IN THE ITAT MUMBAI BENCH ‘D’

Rajesh Keshav Pillai*

v.

Income-tax Officer, Ward 19(3)(2), Mumbai

D. MANMOHAN, VICE-PRESIDENT

AND RAJENDRA SINGH, ACCOUNTANT MEMBER

IT APPEAL NO. 6661 (MUM.) OF 2009

[ASSESSMENT YEAR 2006-07]

AUGUST 13, 2010

Section 54 of the Income-tax Act, 1961 - Capital gains - Profit on sale of property used for residential house - Assessment year 2006-07 - Whether in view of provisions of section 54(1), exemption will be available in respect of transfer of any number of long-term capital assets being residential houses if other conditions are fulfilled - Held, yes - Whether, however, in case there are sales of more than one residential houses, exemption has to be computed considering each set of sale of residential house and corresponding investment in one residential house and not by taking into account aggregate of capital gains and aggregate of investment in residential houses - Held, yes

The assessee owned two flats being the flat Nos. 41 and 51. Both the flats had been purchased on 5-1-2001. The flat No. 41 was sold by the assessee on 16-6-2005 for a sum of Rs. 1.01 crores and the flat No. 51 had been sold on 29-4-2005 for a sum of Rs. 97,79,500. Theassessee had thus, earned income on account of long-term capital gain from sale of two flats in assessment year 2006-07. The indexed gain in respect of flat No. 41 was Rs. 88,55,558 whereas the indexed gain in respect of the flat No. 51 was Rs. 85,55,508. The assessee invested the gain on sale of flats in two different flats, i.e., flat in Sai Dham for Rs. 81,57,624 and flat at Girnar for a sum of Rs. 95,71,364. The total investment in two flats was Rs. 1,77,28,988 which was more than the total index gain on sale of two flats of Rs. 1,74,17,617. The assessee, therefore, claimed the entire capital gain as exempt under the provisions of section 54.

The Assessing Officer held that the assessee was entitled to claim exemption under section 54 only in respect of sale of one flat and the corresponding investment in one flat. Exemption was thus, allowed only in respect of indexed gain of Rs. 88,55,558 in respect of flat No. 41 with respect to the investment of Rs. 95,71,364 in Girnar flat. The investment being more than capital gain in respect of sale of flat No. 41, the capital gain was exempted whereas the indexed gain of Rs. 85,55,058 in respect of flat No. 51 was held taxable. In appeal, the Commissioner (Appeals) upheld the view taken by the Assessing Officer.

On second appeal :

The dispute was regarding computation of exemption under section 54 which is available in case the long-term capital gain arising from sale of a residential house is invested either by way of purchase or construction of a residential house within the prescribed period. In the instant case, the assessee had sold two flats during the year resulting into indexed gain of Rs. 88,55,558 and Rs. 85,55,058 respectively. The capital gain had been invested by the assessee in a flat at Sai Dham for Rs. 81,57,624 and a flat atGirnar for Rs. 95,71,364. The case of the assessee was that exemption under section 54 was available in respect of sale of any number of flats with corresponding investment in a residential house whereas the view taken by the authorities below was that exemption could be allowed only in respect of sale of one residential property with corresponding investment in only one residential house. There was no dispute either in the computation of capital gain or in respect of fulfilment of any other conditions prescribed in section 54 such as the investment being within the specified period etc. [Para 4]

