Sec 54 relief not limited to one house Proceeds from sale of multiple houses, if invested in a single house, would also qualify for exemption from long-term capital gains tax

Sec 54 relief not limited to one house

Proceeds from sale of multiple houses, if invested in a single house, would also qualify for exemption from long-term capital gains tax

As most readers would be aware, exemption from long-term capital gains tax from sale of a residential house is available u/s 54 provided the capital gain amount is invested within specified time limits in another residential house. However, recently the issue that came up before the Mumbai bench of the income tax tribunal was whether the exemption was available in cases where more than a single house is sold and the resultant combined long-term capital gain is invested in another residential property. The brief facts of the case were that the assessee, along with his three brothers, had purchased two flats in two separate buildings. The first flat was bought in 1983-84 whereas the other in 1981-82. In both the flats, the assessee held a 25% share. Subsequently, one flat was sold in 1996-97 whereas the other in 1997-98. The assessee computed the long-term capital gain in respect of the two flats treating the same as one property and invested the amount of capital gain from the two sale transactions in construction of a residential house. The balance amount (that was not invested) was offered for tax. The assessee submitted before the assessing officer (AO) that the two flats though not contiguous were in proximate buildings and as both had been routinely used as one residential house it was submitted that the same should be treated as one house. The AO, however, did not accept this contention. It was observed by him that these flats were located in different buildings and were situated on different roads and these had also been acquired in different years. So, they could not be treated as one house property. The AO also observed that the scheme of Section 54 allowed exemption in respect of residential houses, the income from which was chargeable under the head “income from house property”. In this case, the assessee owned two residential houses and exemption from house property income was available only in respect of one house as self-occupied property. The second property automatically would be considered to be deemed let out. However, since the assessee had not declared it as such in the tax return, it was to be assumed that the only reason there of was that the assessee had ipso facto treated the flat as being used for the purpose of business. The AO, therefore, held that since the second flat had been used for the purpose of business, income from which was not chargeable to tax under the head “income from house property”, the exemption u/s 54 was not available on that flat. The assessee disputed the decision of the AO and appealed before the commissioner of income tax (appeals) CIT(A). The CIT(A) after considering the submissions of the assessee observed that though the flats in question were not contiguous, these were part of one and the same residential house and, therefore, two flats had to be treated as one residential property. The CIT(A) accordingly held that the AO was not justified in treating one of the flats as business asset and in denying benefit of claim of deduction u/s 54. Aggrieved by the said decision, it was the turn of the revenue department to appeal before the tribunal. The tribunal did not agree with the view taken by the CIT(A) that the two flats constituted one residential house. The flats were located in two different buildings owned by the two different housing societies and were situated on two different roads. These flats were acquired in two different years. There was no common approach road to the buildings. Therefore, the two flats could not be treated as one residential property. Having held that the two flats were in fact two different residential houses, the tribunal was of the view that now it is required to be examined whether the assessee is entitled for exemption u/s 54 of the Act. Its opinion was that there was no restriction placed in Section 54 that exemption is allowable only in respect of sale of one residential house. Even if the assessee sells more than one residential house in the same year and the capital gain is invested in a new residential house, the claim of exemption cannot be denied if the other conditions of Section 54 are being fulfilled. The provisions of Section 54 as pointed out earlier apply to transfer of any number of residential houses by the assessee provided the capital gain arising therefrom is invested in a residential house within the prescribed time limits. Thus, there is an in-built restriction that capital gain arising from the sale of one residential house cannot be invested in more than one residential house. However, there is no restriction that capital gain arising out of sale of more than one residential house cannot be invested in another residential house. As regards the finding given by the AO that one of the flats, by default, would be considered as having been used for the purpose of business and therefore, was not eligible for exemption u/s 54, the AO has drawn his conclusion based on the ground that the assessee had not returned any income from the flat. The CIT(A) had not accepted the finding given by the AO and the tribunal agreed to the view taken by CIT(A). The assessee had shown no income from the second flat because the assessee had treated both the flats as one residential house which had been used as a self-acquired property. There was no material to support any business use of the flat. While it is true that the requirement of Sec. 54 is that income should be chargeable to tax under the head “house property income”, it is not necessary that income should have been actually charged. To conclude Taking all of the above into considerations, the tribunal finally ruled that AO should allow the capital gain exemption u/s 54 of the Act after verifying that the new residential house had been constructed within prescribed time limits.