2021 (1) TMI 960 - AT - Income Tax

Eligible to claim deduction u/s 54 on account of investment made - exemption of reinvestment of capital gain to one residential house property by taking view of phrase a residential property in Section 54(1) as only one house property ignoring the explanations and submissions made before him - HELD THAT - We find that the provisions of Sec. 54 as it stood during AY 2011-12, provides for a deduction against certain Long-Term Capital Gains earned by an individual assessee on account of investment made by way of purchase / construction of a residential house property within specified time period. The Finance Act, 2014 substituted the expression a residential house property with the words one residential house with effect from 01/04/2015. The Finance Act, 2019 has further amended the said provision with effect from 01/04/2020 to provide that in case of capital gain not exceeding ₹ 2 Crores, deduction shall be available even against investment in two residential houses in India. Interpreting the provisions of Section 54, Hon ble Madras High Court in recent decision titled as Tilokchand Sons V/s ITO 2019 (4) TMI 713 - MADRAS HIGH COURT held that if the word 'a' as employed under Section 54 prior to its amendment and substitution by the words 'one' with effect from 01/04/2015 could not include plural units of residential houses then there was no need to amend the said provisions by Finance Act No.2 of 2014 which the Legislature specifically made it clear to operate only prospectively from AY 2015-16. Once it is held that the word 'a' employed can include plural residential houses also within the meaning of Section 54 prior to its amendment, then such interpretation will not change merely because the purchase of new assets in the form of residential houses is at different addresses. So long as the same Assessee purchased one or more residential houses out of the sale consideration for which the capital gain tax liability is in question, in its own name, the same Assessee should be held entitled to the benefit of deduction u/s 54 of the Act, subject to the purchase or construction being within the stipulated time limit in respect of the plural number of residential houses also. It was also held that the amendment made by The Finance Act, 2014 was intended to be specifically applied only prospectively with effect from AY 2015-16 since it took note of the judicial precedents for period prior to 01/04/2015. In view of the foregoing accepting the interpretation of word a as occurring in Section 54 as made by Hon ble Madras High Court in Tilokchand Sons V/s ITO 2019 (4) TMI 713 - MADRAS HIGH COURT we hold that on the facts and circumstances, the assessee would be eligible to claim deduction u/s 54 on account of investment made in both the flats. We order so. The Ld. AO is directed to re-compute assessee s income in terms of our above order. AO is directed to re-compute assessee s income in terms of our above order.

Summary

Issues Involved:
1. Interpretation of the phrase "a residential house property" in Section 54(1) of the Income Tax Act, 1961.
2. Legitimacy of the Assessing Officer's decision to restrict the exemption of reinvestment of capital gain to one residential house property.

Issue-wise Detailed Analysis:

1. Interpretation of the phrase "a residential house property":
The primary issue revolves around the interpretation of the phrase "a residential house property" in Section 54(1) of the Income Tax Act, 1961. The assessee contended that the term should be interpreted to include multiple residential properties, whereas the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that it refers to a single residential property.

The Tribunal examined the legislative history and judicial precedents to interpret this phrase. It noted that the Finance Act, 2014 amended the phrase "a residential house property" to "one residential house" effective from 01/04/2015, indicating that the legislature intended to clarify that the exemption was limited to one residential house. However, this amendment was prospective and not applicable to the assessment year 2011-12.

The Tribunal referred to the judgments of various High Courts, including the Hon'ble Madras High Court in Tilokchand & Sons V/s ITO, the Hon'ble Karnataka High Court in CIT V/s D. Ananda Basappa, and the Hon'ble Punjab & Haryana High Court in Pawan Arya V/s CIT. These judgments collectively held that the term "a" can include plural residential houses, and the benefit of Section 54 should be available for investments in multiple residential properties, provided they are purchased within the stipulated time frame.

2. Legitimacy of the Assessing Officer's decision:
The second issue pertains to the legitimacy of the AO's decision to restrict the exemption to one residential house property. The AO had relied on the decision of the Mumbai Tribunal (SB) in Sushila M. Jhaveri to restrict the deduction under Section 54 to the investment made in one flat only, as the flats were located at different addresses.

The Tribunal, however, disagreed with this view. It emphasized that the interpretation of the term "a residential house property" should be in line with the judicial precedents, which allowed for the inclusion of multiple residential properties. The Tribunal noted that the amendment by the Finance Act, 2014 was intended to apply prospectively and acknowledged the judicial precedents for the period before 01/04/2015. Therefore, the AO's reliance on the decision in Sushila M. Jhaveri was not justified.

Conclusion:
The Tribunal concluded that the assessee was eligible to claim deduction under Section 54 for the investment made in both the flats. It accepted the interpretation of the term "a residential house property" as including multiple residential houses, as supported by the judicial precedents. Consequently, the AO was directed to re-compute the assessee's income in accordance with this interpretation.

Order:
The appeal was allowed, and the AO was instructed to re-compute the assessee's income in line with the Tribunal's order. The order was pronounced on 25th January 2021.