ITO 16(3)(3), MUMBAI vs. JAYANT KUMAR J CHOKSI, MUMBAI

Per C.N. Prasad, Judicial Member:

This appeal is filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)]-27, Mumbai dated 17.09.2013 for the assessment year 2009-10. The Revenue has raised the following grounds: “1. Whether on the facts and circumstances of the case and in law the Learned CIT(A)erred in concluding that flat No.2301-A in Lokhandwala Residency Tower Worli which is rented out as per leave & Licence Agreement and 1/2 share in the flat No.2401-A in Lokhandwala Residency Tower , Worli which is SOP, be treated as one unit by way of single agreement, for the purpose of Sec-54F?

2 ITA No.5720/M/2013 Mrs. Sonali A. Shah income filed the assessee claimed deduction under section 54F against sale of two properties and purchase of a new property. The assessment was completed on 30.12.2011 under section 143(3) of the Act determining the income of the assessee at Rs.1,24,25,400/-. While completing the assessment, the Assessing Officer denied deduction under section 54F holding that the house i.e. flat Nos.2301A and 2401A in Lokhandwala Residency Tower, Worli is not a single house, therefore on the date of transfer of original asset assessee owns more than one residential house other than the new asset and therefore the assessee has not complied with the provisions of section 54F of the Act and not entitled for deduction. The second objection of the Assessing Officer for denying the claim for deduction under section 54F was that the new property purchased by the assessee was registered in the name of assessee’s wife and daughter in law and not in the name of the assessee, thus the Assessing Officer held that assessee is not entitled for deduction under section 54F.

3 ITA No.5720/M/2013 Mrs. Sonali A. Shah 4. Assessee carried the matter to the Ld. CIT(A) and the Ld. CIT(A), considering the elaborate submissions made by the assessee, the evidences produced by the assessee before the Assessing Officer and before him and the averments of the Assessing Officer, held that the property situated in flat Nos.2301A and 2401A should be considered as a single unit as this property (duplex flat) was purchased by a single agreement, there is a single entrance with 4 bed rooms and single kitchen, therefore should be considered as a single unit in view of the special bench decision of the Mumbai, ITAT in the case of ITO vs. Sushila M. Jhaveri (107 ITD 327). Thus the Ld. CIT(A) accepted the contention of the assessee that the duplex flat is a single house owned by the assessee on the date of transfer of original asset and deduction under section 54F of the Act is allowable. The Ld. CIT(A) also held that in view of various decisions the deduction under section 54F cannot be denied for the reason that the property is registered in the name of assessee’s wife and daughter in law when the entire sale consideration was paid by the assessee only. Against this order the Revenue is in appeal before us.

4 ITA No.5720/M/2013 Mrs. Sonali A. Shah the builder since it is constructed accordingly having common kitchen and living room. Therefore, he submits that it is not possible to split into two flats separately. Further, referring to page 48 & 49 of the paper book which is the floor plan of the flat submitted that the flat is connected by a common staircase and has a common kitchen and living room as is evident from the floor plan. Therefore, he submits that the assessee owns no other residential house other than the new asset on the date of the transfer. Therefore, he submits that assessee does not own more than one residential house on the date of transfer and therefore the contention of the Assessing Officer that the assessee owns more than one house is not correct. The Ld. Counsel further submits that in various judicial pronouncements it was held that where the assessee has purchased more than one house and has converted the same into one residential house having a common entrance and common kitchen the same has to be construed as one residential house for the purpose of deduction under section 54/54F, if they are internally connected. For the above proposition he relied on the following case laws: 1. CIT vs. Ramkumar Suri [29 taxmann.com 231 (Bombay)] 2. ITO vs. Sushila M. Jhaveri (107 ITD 327) (Mumbai Special Bench) 3. Shri Deepak S. Bheda (ITA No.5011/M/2010)

Further placing reliance on the decision of the Hyderabad Bench in the case of N. Revathi vs. ITO (45 taxmann.com 30) the Ld. Counsel submits that “a residential house” does not mean a single residential house even where the assessee constructs or receives a number of flats adjacent to each other or in different floors of the same building then also the assessee would be entitled for deduction under section 54F of the Act.

