HUMAYUN S. RANGILA, MUMBAI v. ITO 19(3)(2), MUMBAI

1 IN THE INCOME TAX APPELLATE TRIBUNAL H BENCH MUMBAI BEFORE SHRI RAJENDRA SINGH(AM) AND SHRI V.D.RAO (JM) ITA NO.1239/M/2010 ASSESSMENT YEAR 2006-07 SHRI HUMAYUN S.RANGILA THE ITO 19(3)(2) 1003 10 TH FLOOR B WING PIRAMAL CHAMBERS SILVER ARCH OSHIWARA MUMBAI ANDHERI (W) MUMBAI 400 053. PAN : AACPR 2481 E APPELLANT RESPONDENT ASSESSEE BY : SHRI KESHAV BHUJALE REVENUE BY : SHRI SHRAVAN KUMAR O R D E R PER RAJENDRA SINGH (AM) THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER DATED 30.11.2009 OF CIT(A) FOR THE ASSESSMENT YEAR 2006-0 7. THE ONLY DISPUTE RAISED BY THE ASSESSEE IS REGARDING DISALLOWANCE OF CLAIM UNDER SECTION 54 OF THE INCOME-TAX ACT 1961. 2. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT TH E ASSESSEE DURING THE YEAR HAD SOLD THREE RESIDENTIAL FLATS AS PER DETAILS GIV EN BELOW : 1) FLAT NO. 25/501 MHADA OSHIWARA ANDHERI MUMBAI 2) FLAT NO.302 SAQIB APARTMENT 24 TURNER ROAD BAND RA (W) MUMBAI 3) FLAT NO.303 BLUE BIRD SHERLY RAJAN ROAD BANDRA ( W) MUMBAI 2 2.1 THE CAPITAL GAIN ARISING FROM THE SALE OF ABOVE THREE FLATS AFTER CONSIDERING THE INDEXED COST OF ACQUISITION WERE RS .8 92 781/- RS.36 08 400/- AND RS.4 70 194/- RESPECTIVELY. THE TOTAL CAPITAL G AIN WAS RS.49 71 375/-. THE ASSESSEE INVESTED THE CAPITAL GAIN IN PURCHASE OF T HREE RESIDENTIAL FLATS IN THE SAME BUILDING KNOWN AS SILVER ARC ANDHERI (W) MUM BAI BEING THE FLAT NOS.1003 1101 AND 1201. THE ASSESSEE CLAIMED THAT FLATS NO.1101 AND 1201 WERE ADJACENT TO EACH OTHER AND HAD BEEN CONVERTED INTO ONE HOUSE FOR THE PURPOSE OF RESIDENCE. AO ACCEPTED THE CLAIM AND TRE ATED THE FLAT NO.1101 AND 1201 AS ONE FLAT. THE ASSESSEE TOOK THE VIEW THAT E XEMPTION UNDER SECTION 54 IN RESPECT OF CAPITAL GAIN WAS AVAILABLE TO ANY FLA T SOLD AND THE CORRESPONDING INVESTMENT IN A RESIDENTIAL FLAT. THEREFORE AS PER THE ASSESSEE THE CAPITAL GAIN ARISING IN RESPECT OF ALL THE THREE FLATS WAS EXEMP T AS THE ASSESSEE HAD INVESTED MONEY IN THE THREE RESIDENTIAL FLATS WHICH WAS MORE THAN THE CAPITAL GAIN EARNED. RELEVANT PROVISIONS OF SECTION 54 ARE REPRODUCED BELOW AS A READY REFERENCE. [SUBJECT TO THE PROVISIONS OF SUB-SECTION (2) WHE RE IN THE CASE OF AN ASSESSEE BEING AN INDIVIDUAL OR A HINDU UNDIVIDED F AMILY] THE CAPITAL GAIN ARISES FROM THE TRANSFER OF A LONG TERM CAPITA L ASSET BEING BUILDINGS OR LANDS APPURTENANT THERETO AND BEING A RESIDENTI AL HOUSE THE INCOME OF WHICH IS CHARGEABLE UNDER THE HEAD INCOME FROM HOUSE PROPERTY (HEREAFTER IN THIS SECTION REFERRED TO AS THE ORIGI NAL 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] O R HAS WITHIN A PERIOD OF THREE YEARS AFTER