Entire 54F deduction can be claimed even if property Purchased in Joint Names : ITAT

ORDER

N.V. Vasudevan, Vice-President – This appeal by the assessee is against the order dated 24.08.2018 of the CIT (Appeals)-V, Bengaluru, relating to assessment year 2015-16.

2. There are basically 3 issues that arise for consideration in this appeal. The first issue is with regard to the computation of capital gain on sale of a property viz., Site No.513 (PII), R.R. Nagar, Bangalore by the assessee [hereinafter referred to as the RR property]. It is not in dispute that the assessee acquired the RR property from Ideal Homes Co-op. Building Society Ltd., Bangalore, under a lease-cum-sale agreement dated 22.3.2001. As per the terms of lease-cum-sale agreement, the assessee paid a sum of Rs. 60,000 towards the value of site on the date of agreement for lease-cum-sale. As per the further terms of this agreement, the assessee has to construct the building on the site within two years from the date of agreement. The assessee should not alienate the site for a period of 10 years. The assessee took possession of the property and constructed a building. As per the agreement, for 10 years the assessee has to pay annual lease charges and at the end of 10 years period, the property will be conveyed to the assessee. It is not in dispute that the assessee complied with the aforesaid terms of lease-cum-sale agreement and was in possession of the property and put up construction on the site on the date of agreement and subsequently.

3. The society by registered sale deed dated 31.08.2014 conveyed the property to the assessee. The fact that the assessee was allotted the site as per the terms of lease-cum-sale agreement dated 22.3.2001 and the fact that assessee complied with all the conditions in the said lease-cum-sale agreement have been acknowledged in the sale deed.

4. The assessee sold the site as well as the building constructed thereon under a Sale Deed dated 03.12.2014. The assessee computed long term capital gain on the sale of this property by taking the date of lease-cum-sale agreement viz., 22.03.2001 as the date of acquisition of the property. Since the property was held by the assessee for more than 3 years, the assessee claimed that the capital gain arising on transfer was a long term capital gain.

5. The AO, however, construed the date of acquisition of property by the assessee as 31.08.2014, the date on which the society made an absolute conveyance to the assessee. Since the assessee sold the property on 03.12.2014, the AO treated the date of acquisition of property as 31.08.2014 and the date of sale being less than 36 months, the AO construed the capital gain on sale of property as a short term capital gain. The assessee had claimed deduction u/s. 54F of the Act by investing the capital gain in acquisition of another property. Since the gain in question was construed as a short term capital gain, the deduction claimed u/s. 54F of the Act was not allowed by the AO.

6. On appeal by the assessee, the CIT (Appeals) confirmed the order of AO.

7. Aggrieved by the order of CIT (Appeals), the assessee has preferred the present appeal before the Tribunal and the relevant grounds of appeal raised by the assessee in this regard are contained in ground Nos.1 to 4.

8. We have heard the rival submissions. The dispute between the Assessee and the Revenue is as to whether the gain on sale of the RR Property which was obtained originally on 22.03.2001 on lease from the society which was subsequently conveyed absolutely by the society to the Assessee by a registered sale deed dated 31.08.2014 can be said to be a LTCG.

9. Sec.2(29B) of the Act defines Long term capital gain as follows:—

“long-term capital gain” means capital gain arising from the transfer of a long-term capital asset;

Sec.2(29A) of the Act defines Long term Capital asset as follows:—

“long-term capital asset” means a capital asset which is not a short-term capital asset ;

Sec.2(42A) of the Act defines Short Term Capital asset as follows:—

‘(42A) “short-term capital asset” means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer :

Sec.2(42B) of the Act defines Short term capital gain as follows:—

‘(42B) “short-term capital gain” means capital gain arising from the transfer of a short-term capital asset;’

10. We have to look at the definition of the term “Short term capital gain” because what is not short term capital gain is Long term capital gain and that is the way Long term capital gain has been defined in the Act. Short term capital gain means capital gain arising from the transfer of a short term capital asset. Short term capital asset has been quite exhaustively defined, covering several situations. For the present appeal the portion of the definition which says short term capital asset means “a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer” alone is relevant.