A perusal of provisions of section 54(1) shows that capital gain arising from transfer of a long-term capital asset being a residential house the income of which is chargeable under the head ‘Income from house property’ is exempt if the capital gain is invested in a residential house in the manner prescribed in the said section. There is no restriction placed anywhere in the section 54 that exemption is available only in relation to sale of one residential house. Therefore, in case the assessee has sold two residential houses, being long-term assets, the capital gain arising from the second residential house is also capital gain arising from the transfer of a long-term assets being a residential house. The provisions of section, therefore, will also be applicable to the sale of second residential house and similarly to a third residential house and so on. Whenever the exemption available is restricted to one asset, a suitable provision is incorporated in the relevant section itself. For instance section 23(2) exempts income from a property consisting of a house or a part of house which is in occupation of the assessee or which could not be occupied by the assesseebecause of his employment/business/profession being carried on at some other place. Based on such provisions contained in section 23(2), income from any number of properties being residential houses which are self-occupied will have to be treated as exempt. But a restriction has been placed in section 23(4) which provides that where the property referred to in sub-section 2 consists of more than one residential houses exemption would be available only in respect of one house and other self-occupied residential houses will be treated as let out. There is no such provision in section 54 to restrict the exemption of capital gain only to sale of one residential house. The authorities below had taken the view that whenever more than one option was given to the assessee the word uses was ‘any’. The reference had been made to the provisions of section 54E. It was found from perusal of the said section that the word ‘any’ has been used because the assessee has option to invest in any of the assets mentioned therein. For instance, section 54E provides exemption in respect of capital gain arising from transfer of a long-term capital asset, if whole or any part of the net consideration is invested in any specified assets within six months from the date of transfer. Since the specified assets were more than one, the word ‘any’ has been used because the exemption will be available if the investment is made in any of the specified assets. The situation in section 54 is different. Considering the language used in section 54(1), exemption will be available in respect of transfer of any number of long-term capital assets being residential houses if other conditions are fulfilled. [Para 4.1]

Thus, in case there is sale of more than one residential house, the exemption will be available in relation to each set of sale and corresponding investment in the residential house. However, the plea of the assessee that exemption had to be calculated considering the aggregate of capital gain and aggregate of investment in the residential houses could not be accepted. In case there are sales of more than one residential houses, exemption has to be computed considering each set of sale of residential house and the corresponding investment in one residential house and the combination which is beneficial to the assessee has to be allowed. In the instant case, the assessee had submitted that indexed gain of Rs. 88,55,558 in respect of sale of flat No. 41 should be considered against the investment in flat at Girnar for Rs. 95,71,364 which was allowed and the investment being more entire indexed gain ofRs. 88,55,558 in respect of sale of flat No. 41 would be exempt. The indexed gain of Rs. 85,55,508 in respect of sale of flat No. 51 would have to be considered against the investment of Rs. 81,57,624 in the flat at Sai Dham. Since the investment was less than the capital gain, the difference of Rs. 3,97,434 would have to be taxed. [Para 4.2]

In the result, appeal of the assessee was to be partly allowed. [Para 5]

ITO v. Ms. Sushila M. Jhaveri [2007] 107 ITD 327 (Mum.) (SB) distinguished.

ITO v. Ms. Sushila M. Jhaveri [2007] 107 ITD 327 (Mum.) (SB) (para 2.1), Polestar Electronic (P.) Ltd. v. Addl. CST [1978] 41 STC 409 (SC) (para 2.1) and Prakash Nath Khanna v. CIT [2004] 266 ITR 1/135 Taxman 327 (SC) (para 2.1).

S.E. Dastur and H.S. Raheja for the Appellant. R.N. Jha for the Respondent.

Rajendra Singh, Accountant Member. - This appeal by the assessee is directed against the order dated 30-10-2009 for the assessment year 2006-07. Though the assessee has raised several grounds in the memorandum of appeal, effectively there is only one issue which relates to claim of exemption under section 54 in respect of income from sale of two flats.

2. Briefly stated the facts of the case are that the assessee owned two flats being the flat Nos. 41 and 51 in Shikha Building, Pali Hill, Bandra(West). Both the flats had been purchased on 5-1-2001. The flat No. 41 was sold by the assessee on 16-6-2005 for a sum of Rs. 1,01,00,000 and the flat No. 51 had been sold on 29-4-2005 for a sum of Rs. 97,79,500. The assessee had thus earned income on account of long-term capital gain from sale of two flats in assessment year 2006-07. The indexed gain in respect of flat No. 41 was Rs. 88,55,558 whereas the indexed gain in respect of the flat No. 51 was Rs. 85,55,508. The assessee invested the gain on sale of flats in two different flatsi.e., flat in Sai Dham at Govind Patil Road for Rs. 81,57,624 and flat at Girnar 55, Pali Hill for a sum of Rs. 95,71,364. The total investment in two flats was Rs. 1,77,28,988 which was more than the total index gain on sale of two flats of Rs. 1,74,17,617. The assessee, therefore, claimed the entire capital gain as exempt under the provisions of section 54. The said provisions are reproduced below as ready reference.