THAT DATE CONSTRUCTED A RESID ENTIAL HOUSE THEN] 3 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 SE CTION THAT IS TO SAY - 3. AO HOWEVER OBSERVED THAT THE PHRASE USED IN SECT ION 54 WAS A LONG TERM CAPITAL ASSET AND NOT ANY LONG TERM CAPITAL ASSET AND THEREFORE THE PROVISIONS OF SECTION 54 WERE APPLICABLE ONLY IN RE SPECT OF SALE OF ONE RESIDENTIAL FLAT. THE AO ALSO HELD THAT CORRESPONDI NG INVESTMENT HAS ALSO TO BE ONLY IN ONE FLAT AND NOT MORE THAN ONE FLAT. RELIAN CE WAS PLACED ON THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN CASE OF ITO VS MISS SUSHILA M. JHAVERI (292 ITR (AT) 1) IN WHICH IT WAS HELD THAT CAPITAL GAIN ARISING FROM SALE OF RESIDENTIAL FLAT HAD TO BE INVESTED ONLY IN ONE RES IDENTIAL HOUSE FOR EXEMPTION UNDER SECTION 54. AO THEREFORE ALLOWED EXEMPTION ON LY IN RESPECT OF SALE OF ONE FLAT AND THE CORRESPONDING INVESTMENT IN ONE FLAT. SINCE THE MAXIMUM CAPITAL GAIN HAD ARISEN FROM SALE OF FLAT NO.302 AMOUNTING TO RS.36 08 400/- THE AO ALLOWED EXEMPTION IN RESPECT OF FLAT NO.302 AND THE CORRESPONDING INVESTMENTS IN THE FLAT NO.1101 AND 1201 WHICH WERE TREATED BY HIM AS ONE RESIDENTIAL UNIT. THE TOTAL INVESTMENT IN THE FLATS NO.1101 AND 1201 WAS RS.42 12 500/- WHICH WAS MORE THAN THE CAPITAL GAIN EARNED IN RESPECT OF FLAT NO.302. AO THEREFORE EXEMPTED THE ENTIRE CAPITAL GAIN OF RS.36 08 400/-. THE CAPITAL GAIN ARISING FROM FLAT NO.302 BLUE BIRD (RS.4 70 194) AND FROM T HE FLAT AT MHADA (8 92 781) AGGREGATING RS.13 62 975/-WAS NOT CONSID ERED BY THE AO FOR EXEMPTION AND THUS ADDED TO THE TOTAL INCOME. IN AP PEAL CIT(A) UPHELD THE VIEW TAKEN BY THE AO AND CONFIRMED THE ADDITION MAD E AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 4 4. BEFORE US THE LEARNED AR FOR THE ASSESSEE ARGUED THAT UNDER THE PROVISIONS OF SECTION 54 CAPITAL GAIN EXEMPTION WAS AVAILABLE IN RESPECT OF GAIN ARISING FROM TRANSFER OF A LONG TERM ASSET AND THER EFORE THE PROVISION WILL APPLY TO TRANSFER OF ANY LONG TERM CAPITAL ASSET BEING A RESIDENTIAL HOUSE. THERE WAS NO RESTRICTION IN THE SECTION THAT IT WILL APPLY ON LY TO TRANSFER OF ONE RESIDENTIAL HOUSE. HE ALSO REFERRED TO THE CIRCULAR F.NO.207/24 /76-IT(II) DATED 25.3.97 OF CBDT IN WHICH IT WAS CLARIFIED THAT IF THE ASSESSEE HAD RETAINED MORE THAN ONE HOUSE FOR THE PURPOSE OF HIS OWN OR PARENTS OWN RE SIDENCE AND NOT FOR ANY OTHER PURPOSE THE CAPITAL GAIN ARISING ON TRANSFER OF EACH SUCH HOUSE WOULD QUALIFY FOR EXEMPTION UNDER SECTION 54 OF THE INCOM E-TAX ACT IF OTHER CONDITIONS WERE FULFILLED. AS REGARDS THE DECISION OF SPECIAL BENCH OF TRIBUNAL IN CASE OF ITO VS MISS SUSHILA M. JHAVERI (SUPRA) WAS CONCERNED IT WAS POINTED