5 ITA No.5720/M/2013 Mrs. Sonali A. Shah of the female members of the family as they are considered as “laxmi”. He further submits that wife and daughter in law of the assessee have executed an affidavit wherein they have affirmed that entire sale consideration for the purchase of the property is paid by the assessee himself and they have no right, title and interest and possession in this property and that the property belongs to assessee. The Ld. Counsel for the assessee submits that investment was shown in assessee’s books of account, entire purchase consideration along with other expenses, stamp duty, registration, corporation tax and legal expenses have been paid by the assessee. No amount has been contributed by the wife or daughter in law. All the payments were made through banking channels as is evident from the assessment order itself. The Ld. Counsel for the assessee further submits that the Revenue is assessing the rented income from the said new property in the assessee’s hands. Therefore he submits that in such circumstances there is no justification in rejecting the assessee’s claim under section 54F.

6 ITA No.5720/M/2013 Mrs. Sonali A. Shah assessee owns more than one residential house as on the date of transfer of original asset because the pent house which the assessee owns according to the Assessing Officer is not a single unit/residential house but they are two residential houses. The second main objection of the Assessing Officer is that the asset which the assessee purchased was not in his name but it was registered in the name of his wife and the daughter in law therefore Assessing Officer was of the view that the assessee is not entitled for deduction under section 54F of the Act. The Ld. CIT(A) after considering the elaborate submissions of the assessee and the various case laws on the issues allowed the claim of the assessee by following the Special Bench, Mumbai in the case of ITO vs. Sushila M Jhaveri (supra) and referring to various other decisions wherein it was held that asset need not be registered in assessee’s name for the purpose of allowing deduction under section 54/54F of the Act observing as under:

“2.4.4 The Ld. AO on the basis of document submitted found that the appellant had not invested the entire amount from his account for the purchase of the new asset. Further, he also found that as per the balance sheet and leave and license agreement presented before him, the appellant owned two properties viz, 1/2 share in Flat No.2401-A, Lokhandwala Residency Tower, Worli which was claimed as self occupied property and secondly Flat No. 2301-A, Lokhandwala Residency Tower, Worli which was let out as per leave and license agreement dated 07-01-2008. Thus, the Ld. AO came to the conclusion that the appellant has been owning two properties as on the date of sale of original asset and hence, he was not eligible for claiming deduction u/s. 54F.

2.4.5 During the course of appellate proceedings, the Ld. AR has filed detailed reasoning in support of the appellants claim. It has been stated that the appellant has purchased a residential property at Udaipur jointly in the name of his wife with his daughter-in-law and the entire consideration was paid by him along with the Stamp Duty and corporation tax at the time of registration of Sale Deed. However, no amount was contributed by his spouse towards purchase of the house. After discussing in detail the primary requirements for claiming deduction and the fact that the consideration received towards sale of property was invested in the new asset and after discussing the intention of the legislature in introducing section 54F as explained in Board's Circular No. 346 dated 30-06-1982, which was for encouraging house construction, the Ld. AR relied on a number of decisions in his favour to buttress his claim that even if the house was purchased in

7 ITA No.5720/M/2013 Mrs. Sonali A. Shah joint name, deduction u/s. 54F was available.

24.6 It is seen that vide Purchase Agreement dated 25-09-2009, the Udaipur property was purchased by the appellant in his wife's and daughter- in-law's name, which was also explained to the Ld AO vide letter dated 16-12- 2011 stating as under: "As explained in my letter dated 28-11-2011, I have purchased the property in the name of my wife as benamidat. The transaction is of benami nature, which can be confirmed, in view of the below facts: a) The consideration for purchase of the property has been paid by me. b) The physical possession of the property is also with me. c) The original title deeds are in my possession. d) I have purchased the property in my wife name as benamidar and she is only a ostensible owner of the property. e) My wife has no right, title and interest in the said property. f) The property is shown as asset in my balance sheet and the balance sheet of my wife does not reflect the said property. I am the real actual owner of the property."

2.4.7 It has also been stated that Ld. AO was incorrect in observing that no payments were made towards investment in new house from the sale proceeds of the old house. In this regard, it has been explained as under:

"Sale consideration of Kesri Bhavan amount Rs.45,00,000/- and sale consideration of Sanghvi Bhavan Rs.40,00,000/- was first deposited into appellant NKGSB account (Refer page 63). Out of that sale proceeds appellant transferred Rs.70,00,000/- to Dena Bank for 91 days FDR because rate of interest was higher in FDR (Refer page No.61).

