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2018 (4) TMI 399 - AT - Income TaxEligibility for deduction u/s 54F - LTCG - exemption as restricted to investment in a residential house - two flats converted to a single residential unit - Held that - Prior to the amendment, there are various judicial pronouncements which have held the exemption u/s 54 / 54F was to be allowed in respect of investments in two adjacent or contiguous units converted into one residential house by having common passage / stair-case, common kitchen, etc. intended to be used as single house for the residence of the family. Undisputedly, the assessee in the instant case had purchased two flats in different locations. One at Warriam Road and the other at Layam Road. Therefore, these two flats cannot be converted to a single residential unit. On identical facts, the Special Bench of the Tribunal in the case of ITO v. Ms.Sushila M.Jhaveri 2007 (4) TMI 289 - ITAT BOMBAY-I after considering the judicial pronouncements on the issue, have decided the matter against the assessee.
Issues Involved: Eligibility for deduction under Section 54F of the Income-tax Act for investment in multiple residential units.
Detailed Analysis: 1. Background and Grounds of Appeal: The Department appealed against the Commissioner of Income-tax (Appeals) order dated 08.12.2016 for the assessment year 2013-2014. The primary issue was whether the assessee was eligible for deduction under Section 54F for investing in two separate residential flats. The Department argued that the term "a residential house" implies a single unit, and the CIT(A) erred by allowing the assessee's claim for both flats. 2. Facts of the Case: The assessee sold a residential property in Chennai, generating capital gains. He invested part of the gains in REC bonds and the remaining in two flats in different locations in Ernakulam. The Assessing Officer (AO) restricted the exemption under Section 54 to one flat, arguing that the judicial decisions cited by the assessee did not apply as they pertained to adjacent units or units within the same complex. 3. CIT(A) Decision: The CIT(A) allowed the exemption for both flats, relying on the Karnataka High Court's judgments in CIT v. Rukminiamma and CIT v. Late Khoobchand M. Makhija. The CIT(A) found the facts of the instant case similar to these precedents, where the courts held that the term "a residential house" could include multiple units if the intention was not to evade tax. 4. Tribunal's Analysis: The Tribunal examined the amendment to Section 54/54F effective from 01.04.2015, which clarified the term "constructed one residential house." For the assessment year 2013-2014, the pre-amendment law applied. The Tribunal noted that prior judicial pronouncements allowed exemptions for multiple units if they formed a single residential house. However, in this case, the two flats were in different locations and could not be considered a single unit. 5. Special Bench Ruling: The Tribunal referred to the Special Bench decision in ITO v. Ms. Sushila M. Jhaveri, which held that the term "a residential house" means one unit. The Special Bench emphasized that the intention of the legislature was to allow exemption for investment in one residential house only. The Tribunal agreed with this interpretation, stating that exemptions for multiple units could only apply if they were adjacent or contiguous and used as a single residence. 6. Distinguishing High Court Judgments: The Tribunal distinguished the Karnataka High Court judgments cited by the CIT(A). In Rukminiamma, the units were part of a Joint Development Agreement and located in the same project. In Khoobchand M. Makhija, the court considered specific compelling circumstances, which were not present in the assessee's case. The Tribunal noted that the assessee's claim for the second flat appeared to be an afterthought to avoid tax. 7. Conclusion: The Tribunal concluded that the CIT(A) was not justified in allowing the exemption for both flats. The exemption under Section 54/54F should be restricted to one residential unit. The appeal filed by the Revenue was allowed, and the AO's decision to restrict the exemption to one flat was upheld. Order Pronouncement: The order was pronounced on 05th April 2018, allowing the Revenue's appeal.
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