“54. (1) Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head “Income from house property” (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house, then. Instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—

   (i)  if the amount of the capital gain is greater than the cost of the residential house so purchased or constructed (hereafter in this section referred to as the new asset) the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or

  (ii)  if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain.”

2.1 The Assessing Officer observed that phrase used in section 54(1) was “capital gain arises from transfer of a long-term capital gain” and that the use of the word ‘a’ showed that exemption was available only in respect of sale of one capital asset. Similarly the assessee could purchase or construct only one residential house as the phrase used in section 54(1) was a residential house. The Assessing Officer referred to the decision of the Special Bench of the tribunal in case of ITO v. Ms. Sushila M. Jhaveri [2007] 107 ITD 327 (Mum.)(SB) in which it was held that exemption under section 54 should be allowed only in respect of investment in one residential house. In the said case, it was pointed out, the Tribunal had observed that wherever the Legislature intended that investment could be made in more than one asset, the word used was ‘any’ as was the case in sections 54B, 54D, 54E, 54EA and 54EB. For example, section 54E allowed exemption of capital gain if invested in any of the specified assets and, therefore, the word used was ‘any’ and not ‘a’. But in case of sections 54 and 54F the word used was “a” and not “any” which shows that the Legislature intended to allow expenditure only in respect of one residential house. The Tribunal, therefore, concluded that the investment has to be in only one residential house for getting exemption in respect of sale of an asset. The Assessing Officer also observed that when a statutory provision was plain and unambiguous, literal interpretation has to be adopted. Reliance was placed on the judgment of Hon’ble Supreme Court in case of Polestar Electronic (P.) Ltd. v. Addl. CST [1978] 41 STC 409 and the judgment of Hon’ble Supreme Court in case of Prakash Nath Khanna v. CIT [2004] 266 ITR 1¹, Assessing Officer, therefore, held that the assessee was entitled to claim exemption under section 54 only in respect of sale of one flat and the corresponding investment in one flat. Exemption was thus allowed only in respect of indexed gain of Rs. 88,55,558 in respect of Flat No. 41 with respect to the investment of Rs. 95,71,364 in Girnar flat. The investment being more than capital gain in respect of sale of flat No. 41, the capital gain was exempted whereas the indexed gain of Rs. 85,55,058 in respect of flat No. 51 was held taxable. In appeal CIT(A) upheld the view taken by the Assessing Officer aggrieved by which the assessee is in appeal before the Tribunal.

3. Before us the learned AR for the assessee reiterated the submissions made before lower authorities that exemption under section 54 was allowable in respect of any number of flats sold as there was no restriction placed in the section for allowing exemption only in respect of sale of one flat. However, he agreed that corresponding to each sale of flat there has to be investment in one residential property. It was pointed out that the decision of the Special Bench in case of Ms. Sushila M. Jhaveri (supra) was distinguishable as in that case the assessee had claimed exemption in relation to investment in two properties against the sales of one flat. In case of the assessee, the investments in two flats were corresponding to two different sales of flats. It was accordingly argued that the assessee should be allowed exemption fully as aggregate value of investment in the two flats was more than the aggregate capital gain from sale of flats. Alternatively it was also submitted that in case exemption was considered in respect of each set of purchase and sale taking separately, then investment in Girnar flat should be considered against the gain in respect of flat No. 41 which was fully exempt as the investment was more. As regards the sale of flat No. 51 the indexed gain was Rs. 85,55,058 against which investment made was only Rs. 81,57,624 and, therefore, only a sum of Rs. 3,97,434 could be taxed.

3.1 The learned DR on the other hand strongly supported the orders of authorities below and placed reliance on the findings given in the respective orders.

4. We have perused the records and considered the rival contentions carefully. The dispute is regarding computation of exemption under section 54 which is available in case the long-term capital gain arising from sale of a residential house is invested either by way of purchase and construction of a residential house within the prescribed period. In this case the assessee had sold two flats during the year being the flat Nos. 41 and 51 in Shikha Building, Pali Hill, Bandra (W) resulting into indexed gain of Rs. 88,55,558 and Rs. 85,55,058 respectively. The capital gain had been invested by the assessee in a flat at Sai Dham for Rs. 81,57,624 and a flat at Girnar for Rs. 95,71,364. The case of theassessee is that exemption under section 54 is available in respect of sale of any number of flats with corresponding investment in a residential house whereas the view taken by the authorities below is that exemption can be allowed only in respect of sale of one residential property with corresponding investment in only one residential house. There is no dispute either in the computation of capital gain or in respect offulfilment of any other conditions prescribed in section 54 such as the investment being within the specified period etc.