Thereafter, when FDR matured amount was transferred to HDFC bank account along with interest of FDR. (Refer No. 65-66). After funds come in HDFC bank account purchase consideration of Udaipur property was paid.” 2.4.8 In this regard, Ld. AR has placed reliance on the decision of Hon'ble Mumbai Bench of ITAT in the case of Bombay Housing Corporation Vs. CIT, 81 lTD 545, that even if the assessee borrowed the required funds and satisfied the conditions relating to investment in specified assets, he should be entitled to exemption. 2.4.9 In the case of JCIT Vs. Smt. Armeda K. Bhaya, 95 lTD 313 (Mum), Hon'ble Mumbai Bench of ITAT held that the new asset in the name of the assessee jointly with his mother and father was sufficient compliance for availing exemption u/s. 54F. 2.4.10 Similarly, in the case of CIT Vs. V.Natarajan (2006) 154 Taxmann 399 (Mad), it has been held by the Hon'ble High Court that the purchase of house in the name of wife without even including the assessees name in the title deed will not deny the benefit of exemption u/s. 54F. 2.4.11 In the case of Ravinder Kaur Arora Vs. CIT (2012) 21 Taxmann.com 305 (Del), it has been held that if the new house was bought in

8 ITA No.5720/M/2013 Mrs. Sonali A. Shah the name of the spouse, the assessee could claim exemption 54F if payment for purchase of the new house was made by the assessee as the eligibility for availing deduction was satisfied and merely because the title deed contained the name of the spouse, the same could not be denied. 2.4.12 As regards the Ld. AO's observation that the appellant was already having two house properties and hence, the new house property at Udaipur was his third house, it has been stated that the appellant's flat in Lokhandwala Residency Tower, Worli is a duplex which is internally connected by a stair case and there is only one kitchen and one hall in the said flat. Further, there was a single agreement for the purchase of the said flat and the said Agreement mentioned that this flat has been sold as a single unit as a duplex flat. Hence, relying on the Special Bench decision of the Mumbai ITAT in the case of ITO Vs. Sushila Jhaver, 107 lTD 327 it has been arugd that the duplex flat in question should be treated as only one house and hence, there was no conflict with the claim of deduction made by the appellant u/s. 54F in so far as these objections raised by the Ld. AO is concerned. In the said case of Sushila Jhaver it has been held as under: "11. in view of the above discussions, it is held that exemption u/s. 54 and 54F of the Act would be allowable in respect of one residential house only. If the assessee has purchased more than one residential house, then the choice would be with assessee to avail the exemption in respect of either of the houses provided the other conditions are fulfilled, However, where more than one unit are purchased which are adjacent to each other and are converted into one house for the purpose of residence by having common passage, common kitchen, etc., then, it would be a case of investment in one residential house and consequently, the assessee would be entitled to exemption."

2.4 13 The objective of introduction of section 54F was to encourage house construction. The assessee could not be denied the exemption merely because the contractor had the use of the funds in his house construction business. The present case was no different except that the house construction business happened to be that of the appellant himself. Yet it was not to be gainsaid that it fulfilled the main object of the section, viz., to encourage the construction of houses. In the circumstances, it was to be held that the utilization of the monies by the appellant in the above manner amounted to utilization of the funds for the purpose of the construction his own residential house. Hence, the claim of the appellant for deduction under section 54F to the extent to which there was a reinvestment in the new residential house fulfilling the other conditions of section 54F, was to be upheld. 2.4.14 In view of the above, I am of the considered opinion that even if the new asset was purchased in the joint name of the appellant's wife and daughter-in- law, the first condition regarding purchase I construction of a new asset is fulfilled. Secondly, keeping in view the Special Bench decision of Hon'ble Mumbai Bench of TAT in the case of Sushila Jhaver (supra) which is binding on the appellate authorities in Mumbai, in the facts of the case where the appellant has purchased a duplex unit by way of a single agreement, the second limb of section 54F is also fulfilled as the appellant would be owning just one house property and not two house properties though lying at two

9 ITA No.5720/M/2013 Mrs. Sonali A. Shah different floors interconnected by a staircase.

2,4.15 In view of the same, appellant's claim for deduction u/s. 54F is sustained and the ground raised is allowed. I am also fortified in this view by the decision of Hon'ble ITAT Chennai in the case of Ramachandran Vs. ITO 1TA/941/Mds/2011 dated 24-01-2012 where it has been interalia held as under:

“In the instant case, the appellant has apparently satisfied the ultimate objective of the section by investing in a residential house by way of construction within the time allowed u/s. 54. What the appellant has failed to do is to make an investment in the capital gains account scheme as required u/s. 54(2) within the time allowed for furnishing the return u/s. 139(1). This the appellant contends is only a technical breach. The appellant apparently intended to invest in a residential house which is obvious from the fact that he acquired the land within a short time after the end of the previous year and before the time allowed for filing the return and commenced construction later on the said land which was completed within the time al/owed u/s. 54(1). These acts of the appellant clearly go to show that the appellant always intended to invest in a residential house by way of construction. It, therefore, appears that the failure to invest in the capital gain account scheme is only a technical default given the circumstances and the peculiar facts should not be extended to such an extent as to deny the exemption u/s. 54 when the ultimate purpose of the provision is achieved. To hold that the exemption should be forfeited for a technical breach does not appear to be the correct proposition particularly since the appellant pleads that he was not aware of the requirement to invest in the capital gains account scheme and also states that his objective was to invest in a residential house which is apparent from the fact that he has purchased a land and also constructed a house thereon. It is also seen that section 54E (since deleted) and section 54EC and 54ED which require investment of the proceeds in specified assets, specifically provides that the exemption would be forfeited if the specified assets is given as a security for taking loan. In section 54. we do not find any such provision and therefore, in our considered view the purpose of section 54(2) is not to deprive the assessee of an exemption but only to avoid rectification. The ultimate object of the section having been satisfied namely to encourage construction of houses, we are convinced that the utilization of the funds in constructing a residential house should be treated as sufficient compliance of section 54 and therefore, hold that the appellant is entitled to the exemption u/s. 54 even in respect of the amount 'invested by way of construction of the residential house amounting to Rs.16,40,311/-. Before we depart, we may mention that the Supreme court in Motilal Padampat Sugar Mills Co. Ltd. Vs. State of Uttar Pradesh (1979) 118 ITR 326 has observed as follows: "that there is no presumption that every person knows the law, It is often said that every one is presumed to know the law, but that is not a correct statement, there is no such maxim known to the law.” 6. Therefore, by respectfully following the above decision, we allow this claim of the assessee.” 10. We further notice that the proposition of the decision of Special Bench in the case of Sushila M Jhaveri (supra) has been approved in the

10 ITA No.5720/M/2013 Mrs. Sonali A. Shah case of CIT vs. Raman Kumar Suri by the jurisdictional High Court (29 Taxmann.com 231) wherein it was held as under:

“(d) We find no fault with the order of the Tribunal which has upheld the finding of fact of the Commissioner of Income Tax (Appeals) to the effect though the respondent-assessee had purchased flat Nos. 416A and 516A it was only purchase of one residential house. Further, the Tribunal held that two flats were joined together before the respondent assessee became the owner of the two flats. The Certificate from the society also established the fact that two flat Nos. 416A and 516A were joined together and were considered as one residential house. These concurrent findings of fact by the Commissioner of Income Tax (Appeals) and the Tribunal have not been shown to be perverse or arbitrary. Further, Section 54 of the Act exempts capital gain to the extent the consideration is paid for the purpose of a residential house. Consequently, where respondent-assessee has acquired one residential house consisting of two flats, it cannot be said the respondent assessee had purchased two residential houses. In view of the above, we find that question (e) and (f) also do not raise any substantial question of law. Therefore, the appeal is dismissed with regard to question (e) and (f) above. 11. Therefore, respectfully following the decisions of the Special Bench and the Hon’ble Jurisdictional High Court, we hold that the pent house purchased by the assessee in the form of duplex flat is a single residential house/single owned by the assessee at the time of transfer of original asset and the claim of the assessee under section 54F is allowable.

11 ITA No.5720/M/2013 Mrs. Sonali A. Shah the property was registered in the name of assessee’s wife and daughter in law the deduction as claimed by the assessee under section 54F is to be allowed.

In view of our above discussion we uphold the order of the Ld. CIT(A) in holding that the assessee is entitled for deduction under section 54F of the Act.

Order pronounced in the open court on 11.11.2016.

Sd/- Sd/- (N.K. Pradhan) (C.N. Prasad) ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated: 11.11.2016. * Kishore, Sr. P.S.

Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy// [ By Order

Dy/Asstt. Registrar, ITAT, Mumbai.