11. It is not in dispute that the Assessee paid cost of the site as early as 22.3.2001 and was in possession of the property as lessee cum Agreement holder with right to obtain conveyance of absolute interest over the land that was leased. The expression “held by the Assessee” in the context of Sec.2(42A) of the Act, is rather ambiguous, in the sense that it does not speak of the date of vesting of legal title to the property. Even the provisions of sec.2(47)(v) & (vi) of the Act which defines what is “transfer” for the purpose of the Act, considers possessory rights as akin to legal title. It is therefore necessary to look into the policy and object of the provisions giving exemption from levy of tax on capital gain. In the present case, as we have already seen, the Assessee had paid the entire consideration for the site originally allotted as early as in the year 2001. The Assessee had performed its part of the contract with the society. Therefore the claim of the Assessee that it held the property from 22.3.2001 has to be accepted, keeping in mind the policy and object of the provisions giving exemption from levy of tax on capital gain.

12. The Hon’ble Karnataka High Court in the case of CIT v. Dr. Shakuntala ITA No.117 of 2006 judgment dated 19.9.2007 had to deal with a case where the Assessee got a site allotted in her favour by the Bangalore Development Authority (BDA) under a lease-cum-sale agreement dated 28.2.1981 and was put in possession of the site allotted. She got absolute sale deed from BDA only on 19.9.1996. She sold the property on 25.3.1997. The question before the Hon’ble Karnataka High Court was as to whether the capital gain can be regarded as LTCG or STCG. The case of the revenue was that the period of holding had to be reckoned from 19.9.1996 and the capital gain had to be regarded as STCG. The plea of the Assessee was that the holding period had to be reckoned from 18.2.1981 the date on which the Assessee got possession of the property under lease-cum-sale agreement was accepted by the Hon’ble Karnataka High Court. Similar decisions were rendered by the Hon’ble Allahabad High Court in the case of CIT v. Smt. Rama Rani Kalia 358 ITR 499 (All) & Amar Nath Agarwal v. CIT  371 ITR 183 (all).

13. We also find support for the aforesaid conclusions from another decision of the Hon’ble Karnataka High Court in the case of CIT v. A Suresh Rao 223 Taxmann 228 wherein similar issue was considered and wherein the significance of the expression ‘held’ used by the legislature has been analysed and explained at length. Hon’ble High Court analysed various provisions of the Act pertaining to computation of capital gain under various situations and also circulars issued by the CBDT on this issue. Relevant portion of the observation wherein the issue before us has been properly analysed is reproduced hereunder:—

‘The definition as contained in Section 2 (42A) of the Act, though uses the words, “a capital asset held an assessee for not more than thirty-six months immediately preceding the date of its transfer”, for the purpose of holding an asset, it is not necessary that, he should be the owner of the asset, with a registered deed of conveyance conferring title on him. In the light of the expanded definition as contained in Section 2(47), even when a sale, exchange, or relinquishment or extinguishment of any right, under a transaction the assessee is put in possession of an immovable property or he retained the same in part performance of the contract under Section 53-A of the Transfer of Property Act, it amounts to transfer. No registered deed of sale is required to constitute a transfer. Similarly, any transaction whether by way of becoming a member of or acquiring shares in a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever, which has the effect of transferring, or enabling the enjoyment of any immovable property, also constitutes transfer and the assessee is said to hold the said property for the purpose of the definition of ‘short-term capital gain’. In fact, the Circular No.495 makes it clear that transactions of the nature referred to above are not required to be registered under the Registration Act, 1908. Such arrangements confer the privileges of ownership without transfer of title in the building and are common mode of acquiring flats particularly in multistoried constructions in big cities. The aforesaid new sub-clauses (v) and (vi) have been inserted in Section 2(47) to prevent avoidance of capital gains liability by recourse to transfer of rights in the manner referred to above. A person holding the Power of Attorney is authorized the powers of owner, including that of making construction though the legal ownership in such cases continues to be with the transferor. The intention of legislature is to treat even such transactions as transfers and the capital gain arising out of such transactions are brought to tax. Further, the Circular No.4 71 goes to the extent of clarifying that for the purpose of Income-tax Act, the allottee gets title to the property on the issuance of the allotment letter and the payment of instalments is only a follow up action and taking the delivery of possession is only a formality. In case of construction agreements, the tentative cost of construction is already determined and the agreement provides for payment of cost of construction in instalments subject to the condition that the allottee has to bear the increase, if any, in the cost of construction. Therefore, for the purpose of capital gains tax the cost of the new asset is the tentative cost of construction and the fact that the amount was allowed to be paid in instalments does not affect the legal position. Therefore, in construing such taxation provisions, what should be the approach of the courts and the interpretation to be placed is clearly set out by the Apex Court in the case of Smt. Saroj Aggarwal v. CIT 156 ITR 497 wherein it is held as under:—

“Facts should be viewed in natural perspective, having regard to the compulsion of the circumstances of a case. Where it is possible to draw two inferences from the facts and where there is no evidence of any dishonest or improper motive on the part of the assessee, it would be just and equitable to draw such inference in such a manner that would lead to equity and justice. Too hyper-technical or legalistic approach should be avoided in looking at a provision which must be equitably interpreted and justly administered Courts should, whenever possible unless prevented by the express language by any section or compelling circumstances of any particular case, make a benevolent and justice oriented inference. Facts must be viewed in the social milieu of a country.”

