2013 (6) TMI 278 - HC - Income Tax

Exemption u/s 54 - Purchase of two residential flats - AO observed that two units separated by a strong wall; that they were purchased from two different vendors under two separate sale deeds and as such the deduction under section 54 has to be restricted to only one flat. - Held that - As held in D. Ananda Basappa s case 2008 (10) TMI 99 - KARNATAKA HIGH COURT by the Karnataka High Court, the expression a residential house in section 54(1) of the Act has to be understood in a sense that the building should be of residential nature and a should not be understood to indicate a singular number and where an assessee had purchased two residential flats, he is entitled to exemption under section 54 in respect of capital gains on sale of its property on purchase of both the flats, more so, when the flats are situated side by side and the builder has effected modification of the flats to make it as one unit, despite the fact that the flats were purchased by separate sale deeds. - Exemption to be allowed - Decided against the revenue.

Summary

Issues:
Interpretation of section 54 of the Income-tax Act regarding exemption for residential properties.

Analysis:
The case involved a dispute regarding the interpretation of section 54 of the Income-tax Act, specifically concerning the eligibility for exemption for residential properties. The respondent, an individual assessee, had offered long-term capital gains from the sale of an ancestral house property in his income tax return for the assessment year 2007-08. The assessee claimed deduction/exemption under section 54 of the Act for the purchase of two adjacent residential flats, contending that the provision should be construed liberally to include multiple residential units. The Assessing Officer initially allowed exemption only for one flat, based on an inspection report showing that the flats were purchased from different vendors under separate sale deeds. The Commissioner of Income-tax (Appeals) later allowed 100% deduction for both flats, emphasizing that they had adjacent kitchens and toilets with a common meeting point.

The Revenue challenged the decision before the Income-tax Appellate Tribunal, which dismissed the appeal, holding that even though the flats were on different floors, they could be combined and treated as a single residential accommodation. The Tribunal's decision was based on previous rulings supporting a broad interpretation of the term "residential house" under section 54. The Revenue further appealed the decision, arguing that the deduction should only apply to one residential house, citing a decision by the Special Bench of the Tribunal.

The High Court, in its judgment, disagreed with the Revenue's contention and upheld the Tribunal's decision. The Court relied on previous judgments by the Karnataka High Court and decisions from various Tribunal benches, emphasizing that the expression "a residential house" in section 54 should not be limited to a singular number. The Court highlighted that the key factor is whether the building is of a residential nature, and in cases where an assessee purchased multiple residential units that could be combined into one, the exemption under section 54 should apply. The Court specifically disapproved of the Special Bench decision cited by the Revenue, affirming the broader interpretation of section 54 as established in previous rulings.

Ultimately, the High Court concluded that no substantial question of law arose for consideration in the appeal and dismissed it accordingly, without any costs. The judgment clarified the interpretation of section 54 regarding the eligibility for exemption for multiple residential units purchased by an assessee, emphasizing a liberal construction of the provision based on the nature of the properties and their potential combination into a single residential unit.