Section 54 of the Income Tax Act relates to profit on sale of property to be used for residential purpose. This section provides that if an individual or HUF has transferred long-term capital asset, being a residential house, whose income is taxable under the head “income from house property” and (1) purchases a residential house within one year before or two year after the date of transfer or (2) constructs a residential house within three years from the date of transfer, then amount of capital gain arising on transfer of residential house or amount invested in purchase/construction of new residential house, whichever is lower, is exempt provided that the new residential house should not be transferred within three years and this exemption is available only for one residential house in India. The amount of capital gain not so utilized before the due date of furnishing return of income under section 139(1) should be deposited in capital gains account scheme before due date of filing return of income under section 139(1). Even if this section has been amended as needed, litigations have been raised due to different interpretations of some terms used. Interpretation of some terms is discussed hereunder.
Date of transfer of residential house
Date of transfer of residential house is the main factor in deciding allowability of deduction u/s.54. When date of sale agreement, date of payment of consideration and date of sale deed are different, it is difficult to interpret the term “date of transfer”. As per many judicial rulings, where there is an agreement for sale and physical possession of property was handed over to the purchaser and the purchaser is in enjoyment of the property as his own, this date is considered as date transfer of property, even if registered sale deed is not executed on that date. Hence, the date on which all rights of property are transferred to buyer is considered as date of transfer of residential house. The date of sale deed is immaterial in such circumstances.
Meaning of “purchase” and “construction” of new house
The time limit given for ‘purchase” and “construction” of house is different. Hence, it is essential to interpret the term “purchase” and “construction” of new house in the light of section 54. Both these terms are not defined in the Act. But dictionary meaning of the term “purchase of property” is “to acquire property by paying for it” and “construction of property” means “action of building large structure”. Both these terms are used, in case of a transaction of entering into agreement with a builder for purchase of a flat which is going to be constructed; it is difficult to define whether such transaction should be considered as “purchase” or “construction of house? It is decided on the basis of facts and circumstances of each case. Some judicial rulings pronounced that “in case the assessee has booked new flat with the builder and as per agreement, the assessee has to make payment in instalments and the builder has to handover possession of the flat after completion of construction, it has to be considered as construction of new residential house.” Same judgment was reiterated in case of ACIT v. Sagar Nitin Parikh ITA No. 6399/Mum/2011. Similarly, when assessee had entered into a development agreement with a developer under which he had to surrender his residential flat in an existing building in lieu of another flat agreed to be allowed by the developer in the building proposed to be redeveloped, then acquisition of new flat in exchange for the old flat would be considered as construction of a new flat, as decided by Mumbai tribunal in case of Jaatinder Kumar Madan v. ITO [2012] 26 SOT 583. One notable point is that the construction should be real one and not symbolic construction. Moreover, remodelling or renovation is also considered as “construction”, but mere extension of old house will not be considered as “construction”.
Further, when other co-owners release their share in the property in favour of one of the co-owners, it will be deemed that the property has been purchased by the release. Hence, such release is also considered as “purchase” for the purpose of section 54.
Date of purchase or construction of new house
Deduction u/s. 54 is available only if the assessee purchases new residential house within one year before or two years after the date of transfer or constructs new house within three years after the date of transfer. Hence, the date on which the house is considered as “purchased” or “constructed” is deciding factor to define allowability of deduction u/s. 54. In case of purchase of under construction house/flat, date of agreement for purchase of house and date of handing over possession of house are different. In such cases, it is difficult to define “date of purchase” or “date of construction” of new house. The term used in this section is “purchased” or “constructed” instead of the term “owned”. Hence, the section requires only to reinvest consideration either in purchase or construction of new house within specified time period, irrespective of the fact whether the transaction is complete or not in all respects. Hence, physical possession or registered sale deed is immaterial to claim deduction under this section. Some judicial rulings have decided that “buyer gets title of the property from the date of issuance of allotment letter and payment of first instalment is only a consequential action upon which delivery of possession flaws. Even if the sale deed or agreement to sale is executed or registered subsequently, it can be said that the assessee held the property immediately from the date of allotment letter: “Hence, the new house will be considered as “purchased” on the date of issuance of allotment letter. Moreover, In case of Hasmukh N. Gala v. ITO [2017] 83 taxmann.com 49 (Mum.). ITAT Mumbai held that even if construction is not completed and title to the property is not transferred to the assessee within specified time, but if the advance is not returned by the builder and allotment letter is issued to assessee, then date of giving advance to builder constitutes “date of purchase” of new house.
