2012 (7) TMI 586 - AT - Income Tax

Allowance of claim of deduction u/s 54 - joint holders of property - Held that - Capital gain arising from the transfer of a residential house is not admissible against the investment in second house as the only restriction is that the capital gain arising from the sale of one residential house must be invested in one residential house and not in two residential houses - Unable to agree with the view taken by the CIT(A) that the two flats constituted one residential house. The flats were located in two different buildings owned by the two different housing societies and were situated on two different roads. These flats were acquired in two different years. There was no common approach road to the buildings. Therefore the two flats cannot be treated as one residential property only on the ground that two buildings in which the flats were located were within the walking distance as claimed by assessee - Assessee sells more than one residential houses in the same year and the capital gain is invested in a new residential house, the claim of exemption cannot be denied if the other conditions of section 54 are fulfilled - No rulings have been brought on record by the ld. DR to show that the capital gain arising from sale of more than one residential houses cannot be invested in one residential house - The only requirement of section 54 is that income should be chargeable to tax under the head house property income and it is not necessary that income should have been actually charged - direct the AO to allow the capital gain exemption u/s 54 after verifying that the new residential house had been constructed within prescribed time limit - partly in favour of revenue.

Issues Involved:
1. Claim of deduction under Section 54 of the Income Tax Act, 1961.
2. Determination of whether two separate flats constitute one residential house.
3. Eligibility of exemption under Section 54 for capital gains from multiple residential houses.
4. Use of one of the flats for business purposes and its impact on exemption eligibility.

Issue-wise Detailed Analysis:

1. Claim of Deduction under Section 54:
The primary dispute revolves around the assessee's claim for deduction under Section 54 of the Income Tax Act, 1961, concerning the investment of capital gains from the sale of two flats into a new residential property. The assessee had sold two flats, one in Ramkrishna Sadan and another in Vishnu Villa, and invested the capital gains in constructing a new house in Bangalore. The assessee claimed the capital gains from both flats as exempt under Section 54.

2. Determination of Whether Two Separate Flats Constitute One Residential House:
The assessee argued that the two flats, although located in different buildings and on different roads, were used as a single residential unit by the four brothers and their families. The CIT(A) accepted this claim, considering the assessee's previous treatment of the flats as a single unit in wealth tax returns and income tax computations. However, the Tribunal disagreed, noting that the flats were in separate buildings with no common approach and were acquired in different years. The Tribunal held that the two flats could not be considered one residential house under Section 54, citing the Allahabad High Court judgment in Shiv Narain Chaudhari v. CWT, which distinguished between contiguous units and separate buildings.

3. Eligibility of Exemption under Section 54 for Capital Gains from Multiple Residential Houses:
The Tribunal examined whether Section 54 allows exemption for capital gains from the sale of multiple residential houses if the gains are invested in a single new residential house. The Tribunal found no restriction in Section 54 against such an arrangement. It referenced the Mumbai Tribunal's decision in Rajesh Keshav Pillai v. ITO, which held that exemption under Section 54 is available for the transfer of any number of residential houses, provided the capital gains are invested in a new residential house within the prescribed time limit. The Tribunal concluded that the assessee could claim exemption for capital gains from both flats, subject to fulfilling other Section 54 conditions.

4. Use of One of the Flats for Business Purposes and Its Impact on Exemption Eligibility:
The AO had denied the exemption for the Vishnu Villa flat, asserting it was used for business purposes since no income from house property was declared for it. The CIT(A) and the Tribunal rejected this view, noting that the assessee had treated both flats as a single residential unit and had not shown income from the Vishnu Villa flat due to this treatment. The Tribunal emphasized that the absence of declared income from house property does not imply business use without supporting evidence. Consequently, the Tribunal held that the Vishnu Villa flat qualified as a residential house eligible for Section 54 exemption.

Conclusion:
The Tribunal directed the AO to allow the capital gains exemption under Section 54 after verifying that the new residential house was constructed within the prescribed time limit. The appeal of the Revenue was partly allowed, affirming the eligibility of the assessee's claim for deduction under Section 54 for the capital gains from both flats.

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