2011 (1) TMI 551 - HC - Income Tax

Exemption under sections 54 and 54F - The Assessing Officer held that the assessee was already an owner of a residential flat at Bombay and she has purchased two flats out of the sale proceeds - The fact that the assessee could have purchased both the flats in one single sale deed or could not have narrated the purchase of two premises as one unit in the sale deed could not have made any difference - An asset newly acquired after the sale of the original asset can also be buildings or lands appurtenant thereto, which also should be a residential house - The evidence on record also discloses that the two units are situated side by side, modification were made, the door was opened making it as a single unit and the consideration received from the sale of the residential unit is utilised to purchase these residential units and therefore, the assessee is entitled to the benefit of section 54.

Summary

Issues:
Interpretation of sections 54 and 54F of the Income-tax Act regarding exemption from capital gains tax for the purchase of residential property.

Analysis:
The case involves a dispute over the applicability of capital gains tax exemption under sections 54 and 54F of the Income-tax Act. The appellant, the revenue, challenged the Tribunal's decision that the assessee, who purchased two flats with the sale proceeds of a residential property, was not liable to pay capital gains tax as the flats were utilized as a single residential unit.

The assessee and her son sold their property and used the sale proceeds to purchase two flats. The Assessing Officer initially denied the exemption, arguing that the assessee already owned a residential flat in Bombay. However, the Commissioner and the Tribunal ruled in favor of the assessee, stating that even though two flats were purchased, they were intended to be used as a common residence, thus qualifying for the exemption.

The High Court examined the facts, noting that the two flats were situated side by side and were modified by the builder to function as a single unit. Referring to a previous case, the Court clarified that the expression 'a residential house' in section 54 does not necessarily refer to a single unit but can include multiple buildings or lands appurtenant thereto. The Court emphasized that the use of the indefinite article 'a' permits the interpretation of 'a residential house' to encompass plural units, especially when considering the context of the legislation.

Given the evidence of the physical connection between the two flats, the utilization of sale proceeds from the original property, and the intention to use them as a single unit, the Court upheld the Tribunal's decision. It concluded that the assessee was entitled to the benefit of section 54 and was not liable to pay capital gains tax. The Court found no infirmity in the Tribunal's order, affirming its legality and dismissing the revenue's appeal.

In summary, the judgment clarifies that the exemption under sections 54 and 54F of the Income-tax Act can extend to the purchase of multiple residential units if they are intended and utilized as a single residential unit, even if they are not formally consolidated in a single sale deed. The Court's interpretation of 'a residential house' allows for flexibility in considering multiple units as part of a cohesive residential property for the purpose of tax exemptions.