Tax Exemption u/s 54 Allowed Even if You Invest Capital Gains in More Than One House !

Section 54 of the Income Tax Act provides that if the long term capital gains on sale /transfer of a house property is used for buying or contsructing a house within stipulated time , the long term capital gain shall be exempt to the extent of investment. The provision u/s 54 has used the phrase ” a residential house” . Now this phrase has become a bone of contention between the department and assessee . It is usual that the sale proceeds are invested in more than one house or units for various reasons and is used as one residential house . However, the department denies the exemption on all amount stating that section 54 restrcits the tax exemption in case of one residential house only . Fortunately, the courts have goine into the issue and settled the law that the meaning of ” a residential house” is not ” a residential unit”.

Meaning of ” a residential house “

Therefore, when the issue whether two units of house can be considered “ a residential house” for the purpose of exemption u/s 54 reached Tribunal and High Courts , it has been held that if the facts of the case shows that more than one independent units are actually part of one house , in that case , the units are not separate house, but are part of one residential house.

one_thumb.gif The foremost decision is that of Karanataka High Court in CIT vs D Ananda Basappa (2009) 180 Taxman 4 / 223 CTR 186 . The facts of the case was that the assessee sold a residential and purchased two residential flats adjacent to each other. The assessee has, however, taken two separate registered sale deeds in respect of the two flats situate side by side purchased on the same day. Then from the builder made necessary modifications to the two flats to make it one residential apartment. The assessee sought for exemption under section 54 of the Income-tax Act.

The A.O did not allow it on the ground that section 54(1) of the Income-tax Act does not permit exemption for the purchasers for more than one residential premises. The CIT(A) confirmed the order of the assessing authority.

However, the Tribunal set aside the order of the CIT(A) and held that the purchase of the two flats made by the assessee has to be treated as one single residential unit and that the assessee is entitled for full exemption

When department appealed in Karanataka High Court , it also confirmed the order of ITAT and gave judgment against the department . The hon’ble high court held as under :

6. The contention of the revenue is that the phrase “a” residential house would mean one residential house and it does not appear to the correct understanding. The expression “a” residential house should be understood in a sense that building should be of residential in nature and “a” should not be understood to indicate a singular number.

two_thumb.gifDelhi High Court dismissed departmental appeal in case of CIT vs Sunita Agarwal (Smt) (2006) 284 ITR 20 by agreeing to finding of the ITAT that even the purchase was of more than one unit, it all related to one residential house .
The facts in brief was that The assessee sold a and the said sale proceeds was invested by her in the purchase of a property She claimed benefit under section 54 .However, the A.O disallowed exemption claim on the ground that the sale transaction of the property had been made only on paper.

In appeal the Commissioner of Income-tax (Appeals) upheld the disallowance of deduction on the ground that the property purchased by the assessee in fact comprised two distinct units owned by two different persons. The Commissioner was of the view that the assessee was entitled to the benefit of deduction only to the extent of purchase of one unit. The Assessing Officer was, therefore, directed to restrict the benefit under section 54 to 500 sq. yds. of land purchased by the assessee from one of the vendors.

In a further appeal before the Tribunal the said view has been reversed and the assessee held entitled to a deduction under section 54.

Tribunal noted the fact that the property purchased by the assessee was a single unit and was being used for residential purposes continuously ever since the possession of the different portions of the said property was taken over from the vendors. The Tribunal , therefore , held that the execution of four different sale deeds in respect of four different portions of the property did not materially affect the nature of the transaction or the nature of the property acquired since the property in question was being used by the assessee for her own purposes and investment made in the purchase of the same was therefore eligible for deduction under section 54.

When department appealed before High Court, the appeal was dismissed.

three_thumb.gifThe third case law that can be relied is also from Karanataka High court in case of CIT vs Khoobchand Makhija [2014] 43 143 (Karnataka) in which the facts involved were that the assessee had sold his residential house and invested sale consideration in two residential house properties for his two sons to avoid litigation and disharmony among them in future.
After purchasing these two houses, he deposited unutilized capital gain in a bank. In terms of section 54(2), the said amount was offered for taxation for the assessment year 1999-2000.
The assessing authority was of the view that the assessee was entitled to the benefit of section 54(1) only to the extent of acquiring one residential house property and adopted Rs. 200 per square feet as the basis for calculating the indexed cost as against the claim of the assessee at Rs. 200 per square feet. After deducting the cost of investment in respect of purchase of one residential house, the long-term capital gain was computed which, according to him, was not deposited before the due date. Therefore, he levied tax on the said amount. He also denied the benefit under section 54(2).

