Thursday, July 28

Whether construction by way of extension of the old existing house would mean construction of residential house for capital gain exemption of Section 54 of the Income tax act, 1961?

         

Whether construction by way of extension of the old existing house would mean construction of residential house for capital gain exemption of Section 54 of the Income tax act, 1961?



ISSUE:

When assessee transfers a plot of land and Long Term Capital Gain is invested in construction of additional floor in the existing residential house, whether long term capital gain can be claimed as exempt U/s 54 of the Income Tax Act, 1961?



PROPOSITION:

Exemption u/s 54 of the Income Tax Act, 1961 is available only when any long term asset other than a residential house is transferred and long term capital gain is invested in acquiring a residential house either by way of purchase or by way of construction within the prescribed time period. The assessee must acquire a residential house. It is proposed that even addition of a floor of a self contained type to the existing house would qualify for exemption u/s 54F of the Income Tax Act, 1961.



VIEW AGAINST THE PROPOSITION:

Section 54F deals with capital gain on transfer of certain capital assets not to be charged in the case of investment in residential house. The section reads as follows:
           
“54F. Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house- (1) Subject to the provisions of sub-section (4), where, in the case of an assessee being as individual or a Hindu undivided family, the capital gain arises from the transfer of any long term capital asset, not being a residential house (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 (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,-

(a)                           if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged u/s 45;
(b)                          if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged u/s 45:
Provided that nothing contained in this sub-section shall apply where the assessee owns on the date of the transfer of the original asset, or purchase, within the period of one year after such date, or constructs, within the period of three years after such date, any residential house, the income from which is chargeable under the head ‘Income from house property’, other than the new asset.”  

            Section 54 of the Income Tax Act, 1961 emphasizes on construction of a residential house. The section is very clear about the requirement of the investment of the capital gains in a new residential house. The said construction must be a real one. It should not be a symbolic construction. If the assessee constructs an additional floor in the existing residential house, then there is no investment in a residential house. It is only an extension of the old building. A mere extension of the existing building will not give benefit to the assessee as contemplated u/s 54 of the Income Tax Act, 1961. It is submitted that mere construction by way of extension of the old existing house would not mean constructing a residential house as contemplated u/s 54 of the Act. (181 ITR 101)




VIEW IN FAVOUR OF THE PROPOSITION:

            It is submitted that section 54 is a beneficial provision and the same should be              construed liberally. For the purpose of explanation u/s 54F the assessee must purchase or construct a residential house, when the investment is made in a part of the house, then also it satisfies the conditions of investment in a new residential house. The reliance can be placed on the judgment of Mrs. Meera Jacob v/s ITO. [313 ITR 411(Kerala)].

In the said case the assessee claimed exemption u/s 54 of the Income Tax Act, 1961 in respect of investment in modification or renovation of the existing house. If the investment is made in the existing house in respect of renovation or modification of the house, then exemption u/s 54F is not available. Their lordships of kerala High Court held as under:
                                                           
The question involved is whether the assessee, in the computation of long term capital gains, is entitled to deduction u/s 54F of the Income Tax Act in respect of investment in modification/ expansion of an existing residential house. The tribunal took the stand that exemption is available only when the investment is in the consideration of a house and not for investment in modification or renovation. Admitted facts are that the assessee had a fairly big house to which the assessee made addition of 140 sq. meters of plinth area. However, it is the conceded position that the assessee has not constructed any separate apartment or house. Section 54F does not provide for exemption on investment in renovation or modification of an existing house. On the other hand, construction of a house only qualifies for exemption on the investment. Even addition of a floor of a self contained type to the existing house would have qualified for exemption. However, since the assessee has only made addition to the plinth area, which is in the form of modification of an existing house, she is not entitled to deduction claimed u/s 54F of the Act.      





SUMMATION:

In order to claim exemption u/s 54 of Income Tax Act, 1961, two conditions are required to be satisfied namely, (1) the house property must have been used by the assessee or a parent of his mainly for the purposes of his own or the parents’ residence during the two years immediately preceding the date on which the transfer took place, and (2) the assessee must have, within a period of one year before or after such date, purchased or within a period of two years after such date, constructed a house property for the purposes of his own residence. When section 54 talks of house property, it does not mean an independent and complete house in the sense in which the terms used to be understood once upon a time. House property for the purposes of section 54 has the same meaning as the concept of house property u/s 22 to 27 which makes it clear that the expression “house property” takes into account an independent residential unit. In fact, there can be no doubt that the section takes into account all independent residential units, particularly, in these days, when multi- storeyed flats are becoming the order of the day.

