benefits for purchase of more than one residential house.
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Tax law allows exemption from capital gains tax when you sell a residential
house and reinvest the proceeds in another residential house. Section 54 of
the Income-Tax Act 1961 prescribes the mode of dealing with profits on sale
of property used for residence.
The subject of transfer should be a long term capital asset being buildings,
lands appurtenant thereto and a residential house. The income from the
residential house should be chargeable under the head ‘income from house
property’.
Such a property should have been transferred giving rise to taxable capital
gains. Within one year of the date of transfer, another property should have
been purchased for residence. Such purchase could have been either one year
before or two years after the date of transfer. Or another residential house
should have been constructed within three years from the date of transfer.
The sale proceeds should have been utilised for the purchase or
construction. If these conditions are satisfied, there will be no liability
for capital gains tax in respect of the sale of residential house. It should
be noted that Section 54(1) refers to purchase or construction of a
residential house
The Ananda Basappa case
Ananda Basappa sold a residential house in Bangalore for Rs 2.12 crore in
October 1995. He purchased two residential flats adjacent to each other from
a developer. He took two separate sale deeds for the two flats on the same
day. The vendor certified that he has effected necessary modification to the
two flats to make it one residential apartment.
Basappa sought exemption under Section 54 in respect of the capital gains
arising from transfer of the residential house. The income-tax officer (ITO)
gave exemption for capital gains tax to the extent of purchase of one
residential flat. The income-tax inspector inspected the newly acquired
property and reported that the residential flats were in occupation of two
different tenants disclosing separate enjoyment.
The ITO consequently held that Section 54(1) does not permit exemption for
the purchasers for more than one residential premise. On appeal, the Income
Tax Appellate Tribunal (ITAT) held that the purchase of the two flats by
Basappa should be treated as one single residential unit and granted full
exemption.
The Revenue took up the matter in appeal to the Karnataka High Court (*309
ITR 329*). It was argued for the Revenue that Section 54(1) used the phrase
a residential house.
This limits the exemption to only one flat. This argument is based on plain
common sense. The High Court did not agree. It pointed out that Section
54(1) allows exemption both to individuals and Hindu Undivided Family (HUF).
It will be incorrect to argue that sale proceeds of a residential house of a
HUF should be invested for the purchase of only one residential house. The
HUF property is held by the members as joint tenants. The members keeping in
view the future needs in event of separation may purchase more than one
residential building.
It cannot be said that the benefit of exemption is to be denied under
Section 54(1) of the Act.
The apartments were situated side by side. The builder had effected
modifications of the flat to make it as one unit by opening the door in
between the two apartments.
The fact that at the time of inspection by the inspector, the flats were
occupied by two different tenants cannot be a ground to hold that the
apartment is not one residential unit. The fact that Basappa could have
purchased both the flat in one single sale deed or could have narrated the
purchase of two premises as one unit in the sale deed cannot also be a
ground to hold that Basappa had no intention to purchase the two flats as
one unit.
Singular includes Plural
How does the court meet the objection that Section 54(1) talks only of a
residential house and not two? The High Court brought in the General Clauses
Act, 1897 to help in interpretation. Section 13 of this Act declares that
whenever the singular is used for a word, it is permissible to include the
plural. This is an ingenious way of interpreting words and phrases in the
Act.
*Black’s Law Dictionary* lays down that the article “a” is not necessarily a
singular term. It is often used in the sense of “any” and then is applied to
more than one individual object. The meaning depends on the context.
There have been judgments allowing exemption even for purchase of a
fractional interest, taking it as sufficient compliance with the
requirements of Section 54 (*132 ITR 661*).