DEEPANKAR MOGHA,MUMBAI vs. THE ASSISATNT COMMISSIONER OF INCOME TAX, CIRCLE 17(1) , MUMBAI

"5. We have perused the records and considered the rival contentions carefully The dispute is regarding allowability of exemption under section 54 of the I. T. Act in respect of capital gain earned by the assessee from sale of a residential property. Under the provisions of section 54, capital gain arising from transfer of a residential house income from which is chargeable under the head income from house property is exempt if the capital gain is invested in purchase of a new residential house within one year before or two years after date on which transfer took place or assessee has constructed a new residential house within the period of three years after the date of transfer. In the present case, assessee had sold the residential property for Rs.3.50 crores on 8.8.2007 and thereafter on 16.8.2007 assessee purchased tenancy rights in flats in the building "Symphony" on deposit of Rs. 1.85 crores which was not refundable and on payment of monthly rent of Rs. 500/-. The case of the assessee is that tenancy right was perpetual and assessee was therefore deemed owner of the property under section 27(iiib). The flat taken for tenancy was to be used for res/dent/a/ purposes and income from the same was chargeable under income from house property It has also been submitted that under the provisions of tenancy agreement, the assessee was entitled to subletting the flat or to give on leave and license and could also avail loan against said tenancy right. The assessee had also the right to assign or transfer the right in the flat and further entitled to make alteration in the flat.

Therefore, it has been argued that for all practical purposes, the assessee was owner of new residential property and therefore. assessee should be entitled for exemption under section 54 of the Act. The case of the revenue is that as per requirement of section 54, the assesses had to purchase or construct a new residential house and then only is entitled for exemption under the said section. Acquisition of new residential house by any other mode is not prescribed and, therefore, assessee is not entitled for exemption.

5.1 We have carefully considered the various aspects of the matter. We find that under the provisions of section 54, exemption of capital gain is available in respect of transfer of residential house owned by the assessee. The purpose of the section is to grant exemption in case the assessee acquires a new residential house by investing the capital gain as an owner. It is because of this reason, the words used in section 54 are "purchase" or "construction" of a new residential house. The requirement of section is not that assessee may acquire a new residential house by any other mode. The word "purchase" appearing in section 54 had come for consideration before Hon'ble Supreme Court in case of CIT vs. T.N. Arvinda Reddy (120 ITR 46) in which Hon'ble Supreme Court held that the word "purchase" appearing in section 54(1) has to be given its common meaning i.e. buy for a price or equivalent of price by payment in kind or adjustment towards a debt or for other monetary consideration. Thus, for application of provisions of section 54, the assessee has to buy a property as an owner In this context, it may be appropriate to refer to the judgment of Hon'ble High Court of Bombay in case of Hameed Jaffery vs. CIT (227 ITR 724) which was in the context of old provision of section 54 which required that the property which had been transferred should be in the occupation of the assessee for his own residence or for the residence of his parents. The Hon'ble High Court held that occupation should be as an owner and not as tenant. The exemption under section 54 from capital gain is available to an assessee, who invests the capital gain in similar asset being a residential house which would obviously mean that acquisition of the house should be as an owner as the capital gain covered under section 54 is the capital gain arising from transfer of a residential house owned by the assessee

5.2 Further, as rightly pointed out by the Id. CIT-DR, provisions of section 54 are exemption provisions and, therefore, in case two interpretations are possible i.e. whether assessee should acquire the new residential house as owner or even the perpetual tenancy right would suffice, the interpretation favorable to the revenue shall be followed as held by Hon'ble Supreme Court in case of Novopan India Ltd. (3 SCR 549). In the said case, the Hon'ble Supreme Court held that the principle that in case of ambiguity, a taxing statute should be construed in favour of the assessee would not apply to the construction of an exception or an exempting provision: these have to be construed strictly. The Hon'ble Supreme Court also held that the person invoking an exception or an exemption provision to relieve him of the tax liability must establish clearly that he is covered by the said provision. In case of doubt or ambiguity, benefit of it must go to the State. Following the said judgment, therefore, even if there is some ambiguity in the provision, the same has to be interpreted in favour of the revenue because it is an exemption provision. In the present case, there is no ambiguity. The provision refers to purchase or construction of a new residential house and it is quite obvious that the same should be as an owner and not as perpetual tenant.

