2008 (10) TMI 99 - HC - Income Tax

Exemption u/s 54 - assessee purchased two residential flats adjacent to each other - assessing authority gave exemption for capital gains to the extent of purchase of one residential flat on ground that section 54(1) does not permit exemption for the purchasers for more than one residential premises purchase of two flats which were combined to make one residential unit - held that two flats has to be treated as one single residential unit and that the assessee is entitled for full exemption

Summary

Issues:
1. Interpretation of section 54 of the Income-tax Act regarding exemption for capital gains on the sale of residential property.
2. Whether the purchase of two adjacent residential flats by a Hindu undivided family can be considered as one residential unit for exemption under section 54.
3. Application of the proviso to section 54F of the Income-tax Act in claiming exemption for more than one dwelling unit.

Analysis:
The judgment dealt with the interpretation of section 54 of the Income-tax Act concerning the exemption for capital gains on the sale of a residential property. The respondent, a Hindu undivided family, sold a residential house and purchased two adjacent residential flats from the same developer. The assessing authority initially granted exemption for one flat only, citing separate enjoyment by different tenants. However, the Tribunal overturned this decision, considering the two flats as one residential unit and allowing full exemption to the assessee.

The substantial questions of law framed for consideration included whether the assessee could invest sale proceeds in two residential flats and claim deductions under section 54, and whether the proviso to section 54F allowed relief for more than one dwelling unit. The judgment analyzed the provisions of section 54(1) of the Income-tax Act, emphasizing that the singular term "a" residential house could include the plural, allowing investment in multiple residential units for exemption.

The court rejected the Revenue's contention that "a" residential house should be strictly interpreted as singular, highlighting that a non-residential building could be sold to invest in a residential building for exemption. It was noted that in the case of a Hindu undivided family, owning multiple residential properties did not disqualify them from claiming exemption under section 54(1) of the Act, considering the joint ownership structure.

The judgment emphasized the physical connection between the two flats purchased by the assessee, with the builder confirming modifications to unite them into one residential unit. The presence of separate tenants at the time of inspection was deemed irrelevant to the unit's status. The court held that the intention to purchase the two flats as a single unit was evident, dismissing the appeal and ruling in favor of the assessee based on the facts presented.

In conclusion, the court's decision favored the assessee, allowing the purchase of two adjacent residential flats by a Hindu undivided family to be considered as one residential unit for exemption under section 54 of the Income-tax Act. The judgment clarified the interpretation of relevant provisions and upheld the assessee's entitlement to full exemption based on the circumstances and intentions of the property purchase.