2013 (3) TMI 101 - HC - Income Tax

Deduction u/s 54/54F disallowed - as per AO house/units in the first and second floors holding that they were separate and independent residential units having separate entrances and cannot be considered as one unit to enable the assessee to claim the deduction - ITAT allowed assessee s claim of deduction u/s 54 - Held that - Section 54/54F uses the expression a residential house . The expression used is not a residential unit . This is a new concept introduced by the AO into the section. There is nothing in Sections 54/54F which require the residential house to be constructed in a particular manner. The only requirement is that it should be for the residential use and not for commercial use. If there is nothing in the section which requires that the residential house should be built in a particular manner, income tax authorities cannot insist upon that requirement. A person may construct a house according to his plans and requirements. One may build a house consisting of four bedrooms (all in the same or different floors) in such a manner that an independent residential unit consisting of two or three bedrooms may be carved out with an independent entrance so that it can be let out. He may construct his residence in such a manner that in case of a future need he may be able to dispose of a part thereof as an independent house.There may be several such considerations for a person while constructing a residential house.Therefore, unable to see how or why the physical structuring of the new residential house,whether it is lateral or vertical, should come in the way of considering the building as a residential house. The residential house consists of several independent units can be permitted to act as an impediment to the allowance of the deduction under Section 54/54F - Tribunal took the correct view. No substantial question of law arises for consideration - in favour of assessee.

Summary

Issues Involved:

1. Inclusion of the cost of construction incurred by the developer in the total sale consideration.
2. Eligibility for exemption under Section 54 of the Income Tax Act, 1961.
3. Eligibility for exemption under Section 54F of the Income Tax Act, 1961.

Detailed Analysis:

1. Inclusion of the Cost of Construction Incurred by the Developer in the Total Sale Consideration:

The assessing officer included the cost of construction incurred by the developer in the total sale consideration. The assessee argued that the entire cost of construction was incurred by the builder and should be exempt under Section 54 of the Act if considered part of the sale consideration. The assessing officer, however, added Rs.3,43,72,529/- (cost of construction) to the sale consideration of Rs.4 crores, making the total sale consideration Rs.7,43,72,529/-.

2. Eligibility for Exemption under Section 54 of the Income Tax Act, 1961:

The assessing officer rejected the assessee's claim for exemption under Section 54, stating that the two floors given to the assessee by the developer were independent of each other and self-contained, thus not qualifying as a single residential unit. The CIT(Appeals) disagreed and allowed the exemption, following the judgment of the Karnataka High Court in CIT Vs. B. Ananda Basappa, which stated that "a residential house" does not necessarily mean a single house but can include multiple units.

3. Eligibility for Exemption under Section 54F of the Income Tax Act, 1961:

The assessing officer allowed exemption under Section 54F only for one unit, as he considered the two residential units as separate and independent. He recomputed the capital gains by adding Rs.98,20,722/- to the income. The Tribunal, however, upheld the CIT(Appeals)'s decision, stating that the words "a residential house" in Section 54/54F should not be construed to mean a single residential house. The Tribunal cited the General Clauses Act, which allows the singular to include the plural, supporting the assessee's contention.

Conclusion:

The Tribunal confirmed the CIT(Appeals)'s decision, rejecting the revenue's appeal. The Tribunal held that the expression "a residential house" in Section 54/54F does not mean a single house but can include multiple units, thus allowing the exemption. The Tribunal's view was supported by the Karnataka High Court's judgment, which had become final. The Tribunal also noted that there is no requirement in Section 54/54F for the residential house to be constructed in a particular manner, and the physical structuring of the house should not impede the allowance of the deduction. The High Court dismissed the revenue's appeal, affirming the Tribunal's decision and stating that no substantial question of law arises for consideration.