5.3 The Id. AR for the assessee has referred to the provisions of section 27(iiib) r.w.s. 269UA(f) as per which a person having lease hold right for more than 12 years in property including the period renewal of lease if any has to be considered as deemed owner Since the assessee in this case had perpetual lease, it has been argued that the assessee was deemed owner and therefore, should be entitled to exemption under section 54 of the Act However, we find that the provision of deemed owner under section 27(iiib) is only for the purposes of section 22 to 26 as clearly mentioned in the said section, which relate to computation of income from house property Therefore, argument of deemed owner is relevant only in connection with computation of income from house property and not in relation to exemption provisions of section 54. Similarly, treating the tenancy as conveyance under the Bombay Stamp Act was only for the purpose of payment of stamp duty and cannot be considered as conveyance of the title of the property to the assessee as an owner. As for taking possession of the flat, taking possession can not be considered as ownership as the possession had been taken as a tenant and not as an owner of the flat.

5.4 It has also been argued that under the provisions of tenancy agreement, assessee had right to bequeath the flat, sub-let/lease it and was also entitled to raise loan against the flat. The assessee had also right to make alteration in the flat and therefore, considering these factors and also the fact that the lease was perpetual, the assessee had to be considered as owner of the flat, entitled to exemption under section 54 The arguments are however not convincing. No doubt, the assessee was permitted to sub-let the flat, to bequeath it and to raise loan but such powers were only in relation to tenancy right of the assessee and not as owner of the flat. All these facilities to which assessee was entitled was only against right of the assessee as tenant in the flat and not as owner. Further, clause-12 clearly provides that the tenant was not entitled to make any structural changes in the flat which clearly shows that the assessee was not the owner because an owner has full right in relation to his property. The said clause also provided that the tenant had no right to put up any construction on the aforesaid plot of land. The clause-17 provided that right of tenant was limited and restricted to the said flat. Further clause-19 placed restriction that tenant was not entitled to do any act that affected the right of the land lord in the said building and in the said property which clearly shows that the assessee did not have the status of land lord and was only a tenant.

The owner of the flat was Laxminagar Co-operative housing Society and as per rules of the society, there was no provision of transfer of land and, therefore, subsequent buyers were only tenants and not owners.

5.5 The Id. AR for the assessee has placed reliance on Circular No.8/2/169-IT(A)-1 dated 25.3.1969 to argue that in terms of the said Circular the assessee was owner for all practical purposes. The said circular in our view is distinguishable as the same related to a situation in which the builder had transferred land and building to the society and society had allotted the tenancy to the purchasers and possession of the flat had been given. Thus, in that case society had ownership of land as the land had been transferred to the society and it was under these circumstances that it was held that for all purposes including adjustment and recovery, individual members could be regarded as legal owners. In the present case there was restriction on transfer of land which was owned by Laxminagar Co-operative Society. The subsequent buyers were only tenants and not owners of land and this was the reason that only tenancy rights were given to various persons including the assessee. The builder had no right in the land and, therefore, only, tenancy right could be given to the buyers. Moreover the circular related to a case where individual members had paid the entire cost of the flat as purchaser, which is not so in the present case. Therefore, the circular does not find any application to the facts of the case. The Id. AR has also referred to opinion of the solicitor. Maya Bhatt & Co. placed at page 61 of the paper book but there is nothing in the opinion to show that the assessee was an owner. The solicitor had only stated that the land lord had given irrevocable right to the builder Kashmita Property Pvt. Ltd. to enter the property for the purpose of development and that the property was free from any encumbrance. Thus the solicitor had given only an opinion that the builder was entitled to development right in the property for construction of the building. So the opinion given is of no help to the assessee. The Id. AR has also placed reliance on the decision of the Tribunal in the case of Prema P. Shah vs. ITO (100 ITD 60) and based on the said decision it has been argued that the assessee has to be treated as owner. However, on careful perusal of the said decision we find that the said decision is distinguishable. The property in the said case was on perpetual lease of 150 years. The Tribunal noted that the rent fixed was 'peppercorn' rent and was payable only if demanded. Thus, the assessee in that case was not duty bound to pay rent It was under these circumstances that the Tribunal held that the assessee had to be treated as an absolute owner and entitled to exemption under section 54. In the present case, the assessee was bound to pay the rent as per the agreement and therefore, it could not be considered as 'peppercorn' rent. The case is therefore distinguishable and not applicable to the facts of the present case.