Therefore, keeping the aforesaid principles in mind, when we look at Section 48, the language employed is unambiguous. The intention is very clear. When a capital asset is transferred, in order to determine the capital gain from such transfer, what is to be seen is, out of full value of the consideration received or accruing, the cost of acquisition of the asset, the cost of improvement and any expenditure wholly or exclusively incurred in connection with such transfer is to be deducted. What remains thereafter is the capital gain. It is not necessary that after payment of cost of acquisition, a title deed is to be executed in favour of the assessee. Even in the absence of a title deed, the assessee holds that property and therefore, it is the point of time at which he holds the property, which is to be taken into consideration in determining the period between the date of acquisition and date of transfer of such capital gain in order to decide whether it is a short-term capital gain or a long-term capital gain.’

14. In the light of the aforesaid decisions, we are of the view that the capital gain in question in the present case has to be treated as LTCG as claimed by the Assessee. Ground Nos.3 to 5 are accordingly allowed.

15. The next dispute is with regard to computation of capital gain and deduction u/s. 54F of the Act in respect of another property sold by the assessee during the relevant previous year. The assessee during the previous year sold a site bearing No.689, HSR Layout, Bangalore by a Sale Deed dated 05.06.2014. It is not in dispute that the capital gain on sale of this house site was a sum of Rs. 1,33,89,451. The assessee claimed exemption u/s. 54F of the Act. The assessee purchased property at N.R. Colony for a consideration of Rs. 3,60,00,000. The items of property that was purchased by assessee under registered sale deed dated 20.06.2014 are as follows:—

“SCHEDULE

ITEM # 1

All that piece and parcel of immovable property being residential house (Ground floor) bearing Bruhat Bangalore Mahanagara Palike Khatha # 37, PID #’51-14-37, (previously # 2), situated at 1st Main Road, N R Colony, Bangalore, the residential house having total built up area of 1260 sft., built with RCC roof, red-oxide flooring, teak wood doors and windows.

ITEM # 2

All that piece and parcel of immovable property being residential house (First floor) bearing Bruhat Bangalore Mahanagara Palike Khatha # 37/1, PID # 51-14-37/1, situated at 1st Main Road, N R Colony, Bangalore, the residential house having total built up area of 1180 sft., built above property # 37, PID # 51-14-37, built with RCC roof, red-oxide flooring, teak wood doors and windows, the ITEM # 1 & 2 of SCHEDULE PROPERTY, built on site measuring East to West 60 ft., and North to South 40 ft., measuring in all 2400 sft., and bounded on:

EAST BY : 1ST MAIN ROAD

WEST BY : PRIVATE PROPERTY

NORTH BY : 3RD CROSS ROAD

SOUTH BY : PRIVATE PROPERTY

IN WITNESS WHEREOF THE VENDORS AND THE PURCHASERS HAVE AFFIXED THEIR SIGNATURES TO THIS DEED OF ABSOLUTE SALE ON THE DATE MENTIONED ABOVE AT BANGALORE.”

16. Another aspect which is to be noted is that the assessee purchased property in the name of himself, his wife – Smt. Geeta Prakash and his son – Shri Amit Prakash.

17. The AO was of the view that to claim deduction u/s. 54F of the Act, the assessee should not own more than one house, other than the new asset. Since as per the description of the property purchased by the assessee given above consisted of two door nos., the AO was of the view that the assessee purchased two house properties and therefore cannot claim deduction u/s. 54F of the Act as he owned more than one house property, other than the property that was transferred. Another objection of the AO was that to claim exemption u/s. 54F of the Act, the property had to be purchased only by the assessee in his name and since the assessee’s wife and children were also added as purchasers, the assessee can claim deduction u/s. 54F of the Act only to the extent of 1/3rd of sale consideration invested in acquiring the new property. In that view of the matter, the AO computed the disallowance u/s. 54F of the Act as follows:—

