Two distinct, non-adjacent flats at opposite ends of two different floors does not fulfill the criteria for exemption under Section 54F – Delhi High Court
In a recent judgment, Delhi High Court held that use of the word ‘a‘ in Section 54F of the Income Tax Act denotes one singular residence, along with the caveat that in case the floors or houses are so constructed as to be used as one singular unit or capable of being used as such, they may fall within the definition of a residential house.
ABCAUS Case Law Citation:
4342 (2024) (12) abcaus.in HC Delhi
In the instant case, the appellant assessee had challenged the order of the ITAT restricting the exemption u/s 54F of the Income Tax Act, 1961 (the Act) to only one residential apartment out of two flats purchased.
The assessee had sold a plot of land and out of its sale proceeds, purchased two apartments. In her return of incme, the assessee calculated Income from Capital Gain after claiming deduction under Section 54 of Act for the amount invested in purchase of both the apartments. In alternative, the assessee claimed deduction under Section 54F of the Act.
The case of the assessee was selected for scrutiny under Computer Assisted Scrutiny Selection (CASS) and a notice under Section 143(2) of the Act was issued. The Assessing Officer (AO) noted that Plot sold was a mere piece of land without any structure thereon and thus, the same was only a long term capital asset, and not a residential house. Therefore, the benefit under Section 54 of the Act could not be claimed. The AO further noted that insofar as the alternative claim under Section 54F of the Act was concerned, the two residential properties i.e. two flats purchased were located on two different floors at two different ends in the same block/tower of the society and they were not adjacent to each other so as to be converted into one unit.
The AO also further noted that by virtue of The Finance (No. 2) Act, 2014 an amendment had been brought in Section 54F of the Act, whereby the words ‘a residential house‘ had been replaced with ‘one residential house‘, and thus, the legislature had clarified that the intention was always to allow exemption in respect of one residential house only. Therefore, the AO denied any benefit to the assessee under Section 54F of the Act since the assessee had purchased two flats i.e. two residential houses.
The CIT(A) confirmed the denial of exemption u/s 54F. However, ITAT partly allowed the appeal holding that the assessee was eligible for a partial exemption under Section 54F of the Act, in respect of the higher amount invested in one of the flats.
The Hon’ble High Court framed the following question of law for consideration;
Whether the benefit as conferred by Section 54F of the Act and which uses the expression ‘a residential house’ would stand confined to a singular unit or could it also be read as contemplating a plural interpretation?”
The assessee relied upon the judgment of the Co-ordinate Bench of the High Court wherein it was held that even if a residential house consisted of multiple floors or units, it could still qualify as a single residential house for the purpose of the exemption, particularly in cases of redevelopment of the plot.
The assessee also relied upon the judgment of the Madras High Court wherein it was held that the exemption under Section 54F of the Act could apply to multiple apartments purchased as long as the the same were located within the same address or location, on the same piece of land, and their division into separate units or blocks did not disqualify them from exemption under Section 54F of the Act.
The Hon’ble High Court observed that there was nothing to indicate that the two flats were intended to be combined into a single residential unit. Even otherwise, since the two flats were constructed and situated physically in a manner that it is not possible to combine them, they cannot be used as one single dwelling unit.
The Hon’ble High Court opined that the spatial separation between the flats, which were located on different floors and at opposite ends of the building, reinforced their distinction, and leave no ambiguity about their status as independent residential houses. Therefore, the two flats were distinct and complete residential units and were incapable of physically or legally being combined together to be used as one single dwelling house.
The Hon’ble High Court observed that in case of the judgment relied upon by the assessee, the floors were constructed on one single plot, and were located adjacent to each other, enabling their use as one residential house. Further, in another case, two residential flats purchased by the assessee were adjacent to each other and the vendor had certified that necessary modifications had been done to the flats to make them as one residential apartment. In the case of Madras High Court, the flats, though located in several blocks/towers, were constructed on a piece of land which was originally owned by the assessee only.
The Hon’ble High Court observed that the word ‘a‘ carries multiple meaning. Though it does mean and refer to ‘one‘, its interpretation varies depending on the context in which it is used.
The Hon’ble High Court observed that CBDT‘s circular dated 21.01.2015, which explained the provisions of Finance Act, 2014, mentioned that certain courts had interpreted that the exemption was also available if investment was made in more than one residential house. However, the amendment clarified that the benefit under Section 54 or 54F of the Act was intended only for investment in one residential house within India.
The Hon’ble High Court opined that apparently the amendment to Section 54F of the Act was introduced to resolve any ambiguity, clarifying that ‘a residential house‘ indeed meant ‘one residential house‘ to ensure consistency with the initial legislative intent. It may also be interpreted in a manner that ‘a residential house‘ under Section 54F of the Act was never meant to cover multiple residential units.
The Hon’ble High Court observed that the legislature has used the words ‘new asset‘, and not ‘new assets‘, in relation to ‘a residential house‘. As per the principles of interpretation of statutes, there is no ambiguity in the words ‘a residential house‘ or ‘a new asset‘. Further, even by going behind the intent of the provision, the said words would essentially mean a singular house or a singular asset and not multiple houses or multiple asset.
The Hon’ble High Court held that the word ‘a‘ would indicate ‘one‘ or ‘singular‘ item, entity, object, person, etc. and will not indicate ‘more than one‘ or ‘many‘. In case the legislature intended to use it in plural connotation, it would have used the word ‘assets‘ instead of ‘a new asset‘, and not used the article ‘a‘ before the term ‘residential house‘. In the said eventuality, there would have been merit in the contention of the assessee that she was entitled to exemption under Section 54F of the Act even if she had invested in purchasing/acquiring multiple residential flats incapable of being structurally or legally combined and even failing the test of being adjacent. If the argument of the assessee is to be accepted, even different residential units bought in different parts of a city or different states would have to be brought under the ambit of Section 54F of the Act, which was not the intent of the legislature.
The Hon’ble High Court added that the word ‘a‘ used in Section 54F of the Act denotes one singular residence, along with the caveat that in case the floors or houses are so constructed as to be used as one singular unit or capable of being used as such, they may fall within the definition of a residential house.
As a result the Hon’ble High Court held that in the given case, the purchase of two distinct, non-adjacent flats, located on diagonally opposite ends of two different floors, even though in a same tower of a residential society, does not fulfill the criteria for exemption under Section 54F of the Act particularly in post amended section 54F.
Accordingly, the question of law was answered in favour of the Revenue and against the assesse.
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