2014 (7) TMI 1264 - HC - Income Tax

Benefit of Section 54(1) in respect of the second residential property purchased by him - whether purchase of a residential house as mentioned in Section 54(1) means one residential house only? - Held that - From the facts it is clear that having sold the property in Basavanagudi, probably, as the assessee could not secure a proper residential house sufficiently big to invest the entire sale consideration derived from the sale of residential house, he has chosen to purchase two properties nearby. In fact to purchase a second property, the balance consideration was not sufficient. Therefore, in the sale deed in respect of the second residential house, the name of his wife who is a doctor by profession as well as his father s name are included who might have contributed the balance sale consideration. So it is not a case where the assessee is attempting to evade tax. He had made a bonafide attempt to invest the sale consideration from the sale of residential premises in purchasing two residential premises in the very same locality situated nearby. - Decided in favour of assessee

Summary

Issues:
Challenge to denial of benefit under Section 54(1) of the Income Tax Act for the second residential property purchase.

Analysis:

1. Investments and Exemptions: The appellant, being the owner of a property in Basavanagudi, Bangalore, sold it and purchased another property in the same area. Additionally, he invested in a Capital Gains Scheme and purchased RECC bonds, claiming exemptions under Section 54 and Section 54EC of the Income Tax Act. The appellant declared a net capital gain of Rs. 138.

2. Scrutiny and Clarifications: The case was selected for scrutiny, and it was noted that the appellant had invested the capital gains in the purchase of a residential property but also in the Capital Gains Scheme for renovation purposes. The appellant clarified that the intention was to utilize the amount for renovation and to purchase or construct another residential property. Subsequently, the appellant purchased a second property with the withdrawn amount from the Capital Gains Scheme Account.

3. Appeal and Rejection: The assessing authority rejected the appellant's case, stating that the appellant did not purchase two residential flats or houses simultaneously with the intention of converting them into a single unit. The appellate authority, however, allowed the appeal, emphasizing that there was no bar in claiming deductions under Section 54 for investments made in more than one house.

4. Tribunal Decision: The Tribunal, after reviewing previous judgments, held that the legislation intended to allow exemptions for investments in more than one asset using the word "any." It interpreted that only one residential house property would entitle the assessee to claim exemption from computed Capital Gains. The Tribunal concluded that the appellant was not entitled to the benefit of Section 54 for the second house as it was not in the vicinity of the first house.

5. Court's Interpretation: The High Court analyzed the term "a residential house" in Section 54, referencing a previous case where it was clarified that the term "a" does not necessarily mean singular and can encompass plural interpretations. The Court stressed the need to consider each case's facts to determine whether "a" should be read singularly or plurally to avoid tax evasion under Section 45.

6. Decision and Rationale: The High Court found that the appellant's purchase of two residential properties in Basavanagudi was a genuine attempt to invest the sale proceeds from the first property sale. The Court concluded that the Tribunal's approach was contrary to law and reinstated the lower appellate authority's order in favor of the appellant.

7. Conclusion: The High Court allowed the appeal, setting aside the Tribunal's order and restoring the lower appellate authority's decision. The substantial questions of law were answered in favor of the appellant, with each party bearing their own costs.