefore, his claim of deduction under Sec. 54 was well in order. The assessee fortified his aforesaid view by claiming that the term “a residential house” used in Sec. 54 would mean “any residential house”. It was the claim of the assessee that the expression “a residential house” was descriptive of the nature of property and in no way had any reference to the numerical strength of the house property. However, the submissions of the assessee did not find favour with the A.O, who holding a conviction that the claim of deduction under Sec. 54 could not be extended beyond the investment made by the assessee in one residential house, therefore, called upon the assessee to choose the property against which he sought to claim deduction under Sec.

The assessee however being of the view that he was duly entitled for claim of deduction in respect of the investment made in both of the residential houses, therefore, pressed upon his entitlement towards deduction as regards the investment made in both of the aforesaid residential houses, as was claimed by him.

That in the backdrop of the aforesaid facts the A.O declined to accept the aforesaid claim of the assessee and restricted his entitlement towards claim of deduction under Sec. 54 only in respect of the residential property at Mumbai, viz. 4-5 Apsara CHS Ltd, Nargis

Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating on the contentions of the assessee was however not persuaded to accept the same. The CIT(A) observed that as the assessee had invested in a residential property in Pune and the second one in Mumbai, therefore, the benefit of provision of P a g e | Mr. Ravi Shankar Vs. ACIT-16(3) Sec.54 by no stretch of examination could be extended to such separate investments made by him in two distinct residential houses in two different cities. The CIT(A) being of the view that the entitlement of the assessee towards the claim of deduction under Sec. 54 was rightly restricted by the A.O only as regards the investment made in one residential property, viz. flat in Mumbai, which was of the higher value, therefore, upheld the order passed by the A.O.

The assessee being aggrieved with the order of the CIT(A) had carried the matter in appeal before us. The ld. Authorized Representative (for short „A.R‟) for the assessee submitted that Sec. 54 as was available on the statute during the year under consideration, clearly provided that the claim of entitlement of the assessee for deduction under the said statutory provision was available if the assessee had within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of 3 years after that date constructed, a residential house. It was submitted by the ld. A.R that the term “a residential house” nowhere provided any restriction as regards the number of the residential houses in which an investment could validly be made by an assessee for claim of deduction under Sec. 54 of the Act. The ld. A.R in order to fortify his aforesaid contention submitted that the legislature in all its wisdom had substituted the term “a residential house” by “one residential house in India”, vide the Finance (No. 2) Act. 2014, with effect from 01.04.2015. It was thus the claim of the ld. A.R that as the aforesaid amendment which restricted the entitlement of an assessee towards claim of deduction under Sec. 54 to one residential house in India was made available on the statute with effect from A.Y 2015-16 and was prospective in nature, therefore, the same would have no bearing to the case of the assessee for the year under P a g e | Mr. Ravi Shankar Vs. ACIT-16(3) consideration. Per contra, the ld. D.R relied on the orders of the lower authorities.

We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. We find that Sec. 54 of the Act which provides for a deduction to an assessee in respect of the capital gain that arises from transfer of a long term capital asset being a residential house, as was available on the statute during the year under consideration, viz. A.Y 2012-13, clearly provided that the deduction would be available to an assessee either where he had within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed „a residential house‟. We find that the legislature in all its wisdom had came up with a prospective amendment to Sec. 54 of the Act, vide the Finance (No. 2) Act, 2014 with effect from 01.04.2015, as per which the term “a residential house” was substituted by “one residential house in India”. We are of the considered view that the pre-amended Sec. 54 as would be applicable to the case of the present assessee, by using the term “a residential house” though characterized the nature of investment and thus required that the investment was to be made towards purchase or construction of a residential house, but however, it did not place any restriction as regards the number of residential houses in which the assessee could invest for claiming deduction under the said statutory provision. We are of the considered view that the amendment made available on the statute, vide the Finance(No.2) Act, 2014, with effect from 01.04.2015, pursuant whereto the term “a residential house” had been substituted by “one residential house in India”, rather supports the fact that the restriction of making the investment in only one residential house had been made available on P a g e | Mr. Ravi Shankar Vs. ACIT-16(3) the statute only with effect from A.Y 2015-16, and as such cannot be extended to the years prior to that. We find that our aforesaid view is fortified by the judgment of the High Court of Karnataka in the case of Commissioner of Income tax Vs. Khoobchand M. Makhija (2014) 223 taxman 189 (Kar), wherein the High Court after deliberating at length on the issue under consideration, had observed as under:

This Court in the case of Commissioner of Income-Tax and Another -vs- Smt. K.G. Rukminiamma reported in (2011) 331 ITR 211 (Karn), had an occasion to consider Section 54 of the Act and had held as under: “For a proper appreciation of the aforesaid contention, it is necessary to have a careful look at Section 54 of the Income Tax Act, which reads as under: "54. Profit on sale of property used for residence - (1) Subject to the provisions of sub-section (2), where, in the case of an assesses being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of winch is chargeable under the head „Income from house property‟ (hereafter in this section referred to as the original asset), and the assesses has within a period of one year before or two years after the dole on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say, -…….”

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 numberand 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. This is the view which is taken by this court in the aforesaid Anand Basappa's case in I.T.A.No. 113/2004, disposed of on September 20, 2008([2009] 309 ITR 329 (Kam)]. ”

That was the case where the assessee gave his property for joint development agreement for putting up flats. Under the terms of the agreement, out of eight flats to be put up, four flats had to be given to the assessee, representing 48%, the consideration for the said four flats was consideration for selling 52% of the site. It was held that, though under the joint development agreement, the assessee received four residential flats, it constituted a residential house for the purpose of Section 54 and therefore, entitled to the said benefit.

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.

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 P a g e | Mr. Ravi Shankar Vs. ACIT-16(3) 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 Genera] Clauses Act.

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 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.”

We further find that the Hon’ble High Court of Madras in the case of CIT Vs. Smt. V. R. Kampagm had further clearly held in context of a similar amendment that was made available to Sec.54F, that the same was effective from 01.04.2015, which thus made it clear that prior to the said amendment the assessee was entitled the claim deduction in respect of investments made in more than one residential house. We find that a similar view had also been taken by the Hon’ble High Court of Andhra Pradesh in the case of CIT Vs. Syed Ali Adil (2013) 352 ITR 418 (AP).

We have given a thoughtful consideration to the facts of the case in context of the issue under consideration. We are of the considered view that in the backdrop of our aforesaid observations and the judgment of the Hon‟ble High Courts as had been deliberated upon by us hereinabove, it can safely be concluded that prior to A.Y 2015-16 no restriction was placed by the legislature in respect of investments in the residential houses that an assessee could make for claiming deduction under Sec. 54 of the Act. We thus are of the view that the P a g e | Mr. Ravi Shankar Vs. ACIT-16(3) claim of deduction raised by the assessee under Sec. 54 in respect of investment made towards purchase of residential house at Mumbai and Pune was well in order. We thus in context of the issue under consideration set aside the order of the CIT and uphold the claim of deduction as was raised by the assessee. The Grounds of appeal Nos. 1 to 3 are allowed in terms of our aforesaid observations. The Ground of appeal No. 4 being general in nature is dismissed as not pressed.

The appeal of the assessee is allowed.