The appellate authority held that the valuation of the assessee at Rs. 300 per sq. ft. for the property, was correct and further, it was held that the assessee was entitled to the benefit of section 54(1) only to the extent of investment in both the residential houses. It also granted benefit of section 54(2).

The Tribunal upheld the order passed by the appellate authority.

On further appeal, the revenue submitted that since assessee had purchased two residential houses, he was entitled to the benefit only in respect of one residential house, which was higher in value and he was not entitled to the benefit on second residential house.
The High Court held in favour of assesse and dismissed the departmental appeal.

17. It is clear that the assessee was not attempting to evade tax. In fact, after purchasing two residential houses, still there remained unutilized capital gain, which he has offered for tax. Therefore, as held in the aforesaid Rukminiamma’s case, the context in which the expression “a residential house” is used in Section 54 makes it clear that it was not the intention of the legislature to convey the meaning that it refers to a single residential house. The letter “a” in the context, which is used, should not be construed as meaning singular, but being a indefinite article, the said expression should be read in consonance with the other words “buildings and lands” and therefore, the singular “a residential house” also permits use of plural by virtue of Section 13(2) of the General Clauses Act.
18. Therefore, we are of the view, in the facts and circumstances of this case, the acquisition of two residential houses by the assessee out of the capital gains falls within the phrase “residential house” and accordingly, the assessee is entitled to the benefit conferred under Section 54(1) of the Act. However, we make it clear that while interpreting this word, the Court or the Tribunal or the authorities have to keep in mind the facts of the particular case. When we have held “a” cannot be read as singular, it also cannot be read as multiples and so as to avoid paying tax under Section 45 of the Act. Therefore, in the facts and circumstances of this case, we answer the first substantial question of law raised in favour of the assessee and against the Revenue.

In fact the Karanataka High court relied on its earlier judgment in case of CIT vs K.G. Rukiminamma (Smt) [2011] 331 ITR 211 in which the HC had held that the expression “a residential house ” in section 54 should be understood in a sense that the building should be residential in nature and “a ” should not be understood to indicate a singular number , assesse was entitled to claim exemption under section 54 in respect of four residential flats acquired by her.

fourMumbai High Court decision in case of CIT-21 vs Devdas Naik [2014] 49 30 (Bombay) is also on same line . In that case ,the assessee alongwith his wife jointly owned bunglow. The bunglow was sold . With this sum, they bought three flats, one in the assessee’s name, another in the name of assessee and his wife and third in the name of the wife. The assessee claimed deduction under section 54 on purchase of two flats in which he was either a sole owner or a joint owner.
The Assessing Officer disallowed said claim on ground that it was contrary to the legislature intent and also the plain language of section 54.
Both CIT(A) and ITAT however favoured assesse.
When the department field appeal in High Court , it dismissed appeal with following observation:

The language of the section has been noted in both the decisions and it has been held that so long as there is a residential unit or house, then the benefit or deduction cannot be denied. In the present case, the unit was a single one. The flats were constructed in such a way that they could be combined into one unit. Once there is a single kitchen then, the plans can be relied upon. We do not think that the conclusion is in any way impossible or improbable so as to entertain this Appeal. In this peculiar factual backdrop, this Appeal does not raise any substantial question of law. The Appeal is devoid of any merit and is dismissed. No order as to costs.

fiveThe facts involved in case before Delhi High Court in CIT v. Gita Duggal [2013] 30 30/214 Taxman 51 (Delhi) was that the assessee had entered into a collaboration agreement with ‘T’ Ltd. for developing a property.According to its terms, the builder was to demolish the existing structure on the plot of land and develop, construct, and/or put up a building consisting of basement, ground floor, first floor, second floor and third floor with terrace at its own costs and expenses.

• In addition to the cost of construction incurred by the builder on development of the property, a further payment of rupees four crores was payable to the assessee as consideration against the rights of the assessee.
• The builder was to get the third floor.
• The assessee claimed that if the cost of construction incurred by the builder was to be added to the sale price, then the same should also be correspondingly taken to have been invested in the residential house namely the two floors which the assessee was to get in addition to the cash amount under the agreement with the builder, and the amount so spent on the construction should be allowed as deduction under section 54.
• The Assessing Officer rejected the claim for deduction under section 54 on the footing that the two floors obtained by the assessee contained two separate residential units having separate entrances and could not qualify as a single residential unit for purpose of section 54.

