2015 (10) TMI 85 - HC - Income Tax

Exemption in respect of both the residential unit under section 54F - ITAT allowed the claim relying on the decision of the Special Bench of the ITAT in the case of Ms.Sushila M.Jhaveri (2007 (4) TMI 289 - ITAT BOMBAY-I) - Held that - The fact that only one kitchen was functional in the house was itself an indication of the fact that both the flats are being used as one residential unit. The Special Bench of the Tribunal in the case of Ms.Sushila M.Jhaveri (supra) has held that where an assessee had purchased two independent flats and converted into one that by itself would not deprive the respondent-assessee the benefit of Section 54F of the Act. We find that the view taken by the impugned order on facts is a possible view and nothing has been shown to us to hold that view of the Tribunal is perverse or arbitrary. Thus, no substantial question of law arises for our consideration. - Decided against revenue.

Issues:
1. Interpretation of section 54F of the Income Tax Act regarding exemption for purchase of residential units.
2. Application of the decision in the case of Ms. Sushila M. Jhaveri to the current scenario.
3. Determination of whether two adjoining residential flats can be considered as a single residential unit for tax exemption purposes.

Analysis:
The appellant-revenue filed an appeal against an order dated 15th February 2013 concerning the Assessment Year 2008-09 under section 260A of the Income Tax Act. The main question raised was whether the Appellate Tribunal was correct in allowing exemption under section 54F of the Act for the purchase of two residential flats, which were subsequently joined, based on the decision in the case of Ms. Sushila M. Jhaveri. The respondent-assessee had sold tenancy rights for a property and used a portion of the sale proceeds to purchase two adjoining residential flats, claiming exemption under section 54F for both flats. The Assessing Officer initially restricted the benefit to one flat, leading to subsequent appeals.

The Commissioner of Income Tax (Appeals) upheld the restriction based on separate kitchens and other factors. However, the Tribunal, relying on the decision in Ms. Sushila M. Jhaveri's case, concluded that the two flats were converted into a single residential unit and granted exemption for both flats. The Tribunal considered the physical layout, common passage, and functional kitchen as factors indicating the use of the two flats as one unit. The Tribunal's decision was based on the principle that adjacent residential units converted into one house qualify as a single residential unit for exemption purposes under section 54F.

The appellant argued that separate kitchens, electricity meters, and maintenance bills indicated that the flats should not be considered as one unit for tax purposes. On the other hand, the respondent relied on the Ward Inspector's report, which supported the conversion of the two flats into a single unit. The Ward Inspector's report highlighted the physical connection between the flats and the functional aspects of the combined unit, such as a common kitchen. The Tribunal's decision was upheld, emphasizing that the functional use of the flats as a single unit outweighed the separate elements like kitchens and bills.

In conclusion, the High Court dismissed the appeal, stating that the Tribunal's decision was reasonable and not arbitrary. The Court found that the conversion of two adjacent flats into a single residential unit met the criteria for exemption under section 54F of the Act, as established in the case law. The functional aspect of the combined unit as a single residence was pivotal in determining the eligibility for tax exemption, regardless of certain separate elements like kitchens and bills.

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