2022 (4) TMI 220 - AT - Income Tax

Deduction u/s 54 - LTCG invested in buying two residential units - HELD THAT - Assessee has invested in two residential flats within one year of the sale of the property. As per the requirement of section 54, the Long Term Capital Gain (LTCG) arising on account of transfer of Long Term Capital Assets is not chargeable to the income, if the assessee purchases one residential house in India. Importantly and relevant date for the purpose of section 54 is the date of investment in residential house. To put in other words it is the duty of revenue to find out whether the assessee had invested in one house or many houses after earning the LTCG. If on enquiry or otherwise it came to the notice of the revenue that investment was made by the assessee in the two residential house than the benefit of 54 cannot be extended to whole amount invested in both the houses and is required to be restricted to one house alone. The subsequent conversion of two houses or amalgamation of two residential houses into one residential house is immaterial. In the present case, admittedly, as clear from the allotment letters, two residential houses with two separate entrances and Kitchens were purchased by the assessee respectively on 13.01.2015 and 24.01.2015 though were situated adjacent to each other. In our considered opinion, the assessee would only entitle to the benefit of section 54, 1) if the assessee invested the LTCG amount for buying one residential house or 2) if the assessee purchased one residential house which was made after merger of two residential units already amalgamated and were in existence as one residential unit . However the assessee is not entitled to benefit of LTCG invested in buying two residential units and thereafter converting the said two residential units as one. In the present case on facts, if we look into approved plans there are two separate flats with two separate kitchens and two separate entrances and therefore, at the time of purchased of the properties, they were two different residential houses and therefore, it cannot be accepted that the assessee had invested in one single residential house. Further, we may also refer the letter filed by the assessee, reproduced by the AO at page-6 of the assessment order issued by the Builder wherein it is categorically mentioned that the said flats are two different units as per the plans sanctioned by the concerned authorities, however, you may combine the said units as a single one flats to be used as single residential house by removing the common wall between the said units which structurally position of such to obtain a requisite approvals from the concerned authorities . As the assessee failed to file any approval/sanctioned plan from the local municipal authority, it cannot be said that the assessee had purchased one single unit at the time of purchasing the property. Further, the letter placed on record clearly shows that the permission to convert in one single unit was given subject to obtaining the requisite approval/permission from the concerned authorities. In the absence of any supporting documents authorizing amalgamation of two flats, the adverse inference is required to be drawn against the assessee. We do not find any merit in the appeal of the assessee, as the assessee has invested in more than one houses, and therefore, the appeal is bereft of any merit and accordingly, the same is liable to be dismissed.

Summary

Issues Involved:
1. Whether the benefit of exemption under Section 54 of the Income Tax Act, 1961, can be given to the appellant for purchasing two adjacent residential units.
2. Whether the amendments made by the Finance Act, 2014, to Section 54, restricting the benefit to "one residential house," apply to the appellant's case.
3. Whether the appellant's conversion of two adjacent flats into a single residential unit qualifies for the exemption under Section 54.

Issue-Wise Detailed Analysis:

1. Exemption Under Section 54 for Two Adjacent Residential Units:
The appellant sold a residential flat for ?8.5 crores and claimed exemption under Section 54 by investing in two adjacent residential properties. The Assessing Officer (AO) denied the exemption, stating that post-amendment, the benefit under Section 54 is restricted to investment in "one residential house." The appellant argued that the two flats were intended to be used as a single residential unit for their joint family of 10 members, and the builder confirmed that the two adjacent flats could be combined into one unit. However, the AO and subsequently the Commissioner of Income Tax (Appeals) [CIT(A)] rejected this claim, emphasizing that the flats were purchased under two separate agreements and had two separate kitchens and entrances, thus constituting two distinct residential units.

2. Applicability of Amendments by Finance Act, 2014:
The CIT(A) upheld the AO's decision, citing the amendment to Section 54 by the Finance Act, 2014, which substituted "a residential house" with "one residential house in India." The CIT(A) referred to the Explanatory Memorandum of the amendment, which clarified that the benefit was intended for investment in one residential house within India. The CIT(A) emphasized the rule of literal construction, stating that the clear legislative intent was to restrict the exemption to one residential house. The appellant's reliance on judicial precedents was dismissed, as the CIT(A) noted that the amendment explicitly aimed to limit the benefit to a single residential unit.

3. Conversion of Two Flats into a Single Residential Unit:
The appellant argued that the two flats were converted into one unit to accommodate their large family, and thus should be considered as one residential house for the purpose of Section 54 exemption. However, the Tribunal noted that the relevant date for determining the applicability of Section 54 is the date of investment in the residential house. At the time of purchase, the flats were two distinct units with separate kitchens and entrances. The Tribunal also highlighted that no approval or permission from the municipal authorities for the amalgamation of the two flats was provided by the appellant, despite being directed to do so. The Tribunal concluded that the subsequent conversion of two flats into one unit is immaterial for the purpose of Section 54, which requires the investment to be made in one residential house at the time of purchase.

Conclusion:
The Tribunal dismissed the appeal, holding that the appellant is not entitled to the benefit of Section 54 for the investment made in two residential units, even if they were later converted into a single unit. The Tribunal emphasized the clear legislative intent of the amendment to restrict the exemption to one residential house and the requirement for literal interpretation of the statute. The Tribunal also noted the absence of necessary approvals for the amalgamation of the two flats, further supporting the denial of the exemption.