2008 (1) TMI 649 - AT - Income Tax

Computation of Capital gain - Disallowed exemption u/s 54(1) - two residential house - sale proceeds utilized for purchase of a commercial property and residential house was purchased out of the funds obtained from different sources - HELD THAT - We do not find much force in this argument as the requirement of section 54 is that the assessee should acquire a residential house within the period of one year before or two years after the date on which transfer took place. Nowhere, it has been mentioned that the same funds must be utilized for the purchase of the another residential house. Since the assessee has purchased the residential house before the due date of filing of the return of income, its claim is not hit by sub-section (2) of section 54 of the Act. We, therefore, of the view that assessee is entitled for deduction under section 54(1) of the Act. Whether the assessee can claim deduction with respect to both the flats purchased by the assessee, but, were not used by himself for its residential purpose? - We are conscious about the decision of the Special Bench in the case of Ms. Sushila M. Jhaveri 2007 (4) TMI 289 - ITAT BOMBAY-I , in which it has been held that if the two adjoining flats are purchased by the assessee which can be used as a residential house by removing the intermediate walls with a common kitchen, the same can be treated as a residential house for allowing deduction under section 54(1) of the Act. But, in the instant case, the assessee has purchased two independent flats though, adjoining with each other, and they were let out to two different tenants and finally in 2005, they were sold out. From the facts available, we are of the view that assessee had never intended to use these flats as a residential house by removing the intermediate walls with a common kitchen, as such, assessee is not entitled for deduction with respect to both the flats. He can only claim deduction with respect to any one of the flat. We, accordingly, restore the matter to the file of the Assessing Officer to allow deduction under section 54(1) of the Act with respect to any one of the flat as claimed by the assessee. Accordingly, this appeal is disposed of. In the result, appeal of the revenue is partly allowed for statistical purposes.

Summary

Issues:
1. Eligibility for relief under section 54(1) of the Income-tax Act.
2. Entitlement for relief in respect of multiple residential flats.

Analysis:

Issue 1: Eligibility for relief under section 54(1) of the Income-tax Act:
The appellant claimed relief under section 54(1) of the Act after selling a residential flat and purchasing commercial property and two residential flats. The Assessing Officer disallowed the claim citing non-full deployment of sale proceeds and purchase of two units. The CIT(A) allowed the deduction, emphasizing that the sale proceeds were fully utilized for purchasing both flats. The Tribunal noted the requirement of acquiring a residential house within the specified period, not mandating the same funds for purchase. The Tribunal upheld the CIT(A)'s decision, stating the source of funds is irrelevant as long as the residential property is acquired within the stipulated timeframe.

Issue 2: Entitlement for relief in respect of multiple residential flats:
The appellant purchased two adjoining residential flats, rented them out, and later sold them. The revenue contended that the flats were separate units and not intended for joint residential use, citing a Special Bench decision. The appellant argued for deduction for both flats, claiming intent to merge them. The Tribunal found that the appellant never intended to combine the flats for residential use, thus allowing deduction for only one flat. The matter was remanded to the Assessing Officer for allowing deduction for one of the flats as claimed by the appellant.

In conclusion, the Tribunal partly allowed the revenue's appeal for statistical purposes, affirming the eligibility for relief under section 54(1) of the Act with no requirement for the same funds to be used for purchase. However, deduction for multiple flats was disallowed as the appellant did not intend to merge them for residential purposes.