2013 (4) TMI 209 - AT - Income Tax

Exemption of Long Term Capital Gains u/s. 54F - disallowance of one residential flat out of 2 adjacent flats used as one residential unit - Whether the phrase a residential house used in sub-section (1) of Section 54 and 54F means one residential house or more than one residential house independently located in the same building/compound/city ? - Held that - Considering the case of Ms. Sushila M. Jhaveri 2007 (4) TMI 289 - ITAT BOMBAY-I exemption u/s 54 and 54F would be allowable in respect of one residential house only. If the assessee has purchased more than one residential house, then the choice would be with assessee to avail the exemption in respect of either of the houses. However, where more than one unit are purchased which are adjacent to each other and are converted into one house for the purpose of residence by having common passage, common kitchen, etc., then, it would be a case of investment in one residential house and consequently, the assessee would be entitled to exemption. As in the present case two adjacent flats were purchased and later on same were converted into one single residential unit. Both the flats were on one floor only and no other dwelling unit there was there on that floor. Builder had constructed two units, but the assessee converted them in one unit only. Spot inspection report clearly prove that there was common passage and only one kitchen was functional with all appliances. There is no doubt that assessee had purchased two flats and later on converted them into one unit for the purpose of residence. Therefore, assessee is entitle to claim exemption u/s. 54 - in favour of assessee.

Summary

Issues:
1. Disallowance of exemption of Long Term Capital Gains u/s. 54F for one residential flat out of 2 adjacent flats.
2. Consideration of the decision of Jurisdictional Tribunal regarding the interpretation of "a residential house" in Section 54 and 54F.
3. Discrepancy in allowing exemption for both adjacent residential flats.
4. Assessment of whether the AO and FAA were justified in allowing exemption for one residential flat only.

Issue 1: Disallowance of Exemption for One Residential Flat:
The case involved the disallowance of exemption of Long Term Capital Gains u/s. 54F for one residential flat out of 2 adjacent flats used as one residential unit. The Ld. C.I.T. (Appeals) erred in not considering the judgment of the Special Bench of Mumbai Tribunal, which clarified that exemption under Section 54 and 54F would be allowable in respect of one residential house only, even if multiple units are purchased and converted into one house for residence. The judgment emphasized the importance of common passage and kitchen in determining the eligibility for exemption.

Issue 2: Interpretation of "a Residential House" in Section 54 and 54F:
The key issue was the interpretation of the phrase 'a residential house' in Section 54 and 54F of the Income Tax Act. The Special Bench's decision clarified that the exemption would be available for one residential house only, even if multiple adjacent units are converted into one house for residence. The judgment highlighted the significance of common facilities like a common kitchen to establish the conversion of multiple units into one residential house.

Issue 3: Discrepancy in Allowing Exemption for Both Adjacent Flats:
The Ld. C.I.T. (Appeals) erred in not considering the actual facts of the case, which indicated that the two adjacent flats were used as one residential unit with a common passage and a functional kitchen. Despite the presence of separate entry doors and electrical meters, the conversion of the two flats into one residential unit was evident. The judgment of the Special Bench supported the assessee's claim for exemption based on the conversion of adjacent flats into a single residential house.

Issue 4: Justification of Allowing Exemption for One Residential Flat Only:
The AO and FAA restricted the exemption of Long Term Capital Gain u/s. 54 to one residential flat only, citing separate entry doors and agreements for the two flats. However, the Tribunal's decision in the case of Sushila M. Jhaveri supported the assessee's claim, emphasizing the conversion of adjacent flats into one residential unit with common facilities. The Tribunal ruled in favor of the assessee, allowing the appeal and granting the exemption for the investment in two adjacent flats converted into one residential house.