OUT THAT THE SAME WAS RELEVANT FOR THE PROPOSITION THAT CAPITAL GAIN ARISING FROM TRANSFER OF ONE RESIDENTIAL HOUSE COULD NOT BE INVESTED IN MORE THAN ONE RESIDENTIAL HOUSE BECAUSE THE PHRASE USED IN SECTION 54 WAS PURCHASE D OR CONSTRUCTED A RESIDENTIAL HOUSE. HOWEVER THERE WAS NO BAR FOR I NVESTMENT OF CAPITAL GAIN ARISING FROM TRANSFER OF TWO RESIDENTIAL HOUSES INT O ONE RESIDENTIAL HOUSE. HE PLACED RELIANCE ON THE DECISION OF THE TRIBUNAL IN CASE OF RAVINDRA K. MARIWALA VS JCIT (86 ITR 35) IN SUPPORT OF THE SAID PROPOSIT ION. IN THE SAID CASE THE ASSESSEE HAD EARNED LONG TERM CAPITAL GAIN IN A.Y.1 997-98 AND HAD PURCHASED A NEW HOUSE WITHIN A PERIOD OF ONE YEAR IN THE ASSE SSMENT YEAR 1996-97. THE INVESTMENT IN PURCHASE OF HOUSE WAS MORE THAN THE C APITAL GAIN EARNED. THE ENTIRE CAPITAL GAIN WAS THEREFORE EXEMPT UNDER SECT ION 54. THE ASSESSEE HAD ALSO LONG TERM CAPITAL GAIN FROM SALE OF A LONG TER M ASSET NOT BEING A RESIDENTIAL HOUSE. THEREFORE UNDER THE PROVISIONS O F SECTION 54F THE CAPITAL GAIN WAS EXEMPT IF THE GAIN WAS INVESTED IN PURCHASE OF A RESIDENTIAL HOUSE WITHIN A PERIOD OF ONE YEAR BEFORE OR TWO YEARS AFTER THE DA TE IN WHICH THE TRANSFER TOOK 5 PLACE OR IN CONSIDERATION OF A RESIDENTIAL HOUSE WI THIN A PERIOD OF THREE YEARS AFTER THAT DATE. SINCE IN THIS CASE THE ASSESSEE HA D ALREADY PURCHASED A RESIDENTIAL HOUSE IN ASSESSMENT YEAR 1996-97 WITHIN A PERIOD OF ONE YEAR IT WAS HELD THAT THE ASSESSEE WAS ENTITLED TO EXEMPTIO N UNDER SECTION 54F IN RESPECT OF THE BALANCE INVESTMENT IN RESIDENTIAL HO USE WHICH WAS NOT EXHAUSTED BY SECTION 54. FOLLOWING THE SAME ANALOGY THE LEARN ED AR ARGUED THAT EXEMPTION UNDER SECTION 54 CAN BE ALLOWED IF CAPITA L GAIN ARISING FROM MORE THAN TWO RESIDENTIAL HOUSES IS INVESTED IN ONE RESI DENTIAL HOUSE. 5. THE LEARNED DR ON THE OTHER HAND SUPPORTED THE O RDERS OF AUTHORITIES BELOW AND PLACED RELIANCE ON THE FINDINGS GIVEN IN THEIR ORDERS. 6. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE R IVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING EXEMPTION OF CA PITAL GAIN UNDER SECTION 54 ARISING FROM SALE OF MORE THAN ONE RESIDENTIAL HOUS E. THERE IS NO DISPUTE THAT THE ASSESSEE OWNED THREE RESIDENTIAL HOUSES AND ALL OF THEM HAD BEEN USED FOR RESIDENTIAL PURPOSES. THE SALE CONSIDERATION HAD BE EN INVESTED BY THE ASSESSEE IN PURCHASE OF THREE RESIDENTIAL FLATS TWO OF WHICH I.E FLAT NO.1101 AND 1201 HAD BEEN TREATED AS ONE RESIDENTIAL UNIT WHICH HAD ALSO BEEN ACCEPTED BY THE AO INVOLVING TOTAL COST OF RS. 42 12 500/-. THE INVEST MENT IN THIRD RESIDENTIAL FLAT WAS RS.14 96 744/-. THE AO HAD TREATED THE LONG TER M CAPITAL GAIN OF RS.36 08 