7.4 Following the decisions of the Jurisdictional Tribunal in the above cases it is held that purchase of tenancy rights does not qualify as purchase of a residential house property within the meaning of section 54 of the Act.

7.5 Furthermore, it has been noted by the A.O that the flat in Delhi was sold on 11.01.2017 giving rise to capital gains and the tenancy rights were purchased vide deed dated 19th January, 2019 which is beyond the period of 2 years allowed by section 54 for purchase the residential house.

7.6 For the reasons given above, the disallowance of the claim of Rs. 3,28,00,000/- by the Assessing Officer is upheld. The ground of appeal is not allowed.”

4. We have given our thoughtful consideration to vehement rival arguments against in support of impugned section 54 disallowance. There is hardly in dispute in both learned lower authorities have invoked reasoning in rejecting assessee’s 54 deduction claim i.e. he has only acquired tenancy rights in the new residential house than purchasing or constructing it and reinvestment in question has not been made within a period of two years from the date of transfer i.e. 11.1.2017. We wish to make it clear an abundant caution for all other relevant facts stand admitted so far as assessee having sold his capital asset giving rise to capital asset i.e. a residential property at S-175, Greater Kailash, Part II, New Delhi for R. 4,00,00,000/- giving rise to the long term capital gains of Rs. 3,28,07,377/-, are concerned. A perusal of the case file reveals that the assessee has filed his paper book running into 157 pages as well which stands perused.

5. We advert to the Revenue’s first and foremost clinching reason that the impugned 54 deduction could not have been availed in case of acquisition of mere tenancy rights in the new residential house. It emerges from page No. 101 in assessee’s paper book that the developer concerned had in fact offered and granted a new residential house/flat to the assessee’s vendor Mr. Ishak Balwa as “by way of permanent alternate accommodation in lieu of..............”. Meaning thereby that assessee’s vendor; herein was a tenant earlier who had been allotted the new residential property on permanent basis with absolute ownership right. Learned lower authorities have failed to give due consideration to all these facts. We thus reverse the impugned former reason adopted by learned lower authorities for refusing section 54 deduction to the assessee to this effect.

5. Next come the learned lower authorities is beyond the period of “two years from the date of transfer of capital asset i.e. 11.1.2017. It is noticed from the perusal of the case records that assessee had paid five installments; covering various heads, between 3.4.2018 to 17.1.2019 in respect of the new residential house which had to be constructed by the developer concerned. Section 54(1) stipulates time period of “three years” for the period of construction of the new residential house meaning thereby that even if it is held that there is delay regarding completion of residential house, be it purchase or construct, the same would hardly result in section 54 disallowance as per CIT Vs. Vinay Girish Bajpai (ITA No. 7676/Mum/2019 dated 1.2.2022) deciding the issue against the Department as under :

6. We accordingly conclude in light of the all the relevant facts herein that both the learned lower authorities herein have erred in law and in fact in disallowing assessee’s 54 deduction claim of Rs. 3,28,00,000/-. The same is directed to be deleted. The Revenue vehement contention supporting impugned disallowance hereby disallowed. Ordered accordingly.