Free Press Journal

Income Tax Act – Even an alphabet is crucial


It is common knowledge that there in Income Tax law there are litigations galore caused due to faulty construction of language  that causes the law to be interpreted differently  by different people. This week we look at one such example – that of Sec. 54 and Sec. 54F which offer exemption on Long-Term Capital Gain (LTCG) arising out of certain specified assets if the assessee purchases or constructs ‘a’ residential house within specified time frame. Here the debate hovered around two aspects —

n Whether the letter ‘a’ was only a preposition or it meant one. In other words, does it mean one house or more than one?

n Whether the exemption can be claimed by purchasing or constructing a residential property abroad.

Both these issues now stand resolved as the tax law has amended both the Sections declaring that the legislative intent was for investment in one residential house within India.

Are they really resolved? There remain two problems:

n If the stand that ‘a’ is not two is accepted, then it can be claimed that ‘a’ is also not half. Consequently, if an assessee reinvests an amount in a residential property, jointly with another individual, the related exemptions would not be available.

n  Moreover, Sec. 54 continues to state, “. . . the capital gain arises from a long-term capital asset . . . being aresidential house. . . .” This word ‘a’ appearing here has not been changed. Consequently, if joint owners sell a house, and each one of them buys one separate house, the exemption u/s 54 cannot be claimed.

Thanks are due to reader Ms Deepa Kumtakar for pointing out this deficiency. Yes, this appears to be preposterous, but there are very strong reasons, backed up by a case law, ITO vs Rasiklal N. Satra(280ITR243 dt 19.9.05).

Here the assessee declared capital gains of Rs 6,68,698 on sale of shares and claimed exemption u/s 54F by investing the same in purchase of residential flats at Vashi, Navi Mumbai. ITO noticed that the assessee was co-owner of a flat in Sion (West), Mumbai. Accordingly, the assessee was asked to explain as to why exemption u/s 54F be not denied. In reply, the assessee contended that he was not an independent owner of the house and exemption can be denied only where the assessee is the absolute owner of the house. He showed that out of the cost of Rs 3,05,000 he had contributed Rs 1,60,000 and the balance was by his wife. However, the ITO claimed that the assessee could be said to be the owner of house at Sion (Mumbai) on the date of sale of the original asset.

The learned judge observed, “The Legislature has used the word ‘a’ before the words ‘residential house’. In our opinion, it must mean a complete residential house and would not include a shared interest in a residential house. Where the property is owned by more than one person, it cannot be said that any one of them is the owner of the property. In such case, no individual person on his own can sell the entire property. No doubt, he can sell his share of interest in the property but as far as the property is considered, it would continue to be owned by co-owners. Joint ownership is different from absolute ownership. In the case of a residential unit, none of the co-owners can claim that he is the owner of residential house. Ownership of a residential house, in our opinion, means ownership to the exclusion of all others. Therefore, where a house is jointly owned by two or more persons, none of them can be said to be the owner of that house.

“This view of ours is fortified by the judgment of the honourable Supreme Court in the case of SethBanarsiDass Gupta v CIT[1987] 166ITR783, wherein, it was held that a fractional ownership was not sufficient for claiming even fractional depreciation u/s 32 of the Act. Because of this judgment, the Legislature had to amend the provisions of Sec. 32 w.e.f. 1.4.97, by using the expression ‘owned wholly or partly’. So, the word ‘own’ would not include a case where a residential house is partly owned by one person or partly owned by other person(s). After this judgment the legislature could also amend the provisions of Section 54F so as to include part ownership.

Since the Legislature has not amended the provisions of Sec. 54F, it has to be held that the word ‘own’ in Sec. 54F would include only the case where a residential house is fully and wholly owned by the assessee and consequently would not include a residential house owned by more than one person. Consequently, the exemption under Section 54F could not be denied to the assessee.”

Another Problem — U/s 80C(xviii) deduction on repayment of capital amount of housing loan is available — “for the purposes of purchase or construction of ‘a’residential house property . . .”

Does this mean that if a person has taken two houses financed through housing loans, he cannot claim deduction on installments towards part payment of the loan against only one house.

Strangely, the interest paid on the same loans can be claimed as deduction even against more than one house!

Yet Another Problem — the Finance Act 2000 amended Sec. 54F allowing the assessee to own one house, other than the new house on the date of sale of the underlying assets. The Section is now not applicable if the assessee possesses more than one house. Does one-and-half house mean more than one house?

To sum, the authors of the legislation, while amending one existing problem, have (inadvertently?) created two new problems . The authors may be contacted at