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Commissioner Of Income-Tax v. Syed Ali Adil
Factual and Procedural Background
The Revenue filed this appeal under Section 260-A of the Income Tax Act, 1961 challenging the Income Tax Appellate Tribunal, Hyderabad Bench "B" order dated 09-09-2011 in I.T.A. No. 284/Hyd/2011. The respondent (an individual assessee) filed his return for AY 2007-08 on 31-08-2007 declaring net income of Rs.43,97,840/-. The return was processed under Section 143(1) on 24-02-2009, and the case was taken up for scrutiny after notices under Sections 143(2) and 142(1).
The assessee offered long term capital gains of Rs.41.00 lakhs, claiming that he had sold an inherited ancestral house. He reported sale consideration of Rs.1,99,50,000/- for computing capital gains (though the sale deed showed Rs.2,66,00,000/-) and claimed exemption under Section 54 for Rs.93,80,192/- on the ground that he purchased two flats in May Fair Apartment, Banjara Hills, Hyderabad, relying on a liberal construction of "a residential house."
The Assessing Officer, by order dated 25-08-2009, allowed exemption only to the extent of Rs.45,52,860/-, treating the investment as pertaining to one flat on the basis of an inspection report indicating two residential units separated by a strong wall and purchased by separate sale deeds. The assessee appealed to the CIT(A), who by order dated 13-10-2010 allowed the appeal holding that the two flats could be treated as one residential unit and that the assessee was entitled to full deduction under Section 54. The Revenue appealed to the Tribunal (I.T.A. No.284/Hyd/2011), which dismissed the Revenue's appeal on 09-09-2011, relying on prior Tribunal decisions. The Revenue then filed the present appeal to the High Court.
Legal Issues Presented
- Whether the exemption under Section 54 of the Income Tax Act is available where the assessee purchases two independent residential flats (purchased under separate sale deeds) which are adjacent or can be combined so as to constitute "a residential house"?
- Whether the Assessing Officer was correct to restrict the Section 54 exemption to the investment in one flat despite factual findings about adjacency and common meeting points of the two flats?
Arguments of the Parties
Appellant's (Revenue) Arguments
- The deduction under Section 54 is allowable only for one residential house and not for more than one residential house.
- The Tribunal erred in holding that deduction under Section 54 is allowable in respect of two independent residential flats in the same complex.
- Relied upon the decision of the Special Bench of the Tribunal in I.T.O. Vs. Suseela M. Jhaveri as supporting the proposition that relief under Section 54 is confined to one residential house.
Respondent's (Assessee) Contentions
- The assessee sold an ancestral house and purchased two flats; he claimed exemption under Section 54 in respect of the capital gains by treating the two flats as qualifying residential accommodation.
- He relied on the decision in CIT Vs. Ananda Basappa arguing that the expression "a residential house" should be construed liberally and not restricted to a singular house; thus, purchase of two adjacent residential flats should qualify for Section 54 exemption.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT Vs. Ananda Basappa (D. Ananda Basappa) | The expression "a residential house" in Section 54(1) should be understood to mean a building of residential nature; the article "a" should not be read as indicating strictly singular number. Purchase of two residential flats can qualify, particularly where flats are side by side and modified to make one unit despite separate sale deeds. | The Court relied on this Karnataka High Court decision to support a liberal construction of "a residential house" and to hold that the two adjacent flats purchased by the assessee can qualify for exemption under Section 54. |
| CIT Vs. Smt. K.G. Rukminiamma | Where a residential house was transferred and four flats in a single residential complex were purchased, all four flats constituted "a residential house" for the purpose of Section 54; they cannot be treated as four separate residential houses for Section 54 purposes. | The Court followed this Karnataka High Court ruling to support the proposition that multiple flats in a single complex can be treated as "a residential house" for Section 54. |
| K.G. Vyas Vs. I.T.O. (Tribunal) | Exemption under Section 54 requires the property to be of residential nature; the existence of several independent units does not prevent relief, even when units are on different floors, if they can be combined. | The Court noted that the Tribunal consistently took this view and relied on it in confirming that the two flats could qualify as one residential accommodation for Section 54. |
| I.T.O. Vs. P.C. Rama Krishna, HUF (Tribunal) | Same principle as above: the residential nature of property is key and multiple independent units do not automatically preclude Section 54 relief. | The Court referenced this Tribunal decision as part of a line of Tribunal authorities supporting allowance of exemption where units can be treated as one residential house. |
| Prakash Bhutani Vs. A.C.I.T. (Tribunal) | Affirms that separate independent residential units do not prevent Section 54 relief if they constitute a residential house for the purposes of the section. | The Court relied on this decision along with other Tribunal precedents to affirm the CIT(A)'s and Tribunal's conclusions. |
| I.T.O. Vs. Suseela M. Jhaveri (Special Bench, Tribunal) | Held that only one residential house should be given relief under Section 54 (i.e., limited to one house). | The High Court expressly disapproved this Special Bench decision, stating it does not appear to be correct, and declined to follow it. |
Court's Reasoning and Analysis
The Court examined the factual findings and the legal authorities relied upon. It noted that the assessee purchased two adjacent flats which have a common meeting point. The Assessing Officer had restricted the exemption to one flat on the basis of an inspection report indicating two units separated by a strong wall and separate sale deeds. The CIT(A) allowed full exemption treating the two flats as a combined residential accommodation, and the Tribunal dismissed the Revenue's appeal relying on earlier Tribunal decisions.
