2020 (6) TMI 514 - HC - Income Tax

Denial of exemption u/s 54F - interpreting the meaning of the word residential house used in Section 54F(1) - HELD THAT - A bench of this court in SAMBANDAM UDAY KUMAR SUPRA 2012 (3) TMI 80 - KARNATAKA HIGH COURT while interpreting Section 54F has held that provisions of Section 54F is a beneficial provision for promoting construction of residential houses and has to be construed liberally. Kerala, Delhi, Allahabad, Calcutta and Hyderabad High Courts have taken a view that usage of the property has to be considered in determining whether it is a residential property or a commercial property and Madras High Court in C.H.KESVA RAO 1983 (1) TMI 5 - MADRAS HIGH COURT has held that expression 'residence' implies some sought of permanency and cannot be equated to the expression 'temporary stay' as a lodger. Revenue have fairly submitted that out of nine apartments, seven flats have been sanctioned for commercial purposes. Therefore, the dispute only survives in respect of two apartments, which have been sanctioned for residential purposes and are being used for commercial purposes as serviced apartments. The usage of the property has to be considered for determining whether the property in question is a residential property or a commercial property. It is not in dispute that the aforesaid two apartments are being put to commercial use and therefore, the aforesaid apartments cannot be treated as residential apartments. The contention of the revenue that the apartments cannot be taxed on the basis of the usage does not deserve acceptance. We hold that assessee even otherwise is entitled to the benefit of exemption under Section 54F(1) of the Act as the assessee owns two apartments of 500 square feet in same building and therefore, it has to be treated as one residential unit. The aforesaid fact cannot be permitted to act as impediment to allowance of exemption under Section 54F(1). Similar view was taken by Delhi High Court in case of Geeta Duggal wherein the issue whether a residential house which consists of several independent residential units would be entitled to exemption under Section 54F(1) was dealt with and the same was answered in the affirmative. - Decided in favour of the assessee.

Summary

Issues Involved:
1. Denial of exemption under Section 54F of the Income Tax Act, 1961.
2. Interpretation of the term "residential house" in Section 54F(1) proviso (a)(i) of the Income Tax Act.
3. Classification of properties used for commercial purposes as residential houses under Section 54F(1) proviso (a)(i).

Detailed Analysis:

Issue 1: Denial of Exemption under Section 54F of the Income Tax Act, 1961
The assessee, a director of a private company, filed a return for the assessment year 2006-07, declaring a long-term capital gain and claiming exemption under Section 54F of the Income Tax Act, 1961. The assessing officer denied this exemption, stating that the assessee owned nine residential flats and derived income from these properties, thus disqualifying him under proviso (a)(i) and (b) of Section 54F(1). The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal upheld this decision, leading to the present appeal.

Issue 2: Interpretation of the Term "Residential House" in Section 54F(1) Proviso (a)(i)
The assessee argued that two of the properties, though sanctioned as residential, were used for commercial purposes as serviced apartments. The tribunal held that the nature of use (commercial or residential) was immaterial as long as the units were recognized as residential. The High Court, however, emphasized that the term "residential house" should be interpreted liberally to advance the objective of the provision, which is to promote the construction of residential houses. The court noted that the usage of the property should determine its classification as residential or commercial.

Issue 3: Classification of Properties Used for Commercial Purposes as Residential Houses
The court noted that seven out of nine properties were sanctioned for commercial purposes, leaving only two properties in question. These two properties were used commercially as serviced apartments. The court held that the usage of the property should be considered, and since these properties were used commercially, they could not be classified as residential. The court also cited various High Court decisions supporting this view, emphasizing that the beneficial provisions of the Act should be construed to promote their purpose.

Conclusion:
The High Court concluded that the assessee was entitled to the exemption under Section 54F(1) of the Act. It held that the two apartments used commercially could not be treated as residential properties. Additionally, even if considered residential, the two units in the same building should be treated as one residential unit. The court quashed the orders of the assessing officer, the Commissioner of Income Tax (Appeals), and the Income Tax Appellate Tribunal, allowing the appeal in favor of the assessee.