Delhi HC denies capital gains tax exemption u/s 54F claim by a widow who bought two non-adjacent flats in Noida
A widow reinvested the money received from sale of a plot of land situated in Jaipur in AY 2013-14 (FY 2012-13) inherited from her deceased husband. She purchased two flats in a residential society in Noida, Uttar Pradesh using the accumulated capital gains from Jaipur plot sale. She filed her income tax return (ITR) claiming capital gains tax exemption under Section 54F. However, the assessing officer denied this claim. She then filed a case in the Income Tax Appellate Tribunal (ITAT), where she lost. Then she filed an appeal in CIT (Appeals), where her appeal was partially considered. After this she filed an appeal in Delhi High Court.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
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Section 54F allows individual and HUF taxpayers to save tax on capital gains arising from the sale of a long-term capital asset like equities, other than a residential property, by investing the gains in a new residential property.
The primary reason for this denial of capital gains tax exemption under Section 54F is the language used in the law and how it is interpreted. The court said, language used in Section 54F- “a residential house” seems to suggest its one house property. But can it also mean two house properties bought by a taxpayer and then merged into one? This is the question, the answer to which is interpreted by the high court. Interestingly, the precedent set in the Geeta Duggal 2013 case where the court granted capital gains tax exemption for two flats was not applied in this case.
Read below to find out what Delhi High Court said about capital gains tax exemption under section 54F for this taxpayer and what potential homebuyers desirous of using Section 54F know.
Brief facts of the case
According to the order of the Delhi High Court here are the details:
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The taxpayer inherited a plot in Jaipur after the demise of her husband in 2005. This plot was purchased by her late husband in 1983.She sold the plot in FY 2012-13 (AY 2013-14) for Rs 77,75,000. From its sale proceeds, she purchased two apartments in Noida, Uttar Pradesh costing Rs 44,13,775 and Rs 42,39,275 respectively.She filed her ITR on July 31, 2013, where she calculated her capital gains income at Rs 77,21,957 after deducting indexed cost at Rs 53,043The Income Tax Department selected her ITR for scrutiny and issued notice under Section 143(2) on September 23, 2014.The assessing officer (AO) issued a letter dated September 4, 2015, and argued that since the taxpayer purchased two residential properties the benefit of Section 54F could not be claimed.
The Income Tax Department raised the following points
The AO deputed an inspector to make inquiries with regard to the two flats purchased by her. The Inspector submitted his report on November 2, 2015, stating that the two flats were located on two different floors at two different ends in the same block/tower of the society.To further make his denial reason clear, the AO cited Finance Act 2014 where the language of Section 54F was changed from ‘a residential house’ to ‘one residential house’. The AO opined that the law always intended to allow capital gains tax exemption in respect of one residential house only and hence amended the language. Thus, by this logic, the AO denied Section 54F capital gains tax exemption and assessed her total income to be Rs 84,59,520 which included Capital gains of Rs 77,21,957.
She filed an appeal against AO’s order in ITAT, where she lost. She then filed an appeal in CIT (A) and here she won partly. After this she filed an appeal in Delhi High Court.
Two questions about Section 54F answered by Delhi High Court
There are two important questions which Delhi High Court answered in this case:The phrase “a residential house” that is used in the language of Section 54F of Income Tax Act, 1961, does it mean 1 house or 2 houses joined together?What is the meaning of “new asset” used to define “a residential house property” in the Income Tax Legislature?
Analysis and Findings of Delhi High Court
Here’s what Delhi High Court observed:It is evident that the two flats purchased by the assessee are indeed distinct and separate, as they cannot be treated as a single residential unitThe word 'a' carries multiple meanings. Though it does mean and refer to 'one', its interpretation varies depending on the context in which it is used.CBDT in its circular dated January 21, 2015, mentioned that certain courts had interpreted that the exemption was also available if investment was made in more than one residential house. However, the amendment made in the Finance Act, 2014 clarified that the benefit under section 54 or 54F was intended only for investment in one residential house within India.Thus, it appears from the above that the amendment to section 54F was introduced to resolve any ambiguity, clarifying that ‘a residential house'' indeed meant ''one residential house'' to ensure consistency with the initial legislative intent.
Gita Duggal 2013 case’s precedent was not applied in this case due to this reason
In the Gita Duggal case, the Court set a precedent wherein it was held that even if a residential house consisted of multiple floors or units, it could still qualify as a single residential house for the purpose of the capital gains tax exemption.Delhi High Court gives the following reason behind not applying Gita Duggal’s precedent to this case:
As in the case of Gita Duggal, the plot of land and the entire house built up on the said land originally belonged to the assessee only, which was demolished and reconstructed by the builder under an agreement. The Coordinate Bench had observed that people can construct their houses in the manner they so desire, and the said observations would also indicate that the assessee in that case was constructing a house as per her own needs, after modifying the original residential house that she owned. Conversely, in the instant case, the assessee had bought, and not constructed, two flats which are on two different floors and situated at diagonally opposite ends, in a manner which does not make it feasible for them to be connected structurally as one single unit.