Legally, the Court accepted the interpretation of Section 54 adopted by the Karnataka High Court in D. Ananda Basappa and in CIT Vs. Smt. K.G. Rukminiamma, namely that the phrase "a residential house" should be read to require that the property be residential in character and that "a" need not be read as strictly singular; consequently, multiple residential units (flats) that together function as a single residential accommodation can qualify for exemption under Section 54. The Court observed that several Tribunal benches (K.G. Vyas; P.C. Ramakrishna, HUF; Prakash Bhutani) had consistently taken the same view.
The Court explicitly disapproved the Special Bench decision in I.T.O. Vs. Suseela M. Jhaveri, which had held that relief under Section 54 should be confined to only one residential house, stating that that decision "does not appear to be correct."
On applying these legal principles to the facts (adjacent flats with a common meeting point, capable of being treated as one unit), the Court concluded that the CIT(A) and the Tribunal were correct in allowing the exemption in respect of both flats.
Holding and Implications
Holding: The appeal is dismissed. No substantial question of law arises for consideration in this appeal and the Revenue's appeal is accordingly dismissed. No costs were awarded.
Implications:
- The High Court upheld the CIT(A)'s and the Tribunal's decisions allowing exemption under Section 54 in respect of two adjacent flats that can be treated as a single residential accommodation.
- The Court followed the Karnataka High Court decisions in D. Ananda Basappa and CIT Vs. Smt. K.G. Rukminiamma and Tribunal decisions (K.G. Vyas; P.C. Ramakrishna, HUF; Prakash Bhutani) in support of a liberal construction of "a residential house" under Section 54.
- The Special Bench decision in I.T.O. Vs. Suseela M. Jhaveri (holding that only one residential house should get relief) was disapproved by the Court.
- Direct effect: the assessee's entitlement to exemption under Section 54 for the two adjacent flats was sustained; the Revenue's challenge failed. The opinion did not identify any new principle of law to be treated as a binding precedent beyond applying and preferring the cited Karnataka High Court and Tribunal decisions and disapproving Suseela M. Jhaveri.
Judges: Justice Goda Raghuram and Justice M.S. Ramachandra Rao. Date of judgment: 20-12-2012.
This appeal is filed under Section 260-A of the Income Tax Act, 1961 (for short 'the Act') by the Revenue challenging the order dated 09-09-2011 in I.T.A.No.284/Hyd/2011 of the Income Tax Appellate Tribunal, Hyderabad Bench "B", Hyderabad.
2. The respondent is an individual assessee. He filed his return of income for the assessment year 2007-08 on 31-08-2007 with the Assistant Commissioner of Income Tax, Circle-VI (1), Hyderabad admitting therein a net income of Rs.43,97,840/-. The said return was processed under Section 143 (1) of the Act on 24-02-2009. Meanwhile, the case was taken up for scrutiny by issuing notice dt.25-08-2008 under Section 143 (2) of the Act. A notice dt.15-06-2009 under Section 142 (1) was issued calling for various details.
3. Before the assessing officer, the assessee offered under the head, long term capital gains, a sum of Rs.41.00 lakhs contending that he had inherited an ancestral house property which was sold during the year under consideration and the resultant long term capital gains were offered from sale of the said house; that he had taken the sale consideration of Rs.1,99,50,000/- for arriving at the capital gains even though the sale deed mentioned the sale consideration as Rs.2,66,00,000/-; that out of the sale consideration he had purchased two flats in May Fair Apartment, Banjara Hills, Hyderabad and he is entitled to claim deduction/exemption under Section 54 of the Act for an amount of Rs.93,80,192/- and that in view of the decision in CIT Vs. Ananda Basappa1, even though Section 54 mentions that the proceeds should be invested in "a residential house", it being a beneficial provision, it should be construed liberally and the deduction cannot be restricted to only one residential house and it should be extended to the purchase of two adjacent residential flats.
