It was a tough decision for Mrs Dalal (name changed on request). But she finally decided to sell the old ancestral home as her elder son was already married, and the other two were close to doing so. The house, for one, was too small for three families. And in the absence of her husband, the property had little attraction for her.
So, the property was sold and proceeds were divided between her three sons to purchase three separate properties. This arrangement was fine so far as practical life was concerned. However, wherever there is money, there is taxation.
Like, it is in the case of Dalal’s sons’ purchase of three properties from the sale of one. The question: Is the exemption available when a person sells one residential house and reinvests the long-term capital gain in more than one house?
The main issue causing the confusion and ambiguity is the usage of the article ‘a’ before ‘residential house’. The word seems to imply that the exemption would be available only against purchase of one residential house and not two or more. In other words, the law seems to suggest that when a taxpayer invests the capital gains in purchasing or constructing two residential houses, only one of these, as opted for by the taxpayer, could be allowed for the tax concession. But is this the true intention of the legislation?
Adopting the literal meaning of the article “a” as “only one” goes against the very spirit, purpose and intent of the legislation which desires to give a boost to the housing sector. No wonder then that this ambiguity has given rise to conflicting case laws.
In the case of Fulwanti C Rathod v ITO, ITAT Mumbai Bench ‘E’ (ITA 1092/Mum./1995), dt 3.5.02, the learned judge observed, “The word ‘a’ can be equivalent to the word ‘any’. Also as per the General Clauses Act, singular includes plural.” In this case, the judge was referring to the Wealth-tax Act and the Estate Duty Act, where the words used were, ‘one house’ as against the words ‘a house’ used in the Income-tax Act.
On the other hand, in the case of Gulshanbanoo R Mukhi v Joint CIT Appeal no 3369 (BOM) of 2000 [AY 96-97] dt 16.1.02 ITD 649 (Mum) ITAT Mumbai Bench ‘C’, it was held that ‘a’ can be ‘any’ but ‘any’ cannot be ‘many’.
Then there is the Allahabad High Court case of Shiv Narain Chaudhari v CWT (108ITR104) where it was held that if the two flats of the building are situated in same compound and within common boundaries and have unity of structure, then they could be regarded as constituting one house.
Another judgment
If the stand that ‘a’ is not two is accepted, then ‘a’ can also not mean half. The background is that one of the conditions of the exemption under the then existing Sec. 54F was that the investor should not be owning another house other than the new house. In other words, say the taxpayer had sold some commercial property. He could save the consequent capital gains tax by investing the net sale proceeds in a residential house (new house). However, this was allowed only upon the condition that he didn’t already own another residential house (old house). (Subsequently the law has been amended and now the taxpayer can own one residential house other than the new house – but this was before the amendment was carried out. However, the principle applies equally even today.)
In the case of ITO vs Rasiklal N. Satra (280ITR243 dt 19.9.05), the assessee sold shares (this was when long-term capital gains earned on shares were taxable) and claimed exemption under Sec. 54F by investing the same in purchase of residential flat at Vashi, Navi Mumbai. The Assessing Officer (AO) noticed that the assessee was co-owner of a flat in Sion (West), Mumbai.
Now since the assessee already owned an old house, the AO denied him the Sec. 54F exemption. To this, the assessee contended that since he co-owned the old house along with his wife (they were joint owners), he was not an independent owner of the house and exemption can be denied only where he was the absolute owner of the house. It was held that since the legislature has used the word ‘a’ before the words ‘residential house’, it must mean a complete residential house and would not include a shared interest in the house. Where the property is owned by more than one person, it cannot be said that any one of them is the sole owner of the property. In such case, no individual person on his own can sell the entire property. Joint ownership is different from absolute ownership. Ownership of a residential house meant ownership to the exclusion of all others. Since Satra did not have full ownership of the house, it was held that the he was not the owner of ‘a’ residential house on the date of sale of the shares. Consequently, the exemption under section 54F could not be denied to him.
Finally
In spite of such contradictory decisions arising out of ambiguity, CBDT has not issued any clarification in spite of requests from many quarters. We have been given to understand that some of the ITOs have been sticking to the literal meaning of ‘a’ as ‘one’, and others don’t. A clear cut clarification from CBDT would help a number of taxpayers as also reduce the number of litigations arising out of this issue.
The writer is Director, Wonderland Consultants
