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Can a taxpayer avail capital gains tax exemption by investing in more than one residential house?

    Section 54 and 54F of the Income-tax Act provide for an exemption in respect of long term capital gains (LTCG), where subject to fulfillment of prescribed conditions, a taxpayer makes investment either in the purchase or construction of a residential house.

In this context, let us take the case of a taxpayer who has derived LTCG of Rs.80,00,000 on the sale of his old residential house. If he prefers to purchase two apartments costing Rs.40,00,000 each for the use of his two sons, can he claim the benefit of exemption u/s. 54?

There had been a divergence of judicial opinion on this issue for quite some time, with Income-tax Appellate Tribunals (ITATs) holding both for and against the taxpayer in the matter. A Special Bench of the ITAT at Mumbai was, therefore, constituted to resolve the conflict and its decision has come to be recently rendered in the case of ‘ITO v/s. Sushila M. Jhaveri’ 107 ITD 327. The question posed for consideration of the bench was “whether, the phrase ‘a residential house’ used in sub-section (1) of Sections 54 and 54F means one residential house or more than one residential house independently located in the same building/compound/city?”

The ITAT noted that the real controversy before it related to the interpretation of the term ‘a residential house’ used by the Legislature under the said two sections. According to the revenue, it means, one residential house while, according to the taxpayer, the word ‘a’ means ‘any’ which in turn means ‘one or more than one.’ After elaborate consideration, the ITAT held that the exemption under Sections 54 and 54F would be allowable in respect of one residential house only. If the taxpayer had purchased more than one residential house, then the choice would be with him to avail the exemption in respect of either of the houses, provided other requisite conditions are fulfilled.

The Tribunal noted that the word ‘any’ has been used in Sections 54B, 54D, 54E, 54EA and 54EB, while the word ‘a’ has been used in Sections 54 and 54F. This clearly showed that the Legislature intended different meanings to be given to these two words. By using the word ‘any,’ the Legislature intended to allow exemption in respect of investment in more than one asset. For example, Section 54E granted exemption in respect of investment in ‘any specified asset,’ which included various assets in which investment could be made. Had the Legislature intended for investment in more than one asset, it could have easily used the words ‘in any residential house’ in sections 54 and 54F, instead of the words ‘a residential house’. Thus, the intention was to allow exemption under Sections 54 and 54F in respect of investment in one single residential house.


However, in this very decision, the ITAT has also held that if a taxpayer has purchased two apartments, which are adjacent or contiguous units, and they are converted into one residential house by having common passage/stair case, kitchen, etc., in such a case, the taxpayer would indeed be entitled to exemption under the above referred Sections 54 and 54F.

In the case of ‘CIT vs. D. Ananda Basappa’ 309 ITR 329(Kar.), the taxpayer, an HUF, had sold a residential house and purchased two residential flats adjacent to each other under two different sale deeds. However, the vendor had certified that necessary modifications had been done to the said two flats to make the same as one residential apartment. The taxpayer claimed exemption under Section 54. The Assessing Officer allowed exemption to the extent of purchase of only one residential flat holding that Section 54 does not permit exemption on the purchase of more than one residential premises.

The Karnataka High Court held that a plain reading of Section 54 discloses that when an individual or an HUF sells a residential building or land appurtenant thereto, he can invest capital gain for purchase of a residential building to seek exemption of the capital gain tax. The contention of the revenue that the phrase ‘a residential house’ would mean one residential house does not appear to be the correct understanding. The expression ‘a residential house’ should be understood in a sense that building should be residential in nature and ‘a’ should not be understood to indicate a singular number. 

The Court also noted that in the instant case, the apartments were situated side by side. The builder had also stated that he had effected modification to the flats to make them as one unit by opening the door in between the two apartments. The fact that the taxpayer could have purchased both the flats in one single sale deed or could have narrated the purchase of two premises as one unit in the sale deed was not the ground to hold that the taxpayer had no intention to purchase the two flats as one unit. The matter was thus decided in favour of the taxpayer.

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