4.1 A perusal of provisions of section 54(1) which has been reproduced at page 2 earlier shows that capital gain arising from transfer of a long-term capital asset being a residential house the income of which is chargeable under the head “income from house property” is exempt if the capital gain is invested in a residential house in the manner prescribed in the said section. There is no restriction placed any where in the section 54 that exemption is available only in relation to sale of one residential house. Therefore, in case the assessee has sold two residential houses, being long-term assets, the capital gain arising from the second residential house is also capital gain arising from the transfer of a long-term assets being a residential house. The provisions of section, therefore, will also be applicable to the sale of second residential house and similarly to a third residential house and so on. Whenever the exemption available to restricted to one asset, a suitable provision is incorporated in the relevant section itself. For instance section 23(2) exempts income from a property consisting of a house or a part of house which is in occupation of the assessee or which could not be occupied by the assessee because of his employment/business/profession being carried on at some other place. Based on such provisions contained in section 23(2), income from any number of properties being residential houses which are self-occupied will have to be treated as exempt. But a restriction has been placed in section 23(4) which provides that where the property referred to in sub-section (2) consists of more than one residential houses, exemption would be available only in respect of one house and other self-occupied residential houses will be treated as let out. There is no such provision in section 54 to restrict the exemption of capital gain only to sale of one residential house. The authorities below have taken the view that whenever more than one option is given to the assessee the word used is “any”. The reference has been made to the provisions of section 54E etc. We find from perusal of the said sections that the word “any” has been used because the assessee has option to invest in any of the assets mentioned therein. For instance, section 54E provides exemption in respect of capital gain arising from transfer of a long-term capital asset if whole or any part of the net consideration is invested in any specified assets within six months from the date of transfer. Since the specified assets were more than one, the word “any” has been used because the exemption will be available if the investment is made in any of the specified assets. The situation in section 54 is different. Considering the language used in section 54(1), in our view exemption will be available in respect of transfer of any number of long-term capital assets being residential houses if other conditions are fulfilled.

4.2 The revenue has placed reliance on the decision of Special Bench of the Tribunal in case of Sushila M. Jhaveri (supra) but the said case is distinguishable as in that case nowhere it was held that exemption will be available only in respect of sale of one residential house. In fact issue in that case was different. The issue was whether exemption was available in case the gain from sale of a house is invested in more than one residential houses. It was held by the Special Bench that exemption will be available only when the investment was made in only one residential house. We are in full agreement with the decision of the Special Bench that exemption in respect of sale of a residential house will be available only when there is corresponding investment in one residential house. But the exemption will be available in respect of sale of any number of residential houses if there are corresponding investments in residential house and all other conditions are fulfilled. Thus in case there is sale of more than one residential house, the exemption will be available in relation to each set of sale and corresponding investment in the residential house. However, we are unable to agree with the plea of the assessee that exemption has to be calculated considering the aggregate of capital gain and aggregate of investment in the residential houses. In case there are sales of more than one residential houses, in our view exemption has to be computed considering each set of sale of residential house and the corresponding investment in one residential house and the combination which is beneficial to the assessee has to be allowed. In this case the learned AR has submitted that indexed gamof Rs. 88,55,558 in respect of sale of flat No. 41 should be considered against the investment in flat at Girnar for Rs. 95,71,364 which is allowed and the investment being more entire indexed gain of Rs. 88,55,558 in respect of sale of flat No. 41 will be exempt. The indexed gain of Rs. 85,55,508 in respect of sale of flat No. 51 will have to be considered against the investment of Rs. 81,57,624 in the flat at Sai Dham. Since the investment is less than the capital gain, difference of Rs. 3,97,434 will have to be taxed. We hold accordingly.

5. In the result, appeal of the assessee is partly allowed in terms of the order above.