“7.0 From the above, it can be seen that the assessee has declared purchase investment for the purpose of claiming deduction u/s. 54F of the Income Tax Act, 1961 at Rs. 1,40,00,000/- and Rs. 1,02,50,000/-respectively. On perusal of the purchase deed dated 28/06/2014, it is found that the aggregate consideration for the residential property mentioned at ITEM #1 has been paid at Rs. 2,16,00,000/- and for the residential property mentioned at ITEM #2 has been paid at Rs. 1,44,00,000/-. Further the registration charges Rs. 20,16,000/- and stamp duty Rs. 3,60,000/- has also been paid. Accordingly, the cost of acquisition and share of assessee in the investment are worked out as under;

7.1 The assessee has declared sale consideration at Rs. 1,40,00,000/-and computed long term capital gains at Rs. 1,33,89,451/- received from sale of the property “Site # 689, H.S.R. Layout, Bangalore.” The higher share of the assessee in purchase of new asset (residential house property) has been worked out at Rs. 76,75,200/-. Hence, allowable deduction u/s. 54F of the Income Tax Act, 1961 is computed as under;

7.2 In view of the above discussion, taxable long term capital gains in assessee case are computed at Rs. 60,48,571/- (Rs. 1,33,89,451 — Rs. 73,40,480) and brought to tax during A.Y. 2015-16.

Disallowance : Rs. 60,48,571/-“

18. On appeal by the assessee, the CIT (Appeals) confirmed the order of AO. Aggrieved by the order of CIT (A), the assessee has raised ground Nos.5 to 7 before this Tribunal.

19. We have heard the rival submissions. We have already seen that the Assessee claimed that it had invested LTCG in purchase of another residential house property and claimed deduction u/s. 54F of the Act. One of the conditions for allowing deduction u/s. 54F as laid down in Sec.54F(1) proviso is that the Assessee should not own more than one residential house, other than the new asset. The factual details with regard to acquisition of the property by the Assessee has already been set out in the earlier paragraph of this order. The details of the payment made by the Assessee are given in pages 11 to 12 of Assessee’s paper book and the same is as follows:—

20. As far as the case of the AO that assessee has purchased two properties under Sale Deed dated 28.06.2014 is concerned, we have perused the schedule of the property that was purchased. Actually this was a single piece of property viz., Site No.1 owned by Smt. Janaki Iyengar, Smt. Janaki Iyengar constructed a residential house in ground floor in the year 1937 and the first floor in the year 1962-63 with the ground floor of the property re-numbered as No.37 and the first floor as Door No.37/1 of 1st Main Road, N.R.Colony. Janaki Iyengar executed a will on 28.5.1975 wherein she bequeathed to her sister Dr.M.Vaidhei with Door No.37 which is Schedule-A of the Sale Deed under which the Assessee purchased this property and the first floor bearing door No.37/1, described in Schedule B in the sale deed under which Assessee purchased the new asset to her nephew P.Ramanuja Chari. Janaki Iyengar died on 6.6.1975 and the legatees under the will sold their respective shares in one property to the Assessee. The entire property constitutes single house but was bifurcated with two door numbers for the ground and first floor with common entrance in the ground floor only to earmark the share of each beneficiaries. The property otherwise constitutes a single property, though they have two different door nos. In such circumstances, the assessee has purchased only one property and not two properties. In this regard, the decisions cited by the ld. Counsel for the assessee before us supports the plea of the assessee viz., the decision of the Delhi High Court in the case of CIT v. Gita Duggal [2013] 30 taxmann.com 230 (delhi). In the aforesaid decision, the facts were that the assessee entered into a development agreement pursuant to which the developer demolished the property and constructed a new building comprising of three floors. In consideration of granting the development rights, the assessee received Rs. 4 crores and two floors of the new building. The AO held that in computing capital gains, the cost of construction of Rs. 3.43 crores incurred by the developer on the development of the property had to be added to the sum of Rs. 4 crores received by the assessee. The assessee claimed that as the said capital gains was invested in the said two floors, she was eligible for exemption u/s. 54. The AO rejected the claim on the basis that the units on the said floors were independent & self-contained and not “a residential house” and granted exemption for only one unit. The CIT (A) and Tribunal upheld the assessee’s claim by relying on CIT v. D. Ananda Basappa 309 ITR 329 (Kar.) and CIT v. Smt. K.G. Rukminiamma [2010] 331 ITR 211 (Kar.). On appeal by the department, the High Court dismissed the appeal of the revenue. The Hon’ble Court observed that as held in D. Ananda Basappa (SLP dismissed) & K G Rukminiamma, the Revenue’s contention that the phrase “a” residential house would mean “one” residential house is not correct. The expression “a” residential house should be understood in a sense that building should be of residential in nature and “a” should not be understood to indicate a singular number. Also, section 54/54F uses the expression “a residential house” and not “a residential unit”. Section 54/54F requires the assessee to acquire a “residential house” and so long as the assessee acquires a building, which may be constructed, for the sake of convenience, in such a manner as to consist of several units which can, if the need arises, be conveniently and independently used as an independent residence, the requirement of the Section should be taken to have been satisfied. There is nothing in these sections which require the residential house to be constructed in a particular manner. The only requirement is that it should be for the residential use and not for commercial use. If there is nothing in the section which requires that the residential house should be built in a particular manner, it seems to us that the income tax authorities cannot insist upon that requirement. A person may construct a house according to his plans, requirements and compulsions. A person may construct a residential house in such a manner that he may use the ground floor for his own residence and let out the first floor having an independent entry so that his income is augmented. It is quite common to find such arrangements, particularly post-retirement. One may build a house consisting of four bedrooms (all in the same or different floors) in such a manner that an independent residential unit consisting of two or three bedrooms may be carved out with an independent entrance so that it can be let out. He may even arrange for his children and family to stay there, so that they are nearby, an arrangement which can be mutually supportive. He may construct his residence in such a manner that in case of a future need he may be able to dispose of a part thereof as an independent house. There may be several such considerations for a person while constructing a residential house. The physical structuring of the new residential house, whether it is lateral or vertical, cannot come in the way of considering the building as a residential house. The fact that the residential house consists of several independent units cannot be permitted to act as an impediment to the allowance of the deduction u/s. 54/54F. It is neither expressly nor by necessary implication prohibited.

