2012 (9) TMI 769 - AT - Income Tax

Exemption u/s 54 - capital gain earned from sale of house property - assessee s contention that that tenancy right was perpetual and assessee was therefore deemed owner of the property - Held that - Under the provisions of section 54 exemption of capital gain is available in respect of transfer of residential house owned by the assessee. The purpose of the section is to grant exemption in case the assessee acquires a new residential house by investing the capital gain as an owner. It is because of this reason, the words used in section 54 are purchase or construction of a new residential house. The requirement of section is not that assessee may acquire a new residential house by any other mode. As decided in CIT v. T.N. Arvinda Reddy 1979 (10) TMI 1 - SUPREME COURT the word purchase appearing in section 54(1) has to be given its common meaning i.e. buy for a price or equivalent of price by payment in kind or adjustment towards a debt or for other monetary consideration. Thus, for application of provisions of section 54, the assessee has to buy a property as an owner and not as tenant. In case of doubt or ambiguity, benefit of it must go to the State. Thus following the said judgment, therefore, even if there is some ambiguity in the provision, the same has to be interpreted in favour of the revenue because it is an exemption provision. In the present case, there is no ambiguity. The provision refers to purchase or construction of a new residential house and it is quite obvious that the same should be as an owner and not as perpetual tenant - against assessee.

Summary

Issues Involved:
1. Allowability of exemption under section 54 of the Income Tax Act for capital gain on the sale of a residential property.
2. Interpretation of the term "purchase" under section 54.
3. Whether acquisition of tenancy rights qualifies as ownership for the purpose of section 54.
4. Applicability of deemed ownership provisions under section 27(iiib) and section 269UA(f).
5. Relevance of legal opinions and circulars in determining ownership status.

Detailed Analysis:

1. Allowability of Exemption under Section 54:
The primary dispute in this appeal is the allowability of exemption under section 54 of the Income Tax Act concerning the capital gain earned from the sale of a residential property. The assessee sold a bungalow for Rs. 3.50 crores and purchased tenancy rights in two flats for Rs. 1.85 crores, claiming exemption for the capital gain.

2. Interpretation of the Term "Purchase" under Section 54:
The Assessing Officer (AO) and the CIT(A) both held that the term "purchase" under section 54 implies acquiring ownership of a new residential property. The AO cited the Supreme Court judgment in CIT v. TN Aravinda Reddy, which defined "purchase" as buying for a price or equivalent of price. The AO concluded that the assessee did not purchase or construct a new flat but merely acquired tenancy rights, which do not qualify for exemption under section 54.

3. Whether Acquisition of Tenancy Rights Qualifies as Ownership:
The assessee argued that the tenancy rights acquired were perpetual and should be considered as ownership. The tenancy agreement allowed the assessee to use the flat for residential purposes, sublet, assign, transfer, or mortgage the flat, and make interior alterations. The AO, however, noted that the tenancy rights were limited and subject to the landlord's permissions, and thus did not constitute ownership.

4. Applicability of Deemed Ownership Provisions:
The assessee relied on section 27(iiib) and section 269UA(f), which treat perpetual tenancy rights as ownership for computing income from house property. The CIT(A) and the Tribunal held that these provisions are limited to sections 22 to 26 for income computation and do not apply to exemption provisions under section 54.

5. Relevance of Legal Opinions and Circulars:
The assessee referred to various legal judgments and a CBDT circular to support the claim of ownership. The Tribunal distinguished these references, noting that the judgments and circulars cited were not applicable to the present case. The Tribunal emphasized that for section 54, the acquisition must be as an owner, not as a tenant.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, confirming that the assessee's acquisition of tenancy rights does not qualify as a "purchase" of a new residential property under section 54. The appeal of the assessee was dismissed, and the claim for exemption under section 54 was disallowed. The Tribunal concluded that the provisions of section 54 are clear and unambiguous, requiring the purchase or construction of a new residential house as an owner, not merely acquiring tenancy rights.