The Commissioner of Income Tax-III, IT Towers vs Sri Syed Ali Adil

M.S. Ramachandra Rao, J.—This appeal is filed u/s 260A of the Income Tax Act, 1961 (for short ''the Act'') by the Revenue challenging the order dated 09-09-2011 in I.T.A. No. 284/Hyd/2011 of the Income Tax Appellate Tribunal, Hyderabad Bench "B", Hyderabad. The respondent is an individual assessee. He filed his return of income for the assessment year 2007-08 on 31-08-2007 with the Assistant Commissioner of Income Tax, Circle-VI (1), Hyderabad admitting therein a net income of Rs. 43,97,840/-. The said return was processed u/s 143 (1) of the Act on 24-02-2009. Meanwhile, the case was taken up for scrutiny by issuing notice dt. 25-08-2008 u/s 143 (2) of the Act. A notice dt. 15-06-2009 u/s 142 (1) was issued calling for various details.

Before the assessing officer, the assessee offered under the head, long term capital gains, a sum of Rs. 41.00 lakhs contending that he had inherited an ancestral house property which was sold during the year under consideration and the resultant long term capital gains were offered from sale of the said house; that he had taken the sale consideration of Rs. 1,99,50,000/- for arriving at the capital gains even though the sale deed mentioned the sale consideration as Rs. 2,66,00,000/-; that out of the sale consideration he had purchased two flats in May Fair Apartment, Banjara Hills, Hyderabad and he is entitled to claim deduction/exemption u/s 54 of the Act for an amount of Rs. 93,80,192/- and that in view of the decision in Commissioner of Income Tax and Another Vs. D. Ananda Basappa, even though Section 54 mentions that the proceeds should be invested in "a residential house", it being a beneficial provision, it should be construed liberally and the deduction cannot be restricted to only one residential house and it should be extended to the purchase of two adjacent residential flats.

The assessing officer by order dt. 25-08-2009 held that the assessee is not entitled to claim exemption in respect of Rs. 93,80,192/- but only to the extent of Rs. 45,52,860/- comprising of consideration of Rs. 42,36,000/- and a stamp duty of Rs. 3,16,860/- utilized for investment on one of the flats by the assessee on the ground that the inspection report of the I.T.I. deputed by the assessing officer showed that what was purchased were two residential units separated by a strong wall; that they were purchased from two different vendors under two separate sale deeds and as such the deduction u/s 54 has to be restricted to only one flat.

Aggrieved thereby, the assessee filed an appeal to the CIT (Appeals), Guntur. He allowed the appeal by order dt. 13-10-2010 holding that the assessing officer had acted too technically and had erroneously denied the assessee the deduction to the extent of 50% and that since the assessee had purchased two flats having adjacent kitchens and toilets which have a common meeting point, he is entitled to 100% deduction u/s 54 for both the flats purchased by him.

Challenging the same, the Revenue filed I.T.A. No. 284/Hyd/2011 to the Income Tax Appellate Tribunal. By order dt. 09-09-2011, the Tribunal dismissed the appeal of the Revenue on the ground that it had consistently taken the view that even though flats are located at different floors, when they could be combined, it should be construed as a single residential accommodation only; that the said view is supported by the decisions of the (1986) 16 ITD 195 (2009) 31 SOT 38

Challenging the same, the Revenue has filed the present appeal.

Heard Sri B. Narasimha Sarma, learned Standing Counsel for the Income Tax Department at the stage of admission.

He contended that the deduction u/s 54 of the Act is allowable only for one residential house and not for more than one residential house and that the Tribunal erred in holding that the deduction u/s 54 of the Act is allowable for two independent residential flats in the same complex. He also placed reliance on the decision of the Special Bench of the Tribunal in (2007) 107 ITD 327

We see no force in the said contention. As held in D. Ananda Basappa''s case (1 supra) by the Karnataka High Court, the expression "a residential house" in Section 54 (1) of the Act has to be understood in a sense that the building should be of residential nature and "a" should not be understood to indicate a singular number and where an assessee had purchased two residential flats, he is entitled to exemption u/s 54 in respect of capital gains on sale of its property on purchase of both the flats, more so, when the flats are situated side by side and the builder has effected modification of the flats to make it as one unit, despite the fact that the flats were purchased by separate sale deeds. This decision was followed by the Karnataka High Court in Commissioner of Income Tax Vs. Smt. K.G. Rukminiamma, where a residential house was transferred and four flats in a single residential complex were purchased by the assessee, it was held that all four residential flats constituted "a residential house" for the purpose of Section 54 and that the four residential flats cannot be construed as four residential houses for the purpose of Section 54. Admittedly the two flats purchased by the assessee are adjacent to one another and have a common meeting point. In the impugned order, the Tribunal has also relied upon the decisions in K.G. Vyas''s case (2 supra), P.C. Ramakrishna, HUF''s case (3 supra) and Prakash Bhutani''s case (4 supra) wherein it was held that exemption u/s 54 only requires that the property should be of residential nature and the fact that the residential house consists of several independent units cannot be an impediment to grant relief u/s 54 even if such independent units were on different floors. The decision in Suseela M. Jhaveri''s case (5 supra) holding that only one residential house should be given the relief u/s 54 does not appear to be correct and we disapprove of it. We agree with the interpretation placed on Section 54 by the High Court of Karnataka in D. Ananda Basappa''s case (1 supra) and Smt. K.G. Rukminiamma''s case (6 supra) and the decisions of the Mumbai, Chennai and Delhi Benches of the Tribunal in K.G. Vyas (2 supra), P.C. Ramakrishna, HUF (3 supra) and Prakash Bhutani (4 supra). We therefore hold that the CIT (Appeals) was correct in setting aside the order of the assessing officer and the Tribunal rightly confirmed the decision of the CIT (Appeals). We hold that no substantial question of law arises for consideration in this appeal and the same is accordingly dismissed. No costs.