On appeal, the Commissioner (Appeals), as well as the Tribunal held that the words ‘a residential house’ appearing in section 54/54F cannot be construed to mean a single residential house since under section 13(2) of the General Clauses Act, a singular includes plural.
On appeal by assesse, Hon’ble Delhi High Court negated the decisions of CIT(A) and ITAT and held in favour of assesse . The High Court relied on decision by Karanataka High Court in case of Rukmini Amma case ( referred above) and explained the meaning of phrase “ a residential house “ as under :

“…. Section 54/54F uses the expression “a residential house”. The expression used is not “a residential unit”. This is a new concept introduced by the Assessing Officer into the section. Section 54154F requires the assessee to acquire a “residential house” and so long as the assessee acquires a building, which may be constructed, for the sake of convenience, in such a manner as to consist of several units which can, if the need arises, be conveniently and independently used as an independent residence the requirement of the Section should be taken to have been satisfied. There is nothing in these sections which require the residential house to be constructed in a particular manner. The only requirement is that it should before the residential use and not for commercial use. If there is nothing in the section which requires that the residential house should be built in a particular manner, it seems to us that the income tax authorities cannot insist upon that requirement. A person may construct a house according to his plans and requirements. Most of the houses are constructed according to the needs and requirements and even compulsions. For instance, a person may construct a residential house in such a manner that he may use the ground floor for his own residence and let out the first floor having an independent entry so that his income is augmented. It is quite common to find such arrangements, particularly post-retirement. One may build a house consisting of four bedrooms (all in the same or different f1oors) in such a manner that an independent residential unit consisting of two or three bedrooms may be carved out with an independent entrance so that it can be let out. He may even arrange for his children and family to stay there, so that they are nearby, an arrangement which can be mutually supportive. He may construct his residence in such a manner that in case of a future need he may be able to dispose of a part thereof as an independent house. There may be several such considerations for a person while constructing a residential house. We are therefore, unable to see how or why the physical structuring of the new residential house, whether it is lateral or vertical, should come in the way of considering the building as a residential house. We do not think that the fact that the residential house consists of several independent units can be permitted to act as an impediment to the allowance of the deduction under Section 54/54F. It is neither expressly nor by necessary implication prohibited.

sixITAT, Hyderabad in Vittal Krishna Conjeevaram [2013] 36 542 (Hyderabad – Trib.) gave verdict in favour of assesse who was a co-owner of a residential property. He, along with the other co-owners, entered into a development agreement for construction of flats with a developer. As per development agreement, the owner had to transfer 50 per cent of his land for super-structure received as consideration.
The assessee received 7 flats towards his share.He claimed exemption under section 54 on the entire amount of capital gains.
Assessing Officer rejected assessee’s claim under section 54 holding that since assessee transferred long-term asset in the form of open land, without any building, no exemption could be allowed under section 54. He, however, held that the assessee was entitled to exemption under section 54F but only in respect of one flat out of the seven flats.
The Commissioner (Appeals) upheld the order of the Assessing Officer.
When the department preferred appeal before ITAT , it held as under

Therefore, considering the totality of the facts and circumstances in the light of consistent view of different High Courts including the jurisdictional High Court, we are of the view that the lower authorities were not correct in restricting the exemption under section 54F of the Act to only one flat by interpreting the words “a residential house” in a manner which has been held to be an incorrect interpretation in various judicial precedents as referred to hereinabove. In the aforesaid view of the matter, in our considered opinion, the assessee is entitled for exemption under section 54F of the Act in respect of all the seven flats. We, therefore, set aside the Order of the CIT(A) and direct the Assessing Officer to compute capital gain, if any, after allowing exemption under section 54F of the Act in respect of all the seven flats which were received by the assessee under the development agreement.


From the ratio of aforesaid decisions , it is clear that the meaning of a residential house is not necessarily one unit. But more than one units can be part of on residential house .The Karanataka High Court’s clear observation in Khoobchand case that facts and circumstances can actually state whether the mean of phrase “a residential house” can be read to mean plural.
If you can establish the fact that the construction of multiple units or buying of multiple house are for one residential house, you can get the benefit of ratio of aforesaid courts judgments. So, if more than one units of house is bought and merged or shown to constitute one house or multiple units are created  in a building , then also one can get exemption u/s 54.

But not in case the various units of house are so distant or in a such manner or for fact that not used as one residential unit , then one can not use the meaning of “a residential house ” in plural sense.

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