[Opinion] Section 54F Unlocked | Ownership Battles Decoded?

Nishant Sejpal – [2024] 169 taxmann.com 500 (Article)

An assessee, whether an individual or a Hindu Undivided Family (HUF), can benefit from an exemption from income tax on capital gains resulting from the transfer of any long-term capital asset excluding residential house property under Section 54F of the Income-tax Act. This exemption from tax is when the proceeds are used to purchase or construct a residential property within a designated timeframe. However, it is essential to meet specific conditions outlined in Section 54F to qualify for this exemption. A key requirement is that, as of the date of the asset transfer, the assessee must not own more than 1 residential house, aside from the one for which they are seeking the exemption.

The issue under consideration comes when the assessee has to meet the specific conditions outlined in Section 54F, more specifically the limitation of ownership of another house appearing in the proviso to Section 54F “the assessee owns more than one residential house…..’

In this context, a controversy has emerged regarding situations in which the assessee is a co-owner of a residential property alongside owning one house on the transfer date. The crucial question is whether the co-owned residential property, which is not exclusively owned by the assessee but shared with another party, should be included in the tally of houses owned by the assessee as of the date of transfer of the original asset. This matter necessitates a careful interpretation of the terms ‘owns’ and ‘more than one residential house’ as stated in the relevant provision.

Currently, this divergence of opinions continues to exist at the high court level.

The issue first came up for consideration before the Madras High Court in the case of Dr. P.K. Vasanthi Rangarajan v. CIT In this case:

• The assessee was an individual, a doctor by profession. The assessee owned a property along with her husband in equal proportion. The said property consisted of a clinic on the ground floor and a residential portion on the first floor. The assessee and her husband had shown 50 per cent share with reference to the clinic and the residential portion in their respective returns.
• The assessee entered into an agreement for joint development of construction of 8 apartments in another property owned by her individually.
• As per the terms of the joint development agreement, the assessee had retained for herself, undivided share to extent of 50 per cent and the balance of 50 per cent was to be conveyed by the assessee in favour of the developer.
• The consideration for parting with 50 per cent of the undivided share consisted of four flats as well as a sum of Rs. 10 lakhs payable by the developer.
• In the returns filed for the assessment year 2001-02, the assessee claimed the benefit of exemption as provided for under Section 54F of the Income Tax Act. The said claim was sought to be rejected by the Assessing Authority on the ground that persons who own a residential house as on the date of transfer, would not be entitled to the exemption under Section 54F. The assessee being the owner of the residential house already, the proviso to Section 54F, as it then stood, would disentitle the assessee from claiming the benefit for investing the capital gains in yet another house property. Thus, the Assessing Authority held that since the assessee had used the property at 828, Poonamallee High Road and 828A, Poonamallee High Road, as residence and hospital, the conditions prescribed under Section 54F thus not being satisfied, she was not eligible for exemption.
• Aggrieved by these assessment order, the assessee went on appeal before the Commissioner of Income Tax (Appeals), who, rejected the claim of exemption under Section 54F.
• Aggrieved by this, the assessee preferred a further appeal before the Income Tax Appellate Tribunal. A perusal of the order of the Tribunal shows that it rejected the assessee’s case on exemption claimed under Section 54F on the ground that the assessee was owning a residential property on the date of transfer, namely, September, 1999. Even though the property was not owned fully, yet, as the assessee was having 50% share in the residential property, the conditions envisaged under Section 54F not fully satisfied, the assessee was not entitled to exemption under Section 54F. The Tribunal further held that the facts of the case satisfied the ingredients of Clause (v) of Section 2(47) and hence, the assessee was liable for capital gains as per Section 45(1) for the assessment year 2000-01 and the substantial performance of the contract by the handing over of the completed flats was relevant to decide the issue.
• Aggrieved by ITAT’s order the assessee preferred an appeal before High Court wherein, the High Court reviewed the assessee’ s claim that her share in the property should only include the clinic part, not the residential portion owned by her husband. However, this argument was found to contradict the facts. Both the assessee and her husband reported a 50% share of the clinic’s income and claimed depreciation during the income tax assessment. Additionally, they each declared a 50% share of the property in wealth tax proceedings.
• It was further asserted that in order to qualify for the exemption under Section 54F, the limitation pertains only to premises classified as a residential house, which must be owned either as an individual or a Hindu Undivided Family (HUF) at the time of transfer. Co-ownership of the property cannot be regarded as ownership in the capacity of an individual or HUF. Conversely, the Revenue maintained that co-owning another house at the time of transfer, even partially, would disqualify the assessee from the benefits of Section 54F, making the proviso applicable to her situation.
• The High Court ruled that since the assessee did not solely own the house, but rather held it jointly with her husband, the stringent provisions of section 54F could not be used to deny the exemption. The court observed that a liberal interpretation of section 54F illustrates that the ownership status of the residential property at the time of transfer is crucial. Since the assessee, as an individual, did not possess any property in her name at that moment, the joint ownership of the house did not impede her right to claim an exemption under section 54F. Consequently, the High Court granted the exemption to the assessee.

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