2021 (9) TMI 505 - AT - Income Tax

Deduction u/s.54F - Assessee holding more than one property - joint ownership - as per AO Assessee has relinquished his rights on the two flats by settling in favour of his wife only to avoid tax - HELD THAT - We find that the Assessee has relinquished his half share in two properties in favour of his wife. It is not the case of the Department that the Assessee had transferred the entire property which is in the name of the Assessee. It is as a matter of convenience between the husband and wife, this arrangement is made and therefore it can be safely concluded that the relinquishment of the half share of his two properties is a family arrangement which cannot be considered as a tax avoidance plan. In view of the above, the Assessing Officer is not correct in denying the benefit of exemption u/s.54F of the Income Tax Act, 1961 to the Assessee. Though the Assessee had transferred the property in the name of his wife, yet he is the owner of the property and is not entitled for claiming the exemption of Section 54F - A fiction created by one provisions of the Act cannot be super-imposed on another provisions of the Act which has a fiction. Section 54F of the Income Tax Act, 1961 is a provision granting deduction to the Assessee and therefore, it has a fiction. Respectfully following the decision of Mr. Ajit Thomas, Chennai 2015 (11) TMI 1847 - ITAT CHENNAI AND 2016 (8) TMI 1545 - MADRAS HIGH COURT we hold that the Assessee is entitled to claim the benefit of Section 54F of the Income Tax Act, 1961. Accordingly, we cancel the orders passed by both the lower authorities and we direct the Assessing Officer to allow the benefit of claim made by the Assessee u/s.54F. - Decided in favour of assessee.

Summary

Issues Involved:
1. Eligibility for exemption under Section 54F of the Income Tax Act, 1961.
2. Interpretation of ownership of property for tax purposes.
3. Application of judicial precedents in tax avoidance cases.

Detailed Analysis:

1. Eligibility for exemption under Section 54F of the Income Tax Act, 1961:
The core issue revolves around whether the Assessee is eligible for exemption under Section 54F after selling a land and investing the proceeds in a new residential property. The Assessee claimed exemption under Section 54F by asserting ownership of only one residential property at the time of sale. The Assessing Officer denied this exemption, arguing that the Assessee owned more than one property before the sale and had transferred his share in two flats to his wife shortly before the sale to avoid tax. The Tribunal found that the Assessee had relinquished his half share in two properties in favor of his wife as a family arrangement, not as a tax avoidance measure, thereby making him eligible for the exemption.

2. Interpretation of ownership of property for tax purposes:
The Assessing Officer's contention was based on the premise that the Assessee, despite transferring his share to his wife, remained the owner of the properties for tax purposes, invoking the precedent set by the Supreme Court in Sevantilal Maneklal Sheth Vs. Commissioner of Income Tax (Central), Bombay. The Tribunal, however, referred to a recent decision by the Co-ordinate Bench and the Jurisdictional High Court of Madras in the case of Commissioner of Income Tax, Chennai Vs. Mr. Ajit Thomas, which clarified that a fiction created by one provision of the Act cannot be super-imposed on another provision with its own fiction. Thus, for the purpose of Section 54F, the Assessee was not deemed the owner of the properties transferred to his wife.

3. Application of judicial precedents in tax avoidance cases:
The Tribunal critically examined the applicability of the Supreme Court's decision in Sevantilal Maneklal Sheth, which was based on the Indian Income Tax Act, 1922, and found it inapplicable to the present case under the Income Tax Act, 1961. The Tribunal emphasized the distinction between the provisions of Section 27 and Section 54F, holding that the deeming provisions of ownership under Section 27 could not be extended to deny exemptions under Section 54F. The Tribunal followed the Jurisdictional High Court's interpretation that Section 54F operates independently for the purpose of granting exemptions on capital gains from the transfer of assets invested in residential properties.

Conclusion:
The Tribunal concluded that the Assessee's transfer of property shares to his wife was a genuine family arrangement and not a tax avoidance scheme. Consequently, the Assessee was entitled to the exemption under Section 54F. The orders of the lower authorities were canceled, and the Assessing Officer was directed to allow the benefit of the claim made by the Assessee under Section 54F. The appeal filed by the Assessee was allowed, and the Tribunal's decision was pronounced on 8th September 2021 in Chennai.