2007 (4) TMI 173 - HC - Income Tax

Exemption u/s 54F - HC held that in case where an assessee owned another residential house on the date of transfer not eligible for exemption under said section but eligible for exemption in case where the transfer is not evidenced by a registered deed

Summary

Issues involved:
1. Interpretation of section 54F of the Income-tax Act, 1961 regarding exemption from capital gains for investment in residential property.
2. Justification of allowing benefits of section 54F to an assessee who owned another residential house on the date of transfer.
3. Validity of allowing benefits of section 54F even if the transfer is not evidenced by a registered deed.

Issue 1: Interpretation of section 54F regarding exemption from capital gains for investment in residential property:
The assessee sold a plot of land and claimed exemption under section 54F for the purchase of a residential flat. The Assessing Officer initially declined the claim due to the flat not being registered in the assessee's name. However, the Commissioner of Income-tax (Appeals) allowed the exemption, which was upheld in wealth-tax proceedings. The Income-tax Appellate Tribunal also ruled in favor of the assessee, stating that even without a registered sale deed, there was an effective transfer of the flat to the assessee. The Tribunal emphasized actual possession as a key factor. The High Court analyzed the provisions of section 54F and concluded that if the assessee owned more than one residential house on the date of transfer, the exemption would not apply, as the income from the additional house would be taxable under "Income from house property." Therefore, the High Court ruled in favor of the Revenue on this issue.

Issue 2: Justification of allowing benefits of section 54F to an assessee who owned another residential house on the date of transfer:
The High Court observed that if an assessee already possessed a residential house at the time of transfer of the original asset, the assessee would not be entitled to exemption under section 54F for the purchase of a new asset. The Court held that the ownership of more than one residential house on the date of transfer disqualifies the assessee from claiming the exemption. The Court ruled in favor of the Revenue on this issue, emphasizing that having an existing residential house would negate the entitlement to exemption under section 54F.

Issue 3: Validity of allowing benefits of section 54F even if the transfer is not evidenced by a registered deed:
The High Court considered a previous judgment where it was established that registration of the property was not mandatory for claiming exemption under section 54F. The Court referred to a case where substantial investment was made in the construction of a house, and the exemption was allowed despite the absence of property registration. Relying on this precedent, the Court ruled in favor of the assessee on this issue, stating that registration was not imperative for attracting the provisions of section 54F. Therefore, the Court upheld the benefits of section 54F even if the transfer was not evidenced by a registered deed.

In conclusion, the High Court clarified the interpretation of section 54F, highlighting the disqualification for exemption if the assessee owned more than one residential house at the time of transfer. Additionally, the Court affirmed that registration was not a prerequisite for claiming benefits under section 54F, emphasizing the importance of actual possession in determining eligibility for exemption.