2014 (10) TMI 932 - HC - Income Tax

Entitlement to benefit of Section 54(1) in respect of the land sold - Held that - When a property, residential house is sold, the sale consideration includes the value of the land and the value of the construction. Though there is no two sale transactions involved for the purpose of the Act, in order to calculate the capital gains as rightly done by the Assessing authority, he has treated the sale of land on which the residential house is constructed as a long term capital gain and he has treated the building as short term capital gain. If, for levying tax under the Act, such a distinction could be made, we fail to understand why that distinction should not be kept in mind in extending the benefit under Section 54(1) of the Act. If the land on which the building is constructed is a long term capital gain and the amount received towards the sale of such land when it is assessed a s a long term capital gain and taxed. In view of Section 54(1) if that consideration from the sale of the land is utilized in acquiring a residential house, the bene fit from exemption is to be extended. Otherwise, the section looks absurd. The land which is adjoining the residential house is entitled to benefit under Sect ion 54(1) of the Act but the land on which the residential house would not be entitled to such benefit, we cannot impute any such intention to the legislature. On the contrary, the legislative intent is manifest. The assessee is entitled to the benefit of Section 54(1) of the Act in respect of land and building. That land may be the land on which the residential house is constructed or the land appurtenant to the residential house. - Decided in favour of assessee

Summary

Issues:
1. Entitlement to benefit of Section 54(1) of the Income Tax Act, 1961 for land sold.
2. Interpretation of the term "building" in Section 54 for capital gains relief.

Analysis:

1. The appellant challenged the finding that they were not entitled to the benefit of Section 54(1) of the Income Tax Act, 1961 for the land sold. The appellant had obtained a site on settlement and constructed a three-storied building, with the first and second floors along with the proportionate share in the land being the subject of the transaction. While the land was a long-term capital asset, the building was held for less than 36 months before the transfer. The Income Tax Officer contended that the capital gains from the long-term capital asset land would not qualify for relief under Section 54 due to the building being a short-term capital asset. The Tribunal upheld this view, stating that the building and appurtenant land should both be long-term capital assets for Section 54 relief. The appellant's appeal was dismissed based on this interpretation.

2. The Tribunal's decision was based on the interpretation that the word "or" in Section 54 should be understood as "and," meaning that both the building and appurtenant land should be long-term capital assets to qualify for relief. The Tribunal referenced a Kerala High Court judgment to support this interpretation. However, the appellant argued that Section 54 should be interpreted liberally to include land appurtenant to a residential house for the benefit. The High Court referred to a previous judgment where it was held that if the land is contiguous to a residential house, it should be considered appurtenant to the house. The Court disagreed with the Tribunal's interpretation and held that the appellant was entitled to the benefit of Section 54(1) for both the land on which the residential house was constructed and the land appurtenant to the house.

In conclusion, the High Court allowed the appeal, stating that the appellant was entitled to the benefit of Section 54(1) of the Act for both the land on which the residential house was constructed and the land appurtenant to the house. The Court disagreed with the Tribunal's interpretation and set aside the impugned orders, answering the substantial questions of law in favor of the assessee and against the revenue.