21. We are therefore of the view that the Assessee was entitled to claim deduction u/s. 54F of the Act in respect of investment in the property bearing Door No.37 & 37/1, 1^st Main Road, N.R.Colony, Bangalore.

22. The next issue is as to whether the deduction u/s. 54F of the Act has to be restricted to only 1/3^rd of the cost of acquisition of the new asset for the reason that the Assessee purchased the property along with the name of his wife and son shown as purchaser in the document under which the property was purchased.

23. The stand of the Revenue is that to claim deduction u/s. 54F of the Act, the purchase of the new asset should be only in the name of the transferor i.e., the Assessee. To the extent the capital gain is invested in the joint name of the Assessee’s wife and son, the deduction cannot be allowed. On such reasoning the revenue authorities took the view that even assuming the deduction u/s. 54F of the Act has to be allowed to the Assessee, such deduction should be restricted to 1/3^rd of the cost of the new asset. The stand of the Assessee on the other hand is that Sec.54F mandates that the new asset should be purchased by the Assessee and it does not stipulate that the house should be purchased in the name of the Assessee only.

24. The view of the revenue finds support in the decision of the Hon’ble Bombay High Court in the case of Prakash v. ITO [2009] 312 ITR 40 (Bom.)wherein it was held that to claim deduction u/s. 54F of the Act, it is necessary and obligatory to have investment made in residential house in the name of the Assessee only and not in the name of any other person. The view of the Assessee finds support in the decision of Hon’ble Karnataka High Court in the case of DIT (Intl.) v. Mrs. Jennifer Bhide [2011] 15 taxmann.com 82 (Karn.)wherein it was held that there is no requirement that investment u/s. 54EC should be in the name of Assessee only. In that case new asset was purchased in the name of the Assessee and her husband. The AO allowed deduction u/s. 54EC only to the extent of 50% on the reasoning that deduction will be allowed only to the extent of investment made in the name of the Assessee. The Hon’ble Karnataka High Court held that the entire consideration had flow from Assessee and no consideration had flown from her husband. Merely because the husband’s name is also mentioned in the purchase document, the Assessee could not be denied the benefit of deduction. Similar view has been taken in the case of CIT v. Kamal Wahal [2013] 30 taxmann.com 34 (Delhi), Laxmi Narayan v. CIT [2018] 89 Taxman 334 (Raj.) & CIT v. Gurnam Singh [2008] 170 Taxman 160 (Punj. & Har.).

25. The law is well settled that where two views are possible on an issue, the view favourable to the Assessee should be followed. Moreover, the decision of the Hon’ble Karnataka High Court in the case of Mrs. Jennifer Bhide (supra) is in favour of the Assessee. Following the said decisions, we hold that the Assessee should be entitled to the benefit of deduction u/s. 54F of the Act, to the whole extent of investment in purchase of new asset, even though the property has been purchased in the joint names of Assessee, his wife and son. We hold accordingly.

26. In the result, the appeal by the Assessee is allowed.