Moreover, in case of construction of new house, section 54 provides that investment in construction of new house should be completed within three years from date of transfer. It does not mean that construction of the house should be completed within this time period. Some judicial rulings have pronounced that the new house will be considered as “constructed” on the date of possession. Date of commencement of construction is not relevant for deduction under section 54. In case of Mrs. Seema Sabharwal v. ITO [2018] 91 taxmann.com 2 (ITAT Chandigarh) held that “if the intention of the assessee is not to retain cash but to invest in purchase/construction of the property and if assessee has invested such amount within stipulated period and if agreement for purchase of residential property is made, then even if the construction is in progress, benefit of deduction cannot be denied to the assessee.” But if construction is not commenced at all, deduction u/s.54 is allowed considering facts and circumstances of each case. If assessee has invested amount of sale consideration in construction, but assessee was prevented from constructing the house on said land due to order of status quo by civil court as a result of injunction petition filed by owner of the land, assessee is entitled to claim deduction u/s.54 as the intention of statute is fully satisfied by the assessee.
Meaning of One residential house
Before amendment made to section 54, in some cases assessee was entitled to deduction even if he had invested in more than one residential house, as the term used in section 54 was “a residential house”, which was interpreted by some judicial rulings as “any residential house” and not considered it as singular number of units. The intention of introduction of this section was to allow deduction for single residential house. Hence, w.e.f. 1st April, 2015, the term “a residential house” was replaced with “one residential house”. But even after amendment, litigations are still continued regarding interpretation of this term. Many judicial rulings have pronounced that two adjacent or contiguous units converted into one residential house by having common passage/staircase, common kitchen, etc., intended to be used as single house for residential purpose of family will be considered as “one residential house” for the purpose of section 54. Hence, if multiple flats are purchased from multiple vendors through multiple sale deeds, but necessary modifications are made to make them one unit and then it is used as single residential unit by family, it will be considered as “one” residential house. But if three flats situated in same floor separated by wall are purchased, which are not used as single residential unit, deduction u/s. 54 cannot be allowed. The aspect of one or more sale deeds is not determinative of the building being considered as one residential unit or otherwise. Only determinative factor is use of residence as single unit.
Owner of new residential house
Section 54 provides for purchase or construction of new house by assessee. But this section is silent on name of owner of the new house purchased or constructed. After plain reading of this section it can be interpreted that the new house should be in the name of assessee. As the phrase “assessee should be legal owner of new house purchased or constructed” is missing in this provision, controversial judgments are issued by judicial authorities. If investment in new house is made by assessee and payment for the same is made through his bank account, but house is purchased in the name of his wife instead of in the name of assessee, allowability of deduction u/s. 54 is a matter of litigation. Some judicial rulings deny deductions under this section as assessee is not the owner of new house. But in recent judgments in case of Laxmi Narayan v. CIT [2018] 89 taxmann.com 334 (Raj.) and in case of Radhey shyam Arora v. ITO [I.T. Appeal No. 267 (Jp) of 2017, dated 13-12-2017] ITAT Jaipur held that “The law provisions require the assessee to reinvest the gain amount within the stipulated time and there is no specific requirement that he should be the legal owner of reinvested property. It is not specified that it is to be in the name of assessee. Accordingly, when entire investment for the purchase of new house has gone through the assessee’s account, then the benefit u/s. 54 cannot be denied on the ground that the new house was purchased in the name of his wife”. Similarly, when new house is purchased in joint name with brother, sister, children, etc., close relatives, and payment for new house is fully made through bank account of assessee, full deduction u/s. 54 is allowed, when such names are added for sake of convenience only.