4. The assessing officer by order dt.25-08-2009 held that the assessee is not entitled to claim exemption in respect of Rs.93,80,192/- but only to the extent of Rs.45,52,860/- comprising of consideration of Rs.42,36,000/- and a stamp duty of Rs.3,16,860/- utilized for investment on one of the flats by the assessee on the ground that the inspection report of the I.T.I. deputed by the assessing officer showed that what was purchased were two residential units separated by a strong wall; that they were purchased from two different vendors under two separate sale deeds and as such the deduction under Section 54 has to be restricted to only one flat.
5. Aggrieved thereby, the assessee filed an appeal to the CIT (Appeals), Guntur. He allowed the appeal by order dt.13-10-2010 holding that the assessing officer had acted too technically and had erroneously denied the assessee the deduction to the extent of 50% and that since the assessee had purchased two flats having adjacent kitchens and toilets which have a common meeting point, he is entitled to 100% deduction under Section 54 for both the flats purchased by him.
6. Challenging the same, the Revenue filed I.T.A.No.284/Hyd/2011 to the Income Tax Appellate Tribunal. By order dt.09-09-2011, the Tribunal dismissed the appeal of the Revenue on the ground that it had consistently taken the view that even though flats are located at different floors, when they could be combined, it should be construed as a single residential accommodation only; that the said view is supported by the decisions of the Tribunal reported in K.G.Vyas Vs. I.T.O.2, I.T.O. Vs. P.C.Rama Krishna, HUF3 and Prakash Bhutani Vs. A.C.I.T4.
7. Challenging the same, the Revenue has filed the present appeal.
8. Heard Sri B.Narasimha Sarma, learned Standing Counsel for the Income Tax Department at the stage of admission.
9. He contended that the deduction under Section 54 of the Act is allowable only for one residential house and not for more than one residential house and that the Tribunal erred in holding that the deduction under Section 54 of the Act is allowable for two independent residential flats in the same complex. He also placed reliance on the decision of the Special Bench of the Tribunal in I.T.O. Vs. Suseela M.Jhaveri5.
10. We see no force in the said contention. As held in D.Ananda Basappa's case (1 supra) by the Karnataka High Court, the expression "a residential house" in Section 54 (1) of the Act has to be understood in a sense that the building should be of residential nature and "a" should not be understood to indicate a singular number and where an assessee had purchased two residential flats, he is entitled to exemption under Section 54 in respect of capital gains on sale of its property on purchase of both the flats, more so, when the flats are situated side by side and the builder has effected modification of the flats to make it as one unit, despite the fact that the flats were purchased by separate sale deeds. This decision was followed by the Karnataka High Court in CIT Vs. Smt. K.G.Rukminiamma6 where a residential house was transferred and four flats in a single residential complex were purchased by the assessee, it was held that all four residential flats constituted "a residential house" for the purpose of Section 54 and that the four residential flats cannot be construed as four residential houses for the purpose of Section 54. Admittedly the two flats purchased by the assessee are adjacent to one another and have a common meeting point. In the impugned order, the Tribunal has also relied upon the decisions in K.G.Vyas's case (2 supra), P.C.Ramakrishna, HUF's case (3 supra) and Prakash Bhutani's case (4 supra) wherein it was held that exemption under Section 54 only requires that the property should be of residential nature and the fact that the residential house consists of several independent units cannot be an impediment to grant relief under Section 54 even if such independent units were on different floors. The decision in Suseela M.Jhaveri's case (5 supra) holding that only one residential house should be given the relief under Section 54 does not appear to be correct and we disapprove of it. We agree with the interpretation placed on Section 54 by the High Court of Karnataka in D.Ananda Basappa's case (1 supra) and Smt. K.G.Rukminiamma's case (6 supra) and the decisions of the Mumbai, Chennai and Delhi Benches of the Tribunal in K.G.Vyas (2 supra), P.C.Ramakrishna, HUF (3 supra) and Prakash Bhutani (4 supra). We therefore hold that the CIT (Appeals) was correct in setting aside the order of the assessing officer and the Tribunal rightly confirmed the decision of the CIT (Appeals).
11. We hold that no substantial question of law arises for consideration in this appeal and the same is accordingly dismissed. No costs.
_____________________ JUSTICE GODA RAGHURAM ___________________________ JUSTICE M.S.RAMACHANDRA RAO Date:20-12-2012
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