            In CIT v. Tikyomal Jasanmal reported in [1971] 82 ITR 95 (Guj.), though the case went against the assessee on facts, the principle laid down therein, while interpreting the scope of section 54 by Bhagwati C.J., as he then was, speaking for the Bench, was to the effect that for the purpose of claiming exemption u/s 54, two conditions are required to be satisfied, namely, (1) the house property must have been used by the assessee or a parent of his mainly for the purposes of his own or the parents’ residence during the two years immediately preceding the date on which the transfer took place, and (2) the assessee must have, within a period of one year before or after such date, purchased or within a period of two years after such date constructed a house property for the purposes of his own residence. It has also been pointed out in that judgment that the ground floor could be taken as a unit of house property independently for the purpose of section 54.

            Now let me refer to a very important decision of Hon’ble ITAT Delhi bench -in the case of Ashokkumar HUF v AC IT reported in 65 ITD 352. The Hon’ble ITAT has held as under:

The Hon’ble Madras High Court in case of CIT v. P.V. Narasimhan [1990] 181 ITR 101/ [1989] 47 Taxman 89 also considered the exemption u/s 54of the act. In that case the assessee owned two residential houses. He sold one house and with the sale proceeds he put up the first floor of the second house after demolishing the old structure of the first floor. Admittedly he earned capital gains. The ITO disallowed the assessee’s claim for exemption u/s 54 on the ground that the assessee had made only some alterations by adding additional rooms to the existing house and charged tax under capital gains. On appeal the AAC accepted the assessee’s claim holding the construction of the first floor as construction of a unit for house property for the purpose of section 54. The Tribunal concurred the view of the AAC. When the matter came up before the High Court it was held:-
“The view taken by the Tribunal was unexceptionable having regard to the admitted position that the assessee after demolishing completely the first floor had put up a new construction within the period allowed by the statute viz  section 54. It is also common ground that the assessee was in enjoyment of the entire property. Once the principle laid down in the judgements of the Delhi and Gujarat High Courts in Addi. CIT v. Vidya Prakash Talwar [1981] 132 ITR 661, and CIT v. Kodandas Chanchlomal [1985] 155 ITR 273, respectively, that ‘house property’ takes into account an independent residential unit, there was no force in the contention that since the independent residential unit ( first floor in the present case) was put up on an existing old house, exemption u/s 54 was not available. Once it was concluded that the assessee was entitled to the exemption u/s 54, the question whether section 48 read with section 55(b) was applicable or not, would not arise. In the circumstances, the assessee was entitled to exemption u/s 54.”

Having regard to the above decisions and considering the nature of the construction made by the assessee it cannot be said that the assessee had not invested the sale proceeds for the construction of the residential house. The Hon’ble Delhi High Court in the case of Addi. CIT v. Vidya Prakash Talwar [1981] 132 ITR 661 held that the residential house should be interpreted as residential unit as applied in sections 22 to 27. If any independent unit is constructed then that will tantamount to construction of a new residential house.

In the instant case also it was seen that the assessee constructed the mezzanine floor with kitchen and toilet which is an independent unit as such. That the assessee used for his own purposes will not in any case change the fact that a new residential unit has been brought into existence. That the original portion has been occupied by the assessee also will not affect the nature of the newly constructed residential portion as held by the Hon’ble Karnataka High Court in the case of J.R. Subramanyam (supra) (sic). In that case also the assessee sold a building in February, 1977. In March, 1976 he had commenced construction of a new house which was completed in March, 1977. The Assessing Officer did not allow the claim on the ground that the construction of a new building had commenced much earlier to the sale of the old building and the major portion of the building was let out by the assessee. When the matter came up before the Hon’ble High Court it was held that it was immaterial that the construction of the new building was started in 1976. The construction was completed in March, 1977 which was within two years from the sale of the old building. Therefore, the assessee was entitled to exemption u/s 54F of the Act.

Having regard to the ratio of the above decision and also keeping in view the legislative intent as spelt out by the Hon’ble Finance Minister in the Budget speech it cannot be said that the assessee had not invested the capital gains in the construction of a residential house. There is therefore no reason to disallow the claim. We hold accordingly and direct the Assessing Officer to allow the claim for exemption in both the cases.

            In view of the above, it is submitted that when long term capital gain is invested in constructing an additional floor in existing residential house, the exemption u/s 54 cannot be denied.
           


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