Interesting ruling for section 54 and 54F of the Income tax act

Special bench of Income Tax Appellate Tribunal vide a significant ruling AIT-2007-205-ITAT affecting investment decision of sellers and buyers of real estate has ruled that exemption under sections 54 and 54F of the Act would be allowable in respect of one residential house only. If the assessee has purchased more than one residential house, then the choice would be with assessee to avail the exemption in respect of either of the houses provided the other conditions are fulfilled. However, where more than one unit are purchased which are adjacent to each other and are converted into one house for the purpose of residence by having common passage, common kitchen, etc., then, it would be a case of investment in one residential house and consequently, the assessee would be entitled to exemption.

• The Special Bench was constituted to decide the following question of law:

“Whether, the phrase “a residential house” used in sub-section (1) of section 54 and 54F means one residential house or more than one residential house independently located in the same building / compound / city?”

• The Revenue contended that exemption under sections 54/54F of the Income Tax Act, 1961 would be available only in respect of investment made in one residential house. On the other hand, the assessee contended that the exemption under the aforesaid sections would be available even if investment is made in the two house properties though distantly located from each other.
• The assessee and her husband were co-owners of a residential flat at “Gulistan” situated at Bhulabhai Desai Road, Mumbai, having 50% share each. In the year under consideration, the said flat was sold for a total consideration of Rs.3.03 crores on 12.8.1984. The share of the assessee in the sale consideration of Rs.3.03 crores on 12.8.1984. The share of the assessee in the sale consideration amounted to Rs.1.515 crores. The assessee re-invested the sale proceeds in purchase of ½ share in these two flats were purchased by the husband of the assessee. The assessee claimed exemption u/s 54 of Rs.76.44 lacs against long term capital gain arising from the sale of her share in the residential flat at Bhulabhai Desai Road, Mumbai. However, the assessing officer was of the view that exemption was available only in respect of investment in one residential house. Accordingly, he restricted the exemption to Rs.47.79 lacs being the investment in the flat at Erlyn Apartment, Bandra. On appeal, the CIT(A) held that exemption was available in respect to investment made in both the flats.

Observations of Special Bench:

· The real controversy is about the true meaning of the expression “a residential house” used by the legislature in sections 54 and 54F of the Act. According to the Revenue, it means, one residential house while, according to the assessee, the word “a” means “any” which in turn means “one or more than one”.

· The word “a” is ambiguous as it has no definite meaning. Various meanings are given to the word “a”. It not only means “one” or “any” but it has various other meanings depending upon the context in which it is to be used. Therefore, the cardinal principle of interpretation cannot be applied and consequently, the intention of legislature has to be discovered by resorting to the aids to the interpretation. One of the rules of interpretation is to find out the context in which such word is used by the legislature.

· The legislature has used the words “a” and “any” with reference to investment of capital gain / sale consideration in certain asset or assets. The legislature was not oblivious regarding the meaning of these two words. The word “any” has been used by the legislature in sections 54B, 54D, 54E, 54EA, and 54EB while the word “a” has been used in sections 54 and 54F of the Act. This clearly shows that the legislature intended different meanings to be given to these two words. A close reading of these sections shows that legislature intended to allow exemption in respect of investment in more than one asset by using the word “any”. Section 54E allows exemption in respect of investment in any specified asset. Explanation 1 to sections 54E defines the “specified asset”. It includes various assets in which investment can be made by the assessee who are eligible for exemption u/s 54E. There is nothing to indicate that investment is restricted to any of the specified assets. Had the legislature intended to restrict investment in any one of the specified assets, it would have used the words “in any one of the specified assets” instead of “in any specified asset”. This clearly shows that the word “any” has been used where the legislature intended investment in more than one asset. Similarly, in section 54EB, the legislature has used the words “in any of the assets specified by the Board”. Similar is the position in section 54EA. Section 54B and section 54D also used the word “any other land” and “any other land and building” respectively. The expression “any other land” is an expression of widest amplitude and, therefore, its meaning cannot be restricted to any one piece of land. On the other hand, the legislature has used the word “a” in sections 54 and 54F. Had the legislature intended for investment in more than one asset, it could have easily used the words “in any residential house”. Superfluous words are not used by the legislature. Different words “a” and “any” have been deliberately used by the legislature to convey different meanings. Therefore, in our humble view, the legislature used the word “a” where it intended investment in one residential house only and used the word “any” where it intended investment in one or more assets.

· However, we are in agreement with certain decisions of the Tribunal relied on by the learned counsel for the assessee wherein exemption was allowed in respect of investments in two adjacent or contiguous units converted into one residential house by having common passage / stair case, common kitchen, etc. intended to be used as singly house for the residence of the family. As already observed, the intention of the legislature is that investment should be made in one residential house. So long as the house purchased is one even after conversion, the exemption would be available. On the other hand, if the investment is made in two independent residential houses, even located in the same complex, then, in our opinion, exemption cannot be allowed for investment in both the houses. However, the choice would be with assessee to avail exemption in respect of any one house.