400/- ARISING FROM SALE OF ONE FLAT I.E. T HE FLAT NO.302 SAQIB APARTMENT AS FULLY EXEMPT AS CORRESPONDING INVESTME NT IN FLAT NO.1101 AND 1201 TREATED AS ONE UNIT WAS MORE THAN THE CAPITAL GAIN I.E. RS.42 12 500/-. THE ISSUE IS WHETHER THE CAPITAL GAIN OF RS.4 70 19 4/- AND RS.8 92 781/- ARISING FROM SALE OF OTHER TWO RESIDENTIAL HOUSES C OULD BE EXEMPTED AGAINST THE INVESTMENT IN ONE FLAT OF RS.14 96 744/-. 6 6.1 THE FIRST ISSUE IS WHETHER THE PROVISIONS OF S ECTION 54 CAN BE APPLIED TO CAPITAL GAIN ARISING FROM SALE OF MORE THAN ONE RES IDENTIAL HOUSE. IN OUR VIEW THE SECTION 54 EXEMPTS CAPITAL GAIN ARISING FROM SA LE OF A LONG TERM CAPITAL ASSET BEING A RESIDENTIAL HOUSE AND THEREFORE IT WI LL APPLY TO SALE OF ANY RESIDENTIAL HOUSE PROVIDED OTHER CONDITIONS ARE FUL FILLED. THIS POSITION HAS ALSO BEEN CLARIFIED BY CBDT VIDE CIRCULAR F.NO.207/24/76 IT(II) DATED 25.3.97 IN WHICH IT HAS BEEN CLEARLY MENTIONED THAT CAPITAL GA IN ARISING ON TRANSFER OF EACH HOUSE WILL QUALIFY FOR EXEMPTION IN CASE THE ASSESS EE HAD SOLD MORE THAN ONE RESIDENTIAL HOUSES. THE OTHER ISSUE IS WHETHER CAPI TAL GAIN ARISING FROM SALE OF TWO FLATS CAN BE EXEMPTED UNDER SECTION 54 IF THE G AINS ARE INVESTED IN ONE RESIDENTIAL HOUSE. IN OUR VIEW THIS ISSUE IS ALSO T O BE ANSWERED IN FAVOUR OF THE ASSESSEE BECAUSE THE REQUIREMENT OF SECTION 54 IS T HAT THE CAPITAL GAIN ARISING FROM TRANSFER OF A RESIDENTIAL HOUSE SHOULD BE INVE STED IN A RESIDENTIAL HOUSE. THE REQUIREMENT IS THAT THE INVESTMENT SHOULD BE IN ONE RESIDENTIAL HOUSE. THERE IS NO BAR ON INVESTING THE CAPITAL GAIN ARISI NG FROM SALE OF MORE ONE RESIDENTIAL HOUSE IN ONE RESIDENTIAL HOUSE. THEREFO RE IN OUR VIEW THE CAPITAL GAINS ARISING FROM SALE OF MORE THAN ONE RESIDENTIA L HOUSE WILL BE ELIGIBLE FOR EXEMPTION UNDER SECTION 54 IF GAINS FROM BOTH THE H OUSES ARE INVESTED IN THE SAME RESIDENTIAL HOUSE. THIS VIEW IS ALSO SUPPORTE D BY THE DECISION OF TRIBUNAL IN CASE OF RABINDRA K.MERCHANT VS JCIT (SUPRA) IN WHICH CASE EXEMPTION UNDER SECTION 54 AND 54F BOTH WERE FOUND ALLOWABLE IN RES PECT OF INVESTMENT IN THE SAME RESIDENTIAL HOUSE. WE THEREFORE SET ASIDE THE ORDER OF CIT(A) AND ALLOW THE APPEAL OF THE ASSESSEE. 7 7. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED. 8. THE DECISION WAS PRONOUNCED IN THE OPEN COURT ON 23.02.2011. SD/- SD/- ( V.D. RAO ) (RAJEND RA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE : 23.02.2011 AT :MUMBAI COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) MUMBAI CONCERNED 4. THE CIT MUMBAI CITY CONCERNED 5. THE DR H BENCH ITAT MUMBAI // TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT MUMBAI BENCHES MUMBAI ALK