Source of fund invested for purchase of new house
Section 54 of the Act does not specify that new residential house should be purchased only out of sale proceeds obtained from old residential house. This section mandates that only residential property should be purchased within stipulated time period. It does not specify source of funds for new property. Hence, if assessee has initially utilized the sale proceeds of residential house in purchase of commercial properties and later on, he purchased residential house out of funds obtained from different sources within the time period stipulated u/s. 54, deduction for purchase of residential house is allowed under this section. In case of Ishar Singh Chawla v. Dy. CIT [2010] 130 TTJ (Mum) (UO) 108 it was held that u/s. 54 assessee is not required to establish nexus between the amount of capital gain and the cost of new asset. Similarly, if assessee has utilized sale consideration for other purposes and borrowed money for the purpose of purchase of new residential house, it cannot be contended that same amount should have been utilized for purchase of new property and, hence, deduction u/s. 54 should be allowed. Further, if capital gain earned is utilized for other purposes and borrowed funds have been invested in capital gain accounts scheme deduction under section 54 cannot be denied. Thus, some courts have considered sale of property and investment in residential property as separate from each other and interpreted that utilization of sale proceeds is not necessary for purchase/construction of house. However, some judicial rulings have emphasized on “utilization of sale proceeds” and interpreted that if assessee has purchased/constructed new house out of borrowed fund, object of introduction of this beneficial provision is frustrated and, hence, in such cases, assessee is not entitled to claim deduction under section 54.
Construction of new house on commercial or agricultural land
Section 54 mandates that new residential house should be purchased or constructed within stipulated time. But the term “residential house” is not defined in the section. Dictionary meaning of “residential house” is a dwelling place or building used for human habitation. The house explicitly distinct from house of business, warehouse, office, shop, etc, and having amenities like boundary wall, kitchen toilet, etc., and which can be used for the purpose of residence can be considered as “residential house” for the purpose of section 54. Hence, a mud structure, sunshade or construction having only one room without amenities cannot be considered as “residential house” for the purpose of section 54 and, consequently, deduction for purchase/construction of such structure cannot be claimed under this section. Also, it may not be necessary that somebody should live in it continuously.
Moreover, this section emphasizes only on purchase/construction of residential house. It does not specify the land on which such house should be purchased or constructed. Hence, if such residential house is constructed on agriculture land or commercial land, deduction u/s. 54 cannot be denied. But there are controversial decisions regarding allowability of deduction u/s. 54 in such circumstances. Some judicial decisions favour assessee by stipulating that “the essential requirement for claiming deduction u/s. 54 is to see whether a residential house is constructed or not. The law does not prohibit constructing a residential house on commercial land. If all the conditions of section 54 are satisfied, benefit of deduction cannot be denied on the ground that land on which construction was done was commercial.” Similarly, if assessee has constructed a residential house on agriculture land, deduction u/s. 54 is available.
Investment in Capital Gains Account Scheme before due date under section 139(1)
Section 54 mandates that if assessee has not utilized capital gain in purchase or construction of residential house before due date of filing return of income, he should invest unutilized amount in capital gains account scheme not later than due date of filing return of income under section 139(1). Hence, this section emphasizes on “investment in capital gain account scheme” before due date of filing return of income under section 139(1). Hence, benefit of this section should not be restricted only to assessee who has filed return of income before due date specified under section 139(1). Hence, if return of income is not filed before due date u/s.139 (1) but has filed before expiry of the assessment year period for deposit in this scheme should be reckoned from the due date of filing return of income u/s. 139(4). Same judgment was decided by the Karnataka high court in case of Fatima Bai v. ITO (2009) 32 DTR 243. But in a recent case, Bombay High Court has taken a view that assessee is not entitled to the exemption in respect of payment made after the due date of filing return of income. Also, such payments made for purchase of asset subsequent to date of furnishing return of income u/s.139 (1) but before last date available to file return of income u/s. 139(4) are required to be routed out of deposits made in capital gains account scheme.
Source- Taxmann
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