2018 (6) TMI 152 - AT - Income Tax

Disallowance of exemption u/s 54F on sale of second flat against the investment in new flat - Held that - Assessee made investments in two new residential flats for commercial reasons as there was no justification brought on record by the assessee for making investments in two different flats located at different locations - following the judgement in case of INCOME-TAX OFFICER, WARD 19 (3) -4, MUMBAI. VERSUS MS. SUSHILA M. JHAVERI. 2007 (4) TMI 289 - ITAT BOMBAY-I we are of view that under such circumstances no exemption can be allowed u/s 54 for making investment in the second flat - thus appeal of the assessee lacks merit and hence dismissed.

Summary

Issues Involved:

1. Whether exemption under Section 54 of the Income-tax Act, 1961 can be claimed for investment in two properties.
2. Whether the assessee is entitled to invest in one property as against the sale of two properties if the condition of Section 54 for the time limit is fulfilled.

Issue-wise Detailed Analysis:

1. Whether exemption under Section 54 can be claimed for investment in two properties:

The assessee sold a property and computed long-term capital gains, claiming exemption under Section 54 of the Income-tax Act, 1961, by investing in two different residential flats located at separate locations (Panvel and Malad, Mumbai). The Assessing Officer (AO) disallowed part of the exemption claimed, arguing that the unutilized investment in the new asset from the previous financial year could not be claimed again in the current assessment year. The AO relied on the provisions of Section 54, which were interpreted to allow exemption for investment in only one residential property.

The CIT(A) upheld the AO's decision, relying on the Bombay High Court's judgment in CIT v. Devdas Naik, which approved the Special Bench decision in ITO v. Sushila Jhaveri, stating that exemption under Section 54 can be claimed only for one residential house unless the units are adjoining and used as one. The CIT(A) also referred to the Bombay High Court's decision in CIT v. Raman Kumar Suri, where adjacent flats were treated as a single unit for exemption purposes. The CIT(A) concluded that since the investments were made in two different properties at separate locations, the exemption could not be allowed for both.

The Tribunal reviewed the case laws cited by both parties, including decisions from the Karnataka High Court and the Bombay High Court. It noted that in cases where multiple flats were considered a single unit, the flats were either adjacent or interconnected. In contrast, the assessee's investments were in two distinct locations without any justification for such investments. The Tribunal also considered the Karnataka High Court's decision in CIT v. Khoobchand M. Makhija, where exemption was allowed due to the taxpayer's need to settle his two sons in separate flats, which was not applicable in the assessee's case.

The Tribunal concluded that the assessee's investments in two different flats at separate locations did not qualify for exemption under Section 54, as there was no compelling reason for such investments. The appeal on this issue was dismissed.

2. Whether the assessee is entitled to invest in one property as against the sale of two properties if the condition of Section 54 for the time limit is fulfilled:

This issue was decided in favor of the assessee by the CIT(A), and it was not contested further. The CIT(A) held that the assessee fulfilled the time limit condition under Section 54 for investing in one property against the sale of two properties, and this aspect of the case had attained finality.

Conclusion:

The Tribunal dismissed the appeal, upholding the CIT(A)'s decision that exemption under Section 54 cannot be claimed for investments in two residential flats located at different locations. The Tribunal emphasized the need for a compelling reason to justify such investments and noted that the assessee failed to provide any justification. The decision was pronounced in the open court on 30.05.2018.