Delhi High Court denies capital gains tax exemption on two non-adjacent flats
Delhi High Court took the Income Tax Department’s side and said she can only get capital gains tax exemption for one of the flats and not two.According to the judgement order of Delhi High Court dated December 3, 2024 here are the details:
Considering the facts of the case, the terminology used in section 54F, the intent of the provision, and the judicial precedents discussed, it is concluded that the appellant''s purchase of two distinct, nonadjacent flats, located on diagonally opposite ends of two different floors, even though in a same tower of a residential society, does not fulfil the criteria for exemption under section 54F. While it is true that the words ‘a residential house'' used in section 54F (prior to amendment) were judicially interpreted to allow certain flexibility in cases where more than one residential unit could, in essence, form a single residential house, as seen in Gita Duggal. However, this was premised on the possible practical use of the residential units as a unified residence, the characteristics which are absent in the present case.“The question of law, in the instant case, is answered in favour of the revenue and against the assessee. Accordingly, there is no error in the Tribunal's decision to grant exemption under section 54F in respect of only one of the two flats purchased by the appellant,” said Delhi High Court.
This means if she takes the capital gains tax exemption on the highest costing flat- Rs 44,13, 775 then her gains would be Rs 77, 21, 957-44,13,775= Rs 33,08,182.
Dipesh Jain, Partner at Economic Laws Practice (ELP), says, "Firstly, the issue before Delhi High Court was whether two flats purchased by the assessee in the same society located in the same tower but on different ends of two different floors would qualify as one residential house for the purpose of availment of deduction under section 54F of the Income-tax Act, 1961 (‘the Act’). Delhi High Court held that purchase of two flats in the same society and in the same tower cannot be constituted as a single unit as flats were located on different floors and were not adjacent to each other and also as per the builder’s confirmation such flats could not be physically or legally combined into a single unit to constitute one residential house. Therefore, benefits under section 54F of the Act can be availed only for one flat purchased by the assessee. This seems to be broadly in line with the judicial precedents and ratios emanating from the earlier judgements."
Can we claim Section 54F benefits if we purchase 2 adjoining flats?
Neha Gupta, Principal Associate at Athena Legal says: “An assessee can claim benefit under Section 54F in case he/she purchases 2 adjoining flats only when it is able to prove/justify that the two adjoining flats can be/will be combined into a single dwelling unit/a single residential house and should be counted as a single asset in order to fit into the definition of the term singular asset.”Chartered Accountant (Dr.) Suresh Surana says: Section 54F benefits may be claimed for two adjoining flats if they are capable of being combined into a single, functional residential unit. In contrast, if the flats are located apart (e.g., on different floors or opposite ends of the same building) and cannot be structurally integrated, the exemption would apply only to one of the flats.
The judgment thus differentiates the existing case (as the flats in this case are physically and legally separate and cannot be combined) from Gita Duggal 2013 case where adjacent floors allowed integration into one cohesive dwelling, Accordingly, the Delhi High Court held that the decision in Gita Duggal is not applicable to the existing case, as the essential factor of adjacency is absent.
Gupta says: "The question of law in the present case was answered in favor of the Revenue Department and against the assessee. In the present case the assessee had purchased two flats through distinct allotment letters which purchases were independent of each other and there was no material on record to indicate that the two flats were intended to be combined into a single residential unit. Even otherwise, the two flats were constructed in such a manner and were situated on different floors and on diagonally opposite ends that it was not possible to combine them and they could not be considered as one single dwelling unit."
Gupta adds: "Hence, it is clear that the amendment to Section 54F of the Act was introduced to resolve any ambiguity, clarifying that ‘a residential house’ indeed meant ‘one residential house’ to ensure consistency with the initial legislative intent. Since the legislature has used the word ‘new asset’ and not ‘new assets’ in relation to a residential house, the said words would essentially mean a singular house or a singular asset and not multiple house or multiple assets. Therefore, the amendment to Section 54F stands clarified in view of the above observation in the present case."
What is capital gains tax exemption under Section 54F?
According to Surana, Section 54F allows individual and HUF taxpayers to save tax on capital gains arising from the sale of a long-term capital asset, other than a residential property, by investing the gains in a new residential property. Thus, the gains derived from selling one’s stake in a company can be claimed as exemption u/s 54F provided such gains are long term in nature and the amount of net consideration received is invested in accordance with the provisions of S. 54F of IT Act as mentioned below:Such new house property should be purchased within a period of 1 year before or 2 years after the date of transfer of old house or should be constructed within a period of 3 years from the date of transfer of the old house.The assesse should not transfer the newly acquired asset for a period of 3 years from the date of acquisition or construction. In case of any such transfer or conversion made, the exempted gains would be subjected to tax in the year of such transfer or conversion.Assessee should not own more than 1 Residential House Property on the date of transfer of Capital AssetDuring the period of 2/3 Years, the assessee must not purchase/construct any other House Property
The Capital Gains Tax Exemption Calculation u/s 54F would be as follows:
Capital Gains x Investment in New Residential Property/Net Sale Consideration
Herein, the Net Sale Consideration is the amount received from the sale of the capital asset after deducting any expenses related to the sale.
Proportional Exemption:
If the entire capital gains are reinvested in the new property, the taxpayer can claim the full exemption on the capital gains tax amount. However, where the cost of new residential asset exceeds Rs. 10 crores, the amount exceeding Rs. 10 crores shall not be taken into account while computing the exemption.If only a part of the gains is invested, only the proportionate amount of such long term capital gains will be exempt. #sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
This story originally appeared on: India Times - Author:Faqs of Insurances
